A PROJECT REPORT ON FINANCIAL INCLUSION

IN PARTIAL FULFILLMENT OF THE REQUIREMENT OF THE AWARD FOR THE DEGREE OF MASTER
OF BUSINESS ASMINISTRATION
M.B.A SEMESTER III National Institute of Co Operative Management- MBA
Submitted to Prof. URVI AMIN
Submitted By:Sumit Kumar (B-04) Asha Patel (A-25)

PREFACE
Using a new pattern based on proper integration of formal teaching and actual pr
actice the M.B.A. program of National Institute Of Co Operative Management has i
t course of practical exposure and understanding during the study, so as the stu
dents could begin to have the feeling of business environment right in the begin
ning. Practical Study & implications constitutes an integral part of management
studies. The practical knowledge is an important suffix to the theoretical knowl
edge. One cannot rely merely upon theoretical knowledge. Is has to be coupled wi
th practical for it to be fruitful. A few years ago, the rural market in India w
as an unknown territory and many companies were not interested in entering the r
ural markets of India, But these things are the story of the past and now Everyo
ne is looking at the rural markets as the next growth driver in Indian market an
d with banking sector now even RBI has made compulsion of expanding nationalized
banks in rural areas. We consider ourselves lucky to get this type of exposure
by preparing a report on Financial Inclusion. It really helped us to get a pract
ical insight into the actual business & Market environment of banking and provid
e us an opportunity to make our Financial Service Management concepts more clear
in this sector. The advantages of this sort of integration are:
To bridge the gap between theory and practice.
To help students identify their s
trong & weak points in the following & appreciating activities
To acquaint stude
nts with true understanding and knowledge, that will endeavour their future even
in the Industry.

EXECUTIVE SUMMARY
Financial services actively contribute to the humane & economic development of t
he society. These lead to social safety net & protect the people from economic s
hocks. Hence, each & every individual should be provided with affordable institu
tional financial products/services popularly called Financial Inclusion . Despite w
itnessing substantial progress in financial sector reforms in India, it is dishe
artening to note that nearly half of the rural households even today do not have
any access to any source of funds- institutional or otherwise. Hardly one-fourt
h of the rural households are assisted by banks. Hence the major task before ban
ks is to bring most of those excluded, i.e. 75% of the rural households, under b
anking fold. There is a need for the formal financial system to look at increasi
ng financial literacy and financial counseling to focus on financial inclusion a
nd distress amongst farmers. Indian banks and financial market players should ac
tively look at promoting such programs as a part of their corporate social respo
nsibility. Banks should conduct full day programs for their clientele including
farmers for counselling small borrowers for making aware on the implications of
the loan, how interest is calculated, and so on, so that they are totally aware
of its features. There is a clearly a lot requires to be done in this area. This
enables the customer to remit funds at low cost. The government can utilize suc
h bank accounts for social security services like health and calamity insurance
under various schemes for disadvantaged. From the banks point of view, having suc
h social security cover makes the financing of such persons less risky. Reduced
risk means more flow of funds at better rates. Access to appropriate financial s
ervices can significantly improve the day-today management of finances. For exam
ple, bills for daily utilities (municipality, water, electricity, telephone) can
be more easily paid by using cheques or through internet banking, rather than s
tanding in the queue in the offices of the service. A bank account also provides
a passport to a range of other financial products and services such as short te
rm credit facilities, overdraft facilities and credit card. Further, a number of
other financial products, such as insurance and pension products, necessarily r
equire the access to a bank account. Employment Guarantee Scheme of the Governme
nt which is being rolled out in 200 districts in the country would bring in larg
e number of people through their savings accounts into the banking system. It pa
ves the way for establishment of an account relationship which helps the poor to
avail a variety of savings products and loan products for housing, consumption,
etc.

CONTENT No. 1 Title INTRODUCTION 1.1 FINANCIAL EXCLUSION I. INTRODUCTION II. DEF
INITION III. THE INDIAN SCENARIO 2 LITERATURE REVIEW
CAUSES OF FINANCIAL EXCLUSION I. DEMAND SIDE BARRIERS II. SUPPLY SIDE BARRIERS C
ONSEQUENCES OF FINANCIAL EXCLUSION POLICY DEVELOPMENTS FINANCIAL INCLUSION I. IN
TRODUCTION II. PRESENT STATUS OF FI
FINANCIAL INCLUSION BY DENA BANK STUDY RESULT
BIBLIOGRAPHY QUESTIONNAIRE

INTRODUCTION
The future lies with those companies who see the poor as their customers
~C.K.Prahalad
Rural banking in India started since the establishment of banking sector in Indi
a. Rural Banks in those days mainly focused upon the agro sector. Today, commerc
ial banks and Regional rural banks in India are penetrating every corner of the
country and extending a helping hand in the growth process of the rural sector i
n the country. Fifty-eight per cent of the rural households do not have a bank a
ccount and only 21 per cent have access to credit from a formal source. Over 70
per cent of marginal farmers have no deposit account and 87 per cent have no for
mal credit.

HISTORY OF BANKING IN INDIA

Without a sound and effective banking system in India it cannot have a healthy e
conomy. The banking system of India should not only be hassle free but it should
be able to meet new challenges posed by the technology and any other external a
nd internal factors. For the past three decades Indias banking system has several
outstanding achievements to its credit. The most striking is its extensive reac
h. It is no longer confined to only metropolitans or cosmopolitans in India. In
fact, Indian banking system has reached even to the remote corners of the countr
y. This is one of the main reasons of Indias growth process. The governments regul
ar policy for Indian bank since 1969 has paid rich dividends with the nationaliz
ation of 14 major private banks of India. In the past three decades, India's ban
king system has earned several outstanding achievements to its credit. The most
striking is its extensive reach. It is no longer confined to metropolises or cit
ies in India. In fact, Indian banking system has reached even to the remote corn
ers of the country. This is one of the main aspects of India's growth story. The
government's regulation policy for banks has paid rich dividends with the natio
nalization of 14 major private banks in 1969. Banking today has become convenien
t and instant, with the account holder not having to wait for hours at the bank
counter for getting a draft or for withdrawing money from his account. The first
bank in India, though conservative, was established in 1786. From 1786 till tod
ay, the journey of Indian Banking System can be segregated into three distinct p
hases: Early phase of Indian banks, from 1786 to 1969 Nationalization of banks a
nd the banking sector reforms, from 1969 to 1991 New phase of Indian banking sys
tem, with the reforms after 1991.

BACKGROUND
Bank of Hindustan was set up in 1870; it was the earliest Indian Bank. Later, th
ree presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Ban
k of Bombay and Bank of Madras were set up, which laid foundation for modern ban
king in India. In 1921, all presidency banks were amalgamated to form the Imperi
al Bank of India. Imperial bank carried out limited number of central banking fu
nctions prior to establishment of RBI.
It engaged in all types of commercial banking business except dealing in foreign
exchange. Reserve Bank of India Act was passed in 1934 & Reserve Bank of India
(RBI) was constituted as an apex body without major government ownership. Bankin
g Regulations Act was passed in 1949. This regulation brought RBI under governme
nt control. Under the act, RBI got wide ranging powers for supervision & control
of banks. The Act also vested licensing powers & the authority to conduct inspe
ctions in RBI. In 1955, RBI acquired control of the Imperial Bank of India, whic
h was renamed as State Bank of India. In 1959, SBI took over control of eight pr
ivate banks floated in the erstwhile princely states, making them as its 100% su
bsidiaries.
It was 1960, when RBI was empowered to force compulsory merger of weak banks wit
h the strong ones. It significantly reduced the total number of banks from 566 i
n 1951 to 85 in 1969. In July 1969, government nationalized 14 banks having depo
sits of Rs. 50 crores & above. In 1980, government acquired 6 more banks with de
posits of more than Rs.200 crores. Nationalization of banks was to make them pla
y the role of catalytic agents for economic growth.
The Narasimha Committee report suggested wide ranging reforms for the banking se
ctor in 1992 to introduce internationally accepted banking practices. The amendm
ent of Banking Regulation Act in 1993 saw the entry of new private sector banks.
Banking industry is the
an Banking Industry has
een the economic crisis
l scenario of the world

back bone for growth of any economy. The journey of Indi

faced many waves of economic crisis. Recently, we have s
of US in 2008-09 and now the European crisis. The genera
economy is very critical.

