Chapter: 4

Financial Inclusion There is intrinsic relationship of financial literacy with inclusion,

hence, understanding is essential. It is an elaborate task. There is this

story, often repeated to describe coordinated co-existence of diverse

perceptions amongst human beings. It is regarding an elephant being

described by five blind man having access to its different body parts e.g.

Trunk, Teeth, Legs, Tail and Torso. They understood the elephant being

what part they held. ‘‘Financial Inclusion”, similarly can be understood

only with reference to sector wise different perceptions in different

countries by different people, yet it has a thread of unity running through

different sets of perceptions, which applies and makes it a dynamic

concept. A concept needs to be defined, for its own development. The

available literature on the subject makes it clear, that no well cut or

universally accepted -definition of ‘Financial Inclusion’ has been found.

One of the reasons inter-alia is difficulties in measurement of real

inclusion, hence it is defined often, in terms of Financial-Exclusion i.e.

exclusion from the financial system. Review of Literature suggest that

the most operational definitions are context-specific, originating from a

specific country, Country –specific problems of Financial Exclusion and

Socio- Economic conditions. Thus, the context-specific dimensions of

financial exclusion assume importance from the public policy

perspective. Further more, the definitions have witnessed a shift in

emphasis from the earlier ones, which defined Financial Inclusion and

Excl usion largely in terms of physical access, to a wider definition

covering access to and use and understanding of products and

services. The operational definition of Financial Inclusion, based on the

access to financial products and services, also underscores the role of

Financial Institutions or service providers , involved in the process”. The

issues of Financial Inclusion /Exclusion ,have been engaging attention

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of Researchers/Academicians/International bodies/ Governments & its

agencies for long time .As mentioned above ,there is no direct definition

of Inclusion ,which has been developed ,due to difficulties of its

measurement, its indirect definitions have been given in terms of

“Exclusion”. Necessarily, it is necessary to understand the word

‘Exclusion’ and in which context its user has been done. Discussions on

financial exclusion were preceded by earlier discussions in which the

focus was on issue of Geographical access to financial services.

According to Leyshon and Thrift, it was realized that geographical

factors alone can not be responsible for Financial Exclusion (within the

ambit of Social Exclusion). According to Ford & Rowbingson and

Kempson and Whyley, the debate has now broadened to include all

types of people who make little or no use of financial services, and the

processes of Financial Exclusion. As the further review of other

literature suggests, depending upon socio-economic and Financial

developments in different countries and Geographies, the definitions of

Financial Inclusion also vary as it depends on nature of Exclusion which

may include structure of stakeholders in the financial sector, social &

economic status and position occupied by those, who get financially

excluded and response of concerned authorities and Governments to

the problem of Exclusion etc.

“Broadly, financial exclusion is construed as the inability to

access necessary financial services in an appropriate form due to

problems associated with access conditions, prices, marketing or self –

exclusion, in response to discouraging experiences or perceptions of

individuals/entities”. Academic work of Leyshon and Thrift, Meadows et.

al, Kempson et. al, Rogaly bring out following catagorisation in

definitions of Financial exclusion, called as Dimensions- and named as

”Breadth “,”focus” and “Degree” of Exclusion.

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All definitions covering widest of area linking financial exclusion to

social exclusion as well as identifying those processes which prevented

“poor” and “disadvantaged” social groups from gaining access to

financial system, fell in the category having ‘Breadth’ as dimension. The

narrowest of all definitions of financial exclusion which described it as

exclusion from “particular sources” of credit and other financial services

including Insurance, Bill-payment services and accessible and

appropriate deposit Accounts, fell in the category having “Degree”

dimension. The “Breadth” & “Degree” dimensions formed two extremes

of the spectrum. There emerged the third dimension in the middle of the

spectrum named as “Focus” dimension. It linked Financial Exclusion to

other dimensions of Exclusion. According to definitions falling within

ambit of “Focus” dimension, Exclusion is the bundle of potential

difficulties, faced by some segments of population, in accessing main

stream financial services like Bank accounts /home Insurance etc. The

different segments identified as subject matter of exclusion are-

Individuals / Households, communities/Businesses; the difficulties

varying according to their own circumstances. Besides above

‘dimensions’ based definitions, there are definitions which vary based

on ‘Concept of Relativity’ i.e financial exclusion defined relative to some

“standard”. Curiously the ‘Inclusion’ (Which itself gets defined in terms

of ‘Exclusion‘), also itself becomes such a ‘standard’. Kempson etc.

point out in the studies done by them that in developed countries the

phenomena observed with reference to their high degree of financial

development is that there is duality of Hyper Inclusion. There are some

having very good access to a range of financial products, while

simultaneously some segment of population lacks even the basic

Banking services.

This line of thought sees financial exclusion being a consequence

of ‘increased Inclusion’ because while inclusion is occurring for some

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segments yet some “individuals” and “households” etc. are left behind in

their regards and get excluded. Often the operational or working

definition of financial exclusion concentrates the attention on “ownership

of”, or “access to”, particular financial product and services provided by

main stream financial service providers. Bridgeman’s work identifies

such product / services as ‘money transmission, home insurance , short

and long term credit and saving. Publication of H.M (i.e. his / her

majesty) Treasury have indicated that many operational definitions get

evolved from the public policy concerns that certain segments e.g. low

income Group are unable to have access to mainstream Financial

products such as Bank Accounts /Low cost loans and their exclusion

imposes real costs on such poor people, which are most vulnerable.

Developments in India:

According to R.B.I., following a multipronged approach, several

policy initiatives have been under taken to promote ‘financial inclusion’

in India from time to time, although the term ‘financial inclusion’ was not

in vogue until 2005. Bringing the larger population within the structured

and organised financial system has explicitly been on the agenda of the

Reserve Bank since 2005, unlike many central banks in developed

economies (who focus on Inflation), India’s central bank viz Reserve

Bank focuses on growth also. India is an emerging economy –emerging

from poverty. It is an obvious fact that there are large sections of

population which include marginal farmers, landless labourer, oral

lessees, self-employed, unorganised sector enterprises, migrant

workers, slum dwellers ethnic minorities Tribal Area population, Areas

affected by insurgency & Terrorism, socially excluded groups, senior

citizens and woman individually as well as entrepreneur etc. These are

all either financially excluded or may not have adequate access to

financial services. In a fast growing economy, like India, where need for

growth is almost essential one, due to its unchecked population growth,

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it is all the more necessary that not only the growth should be

adequately sustained, but even dangers to growth processes i.e. “Risk”

should be diversified, otherwise plunging back into situation of poverty

(as existing in latter part of 20th century), may become a probability,

once again. United Nations set 2015 as the year by which poverty

removal all over the Globe was fixed as one of the Goals of M.D.G

(Millennium Development Goals) set at the turn of this century (21st).

The concept of Financial Inclusion and its need for poverty alleviation

got recognition in these goals.

Reserve Bank took note of this and for the first time this term

featured in 2005 in its Annual policy statement 2005-2006, in which the

concern about such banking practices that tend to exclude rather than

attract vast sections of the population (as afore said) was openly

brought out and the monetary policy exhorted banks to review their

existing practices to align them with the objective of financial inclusion.