It is the banking rules and regulation framework of India which has prevented it
from the world economic crisis. In order to understand the challenges and oppor
tunities of Indian Banking Industry, first of all, we need to understand the gen
eral scenario and structure of Indian Banking Industry.
Financial Inclusion
The prophecy of Millennium Development goals of U.N. i.e. growth with equity clear
ly envisages that the growth spree of the globe in the 21st century has left som
e people behind the time. Handful of the global populace are still languishing i
n the vicious circle of poverty & are cast aside by those who are economically s
tronger & swifter in the sway of globalization & liberalization. For sustenance/
better growth of the world, the deprived sections should be dragged into the mai
nstream of growth. This is because of the fact that poverty any where is a grave
threat to prosperity everywhere. Financial services actively contribute to the
humane & economic development of the society. These lead to social safety net &
protect the people from economic shocks. Hence, each & every individual should b
e provided with affordable institutional financial products/services popularly c
alled Financial Inclusion .
Definition:
Financial inclusion may be defined as the process of ensuring access to financia
l services and timely and adequate credit where needed by vulnerable groups such
as weaker sections and low income groups at an affordable cost. Financial produ
cts & services are identified as basic banking services like deposits accounts,
institutional loans, access to payment, remittance facilities & also life & non
life insurance services. The following are the denotation & connotation of finan
cial inclusion in India. 1. Affordable credit 2. Savings bank account 3. Payment
s & Remittance 4. Financial advice 5. Credit/debit cards 6. Insurance facility 7
. Empowering SHGs (self help groups) An inclusive financial system facilitates e
fficient allocation of productive resources and thus can potentially reduce the
cost of capital. An all-inclusive financial system enhances efficiency and welfa
re by providing avenues for secure and safe saving practices and by

facilitating a whole range of efficient financial services like easy day to- day
management of finances, safe money transfer etc. The govt. of India as well as
the banking industry has recognized this imperative and has undergone certain fu
ndamental changes over the last two decades. In fact, in order to address the is
sues of financial inclusion, the Government of India constituted a Committee on F
inancial Inclusion under the Chairmanship of Dr. C. Rangarajan. Not only in India
, but financial inclusion has become an issue of worldwide concern, relevant equ
ally in economies of the underdeveloped, developing and developed nations. Build
ing an inclusive financial sector has gained growing global recognition bringing
to the fore the need for development strategies that touch all lives instead of
a select few.

Chapter 2 LITERATURE REVIEW

In India, government-owned banks channel about 70 per cent of the net savings of
the economy into government- and state-owned enterprises, and finance a huge bu
dget deficit of about 9 per cent of GDP. Reducing the governments dependence on t
hese funds would require a change in the way the banking sector thinks and looks
at itself, moving towards participating more formally in financial inclusion. C
urrently, local banks have a long way to go in bringing the unbanked areas withi
n the banking fold. As competitive intensity hots up and ripples from internatio
nal competition touch the Indian shores in search of virgin markets, banks will ha
ve to revisit their cost models. Some estimates indicate that the lack of financ
ial inclusion from the banking system reduces potential GDP by nearly 1.5 per ce
nt. financial inclusion is one of the viable routes through which banks can main
tain their development and also survive the current financial crisis. But in ord
er to do that there should be extensive efforts both from the governments side as
well as the banks themselves. According to the Boston Consulting Groups 2007 rep
ort, The Next Billion Banking Customers the most effective marketing campaigns w
ill have to include equal parts of education and sales pitch. To include their n
ext customers, bank will have to access them, and be accessible. (The entire inf
ormation on this particular section has been extracted from Businessworld Issue
18-24 Nov 2008) In recent times financial inclusion has appeared as a major glob
al agendum. At aggregate level, the common measure of financial inclusion are th
e number of bank account per adult, geographic branch penetration, demographic b
ranch penetration, geographic ATM penetration, demographic ATM penetration, demo
graphic deposit penetration, demographic credit penetration, deposit income rati
o, credit income ratio and cash deposit ratio (Beck, et al. 2006, Peachy, et al.
, 2006 Conrad, et al., 2008 cited in Chattopadhyay (2011). However, these studie
s did not develop any composite index of financial inclusion. Sarma, (2007) firs
t computed the financial inclusion indices of 45 countries for the year 2004. Sh
e has constructed the index considering the indicators - the number of bank acco
unts per hundred populations, the number of bank branches per thousand populatio
n and the ratio of savings and credit to GDP of the country. Considering the alm
ost similar indicators Chattopadhyay (2011) has developed the financial inclusio
n index for the major states in India and for all the

districts in West Bengal. Karmakar, et al. (2011) have constructed the financial
inclusion for rural areas of the major twenty states in India. They have consid
ered number of rural outlets, number of accounts per outlet, per outlet deposit
amount, per outlet credit amount and per account deposit amount as indicator of
financial inclusion. In order to assess the performance of the public sector ban
ks the Finance Minister of India has introduced Financial Inclusion Index based
on two criteria, namely, the number of additional branches covered and the numbe
r of new no-frill account opened (Government of India, 2011). All the studies ha
ve followed the similar methodology used for computation of Human Development In
dex and considered the dimensions equally important. But each dimension may not
be equally important to determine financial inclusion. So to develop a comprehen
sive index of financial inclusion first, researchers should derive the relative
importance (weight) of the indicators then compute the weighted average of the d
imensional indices. Besides, the indicators used by the studies are not adequate
for gauging all possible dimensions of financial inclusion. There may be other
indicators such as participation in SHG, per capita loan outstanding etc. Varman
P (2005) has found that the SHGs in Tamil Nadu have inculcated the banking habi
ts in the rural people. Several empirical studies (Adhikary and Bagli, 2010, 201
1,) conducted in West Bengal have shown that SHGs create a smooth path of financ
ial inclusion for the rural poor. The number of total deposit accounts has incre
ased to 734.8 million and credit account to 118.6 million in 2010 for all banks
and the number of no-frill accounts in all public and private banks has increase
d to 33 million in 2009 from seven million in 2006 (RBI, 2010). Besides, KCC sch
eme has brought 95 million farmers under the purview of the banking system in 20
10 as against 84.6 million farmers in 2009 and the SHG bank linkage programme ha
s helped seven million rural people to have access to formal savings and formal
credit (Government of India, 2011). Against this backdrop, this study has set th
e objectives as follows.
dex of financial inclusion for each state in India.
inclusion .
RIJEB Volume 1, Issue 8(Aug. 2012) ISSN: 2277 1018.
Journal of Radix International Educational and Research Consortium www.rierc.org
.