One may inhale and exhale without knowing or calling it the process of

“Breathing”.Like that only, India had been in the process of increasing

“Financial Inclusion” in the country since its Independence or even

earlier. However, It is after 2005-2006, that academic discussions in this

regard erupted in India too, which were smouldering till then silently in

different academic forums; and Government too took notice of its

need . Many important economists and top R.B.I officials tried their

hand on defining / describing the term ‘Financial Inclusion’, before a

formal committee was set up viz. The Committee on financial inclusion

under chairmanship of Dr. C. Rangrajan, Former Governor of RBI has

been setup to tackle the issues. However, a bird’s eye view of history of

banking in India brings up following scenario , in the perspective of

which efforts at Financial Inclusion are clearly visible from the efforts of

Government and R.B.I., although the term ‘Financial Inclusion’ may not

have been in vogue in India, till 2005.

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As already mentioned in ch. 1 of this thesis, the western pattern

of banking came with advent of entrenchment of East India company in

India in last quarter in 18th century and since then the history of banking

takes root in India. Banks did serve only private interest initially but with

its development and the public service it performed what and how of

Banking environment becomes a concern of any Government. Even

without formalisation or visibility of any definition the essential elements

of Financial Inclusion were being placed in the Indian scenario too.

Right from the Independence of India in 1947, the effort at Institution(s)

building and changing motivation of banks, of giving help to the vested

interest only, had been started. R.B.I., which started in 1935 as a

shareholders’ bank, though incorporated under R.B.I. Act,1934, is a

prime instrument of achieving Economic and banking development

besides being a central bank. It was nationalized in 1948. Then came

nationalization of Imperial Bank in 1955 to form it into S.B.I. followed by

take over of state banks of 8 princely states in 1959, by renaming them

as Associate Banks of S.B.I. It had given the Government and state, a

public sector arm of Banking through which the Government & R.B.I.

could increase the reach of Bank finance into rural areas to alleviate the

poverty in India and by 1960, thus, the Indian Banking system had

become an important tool for economic development (and by corollary

agency for propagating financial inclusion) as part of the public sector

under central Government. In 1966 co. op. banks were put under R.B.I.

to have uniformity of application of banking policies in the country. In

1967 the commercial banks were brought under social control

measures taken by Government of India. In 1969, 14 commercial banks

were nationalized to meet the credit needs of rural & urban poor. In

1971, lead banks scheme was started. In 1976 a new institution – a

hybrid of commercial bank’s structure and co. op. banks philosophy was

created called Regional Rural Banks (RRB(s)). This was done to

increase access to banking in for flung and interior rural areas. In 1980

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again 6 more commercial banks were nationalized to increase the reach

of banking. There after it has been reform process which was set in

1984 onwards under the thinking and philosophy of socialist mind set.

But 1991 saw banking and payment crises which led to massive reform

process under recommendation of Narsimham committee and the

nineties saw emergence of Private sector banks as well as emergence

of market economy and it was said that period was of liberalization,

privatization and Globalization (L.P.G.), of banks. A new experiment,

creating a new set of banks called local area banks, was also done but

it did not gain popularity enough.

On the co-operative side there was emergence of urban co-op

banks. In non-Banking financial sector , consolidation process took

place and Micro finance companies started becoming visible to finance

the below poverty level population. At the turn of century, United

Nations came up with millennium development goals and one of that

was removal of poverty by the year 2015 and for that Financial Inclusion

was identified as an important Goal in which micro finance was

considered important for the purpose and experiments with Self Help

Groups (S.H.G.) came to light; specially the success of Gramin Bank of

Bangladesh was a news for everybody, when world over this topic was

flagged. Western economies were aware about problems of exclusion

and developed quite effective conceptual network of ideas & Research.

While in India efforts were on without any ‘conceptual’ ideology behind

it post Independence, but its need was felt and the word Financial

Inclusion / Exclusion were borrowed from Global thought process . The

concept and Definitions etc. in India cannot be said to be emanating

from any original research but have been adopted from west &

remodelled to Indian conditions. Thus, we were late in starting the

discussion on the topic of Financial Inclusion/ Exclusion which was

under discussion world over actively since beginning of 1990(s), but

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surely India was also on track under stewardship of its central bank i.e.

R.B.I. Hence, there is nothing very new in development of the concept

of financial Inclusion here, yet it is a matter of picking up one or more of

the definitions with respect to removal of particular kind of mischief of

non availability of financial service to a particular type of segment.

Having discussed International and Indian scenario regarding

concept of Financial Inclusion we can now have an overview of some

important but select definitions of Financial Inclusion/ Exclusion as

accepted in Global as well as Indian context….

United Nations- Inclusive financial sector is “A Financial sector

that provides ‘access’ to credit for all ‘Bankable’ people and firms, to

Insurance for all Insurable people and firms, and to savings and

payments services for ‘everyone’. Inclusive finance does not require

that everyone, who is eligible use each of the services, but they should

be able to choose to use them, it desired”. It is observed on close

scrutiny that the above definition is regarding Inclusion, specifying that

bankable persons / entities should not be excluded from credit , and

Insurable persons/ entities should not be excluded from Insurance.

Each and everyone, must have access to savings and payment

services . Actual user of each and every financial service available is

not essential by each person/entity, who is eligible to use such services,

but they must have option to choose, whenever they wish to do so. It

means that those who voluntarily exclude them selves, by not using

financial services available and their abilities have not been put under

any restraint in this regard , they need not be counted in ‘excluded’

category measurement of “Exclusion/Inclusion” remains a problem and

here U.N gives a norm for measurement also, in this definition.

Thus following ingredients are clearly visible-

Financial service providers for purposes of Financial Inclusion are

“Banks” predominantly who should give access to credit (subject to

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bank ability) , savings and payments services (to everyone) while

Insurance sector should provide Insurance services (subject to

Insurability).

Measurement of Inclusion / Exclusion is an issue. It is often seen

that apparently there are no barriers for access to people, but they do

not wish to use the financial services available. These are called

voluntarily excluded persons. These can be called as “included” for the

purpose of “access” of course, this argument has peripheral

weaknesses e.g. if someone can use but does not use the service

because he is lazy or egoist or simply abhorrent to it or for any other

reason with absence of any slur on the service provider , then of course

it is really voluntary exclusion by self and can be added/ substracted to/

from Inclusion /Exclusion measure; but if there is probability of

existence of certain circumstance emanating from service provider or

due to any law/rules /Regulation/ public policy statement that becomes

a reason (explicit/Implicit) for someone to avoid using the financial

service then it cannot be called ‘voluntary’ exclusion (It has to be treated

as “ exclusion” only in the opinion of author of this thesis and victims of

subtle malpractices /misbehavior in the bank often suffer from this

syndrome).

(i) Such reasons can be pricing /fees/charges for a financial

service which makes it unaffordable for a person who otherwise has

“access” to that financial service;

(ii) Cost of using such service being excessive e.g. keeping

minimum balance requirement on very high side , will dissuade

someone from keeping a savings a/c.,

(iii) The service made available is “unsuited” for the user e.g. a

debit card issued to someone who does not understand how to use an

A.T.M .or is mortally afraid of technology or when there are no points of

sale (P.O.S) in the vicinity where the card holder resides.