The experience gained so far suggests that the "One District

One Bank" Model has
not been able to achieve the objective of financial inclusion. Allocation of vil
lages a mongst banks under the Financial Inclusion Plan (FIP), i.e. Roadmap for
providing ba nking services to villages with population above 2000, has been gen
erally on the basis of the Service Area Approach. This has led to a situation wh
ere
in the designated bank for EBT and FIP in the same village differed. This issue
has been raised in various fora by the State Governments and banks. For clearer
conceptu al understanding and based on detailed consultative meetings and interf
ace with stake holders, "Operational guidelines on implementation of Electronic
Benefit Transfer and its convergence with Financial Inclusion Plan" has been for
mulated. These guidelines are expected to give a fillip to financial inclusion e
fforts and lead to a scalable and sustainable financial inclusion model.
RBI/201112/153, April.

Chapter-3
FINANCIAL EXCLUSION Financial Exclusion is the process by which a certain sectio
n of the population or a certain group of individuals is denied the access to ba
sic financial services. The term came to prominence in the early 1990s in Europe
where the geographers found that a certain pockets or regions of a particular co
untry were behind the others in utilizing financial services. It was also found
that these pockets or regions were poorer compared to regions which utilized mor
e of financial services.
DEFINITION The definition of financial exclusion will range upon several dimensi
ons, but the most important dimension are the breadth & focus of financial exclu
sion and the concept of relativity or degree i.e. Financial Exclusion is defined
in relation to some predefined standard(i.e. inclusion). Breadth means the scop
e of definition; the broadest definitions of financial exclusion recognize that
there are many factors interacting between financial exclusion and social exclus
ion and disadvantage. The type of such a broad definition is found in the semina
l work of Leyshon and Thrift, who define financial exclusion as processes that pr
event poor and disadvantaged social groups from gaining access to the financial
system . The other end of extreme definitions are narrowed its scope, for example,
while Rogaly has a broad view of social exclusion, his working definition of fi
nancial exclusion is narrow which he stated as Exclusion from particular sources
of credit and other financial services (including insurance, bill-payment servic
es, and accessible and appropriate deposit accounts)
Extreme definition may be seen as a somewhat sweeping definition, with its appar
ent reference to access to the financial system as a whole, rather than access t
o specific financial services or products and access to specific channels of dis
tribution. The other extreme of definitions of financial exclusion are those tha
t take a very narrow perspective based on a lack of ownership of, or access to,
particular types of financial services or products, including forms of credit an
d insurance. A person transacting regularly with his saving fund bank account an
d availing very basic of services i.e. payment and remittances or for saving som
e of part of his income to meet future contingencies/future requirement is said
to be financially included despite the fact that he is not availing all/majority
of other financial services such as Insurance, investment schemes etc. In other
words, an individual having access to mainstream-necessary financially services
is considered to be financially included as opposed to the first extreme defini
tion stated above.

The focus here refers to the group of people (communities) to household, a regio
n to the specific type of business; this is more often implicitly rather than ex
plicitly acknowledged in the literature Further study of literature suggest that
the operational definitions have also evolved from the underlying public policy
concerns that many people, particularly those living on low income, cannot acce
ss mainstream financial products such as bank accounts and low cost loans, which
, in turn, imposes real costs on them -often the most vulnerable people. Operati
onal definitions are context-specific, originating from country-specific problem
s of financial exclusion and socio-economic conditions. Thus, the contexts speci
fic dimensions of financial exclusion assume importance from the public policy p
erspective. In recent development definitions have witnessed a shift in emphasis
from the earlier ones, which defined financial inclusion and exclusion largely
in terms of physical access, to a wider definition covering access to and use an
d understanding of products and services. This also underscores the role of fina
ncial institutions or service providers involved in the process. Finally, defini
tions of financial exclusion vary considerably according to the dimensions such
as the concept of relativity, i.e., financial exclusion defined relative to some
standard (i.e., inclusion). This line of thinking defines the problem of financ
ial exclusion as that emanating from increased inclusion, leaving a minority of
individuals and households behind.

Thus, there exists duality of hyper inclusion with some having access to a range
of financial products and at the same time a minority lacking even the basic ba
nking services. This phenomenon is observed mostly in developed countries with h
igh degree of financial development.

THE INDIAN SCENARIO :In India the focus of the financial inclusion at present is
confined to ensuring a bare minimum access to a savings bank account without fr
ills, to all. There could be multiple levels of financial inclusion and exclusio
n. At one extreme, it is possible to identify the superincluded, i.e., those custo
mers who are actively and persistently courted by the financial services industr
y, and who have at their disposal a wide range of financial services and product
s. At the other extreme, we may have the financially excluded, who are denied ac
cess to even the most basic of financial products. In between are those who use
the banking services only for deposits and withdrawals of money. But these perso
ns may have only restricted access to the financial system, and may not enjoy th
e flexibility of access offered to more affluent customers. Further, Financial e
xclusion may not definitely mean a social exclusion in India as it does in the d
eveloped countries, but it is a problem that needs to be addressed. The large pr
esence of informal credit, could avoid social exclusion but the legal validity o
f such financial services pose an obstacle for creating a modern globalizing eco
nomy. Causes of Financial exclusion. Some of the important factors responsible f
or financial exclusion are given as under: 1. Terms & conditions. Different type
s of terms & conditions imposed by the bankers often deter people with low incom
e & rural areas from opening bank account. In Canada, USA, France & India strict
regulation is imposed on Opening balance & Minimum balance required for an acco
unt. This often goes beyond the budget of the low income people. Another area of
obstacle is the conditions relating to the use of accounts. In Belgium for inst
ance, accounts have been closed by banks because customers either use them too l
ittle or withdraw money too often. 2. Identity Requirements. Primary requisite o
f opening bank account is identity proof & witness. People mostly from rural are
as dont have driving license or passport. In many cases, wrong information are gi
ven in their ration cards & voter I-cards, which make them illegible as proof. T
his problem is rife with the refugees & slum dwellers. 3. Psychological & cultur
al barriers. Rural people & low income people think transacting through banks is
a cumbersome affair & banks charge highly. Sometimes they think that services o
ffered by the banks are not meant for them. Such type of Self exclusion is far mor
e important than direct exclusion by banks refusing to opening accounts. In Engl
and the Pakistani & Bangladeshi communities face religious barriers to banking,
because, accounts overdrawn (even if inadvertently) is harmful under Islamic law
. 4. Bankers approach. Bankers attitude towards the rural folk & the marginalized
mass is also not conducive. Sometimes these people are distracted by difficult f
inancial terms used by the bankers &

sometime by the apathetic attitude of the bankers. Absence of banks in the vicin
ity of rural area is also one of the causes of exclusion. Effects of financial e
xclusion: Living without financial service & products is disadvantageous when th
e contemporary world is moving on cashless system depending on credit cards, deb
it cards, ATMs &Core Banking Solution (CBS systems). Exclusion imposes real cost
on the excluded lot. The implication of the financial exclusion is much greater
when the excluded mass is entrapped in the hydra headed cycles of poverty. This
causes further social exclusion which is very much detrimental for the equitabl
e growth of the world community. The following points describe disadvantages to
the financially excluded mass: a. They pay higher charges in the absence of fina
ncial transactions like money transfer & cheque cashing etc. b. They take credit
from non- institutional creditors at exorbitantly higher rate which exacerbate
the harm already caused due to poverty. FINANCIAL EXCLUSION
NO SAVINGS NO ASSETS
NO BANK ACCOUNT
NO ACCESS TO MONEY ADVICE
NO INSURANCE, NO AFFORDABLE CREDIT c.
Lack of security in holding & storing money. d. The small business may suffer d
ue to loss of access to middle class and higher-income consumers, higher cash ha
ndling costs and delays in remittances of money. e. Saving potential remains une
xploited & unproductive from social point of view. f. General decline in investm
ents. g. Increase in unemployment. Who are the excluded? The financially exclude
d sections largely comprise of:
Marginal farmers Landless labourers
Self employe
d and unorganized sector enterprises Urban slum dwellers
Migrants
Ethnic minorit
ies and socially excluded groups Senior citizens and women, etc.
Large pockets o
f population in North East, Eastern, and central regions of India.