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A predominant reason for such apparent “voluntary” (but actually

forced) is also definite perception of the potential user that they are not

welcome in the branch of a bank e.g. a poorly clad low income group

person .or the potential user’s fear that his/her request is likely to be

declined in any case; or problems of personal conflict with employees of

service provider; or problems of security- personal/ money related, in

the venue where service is to be utilized; or general law & order

situation inside/outside venue of financial service provider and /or

adverse reputations of service provider. Due to malpractices indulged

by the service provider, REASONS for voluntary exclusion,( which really

make it ‘involuntary’) can be multiplied and if they are there then surely,

such people cannot be called as ‘financially included. On the other hand

, there have to be ‘involuntary’ exclusions (in spite of the concerned

person having access to the financial services like “CREDIT” And

“INSURANCE”), because, these services, according to definition can be

only for bankable and insurable persons / entities, which such excluded

persons are not; due to credit risk being associated with them or

concerns being there with regard to their good faith (which is absolute

necessity for insurability).

World Bank-“Broad access to financial services implies an

absence of price and non-price barriers in the use of financial services.

It is difficult to define and measure because access has many

dimensions”. Apparently, above definition is an apology for a definition.

It does not give any standard to apply to the set of events and

situations, to come to some conclusion regarding inclusion / exclusion.

It reflects only recognition of the fact that defining & measuring financial

inclusion and exclusion, both is difficult. One more aspect appears to be

apparent that in the eyes of world bank, there should be absence of

price and non price barriers. Absence word is an indicator of strong

apathy to said barriers. It is well known fact that these international

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institutions and entities, belonging to the western world, do not

encourage free services. If so, how come World Bank is advocating

‘absence’ of pricing of financial services? Apparently the explanation is

that world bank is saying that price “as a barrier” should not be there i.e.

the services can be priced up to the extent and manner, that these do

not become barrier in broad access to the financial services. Non price

barrier are similar in nature and discussed above. It is not really

possible to have zero presence of these factor but these should not

become barriers even if present. In other words price / non price

situation which cause problems, can be minimal in quantity and should

not be allowed to become a barrier through which one cannot really

pass through.

In this regard it may be worthwhile to reproduce contents of R.B.I.

report relevant to this definition. “Access covers a range of institutions

from more formal to less formal. At one end of the spectrum are banks

or near banks which are often defined as formal financial institutions,

which can provide multiple financial services to their clients, including

deposits, payments and credit services. The attribute of banks and near

banks are broadly comparable across countries. Other formal financial

service providers are all other legal entities licensed to provide financial

services. They are registered and subject to some reporting

requirement. Thus in the case of credit, this may include consumer

finance companies, credit card companies or credit union. Informal

providers of financial services are other organised provider of financial

services that are not registered as financial intermediaries and not

subject to any oversight. Moneylenders and cheque cashing outlets,

which are not regulated financial institutions, belong to their category.

Core and headline indicators place a given population along a

continuum of access depending on its usage of formal, semiformal and

informal financial services and those excluded from the use of financial

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services. The access to finance could be divided into four segments (i)

the proportion of population that uses a bank or bank like institution; (ii)

the population which uses services from non-bank other formal financial

institutions, but does not use bank servisces. (iii) The population which

uses services from informal service providers only. (iv) percentage of

population transacting regularly through formal financial services. (v)

The population which use no financial services.

The second group of core indicators looks in greater details at the

kinds of the financial services offered. This functional perspective

enables a focus on specific service needs and their gradation in order of

priority, from less to more developed financial environment. These

additional core indicators provide augmented understanding of nature

and depth of financial services. The financial service functions identified

to be used as basic for indicators are-(1) transaction or payment

services. (2) saving (Deposit) and investment; and (3)loan or credit

services. Risk transformation services such as insurance could arguably

be added. However it is conceptually similar to a sophisticated saving

and credit investment”. It may be seen that above line and thought

process reported by R.B.I. in its report, is in context of definition given

by world bank. Nothing in these lines indicate that world bank even

remotely indicates towards giving free of cost service; hence the words

in the definition i.e. absence of price and non price barriers appear to

mean (as indicated by the author of the thesis above) that price / non

price situation (while may not be free of cost), indicates that cost should

not be such as to act as barrier. Asean Development Bank (A.D.B.) -

“Provision of a broad range of financial services such as deposits, loan,

payment service money transfer and insurance to poor and low income

household and their micro-enterprises”.

The definition reflects Asian economic condition and brings out

the necessary ingredients of financial inclusion i.e. deposit, credit,

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Payment services, Money transfer, and insurance to poor / low income

groups and small enterprises other definitions discussed above have

also zeroed to similar ingredients. ‘Ability’and ‘appropriate’ both

indicate towards adequate financial literacy, The definition is very short,

with individuals in focus. Enterprises appear to have been over looked

in this Definition. However, One more thing is noticeable when one

looks at the title of this particular report of the relevant session. It

mentions about 3 broad financial products (Credit, Savings, Insurance)

and fourth is “Advice” which is nothing more or less than initiative of

financial literacy and education, which has been made as an essential

element of financial inclusion, Which is distinct departure from other

definitions. In this regards it may not be out of place to mention the

definition adopted by Scotish govt. in 2005 as well as views of Bank

Scotland, in 2007. It states “Access for individuals to appropriate

financial product and services. This includes having Capacity, Skills,

Knowledge, and Understanding to make the best use of product and

services. Financial Exclusion by contrast is the converse of it. The

definition clearly bring out importance and inalienable place of financial

literacy and education, in the concept of financial Inclusion- when it

states, highlighting the entire gamut of financial literacy by use of word

‘capacity, skills, knowledge and understanding. Typically the definitions

of financial inclusion/ exclusion coming out from British soil, make

financial literacy an important ingradient and essential element of

movement of financial inclusion- very overtly; while in other Definitions,

it is implicit.

Chant Link And Associate (Australia) - Their definition is “financial

inclusion is lack of access by certain consumers to appropriate low cost,

fair and safe financial products and services from main stream

providers. Financial exclusion becomes a concern in the community

when it applies to lower income consumers and / or those in financial

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hardship.” Analysing the above Definition it can be seen that it is a

definition of exclusion and converse of it will be indicative definition of

financial inclusion. The functional services which will make elements of

such definition are not enumerated within the definition but the contents

of reports broadly indicate similar products as every body else with few

addition / deletion in the spectrum; the service provider being mentioned

as ‘main stream’ it is indicative of formal financial system having banks /

insurance and investment institutions. Thus the list of services include –

deposite account, loans-Home and personal, credit cards, insurance-

Home and building and direct investments. It does not emphatically

bring out payments machenism and personal insurance and does not

show concerns for small business and enterprise, which other

definitions have been emphatic in pointing out. However, the

exclusion / inclusion is conceptualized in terms of ‘access’ like everyone

else. Also the words ‘appropriate’ ‘low cost’ , ‘fair’ and ‘safe’, used as

adjectives of financial products and services, indicate towards some

level of knowledge and awareness on part of all stake holder in the

event of financial inclusion / exclusion-which is indicative towards

financial literacy and education. Obiously, no one can assess the

appropriateness or safety element until and unless one is aware about

environment surrounding within and without the main stream financial

institutions as well as once own need. Besides ‘cost’ and “fairness” of

any product can be ascertained only when certain level of comparative

information is used. Thus awareness is must.

Stephen P. Sinclair-The academician’s definition is “financial

exclusion the inability to access necessary financial services in an

appropriate form. Exclusion can come about as a result of problem with

access, condition, prices, marketing or self-exclusion in response to

experience or perception. The definition is reflective of work of an

academician focusing on exclusion per se and financial exclusion as a

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consequence. Exclusion per se has been seen as a response to

negative experience or perception; reasons for which are enumerated

as access, conditions under which an event takes place, price and cost

of any transaction i.e. affordability and marketing of a product / services.

Self exclusion is also mentioned (Discussion on which is already

done in previous paragraph). Important thing is that any of the reasons

mentioned, is a form of response to negative experience / or a negative

perception. Apparently this exclusion per se can have relevance for Any

field of activity relevant in society and not only field of “finance”. It can

be education, Entertainment, any other economic activity like Industry /

business etc. Of course “finance” is one of those. The financial

exclusion has been identified with inability to access all necessary

financial services in an appropriate form. This word ‘Appropriate’ as

Discussed earlier require determination about acceptable Ingredients /

product / services And implies certain level of knowledge and

awareness i.e. financial literacy and Education.

Thus, important Ingredients / indicator of financial inclusion which

come out of this definition, based on converse interpretation (because

definition is focused on elements of exclusion) are basic banking

services i.e. Saving, Credit, Money transmission, Debt and Debt

assistance, Insurance & financial literacy .This definition does not talk

about investment Function as a necessary financial services as

essential element of Financial Inclusion.

Definition of Financial Inclusion In Indian Context:

According to R.B.I. “financial Inclusion in Indian context implies

the provision of affordable financial services viz, access to payment and

remittance facilities, saving, Loan, and insurance services by the formal

financial system, to those who tend to be excluded. Besides access,

emphasis is also placed on affordability (low cost) financial services

such as saving / loan and remittance to underprivileged segment of

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population”. The annual policy Statement for the year 2005-2006 of

R.B.I. for the first time used the term financial inclusion and it was

stated that “Although there had been expansion, greater competition

and diversification of ownership of banks leading to both enhanced

efficiency and systematic resilience, there were legitimate concerns

with regard to the banking practices that tended to exclude vast

sections of population, in particular pensioners, self-employed persons

and those employed in un-organised sectors. The statement further

observed that while commercial considerations were important, the

banks had been bestowed with several privileges, especially of seeking

public deposits on a highly leveraged basis and therefore (Banks)

should be obliged to provide banking services to all segments of the

population on the equitable basis”.

Leela Dhar, Dy Governor of R.B.I is of the view that “Financial

inclusion is delivery of banking services, at an affordable cost to the

vast sections of Disadvantaged and low income groups. Unrestrained

access to public goods and services is the nine qua non of an open and

efficient society. As bank services are in the nature of public good, it is

essential that availability of banking and payment services to the entire

population without discrimination is the prime object of public policy”.

The definition purports to define financial Inclusion (As against converse

of exclusion); And this tend to equate “Banking services with financial

services” normal trend of other definitions is to talk about financial

services but elements of such services included almost all important

banking services like saving/ lending / remittance. Stating financial

inclusion in terms of banking services alone, excludes Insurance; which

is normally included in all other definitions, mostly. The definition and its

application may lack force because the reason stated by Leeladhar in

term of access to public goods as sine-qua-non of an open and efficient

society raises debatable issue like, whether banking service provided by

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private bankers / foreign bankers is also in the nature of public goods. If

this concept is forced then whether ours is an open and efficient society

& how much, so as to make it ‘sine qua non.’The definition has been

criticized as being applicable only to public sector banks & not other

banks including co. op. banks. Hence at best it is only a very restrictive

definition.

Thorat, Dy. Governor R.B.I maintained that “Financial Inclusion

means the provision of affordable financial services viz. access to

payment and remittance facilities ,savings ,loans and insurance

services by the formal financial system to those who tend to be

excluded.” This definition is also of “Inclusion” directly and here word

‘Financial services’ has been used and elements have been brought out

clearly . Which are most of basic banking services, but insurance is also

included here as part of financial services.

Mohan the Economist Dy. Governor of R.B.I. is of the view that

“Financial Exclusion signifies lack of access by certain segments of the

society to appropriate low cost , fair and safe financial product and

services from main stream providers. Financial exclusion is thus a key

policy concern because the option for operating a household budget, or

a micro / small enterprises, without main stream financial services can

often be expensive. This process becomes self re-enforcing and can

often be an important factor in” social exclusion, especially for

community with limited access to financial product, particularly in rural

areas”. This definition of financial inclusion is in term of exclusion,

specially because, it is modelled on same line as the definition given by

chant link And Associate in 2004, in Australia. With few modifications

and changes in peripheral words to suit Indian conditions, it conveys the

same meaning. However in this definition also, The retention of word

‘Appropriate’’ and “fair”, indicate needs towards financial literacy &

education, which other Indian definitions appear to ignore, while

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insurance appears to be included. It can be observed, very peculiarly

that almost all definition being quoted, are from Deputy. Governors of

R.B.I., in the same year i.e. 2006, after monetary policy statement in

2005-2006 and yet do not bear stamp of uniformity or R.B.I.’s set

approach towards the financial inclusion and financial literacy etc.

Dr. Y. V. Reddy, Economist and Former Governor of R.B.I. is of

the view that “the process of financial inclusion consists of seeking each

household and offering their inclusion in the banking system.” Here

Reddy does not mention ‘financial system”, but says banking system

very clearly, besides leaving the onus of achieving financial inclusion on

the banking system, by identifying households and including them into

system. Notably efforts as achieving financial inclusion as spear

headed by R.B.I. , bore the stamp of definition given by Reddy, which

came in end of 2007.

The Committee on Financial Inclusion- Chairman Dr. C. Rang

Rajan, Former Economist and Governor of R.B.I., Deputy Chairman

Planning Commission of India and Chief Economic Adviser to Prime

Minister has defined financial inclusion is the process of ensuring

access to financial services and timely and adequate credit where

needed by vulnerable groups such as weaker section and low income

groups, at an affordable cost”. This definition too, like Reddy’s talks of

Financial service in term of it being a process. While Reddy said about

seeking the household and including these in banking system, The

definition given by committee brought in following elements as

essential Ingredient of the said process – Ensuring access to financial

services (not only in banking and thus keeping door open to other

financial sectors, Process of giving credit (Directon to banks) which has

to be (1) Timely (2) Adequate (3) At affordable cost, if needed by

vulnerable groups (e.g. weaker section / lower income group). Some

further explanations are needed in a pointed manner.

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Banking is part of “financial system”, which also include insurance

and investment i.e. raising capital and all incidental sectors & markets

etc. including hybrid financial services which come about as

combination of these 3 primary sectors e.g. mutual funds, units,

Pension, Investment related services. Banking is also a business,

where banking services do not come for free. Certain costs are involved

in providing these services on one hand and the provider do have a

profit motive. That is commercial banking. When there are certain

members of a group and run the business of banking on co-operative

principles- it is co-op banking; but this too is for earning income and

profit. The peculiar aspect associated with this business is, that since

banks provide finance for running other commercial / Industrial /

Business ventures etc., growing business of banks means growth of

economy around the bank and increasing prosperity of its clients. Thus

a good running bank creates a win-win situation for itself and its clients

too. Prima facie Increasing the number of clients for the bank is, thus,

the “Inclusion” of people in banking activity / system.