THE NEED FOR FINANCIAL INCLUSION Despite witnessing substantial progress in fina
ncial sector reforms in India, it is disheartening to note that nearly half of t
he rural households even today do not have any access to any source of funds- in
stitutional or otherwise. Hardly one-fourth of the rural households are assisted
by banks. Hence the major task before banks is to bring most of those excluded,
i.e. 75% of the rural households, under banking fold. But the task is not so ea
sy since they are illiterate, poor and unorganized. They are also spread far and
wide. What is needed is to improve their living standards by initiating new/inc
reased economic activities with the help of banks, NGOs and local developmental a
gencies. To start with, it is necessary to develop a fair understanding of their
profile. In addition, their perception about the bank and its services needs to
be understood. So there is a need for the formal financial system to look at in
creasing financial literacy and financial counselling to focus on financial incl
usion and distress amongst farmers. Indian banks and financial market players sh
ould actively look at promoting such programs as a part of their corporate socia
l responsibility. Banks should conduct full day programs for their clientele inc
luding farmers for counselling small borrowers for making aware on the implicati
ons of the loan, how interest is calculated, and so on, so that they are totally
aware of its features. There is a clearly a lot requires to be done in this are
a. BENEFITS OF FINANCIAL INCLUSION. Financial inclusion has many benefits. Follo
wing are some of the benefits summed up as;
It paves the way for establishment o
f an account relationship which helps the poor to avail a variety of savings pro
ducts and loan products for housing, consumption, etc. An inclusive financial sy
stem facilitates efficient allocation of productive resources and thus can poten
tially reduce the cost of capital. This also enables the customer to remit funds
at low cost. The government can utilize such bank accounts for social security
services like health and calamity insurance under various schemes for disadvanta
ged. From the banks point of view, having such social security cover makes the fi
nancing of such persons less risky. Reduced risk means more flow of funds at bet
ter rates. Access to appropriate financial services can significantly improve th
e day-today management of finances. For example, bills for daily utilities (muni
cipality, water, electricity, telephone) can be more easily paid by using cheque
s or through internet banking, rather than standing in the queue in the offices
of the service.
Transfer of money can be done more safely and easily by using th
e cheque, demand draft or through internet banking.
A bank account also provides
a passport to a range of other financial products and services such as short te
rm credit facilities, overdraft facilities and credit card. Further, a number of
other financial products, such as insurance and pension products, necessarily r
equire the access to a bank account. Lastly, the Employment Guarantee Scheme of
the Government which is being rolled out in200 districts in the country would br
ing in large number of people through their savings accounts into the banking sy
stem. TOOLS OF FINANCIAL INCLUSION AND THE METHODS TO ACHIEVE THEM To address th
e issue of financial exclusion in a holistic manner, it is essential to ensure t
hat a range of financial services is available to every individual. These servic
es are:

a) A no-frills banking account for making and receiving payments, b) A savings p

roduct suited to the pattern of cash flows of a poor household, c) Money transfe
r facilities, d) Small loans and overdrafts for productive, personal and other p
urposes, & e) Micro-insurance (life and non-life) Without a formal and a legally
recognized financial system in which all sections of the population are a part
of, it would be impossible even for the most efficient of the governments to rea
ch out to all sections of the people. A stable and healthy financial service sec
tor creates trust among the people about the economy and only with this trust (w
hich has legal validity) could a strong, stable and an inclusive economy be crea
ted. Financial exclusion could be looked at in two ways: Lack of access to finan
cial services mainly payment system, which could be due to several reasons such
as:
Lack of sources of financial services in our rural areas, which are popular
for the ubiquitous moneylenders but do not have (safe) saving deposit and insura
nce services.
High information barriers and low awareness especially in women an
d in rural areas.
Inadequate access to formal financial institutions that exist
to the extent that the banks could not extend their outreach to the poor due to
various reasons like high cost of operations, less volume and more number of cli
ents, etc. among many others.
Poor functioning and financial history of some bel
eaguered financial institutions such as financial cooperatives in many states, w
hich limit the effectiveness of their outreach figures.
Primary Agricultural Coo
perative Societies (PACS), which number around one lakh are also often exclusion
ary, as their membership is restricted to persons with land ownership. Even to t
heir members, not many PACS offer saving services. Lack of access to formal fina
ncial services in of both rural and urban areas, but is a larger issue in cities
and small towns. The distinction between access to formal and informal services
is crucial to understand, as informal financial markets suffer from several imp
erfections, which the poor pay for in many ways. Some attributes of informal fin
ancial services, due to which there is exclusion are: A. High risks to saving: l
oss of savings is an easily discernible phenomenon in low-income neighborhoods i
n urban areas. B. High cost of credit and exploitative terms: credit against col
lateral such as gold is even more expensive than the effective interest rates, s
imilarly, rates paid by hawkers and vendors who repay on daily basis are very hi
gh. C. High cost and leakages in money transfers: the delays in sending money ho
me through all informal channels add to these. D. Near absence of insurance and
pension services: life, asset, and health insurance needs. Another key aspect of
financial exclusion is the lack of financial education and advice . In India, as t
he basic literacy rate is low supporting basic financial capability is indeed no
t just necessary, but also equally difficult. Financial exclusion is often relat
ed to more complex social exclusion issues, which makes financial literacy and a
ccess to basic financial services even more complex.

Chapter -4
CAUSES OF FINANCIAL EXCLUSION:Financial Exclusion may also have resulted from a
variety of structural factors such as unavailability of products suiting their r
equirements, stringent documentation and collateral requirements and increased c
ompetition in financial services. The Causes of financial exclusion can be ident
ifying broadly in two categories, first the demand side and the second supply si
de.
A. DEMAND SIDE BARRIERS :The people who have the requirement\need but still not
demanding\availing the financial services\products which can be due to the follo
wing reasons: i. Low Income: A higher share of population below the poverty line
results in lower demand for financial services as the poor may not have savings
to place as deposit in savings banks; hence the market lacks incentives in prov
iding financial service/products. Most the people belonging to financially exclu
ded group are having irregular/seasonal income. Hence opening of a bank account
and operating it i.e. deposit and withdrawal in very small denominations with hi
gh frequency will increase the cost of transaction, adding to that they also ant
icipate that bank will refuse if they transact with so small amount. Further pro
vided that, as they have low earning they cannot maintain minimum balance requir
ements of a normal saving bank account which ranges from Rs. 500 to Rs 5000(Rs.
500 in case of PSB and Rs. 5000 for Pvt. Sector Banks) and various annual mainte
nance charges(AMC) levied by banks. ii. Transaction cost: Vast number of rural p
opulation resides in small villages which are often located in remote areas devo
id of financial services. Consequently, the overall transaction cost to the cust
omer in terms of both time and money proves to be a major deterrent for visiting
financial institutions. The excluded section of the society find informal secto
r more reachable due to proximity and ease of transaction. iii. Financial Servic
es Being Very Complex In Nature: excluded sections of the society find dealing w
ith organized financial sector cumbersome.