It can be said that banking being part of the over all financial

system, when one gets into or gets included in that group of people who

commonly get banking services, one get financially included as per

extant concept of Financial Inclusion (F.I.) in India.Simple Insurance

products are already part of it. But Investment/ capital market and

related sectors are not presently essential to F.I.in India( which will be

the next level of F.I.here. Internationally, as evidenced from mission of

Financial education/ Literacy being carried on by O.E.C.D., Financial

Sectors Other Than Banking, are also part of F.I.,now. i.e.” the next

level is already in progress). All the definitions selected above for

discussion appear to be using ‘banking services’ and ‘financial

services’, interchangeably .However it may be pertinent to note and

distinguish once more, at this juncture that Banking Services (B.S.) are

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included in Financial Services (F.S.). F.S. is a wider concept and

include services related to 2 other sector i.e. insurance and capital

related investment, as well as incidental sector e.g. mutual funds /

venture funds / pension funds etc.

But banking remains Basic financial service, where cash and

money covert in other financial product / services and process of

intermediation take place as well as final benefits of other 2 sectors and

many more such sectors be it insurance / Investment / value of capital &

stock market / M.F. / Pension etc. i.e. hard cash and money, once again

get distinguished, stored and utilized through banks only. Hence

“Banking Services” become basic services which are must, to be linked

with any sector of finance / economy. That is why basically all

definitions talk about banking services. Reserve banks report on

currency and finance identifies following Institutions and financial

products and services, which are subject matter of financial inclusion.

Institutions are (1) Commercial / co. op. banks / credit union (2)

postal deptt. (3) micro finance institution and N.G.O. (4) Insurance

company. Their product of services are :Saving A/C, loan / credit

account, payment and remittance services, Postal saving A/C, Postal

remittance, small value loan, credit (Given by M.F./N.G.O.),Insurance

product by insurance company(Through banks); and ‘Financial Advise’

is also mentioned as product. In view of this, it can be conclusively said

that whenever in any definition Banking Services is mentioned, or

Financial Services is mentioned, for the purpose of determining

Financial Inclusion, the set of services mentioned by R.B.I. are definitely

included. In addition certain definitions as discussed aforesaid and

Internationally recognised, have mentioned investment and debt & debt

assistance services as well as “Financial literacy” also as essential to

F.I.. Those definition which define financial inclusion in terms of

‘Exclusion’ basically focus on “Lack of access” to above Financial

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Services/Banking Services. ‘Access’ can have many dimensions, which

must be understood. One may not have ‘’access’’ to banking or other

formal financial Institutions as identified above, because these may not

exist in adequate numbers and at appropriate places.

If these Institutions exist, then, one may not have access to its

product and services for the enumerated reasons elsewhere earlier,

including voluntary or involuntary self- exclusion.. Also, the question as

to who has access and who has not, also becomes important. All the

existing customers of the bank have already the access. There may be

other potential customers, who may be ‘able & informed’, or ‘able &

ignorant’, about banking facilities or its usefulness. If such potential

customers are not yet included, it is a business loss for banks/F.I.s and

the Institutions have to put their Marketing wing on alert to generate this

new business. Such exclusion of such persons, is not the real concern

of entire movement for the “Financial Inclusion” in India (or any other

similarly placed emerging nation), in the present phase. Notably, certain

definitions and almost majority of definitions stated above, talk about

disadvantaged sectors (poor / low income groups / weaker

sections).Only when these sectors get excluded from gaining access, it

becomes concern for the Government, and public policies have to be

devised to see that such a situation is avoided or ameliorated. Reason

is obviously linked to cost and consequences, which results, when one

is financially excluded. Actually, Researches have already established

that “finance” as a resource, aids economic growth and development.

Banks are not only provider of banking services but also agent of

growth as well as creator of secondary money in the system. Access to

credit and other financial services for the poor and vulnerable groups,

disadvantaged areas and lagging economic sectors/ enterprises -

specially small and marginal ones, has been recognized broadly

helping in accelerating the growth in economy as well as source of

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reduction of poverty. Such access if available, to well-functioning

financial system, it creates equal opportunities, integration of socially

excluded persons (due to financial exclusion), with economy, thus

enabling them to contribute in development process, besides enabling

them to meet the challenge of economic shocks, which is becoming a

recurrent affair during last 50 years.

In this regard it may not be out of place to mention about United

Nation’s efforts at removing poverty. There is the broad International

consensus that access to finance is a crucial poverty alleviation tool. In

this regard for achieving United Nations Millennium Development Goals

(MDG), there was held a world summit in 2005 and critical importance

of Micro-finance was highlighted (which is one of ways, interalia for

accessing finance). This was endorsed by the summit for monetary

consensus of the International conference on Financing for

development “The final declaration of the monetary consensus put lot of

emphasis on strengthening domestic financial sectors to include

underserved segments such as rural areas and women. It is also a fact

that in the year 2006, according to estimate of U.N., over 2 Billion

people did not have access to financial services. Even in developed

countries approx. 20% population did not have access, while in L.D.C s

(Low Developing Countries) it may be around 90%. Even in India more

than 50% households do not have “access “for various reasons. The

consequences of “Lack of Access” with reference to credit from formal

sources are that the poor individuals and small and micro enterprises

usually have to rely on their personal savings or internal resources to

invest in Housing, health and education as well as entrepreneurial

activities, if they wish to use the available growth opportunities .The

‘exclusion’ has cost in terms of loss of opportunities to grow. At macro-

level the national economy suffers because a vast segment of

population, which may be financially excluded, cannot grow to their

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combined potential. Other consequences may relate to cost and

scarcity issues related to cash management (as banks’ A/cs. are not

available), lack of smooth payment mechanism, low level of living

standard and if sources of informal credit viz. money lenders etc. are

used, the cost goes up multi- fold and not only financial disaster await

the poor man but even social disaster does not remain for away for

such excluded persons. Even banks lose their business opportunity,

while government may lose because of cost of welfare measures and

due to corruption in society which goes up. The poor man having no

access to banking not only falters on planning of his finances, but also

loses opportunity to save, even if he had some extra cash which could

be of help to growing banking and Economy , when aggregated for

large number of people so “excluded” for known and unknown reason.

The studies of World Bank, Asian Development bank and ‘kempson et

all’ pinpoint the following factors which affect access to Financial

Services in various and different countries (including India ). All may not

be applicable in all countries uniformly but one or the other will apply to

any country.

Gender Issues: women quite often are not allowed access to

financial services-specially credit, if they do not hold title to assets like

land or property or where they need guarantee from ‘males’ to borrow. It

applies in India too.

Age Factor: Financial service providers, often target middle

aged economically active population often ignoring development of

products for older and younger population. In India people above 60-65

years called senior citizens are deliberately kept away from credit

products as well as Insurance products appropriate for them including

health insurance, though they may have adequate sources of funds to

repay the loans etc. For a poor man & old man – it is often no.

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Legal Identity: Woman, ethnic minorities, economic/ political

refugees / migrant workers and similarly disadvantaged groups of

people including unregistered enterprises and unlicensed business,

tend to get excluded due to absence of legally acceptable identity cards/

birth certificates / certificates of incorporation for commencement of

business / written record etc.

Limited Literacy / No Literacy- absence of financial literacy i.e.

basic mathematics, business finance skill, and lack of understanding the

financial system, is cause of exclusion / lack of demand for financial

services.

Place of Living – physical distance from the service provider

venue, density of population, Rural & remote area, mobility of

population (affecting a fixed address), law & order, and Insurgency at

particular location etc. affect the process of accessing the financial

services.

Psychology and Cultural Barriers – Segment of population

having perception of hostile approach of bankers towards themselves

as well as cultural & religious barriers to banking in some countries are

major cause of self- exclusion.

Social security payments- If such payments are linked to

banking system, banking exclusion or financial exclusion is less.

Converse is equally true.

Bank charges- For a low Income group person-bank charges for

services provided are material factor to get included or remain

excluded.

Terms and conditions- When banking products have terms and

conditions e.g. minimum balance in A/C, frequency or operation, etc.,

dissuade people from going to bank.

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Level of income- Low income itself is barrier to the inclusion.

poorer the person harder to get included. Type of occupation:-Banks’

lack of knowledge about certain professions /enterprise /occupation

develops a tendency amongst banks to reject the loan applications from

related clients.

Attractiveness of product- If not advertised properly or not

marketed properly then also people specially the poor, tend not to

choose such product and if that is the only reason for approaching a

bank then it makes him/ her turn away from banks. As per survey and

study done (by author of the thesis), following factors also act as barrier

to Inclusion:

Bribery

Corruption (In branch)

Misconduct by employees of bank

Mall practices in the bank

Law and order situation

Bad reputation of bank.

Another set of factor which came out in the said study are from

bankers’ point of view:

Risk perception with regard to rural people.

Cost of credit assessment and management.

Lack of staff.

Lack of basic infrastructure.

Vast geographical distances.

Above factors inhibit bankers from actively involving in financial

inclusion drive. For a poor man, how the access problem presents

itself, has been described by (A.D.B.- 2007) as follows:

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Amongst the low income households and their micro and small

enterprises, majority have no access to finance, while a small minority

may have access to it. Those who have such access, their large

proportion is underserved while very small proportion may have full

access.

From amongst the underserved proportion—

Significant numbers depend upon services of unsustainable

Institutions, by paying high transaction cost.

Many have access to deposit related services of state owned

financial Institutions and co – operatives, where withdrawing

funds is not easy besides transaction cost being high.

A significant proportion has access only to credit from micro credit

institutions, where quality of credit is poor.

Proportion with access to banking services is very limited, but

here also client transactions carry high cost and time taken for

processing is long. Here also, the minimum loan requirement is

high and banks are geared to serve high income groups (rather

than low income groups).

Access to Insurance services is extremely limited, and that too

with high product incompatibility and low transparency.

To summaries the concept of financial inclusion as it emerges in

our country, it is ensuring provision of affordable financial services

which means (i) Access to payments & remittance facilities and financial

advice (ii) savings (iii) Loans and (iv) Insurance services; and in general

the Banking system and public policy as operated by the Government of

the day , should ensure that there is least ‘Financial Exclusion ‘ i.e. lack

of access to a range of financial services (as afore said). Such

Exclusion can be due to (1) Geographical and locational reasons (ii)

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Depth of Banking institutions and its branches (iii)The cost of banking

services available to the community in the form of ‘charge’ and ‘pricing’

of various services (iv) Exclusion from marketing efforts done by

Financial Institutions and Self – Exclusion . This broad effort at avoiding

Financial Exclusion has to be spearheaded by Government /Public

Authority /Banks generally and specially for the vulnerable /weaker

sections of the society (Including woman & aged and very young

population) , and in general for the low income group persons and micro

& small enterprises .(of course ,banks and other Financial Institutions,

must in their own interest & for better business must not leave

economically /financially better of population and business entities,

which may be financially excluded at any point of time. Those, who

have to spearhead this movement must remember that it is not for some

charity that, this is being done, to help the poor. There are

consequences if financial exclusion is not avoided and inclusion is not

promoted. Consequences of financial exclusion can be summarised as

below –

Increased travel requirement for any one not heaving access to

banking as one himself/herself has to become agent of payment

mechanism as well as remittance of funds etc.

Higher security related issues involved in cash movement,

leading to high incidence of crime.

General decline in investment opportunity for such excluded

persons. On an aggregated basis the economy of nation suffers.

For such person credit from moneylender and other informal

sources comes at high cost monetarily and when repayment

issues crop up there are social adversities caused by money

lenders for such people, making them poorer.

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Potential enterprises do not happen and hence technically

unemployment rises.

Children of poor, are poor too, and hence financial exclusion is

cause of child poverty.(As well as for child marriages, as found

out in survey )

The welfare and social payments/ benefits system operated by

government becomes costly with actual delivery problems. The

social consequences are that bribery and corruption in the

system increases, besides certain category of white colour

crimes.

Financial exclusion also causes social exclusion due to social

status being downgraded.

Financially excluded people are often fodder of

extremists/terrorists and insurgents.

Such persons are more prone to addiction of alcohol/drugs and

aides like illness – as per survey.

As against above the benefits of financial inclusion are-

Increasing propensity to save has been observed once one is

acquainted with bank and banking facilities. Specially, when a

person maintains an account in a bank.

Demand for loan products for consumption, livelihood and

housing, increases provided these are seen as affordable.

Remittance facilities by various modes, increase economic

vibrancy in the system.

Purchases and payment being done by using credit/debit cards,

online etc. helps in growth of economy.

Payment of social security benefits given by Government/others,

reducing possibilities of corruption.

135

Identifications and removal of forged currency from circulation

with the help of banks.

Increase in financial literacy and education.

Also the persons responsible for spread of financial inclusion

should keep in mind that “credit” is an important thing and In terms of

report of Dr. Rangrajan committee “credit” to vulnerable sections of

society once identified as needed, should be made available timely and

at affordable cost, besides being adequate, and as a ’package’ it is an

essential element in financial inclusion.

Linkage with Financial Literacy:

This topic has been dealt with in detail in previous chapter. At this

point suffice to say that financial literacy and education have been

identified as an essential element of Financial Inclusion and many

definitions discussed above clearly bring out this fact. The words like

“financial advice” skill “knowledge” “adequate” “appropriate”

“understanding” etc., cannot be operationalised without adequate

financial literacy and education and hence it is an essential element of

Financial Inclusion, as has been emphasised more than once in

aforesaid discussion. Rather, present thinking, after OECD workshops,

in the mind of RBI is that Financial Literacy/Education must operate side

by side , on its own legs, along with Financial Inclusion.

Status of Financial Inclusion:

The large section of population below the expenditure curve also

points to a worrying inequity in incomes, something that should concern

planners as the government looks to target benefits for those who need

them through initiatives like food security and employment guarantees

(Sunday Times, 2012). India’s schemes might be off target, or suffering

from poor reach while benefits of economic growth are not meeting the

government’s objectives of “inclusive growth” as it is evident from the

136

data (Table 4.1) that there is a concentration of buying power in the top

30 per cent-35 per cent of the population. The 60-plus per cent of

population below the average monthly spending is clearly not

progressing as fast as the segment whose income and expenditure is

disproportionately influencing the statistical mean (Sunday Times,

2012).

Table: 4.1

Position of Households Availing Banking ServicesAs per Census 2001 As per Census 2011

Households Total number of

households

Number of households

availing banking services

Percent Number of households

availing banking services

Number Percent

Rural 138,271,559 41,639,949 30.1 167,826,730 91,369,805 54.4

Urban 53,692,376 26,590,693 49.5 78,865,937 53,444,983 67.8

Total 191,963,935 68,230,642 35.5 246,692,667 144,814,788 58.7

Source: Census of India 2011,

Among the states, there is not much to choose between those

often stigmatized as “backward” like UP and Bihar, Gujarat and

Maharashtra. Even in the better off states, the per centage of rural

populations below the average monthly expenditure line is above 60 per

cent. In urban areas, it is a shade under 60 per cent for Gujarat, but

almost 70 per cent for Maharashtra (Sunday Times, The extent of

financial exclusion in India is (Khan, 2012) found to be higher as

compared with many developed and some of the major emerging

economies. The wide extent of financial exclusion in India is visible in

the form of high population per bank branch and low proportion of the

population having access to basic financial services like savings

accounts, credit facilities, and credit and debit cards.