iv. Easy access to alternative credit: For a good amount of low income people, t
he alternative credit provided by the money lenders and pawn shop owners are far
more attractive and hassle free compared to getting a loan from a commercial ba
nk. Some of the poor that do not have property find it impossible to get credit
without the collateral. The uneducated poor would rather put their trust in mone
ylenders who provide easy non-collateral credit than on the well established com
mercial banks. There might also be cultural reasons for trusting a moneylender r
ather than a bank. Distance from bank branch, branch timings, cumbersome documen
tation/procedures, unsuitable products, language, staff attitude are common reas
ons Higher transaction cost. v. Low literacy level: The lack of financial awaren
ess about the benefits of the banking and also illiteracy act as stumbling block
s to financial inclusion. The lack of financial awareness maybe the single most
risk in financial inclusion as those who are newly included in the financial sec
tor have to maintained within the formal financial sector. vi. Legal identity: L
ack of legal identities like identity cards, birth certificates or written recor
ds often exclude women, ethnic minorities, economic and political refugees and m
igrant workers from accessing financial services. vii. Sophisticated Financial T
erminologies: Bankers often use complex financial terminologies, which the masse
s are unable to comprehend and hence do not approach for financial services volu
ntarily. viii. Terms and conditions: Terms and conditions attached to products s
uch as minimum balance requirements and conditions relating to the use of accoun
ts as in the case of saving bank account often dissuade people from using such p
roducts/services Further, term and conditions and its framework is generally so
tedious and detailed that understanding it is not possible for those who cannot
even write their name or are less literate and do not understand English or Hind
i(in case of some regional rural areas). ix. Psychological and cultural barriers
: The feeling that banks are not interested to look into their cause has led to
self-exclusion for many of the low income groups. However, cultural and religiou
s barriers to banking have also been observed in some of the countries. x. Disin
centives for the consumer: The cost of maintaining an account (non-zero balance
accounts) and procedural problems in accessing formal credit act as disincentive
s for consumers with weaker financial background. The bank would rather give sma
ller number of large credits to middle and upper class individuals and instituti
ons, due to the lower cost involved in banking with them. The banks and other fi
nancial service firms have fewer financial products which are attractive to the
poor and the socially disadvantaged. All these act against the interest of a con
sumer from a poor background.

B. Supply side barriers Some of the important causes of relatively low extension
of institutional credit in the rural areas are risk perception, cost of its ass
essment and management, lack of rural infrastructure, and vast geographical spre
ad of the rural areas with more than half a million villages, some sparsely popu
lated i. Perception among banks about rural population: Generally, there exists
a perception among banks that large number of rural population is un-bankable as
their capacity to save is limited. Therefore, they do not look favorably at sma
ll loans often required by marginalized section. Such loans are considered to be
non-productive. ii. Miniscule margin in handling small transactions: As the maj
ority of rural population resides in small villages that too in remote areas, ba
nks find small transactions cost ineffective. iii. KYC requirements: The KYC req
uirements of independent documentary proof of identity and address can be a very
important barrier in having a bank account especially for migrants and slum dwe
llers. iv. Unsuitable products: One of the most important reasons for the majori
ty of rural population not approaching the formal sector for financial services
is the unsuitability of products and services being offered to them. For example
, most of their credit needs are in form of small lump sums and banks are reluct
ant to give small amounts of loan at frequent intervals. Consequently, they have
to resort to borrowing money from moneylenders at uxorious rates. v. Staff atti
tude: As public sector banks (PSBs) cater to more than 70% of banked population
and about 90% of rural banked population, a majority of staffs in these PSBs rem
ain insensitive to needs of customer and shirk away from duty. The situation is
even worst in rural branches where they behave with rural poor in a condescendin
g manner. vi. Poor market linkage: It is often argued that we may have been grow
ing second fastest in the world, but still our 40-55% of people living in rural
and semi-urban areas do not have access to basic necessities of life. 75% of vil
lages in rural areas have no electricity arrangement, so it can be imagined that
how much penetration market would be having especially when it comes to providi
ng financial services/products, this may be that they are reluctant or there is
no institutional as well as physical. Therefore there is no institutional infras
tructure available in the rural area.

vii. Lack of interest from Commercial Banks: There is a lot of criticism on the
commercial banks because of their inherent tendency to think that poor people ar
e not worthy of being banked on. Banks are in business to make profit and would
like to only indulge in activities that give them profit. Due to high transactio
n costs on smaller transactions and the speculated high risk in lending credit t
o the lower strata of the society, they see banking with poor as unviable. Even
if banks are concerned at the poor, they do it in a manner of corporate social r
esponsibility or social service and treat them differently instead of trying to
bring them into the mainstream. Unless banks see any incentive in banking with t
he weaker sections of the society, they would not be willing to do so. xi. Poor
credit record: Areas with poor credit record, bad past experience, socially unst
able and poor recovery of previous loan/credit given are observed to be highly f
inancially excluded, as banks blacklist such areas as the part of their risk man
agement strategy.
Important Milestones on Road to Financial Inclusion in India:
1904 1969 Setting up of Rural Cooperatives Nationalization of 14 major Commercia
l Banks
1975 1990s 2005 2006
Setting up of Regional Rural Banks Self Help Group RBI advised banks to open no
frill accounts RBI allowed BC/BF to act as agents of banks
Sept. 2010
RBI allowed for - profit companies (excluding NBFC) to act as Business Correspon
dent
2011
National Payment Corporation of India (NPCI) launched Interbank Mobile Payment S
ystem (IMPS)

Chapter -5
CONSEQUENCES OF FINANCIAL EXCLUSION :There are three dimensions of consequences
that financial exclusion has on the people affected: financial exclusion can gen
erate financial consequences by affecting directly or indirectly the way in whic
h the individuals can raise, allocate, and use their monetary resources. A wider
dimension of financial exclusion can be identified as socio-economical conseque
nces i.e. groups which are socially excluded are mostly also found financially e
xcluded. A last dimension can be identified as the social consequences generated
by financial exclusion. These are the consequences affecting the various links
that are binding the individuals: link to corresponding to self esteem, links bi
nding to the society and links binding to community and/or relationships with ot
her individual or groups. Access to a bank account, credit and insurance are now
widely regarded as essential supports for personal financial management and for
undertaking transactions in modern societies (Speak and Graham, 1999). Accordin
g to the Treasury Committee, UK (2006), financial exclusion can impose significa
nt costs on individuals, families and society as a whole. These include:
Barrier
s to employment as employers may require wages to be paid into a bank account;
O
pportunities to save and borrow can be difficult to access;
Owning or obtaining
assets can be difficult; Difficulty in smoothening income to cope with shocks; a
nd Exclusion from mainstream society.

In terms of cost to the individuals, financial exclusion leads to higher charges

for basic financial transactions like money transfer and expensive credit, besi
des all round impediments in basic/ minimum transactions involved in earning liv
elihood and day to day living. It could also lead to denial of access to better
products or services that may require a bank account. It exposes the individual
to the inherent risk in holding and storing money operating solely on a cash bas
is increases vulnerability to loss or theft. Individuals/families could get suck
ed into a cycle of poverty and exclusion and turn to high cost credit from money
lenders, resulting in greater financial strain and unmanageable debt. At the wid
er level of the society and the nation, financial exclusion leads to social excl
usion, poverty as well as all the other associated economic and social problems.
Thus, financial exclusion is often a symptom as well as a cause of poverty. Fin
ancial exclusion is not evenly distributed throughout society; it is concentrate
d among the most disadvantaged groups and communities and, as a result, contribu
tes to a much wider problem of social exclusion. A significant portion of demand
for credit by rural households arises in order to ease the financial burden of
crop failures, illness or death, and health care. In the case of microenterprise
s, credit may be needed to achieve a reasonable and viable scale of activities.
The rising entrepreneurship spanning rural, semi-urban and urban areas, particul
arly in the unorganized and informal sectors may give rise to large potential de
mand for credit. The evidence on the demand for credit in India suggests that me
dical and financial emergencies are the major reasons for household borrowings.
Medical emergencies were particularly high for the lowest income quartile (IIMS,
2007). Thus, the difficulty in obtaining finance from formal sources has major
social implications. Another cost of financial exclusion is the loss of business
opportunity for banks, particularly in the medium-term. Banks often avoid exten
ding their services to lower income groups because of initial cost of expanding
the coverage may sometimes exceed the revenue generated from such operations. Th
ese business related concerns of banks were, however, meaningful when technology
development was at a nascent stage and expanding the coverage of financial serv
ices required substantial initial investment. The strides in technology have now
reduced the required initial investment in a significant manner. What is requir
ed is to explore the appropriate technology which is suitable to socio-economic
conditions of the region under consideration. Moreover, availability and usage o
f financial services by the otherwise excluded population groups would lead to i
ncrease in their income levels and savings. This, in turn, would have the potent
ial to increase savings deposits as well as credit demand, implying profitable b
usiness for banks in the medium-term. Two other factors have often been cited as
the consequences of financial exclusion. First, it complicates day-to-day cash
flow management - being financially excluded means households, and micro and sma
ll enterprises deal entirely in cash and are susceptible to irregular cash flows
. Second, lack of financial planning and security in the absence of access to ba
nk accounts and other saving opportunities for people in the unorganized sector
limits their options to make provisions for their old age. From the macroeconomi
c standpoint, absence of formal savings can be problematic in two respects. Firs
t, people who save by informal means rarely benefit from the interest rate and t
ax advantages that people using

formal methods of savings enjoy. Second, informal saving channels are much less
secure than formal saving facilities. The resultant lack of savings and saving a
venues means recourse to non-formal lenders such as moneylenders. This, in turn,
could lead to two adverse consequences a. Exposure to higher interest rates cha
rged by informal lenders; and b. The inability of customers to service the loans
or to repay them As loans from non-formal lenders are often secured against the
borrowers property, this raises the problem of inter-linkage between two apparen
tly separate markets. Judged in this specific context, financial exclusion is a
serious concern among low-income households, mainly located in rural areas. To s
um up, the nature and forms of exclusion and the factors responsible for it are
varied and, thus, no single factor could explain the phenomenon. The principal b
arriers in the expansion of financial services are often identified as physical
access, high charges and penalties, conditions attached to products which make t
hem inappropriate or complicated and perceptions of financial service institutio
ns which are thought to be unwelcoming to low income people. There has also been
particular emphasis on socio-cultural factors that matter for an individual to
access financial services. The most conspicuous dimension of exclusion is that a
majority of the low-income population do not have access to the very basic fina
ncial services. Even amongst those who have access to finance, most of them are
underserved in terms of quality and quantity of products and services. The criti
cal dimensions of financial exclusion include access exclusion, condition exclus
ion (conditions attached to financial products), price exclusion, and self exclu
sion because of the fear of refusal to access by the service providers. The fina
ncial exclusion process becomes self-reinforcing and can often be an important f
actor in social exclusion, especially for communities with limited access to fin
ancial products, particularly in rural areas. Apart from the above mentioned sup
ply side factors, demand side factors may also significantly affect the extent o
f financial inclusion. For instance, low level of income and hence low savings w
ould result in lower deposits. Similarly, at low level of income, the ability to
borrow is affected because of low repayment capacity and inability to provide c
ollateral. In the Indian context, both demand and supply side factors have an im
portant bearing on the usage of financial/banking services.

POLICY DEVELOPMENT We have seen in the previous chapter that in our country the
financial services has been\being used by a very limited group of people\individ
uals. To enlarge the area and service sector, certain policy measures have been
taken by government. Policy development in India for financial inclusion can be
seen in three stages
Nationalisation of banks presecription of priority sector targets lead bank sche
me
Annual Policy 2005 - 2006
No Fril bank account simple KYC norms NGOs, SHGs, MFIs etc were allowed easier c
redit facilities
determining new model for effective reach leveraging on technology based solutions
improvements in Credit absorption capcaility exisiting formal credit delivery sys
tem
1969 - 1991
Rangrajan committee Report
I.
FIRST PHASE DEVELOPMENTS (1969-1981)
In 1969, the banks were nationalized in order to spread banks branch network in o
rder to develop strong banking system which can mobilize resources/deposits and
channel them into productive/needy sections of society and also government wante
d to use it as an important agent of change. So, the planning strategy recognize
d the critical role of the availability of credit and financial services to the
public at large in the holistic development of the country with the benefits of
economic growth being distributed in a democratic manner. In recognition of this
role, the authorities modified the policy framework from time to time to ensure
that the financial services needs of various segments of the society were met s
atisfactorily Before 1990, several initiatives were undertaken for enhancing the
use of the banking system for sustainable and equitable growth. These included;
I. Nationalization of private sector banks,

II. Introduction of priority sector lending norms, III. The Lead Bank Scheme, IV
. Branch licensing norms with focus on rural/semi-urban branches, V. Interest ra
te ceilings for credit to the weaker sections and VI. Creation of specialized fi
nancial institutions to cater to the requirement of the agriculture and the rura
l sectors having bulk of the poor population. SOCIAL NETWORKING APPROACH The ann
ouncement of the policy of social control over banks was made in December 1967 w
ith a view to securing a better alignment of the banking system with the needs o
f economic policy. The National Credit Council was set up in February 1968 mainl
y to assess periodically the demand for bank credit from various sectors of the
economy and to determine the priorities for grant of loans and advances. Social
control of banking policy was soon followed by the nationalization of major Indi
an banks in 1969. The immediate tasks set for the nationalised banks were mobili
zation of deposits on a massive scale and lending of funds for all productive ac
tivities. A special emphasis was laid on providing credit facilities to the weak
er sections of the economy. THE PRIORITY SECTOR APPROACH The administrative fram
ework for rural lending in India was provided by the Lead Bank Scheme introduced
in 1969, which was an important step towards implementation of the twofold obje
ctives of deposit mobilization on an extensive scale and stepping up of lending
to weaker sections of the economy. Realizing that the flow of credit to employme
nt oriented sectors was inadequate; the priority sector guidelines were issued t
o the banks by the Reserve Bank in the late 1960s to step up the flow of bank cr
edit to agriculture, small-scale industry, self-employed, small business and the
weaker sections within these sectors. The target for priority sector lending wa
s gradually increased to 40 per cent of advances in the case of domestic banks (
32 per cent, inclusive of export credit, in the case of foreign banks) for speci
fied priority sectors. Sub targets under the priority sector, along with other g
uidelines including those relating to Government sponsored programmed, were used
to encourage the flow of credit to the identified vulnerable sections of the po
pulation such as scheduled castes, religious minorities and scheduled tribes. Th
e Differential Rate of Interest (DRI) Scheme was instituted in 1972 to provide c
redit at concessional rate to low income groups in the country. LEAD BANK SCHEME
APPROACH But all these measure were focused towards inclusion of a sector, regi
onal areas etc., there was a very less or no emphasis was on financial inclusion
of Individual/household level. The promotional aspects of banking policy have c
ome into greater prominence. The major emphasis of the branch licensing policy d
uring the 1970s and the 1980s was on expansion of commercial bank branches in ru
ral areas, resulting in a significant expansion of bank branches and decline in
population per branch.