137

State wise per centage of households (GoI-FM, 2012), availing

Banking Services in 2011 (Table 4.2), clearly show that there still

remain a large number of households which do not avail banking

services, resulting to financial exclusion.

Table: 4.2

State-wise per centage of Households Availing Banking Services in 2011

States Percentage of Households availing Banking services

Andhra Pradesh 53.1Arunachal Pradesh 53.0

Assam 44.1Bihar 44.4

Chandigarh 80.1Chhattisgarh 48.8

Delhi 77.7Goa 86.8

Gujarat 57.9Haryana 68.1

Himachal Pradesh 89.1Jammu & Kashmir 70.0

Jharkhand 54.0Karnataka 61.1

Kerala 74.2Madhya Pradesh 46.6

Maharashtra 68.9Manipur 29.6

Meghalaya 37.5Mizoram 54.9Nagaland 34.9

Odisha 45.0Punjab 65.2

Rajasthan 68.0Sikkim 67.5

Tamil Nadu 52.5Tripura 79.2

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Uttar Pradesh 72.0Uttarkhand 80.7

West Bengal 48.8All India 58.7

Source: Census of India 2011.

About half of the of farmer households are financially excluded from

both formal/ informal sources. Of the total farmer households, only 27

per cent access formal sources of credit; one third of this group also

borrowed from non-formal sources. Overall, 73 per cent of farmer

households have no access to formal sources of credit. Across regions,

financial exclusion is more acute in Central, Eastern and North-Eastern

regions. All three regions together accounted for 64 per cent of all

financially excluded farmer households in the country. Overall

indebtedness to formal sources of finance of these three regions

accounted for only 19.66 per cent. However, over the period of five

decades, there has been overall improvement in access to formal

sources4 of credit by the rural households (Table 4.3).

Table: 4.3

Access of Credit by Rural HouseholdsYear Formal Sources Informal Sources

1951 3.9 69.7

1961 9.5 60.8

1971 22.3 36.9

1981 56.6 16.9

1991 47.6 15.9

2002 57.0 29.6

Source: RBI, 2013.

As per census 2011, only 58.7 per cent of households are

availing banking services in the country. However, as compared with

previous census 2001, availing of banking services increased

significantly largely on account of increase in banking services in rural

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areas. Sadhan Kumar8 (2011) worked out an Index on financial

inclusion (IFI) based on three variables namely penetration (number of

adults having bank account), availability of banking services (number of

bank branches per 1000 population) and usage (measured as

outstanding credit and deposit). The results indicate that Kerala,

Maharashtra and Karnataka has achieved high financial inclusion (IFI

>0.5), while Tamil Nadu, Punjab, A.P, H.P, Sikkim, and Haryana

identified as a group of medium financial inclusion (0.3 <IFI<0.5) and

the remaining states have very low financial inclusion (Table 4.4).

Table: 4.4

Availing of Banking Services2001 2011

Rural 30.1 54.4

Urban 49.5 67.8

Total 35.5 58.7

Source: Department of Financial Services, Government of India.

Region-wise population per branch and share in credit is shown

in Table 4.5. Population per bank branch has been reported

significantly high in north-eastern region followed by eastern and central

region while low population per bank branch was recorded in southern

region. Western region has witnessed lion’s share in credit while north-

eastern region received credit least.

Table: 4.5

Region-wise Population Per Bank Branch Region-wise 2010-11 Share in Credit

Central Region 17260 6.8

Eastern Region 18328 7.5

North Eastern Region 19255 0.7

Northern Region 10077 23.8

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Southern Region 10043 26.6

Western Region 12096 34.6

Source: RBI, 2012

Banks have, up to June 2011, opened banking outlets in 1.07

lakh villages up from just 54,258 as on March 2010. Out of these,

22,870 villages have been covered through brick-&-mortar branches,

84,274 through BC outlets and 460 through other modes like mobile

vans, etc. Basic banking no frills account with nil or very low minimum

balance requirement as well as no charges for not maintaining such

minimum balance, were introduced as per RBI directive in 2005. As on

June 2011, 7.91 crores No-frills accounts have been opened by banks

with outstanding balance of Rs. 5,944.73 crores. Banks have been

asked to consider introduction of a General Purpose Credit Card (GCC)

facility up to Rs. 25,000/- at their rural and semi-urban braches. The

credit facility is in the nature of revolving credit entitling the holder to

withdraw up to the limit sanctioned. Interest rate on the facility is

completely deregulated. As on June 2011, banks had provided credit

aggregating Rs. 2,356.25 crores in 10.70 lakh General Credit Card

(GCC) accounts. Kisan Credit Cards to small farmers have been issued

by banks. As on June 30, 2011, the total number of KCCs issued has

been reported as 202.89 lakh with a total amount outstanding to the

tune of 1, 36,122.32 crores (Table 4.6).

Table: 4.6

Data Related to Number of Villages Covered, No Frill Account, GCC and KCC

Year Coverage of Villages

No Frill Accounts (Crores)

Number of GCC

Accounts (Lakh)

Number of KCC

Accounts (Lakh)

March 2010 54,258 4.93 4.73 176.3

June 2011 1, 07,000 7.91 10.70 202.89

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Target March 2012

218574 11.25 37.34 276.59

Source: RBI, 2012

Financial education, financial inclusion and financial stability are

three elements of an integral strategy, as shown in the diagram below.

While financial inclusion works from supply side of providing access to

various financial services, financial education feeds the demand side by

promoting awareness among the people regarding the needs and

benefits of financial services offered by banks and other institutions.

Going forward, these two strategies promote greater financial stability.

Financial Stability Development Council (FSDC) has explicit mandate to

focus on financial inclusion and financial literacy simultaneously. RBI

has issued revised guidelines on the Financial literacy Centres (FLC) on

June 6, 2012, for setting up FLCs. This model helps in bringing more

people under sustainable development in a cost effective manner within

a short span of time. As on March 2011, there are around 7.46 million

saving linked SHGs with aggregate savings of Rs.70.16 billion and 1.19

million credit linked SHGs with credit of Rs. 145.57 billion (Source:

NABARD, Status of Microfinance in India). Though RBI has adopted

the bank-led model for achieving financial inclusion, certain NBFCs

which were supplementing financial inclusion efforts at the ground level,

specializing in micro credit have been recognized as a separate

category of NBFCs as NBFC-MFIs. At present, around 30 MFIs have

been approved by RBI. Their asset size has progressively increased to

reach Rs. 19,000 crore as at end Sept 2013. MSME sector which has

large employment potential of 59.7 million persons over 26.1 million

enterprises, is considered as an engine for economic growth and

promoting financial inclusion in rural areas. MSMEs primarily depend on

bank credit for their operations. Bank credit to MSME sector witnessed

a CAGR of 31.4 per cent during the period March 2006 to March 2012.

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Of total credit to MSME, public sector banks contributed the major share

of 76 per cent, while private sector banks accounted for 20.2 per cent

and foreign banks accounted for only 3.8 per cent as on March 31,

2012.