The branch expansion policy was designed, inter alia, as a tool for reducing int
er-regional disparities in banking development, deployment of credit and urban-r
ural pattern of credit distribution. In order to encourage commercial banks and
other institutions to grant loans to various categories of small borrowers, the
Reserve Bank promoted the establishment of the Credit Guarantee Corporation of I
ndia in 1971 for providing guarantees against the risk of default in repayment.
The scheme, however, was subsequently discontinued. II. SECOND PHASE ANNUAL POLI
CY (2005-2006)
As the central bank of the country, the Reserve bank of India has taken steps to
ensure financial inclusion in the country. It has tried to make banking more at
tractive to citizens by allowing for easier transactions with banks. In 2004 RBI
appointed an internal group to look into ways to improve Financial Inclusion in
the country. With a view to enhancing the financial inclusion, as a proactive m
easure, the RBI in its Annual Policy Statement for the year 2005-06, while recog
nizing the concerns in regard to the banking practices that tend to exclude rath
er than attract vast sections of population, urged banks to review their existin
g practices to align them with the objective of financial inclusion. In the Mid
Term Review of the Policy (2005-06), It is observed that there were legitimate c
oncerns in regard to the banking practices that tended to exclude rather than at
tract vast sections of population, in particular pensioners, selfemployed and th
ose employed in the unorganized sector. It also indicated that the Reserve Bank
would 1. Implement policies to encourage banks which provide extensive services,
while disincentivising those which were not responsive to the banking needs of
the community, including the underprivileged; 2. The nature, scope and cost of s
ervices would be monitored to assess whether there was any denial, implicit or e
xplicit, of basic banking services to the common person; and 3. Banks urged to r
eview their existing practices to align them with the objective of financial inc
lusion. RBI exhorted the banks, with a view to achieving greater financial inclu
sion, to make available a basic banking no frills account either with nil or very
minimum balances as well as charges that would make such accounts accessible to
vast sections of the population. The nature and number of transactions in such a
ccounts would be restricted and made known to customers in advance in a transpar
ent manner. All banks are urged to give wide publicity to the facility of such n
o frills account so as to ensure greater financial inclusion. RBI came out with
a report in 2005 (Khan Committee) and subsequently RBI issued a circular in 2006
allowing the use of intermediaries for providing banking and financial services
. Through such policies the RBI has tried to improve Financial Inclusion. Financ
ial Inclusion offers immense potential not only for banks but for other business
es. Through an integrated approach the businesses, the NGOs, the government agen
cies as well as the banks can be partners in growth.

Brief glimpses of main initiative are followings:a) No-Frill Accounts:

It is a basic saving fund account having all the features of a normal saving fun
d account which it differs in the following aspects 1. The holder is not require
d to maintain any minimum balance requirement and also nothing is charged for op
ening this type of account 2. KYC norms have been simplified so that everyone ca
n have this account 3. Transaction are limited to 5-10 free transactions per mon
th 4. ATM facility is provided free of cost 5. There is no account maintenance c
ost Similar types of accounts, though with different names, have also been exten
ded by banks in various other countries with a view to make financial services a
ccessible to the common man either at the behest of banks themselves or the resp
ective Governments.
b) Overdraft in Saving Bank Accounts: Bank were advised to give credit in form o
f overdraft on saving bank account to its customer so that in case of small cred
it need like medical bill, any accidental charges etc. can be met in.
c) KYC norms: The Know Your Customer (KYC) norms were revised in order to make i
t easy for people to avail financial services on February 18, 2008. These guidel
ines include 1. In case of close relatives who find it difficult to furnish docu
ments relating to place of residence while opening accounts, banks can obtain an
identity document and a utility bill of the relative with whom the prospective
customer is living, along with a declaration from the relative that the said per
son (prospective customer) wanting to open an account is a relative and is stayi
ng with him/her. Banks can also use any supplementary evidence such as a letter
received through post for further verification of the address; 2. banks have bee
n advised to keep in mind the spirit of the instructions and avoid undue hardshi
ps to individuals who are otherwise classified as low risk customers; 3. Banks s
hould review the risk categorization of customers at a periodicity of not less t
han once in six months.

4. Further, in order to ensure that persons belonging to low income group both i
n urban and rural areas do not face difficulty in opening the bank accounts due
to the procedural hassles, the KYC procedure for opening accounts has been simpl
ified for those persons who intend to keep balances not exceeding rupees fifty t
housand (Rs. 50,000/-) in all their accounts taken together and the total credit
in all the accounts taken together is not expected to exceed rupees one lakh (R
s.1,00,000/-) in a year.
d) SHG Model: A Self Help Group (SHG) is a group of about 15 to 20 people from a
homogenous class who join together to address common issues. They involve volun
tary thrift activities on a regular basis, and use of the pooled resource to mak
e interest-bearing loans to the members of the group. In the course of this proc
ess, they imbibe the essentials of financial intermediation and also the basics
of account keeping. The members also learn to handle resources of size, much bey
ond their individual capacities. They begin to appreciate the fact that the reso
urces are limited and have a cost. Once the group is stabilized, and shows matur
e financial behavior, which generally takes up to six months to 1 year, it is co
nsidered for linking to banks. Banks are encouraged to provide loans to SHGs in
certain multiples of the accumulated savings of the SHGs. Loans are given withou
t any collateral and at interest rates as decided by banks. Banks find it comfor
table to lend money to the groups as the members have already achieved some fina
ncial discipline through their thrift and internal lending activities. The group
s decide the terms and conditions of loan to their own members. The peer pressur
e in the group ensures timely repayment and becomes social collateral for the ba
nk loans. Generally, the SHGs need self-help promoting institutions (SHPIs) to p
romote and nurture them. These SHPIs include various NGOs, banks, farmers clubs,
government agencies, self-employed individuals and federations of SHGs. However,
some SHGs have also been formed without any assistance from such SHPIs. There a
re three different models that have emerged under the linkage programI. Model I:
This involves lending by banks directly to SHGs without intervention/facilitati
on by any NGO. II. Model II: This envisages lending by banks directly to SHGs wi
th facilitation by NGOs and other agencies. III. Model III: This involves lendin
g, with an NGO acting as a facilitator and financing agency. Model II accounted
for around 74 per cent of the total linkage at end-March 2007, while Models I an
d III accounted for around 20 per cent and 6 per cent, respectively.