Financial inclusion is one of the biggest challenges facing the

banking sector today. The Reserve Bank has been encouraging the

banking sector to expand the banking network both through setting up

of new branches and also through BC model by leveraging upon the

information and communication technology (ICT). As a result of all

these efforts the status of financial inclusion improved in 2010-11 over

the previous year (Table 4.7). Various indicators mentioned below in the

table are showing growth in year 2010-11 when compared with the

previous year 2009-2010. Still the extent of financial exclusion is

shocking.

Table: 4.7

Progress of Financial InclusionIndicators 2009-10 2010-11Credit-GDP 53.40 54.60

Credit-Deposit 73.60 76.50

Population Per Bank Branch

14000.00 13466.00

Population Per ATM 19700.00 16243.00

Percentage of Population Having Deposit Accounts

55.80 61.20

Percentage of Population Having Credit Accounts

9.30 9.90

Percentage of Population Having

Debit Cards

15.20 18.80

Percentage of Population Having

Credit Cards

1.53 1.49

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Branches Opened in Hitherto Unbanked

Centre’s as Per Cent of Total New Bank

Branches

5.60 9.70

Source: RBI, 2012.To strengthen the financial inclusion drive, almost all banks have

made financial inclusion plans (FIPs) to cover villages with population

more than and also less than 2000 and Reserve Bank is closely

monitoring the implementation of these plans. The progress made

under FIPs is provided in Table 4.8. The total number of villages

covered by at least one banking outlet grew at 82 per cent in 2010-11

over the previous year. Importantly, in 2010-11, 47 per cent of the total

villages covered under FIPs were villages with population less than

2,000. It can be understood from the table that banks have been heavily

relying on BCs to expand the banking network in the unbanked areas

under FIPs. In 2010-11, almost 77 per cent of the total villages covered

were through BCs. The number of 'no-frills' accounts recorded a growth

of 50 per cent in 2010-11 over the previous year. The share of 'no-frills'

accounts with overdrafts in the total 'no-frills' accounts improved from

0.3 per cent in 2009-10 to six per cent in 2010-11. The number of Kisan

Credit Cards (KCCs) and General Credit Cards (GCCs) witnessed

growth of 15 per cent and 49 per cent, respectively in 2010-11 over the

previous year.

Table: 4.8

Progress Made Under Financial Inclusion PlansParticulars End-March Progress

2010 2011Total number of customer service points

deployed33042 58361

Total Villages Covered 54757 99840

Villages Covered – with Population>2000 27743 53397

Villages Covered – with Population<2000 27014 46443

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Villages covered through Branches 21499 22684

Villages covered through BCs 33158 76801

Villages covered through other modes (Mobile van and ATM)

100 355

Urban Locations covered through BCs 423 3653

Number of No-Frill Accounts (in millions) 50 75

Number of KCCs outstanding (in millions) 20 23

Number of GCCs outstanding (in millions) 6 1

Source: RBI, 2012.Financial Inclusion has got momentum in the recent past in India.

In order to promote the accessibility and outreach of banking and

financial services to the masses, banking sector reforms have been

introduced by RBI besides implementing regulatory framework for

financial inclusion (Singh and Rastogi, 2014). As per RBI Report (2012),

India had over 900 million deposit accounts. Of these, over 770 million

accounts were in the names of individual. However, census data (2011)

show that only 144 million households have access to banking services,

indicating that many have multiple accounts. Prosperous states include

Tamil Nadu and Gujarat reported fewer households accessing banking

services than the national average while Kerala, Delhi, Uttarakhand and

Himachal Pradesh were the better performing states. More than 1.8

crore bank accounts were activated as the government stepped up its

financial inclusion efforts on 29th August, 2014, setting a record of the

mega programme of Jan Dhan Yojana. This is one of the most

ambitious financial inclusion programmes undertaken by any

government. The scheme is open for 7.5 crore bank accounts as the

target expected to be achieved by January 26, 2015. The account

holders get a basic account with Rs. 1 lakh personal accident insurance

and Rs. 30,000 in life insurance cover. After the accounts operate for

more than 6 months and bank review the credit history, an overdraft

facility of Rs. 5,000 could be added. Despite the progress on the

opening of bank accounts, access to credit still lags. India has over 130

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million credit accounts, which deal with loan, within average of Rs. 3.7

lakh outstanding in each account. However, credit is highly skewed

towards big cities. Personal loan accounts, the single largest category

of credit accounts, outnumber agricultural loan accounts and the vast

majority of these accounts are in metropolitan cities. There is also a

significant gender gap in banking. Chhattisgarh, West Bengla, Madhya

Pradesh, Maharashtra and Gujarat were even worse than the national

banking sex ratio, while Delhi and the southern states were better.

The analysis of micro credit programmes on women

empowerment simply demonstrate that government’s policies for

empowering weaker sections articulate focus on forward and backward

linkages to make them economically independent and self-reliant. The

micro credit strategy for economic empowerment laid out in the Tenth

Five Year Plan while Government of India started SHG based micro

credit programmes viz. Swashakti, Swayamsiddha, RMK and SGSY for

economic empowerment of rural poor women. Moreover the term loan

and micro credit programmes and schemes are also being implemented

by Apex bodies of the Ministry of Social Justice and Empowerment,

Ministry of Tribal Affairs, Ministry of Minority Affairs and the financial

institutions such as SIDBI and NABARD. These programmes have no

doubt created opportunities for starting of income generating activities,

convergence of schemes and programmes and social empowerment for

women.

Poverty and exclusion continue to dominate socio-economic and

political discourse in India as they have done over the last six decades

in the post-independence period. Poverty reduction has been an

important goal of development policy since the inception of planning in

India. Various anti-poverty, employment generation and basic services

programmes have been in operation for decades in India. The ongoing

reforms attach great importance to removal of poverty and to

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addressing the wide variations across states and the rural-urban divide.

Though the Indian economy recorded impressive growth rates until

recently, its impact has sadly not fully percolated to the lowest deciles.

Despite being one of the ten fastest growing economies of the world,

India is still home to one-third of the world’s poor. Further analysis

shows that poverty is getting concentrated continuously in the poorer

states. The importance of financial inclusion has been emphatically

underlined in the wake of the financial crisis. As we all know, the crisis

has had a significant negative impact on lives of individuals globally.

Millions of people have lost their livelihoods, their homes and savings.

One of the prominent reasons for the crisis was that the financial

system was focused on furthering its own interests and lost its linkage

to the real sector and with the society at large. The crisis also resulted

in a realization that free market forces do not always result in greater

efficiency in the financial system, particularly while protecting the

interests of the vulnerable sections of society. This is due to the

information asymmetry working against these sections, thereby placing

them at a severe disadvantage. In wake of the Crisis, therefore,

Financial Inclusion has emerged as a policy imperative for inclusive

growth in several countries across the globe. However, though much lip

service has been paid to Financial Inclusion, the actual progress has

remained far from satisfactory. As I always mention, it is regrettable that

the entire debate surrounding financial inclusion has generated

significant heat and sound, but little light. Financial inclusion is the main

agenda which India needs to achieve for becoming a global player.

Financial access will attract more global market players in our country

which will result in increasing employment and business opportunities.

Moreover, financial inclusion will lead to reduction in poverty and

empowerment of marginalized, backward and weaker sections of

society. However, India needs to address the supply side factors

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besides improving the existing infrastructure, bank and ATM network

and access of improved technology.

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