e)
KCC / GCC Guidelines:
GCC Scheme With a view to providing credit card like facilities in the rural are
as, with limited pointof-sale (POS) and limited ATM facilities, the Reserve Bank
advised all scheduled commercial banks, including RRBs, in December 2005 to int
roduce a General Credit Card (GCC) Scheme for issuing GCC to their constituents
in rural and semi-urban areas, based on the assessment of income and cash flow o
f the household similar to that prevailing under a normal credit card. The Reser
ve Bank also advised banks to classify fifty per cent of the credit outstanding
under loans for general purposes under General Credit Cards (GCC), as indirect f
inance to agriculture under priority sector. The Reserve Bank further advised ba
nks in May 2008 to classify 100 per cent of the credit outstanding under GCCs as
indirect finance to agriculture sector under the priority sector with immediate
effect. KCC Scheme
Eligible farmer will be provided a Kishan Credit Card and a
Pass Book or a Cardcum-Passbook. Revolving cash credit facility allowing any num
ber of withdrawals and repayments within the limit.
Entire production credit nee
ds for full year plus ancillary activities related to crop production to be cons
idered while fixing limit. In due course, allied activities and non- farm short
term credit needs may also be covered. Limit to be fixed on the basis of operati
onal land holding, cropping pattern and scales of finance.
Seasonal sub limits m
ay be fixed at the discretion of banks.
Limit of valid for 3 years subject to an
nual review. Conversion /re- scheduling of loans also permissible in case of dam
age to crops due to natural calamities.
As incentive for good performance, credi
t limits could be enhanced to take cares of increase in costs, changing in cropp
ing pattern etc. Security, margin and rate of interest as per RBI norms.
Operati
ons may be through issuing branch / PACS or through other designated branches at
the discretion of bank. Withdrawals through slips /cheques accompanies by card
and passbook.
Personal Accident Insurance of Rs. 50,000 for death and permanent
disability and Rs. 25,000/- for partial disability available to Kisan Credit Car
d holder at an annual premia of Rs. 15/- per annum f) Financial Literacy Program
: Recognizing that lack of awareness is a major factor for financial exclusion,
the Reserve Bank has taken a number of measures towards imparting financial lite
racy and promotion of credit counseling services. The Reserve Bank has undertake
n a project titled Project Financial Literacy .

The objective of the project is to disseminate information regarding the central

bank and general banking concepts to various target groups, including, school a
nd college going children, women, rural and urban poor, defense personnel and se
nior citizens. The banking information would be disseminated to the target audie
nce with the help of, among others, banks, local government machinery, schools/c
olleges using pamphlets, brochures, films, as also, the Reserve Banks website. Va
rious initiatives taken by the Reserve Bank in order to promulgate Financial Lit
eracy:
A multilingual website in 13 Indian languages on all matters concerning b
anking and the common person has been launched by the Reserve Bank on June 18, 2
007. Comic type books introducing banking to schoolchildren have already been pu
t on the website. Similar books will be prepared for different target groups suc
h as rural households, urban poor, defense personnel, women and small entreprene
urs. Financial literacy programs are being launched in each state with the activ
e involvement of the state government and the SLBC. Each SLBC convener has been
asked to set up a credit counseling centre in one district as a pilot project an
d extend it to all other districts in due course.
The Financial Inclusion and Fin
ancial Literacy Cell has been established the college of Agricultural Banking, wh
ich would act as a resource centre in this field.
III.
THIRD PHASE - RANGRAJAN COMMITEE
The Government of India (Chairman Dr. C. Rangarajan) constituted the Committee o
n Financial Inclusion on June 26, 2006 to prepare a strategy of financial inclus
ion. The Committee submitted its final Report on January 4, 2008. The Report vie
wed financial inclusion as a comprehensive and holistic process of ensuring acce
ss to financial services and timely and adequate credit, particularly by vulnera
ble groups such as weaker sections and low-income groups at an affordable cost9.
Financial inclusion, therefore, according to the Committee, should include acce
ss to mainstream financial products such as bank accounts, credit, remittances a
nd payment services, financial advisory services and insurance facilities. The R
eport observed that in India 51.4 per cent of farmer households are financially
excluded from both formal/informal sources and 73 per cent of farmer households
do not access formal sources of credit. Exclusion is most acute in Central, East
ern and North-eastern regions with 64 per cent of all financially excluded farme
r households. According to the Report, the overall strategy for building an incl
usive financial sector should be based on Effecting improvements within the exis
ting formal credit delivery mechanism; Suggesting measures for improving credit
absorption capacity especially amongst marginal and sub-marginal farmers and poo
r non-cultivator households; Evolving new models for effective outreach; and Lev
eraging on technology-based solutions. Keeping in view the enormity of the task
involved, the Committee recommended the setting up of a mission mode National Ru
ral Financial Inclusion Plan (NRFIP) with a target of providing access to compre
hensive financial services to at least 50 per cent (55.77 million) of the exclud
ed rural households by 2012 and the remaining by 2015.

This would require semi-urban and rural branches of commercial banks and RRBs to
cover a minimum of 250 new cultivator and non-cultivator households per branch
per annum. The Report of the Committee on Financial Inclusion Committee has also
recommended that the Government should constitute a National Mission on Financi
al Inclusion (NaMFI) comprising representatives of all stakeholders for suggesti
ng the overall policy changes required, and supporting stakeholders in the domai
n of public, private and NGO sectors in undertaking promotional initiatives. The
major recommendations relating to commercial banks included target for providin
g access to credit to at least 250 excluded rural households per annum in each r
ural/semi urban branches; targeted branch expansion in identified districts in t
he next three years; provision of customized savings, credit and insurance produ
cts; incentivizing human resources for providing inclusive financial services an
d simplification of procedures for agricultural loans. The major recommendations
relating to RRBs are extending their services to unbanked areas and increasing
their credit-deposit ratios; no further merger of RRBs; widening of network and
expanding coverage in a time bound manner; separate credit plans for excluded re
gions to be drawn up by RRBs and strengthening of their boards. In the case of c
o-operative banks, the major recommendations were early implementation of Vaidya
nathan Committee Revival Package; use of PACS and other primary co-operatives as
BCs and co-operatives to adopt group approach for financing excluded groups. Ot
her important recommendations of the Committee are encouraging SHGs in excluded
regions; legal status for SHGs; measures for urban micro-finance and separate ca
tegory of MFIs. CREATION OF SPECIAL FUNDS The Committee on Financial Inclusion set
up by the Government of India (Chairman: Dr. C. Rangarajan) in its Interim Repo
rt recommended the establishment of two Funds, namely the Financial Inclusion Pro
motion and Development Fund for meeting the cost of developmental and promotional
interventions for ensuring financial inclusion, and the Financial Inclusion Tech
nology Fund (FITF) to meet the cost of technology adoption. The Union Finance Min
ister, in his Budget Speech for 2007-08 announced the constitution of the Financ
ial Inclusion Fund (FIF) and the FITF, with an overall corpus of Rs.500 Crore ea
ch at NABARD. The Government advised that for the year 2007-08 it was decided to
initially contribute Rs.25 Crore each in the two funds by the Central Governmen
t, RBI and NABARD in the ratio 40:40:20. The final report of the Committee has b
een submitted to the Government in January 2008.

Chapter - 6
HOW GOVERNMENT AND RBI CAN BUILD ON EXISTING BANKING STRUCTURE TO PROVIDE FINANC
IAL SERVICES TO ALL Banking system is like a team, which constitutes from variou
s entities which are different in nature, form, structure and its working but to
gether they makes system in which they efficiently work for a common motive. SHG
BANK LINKAGE PROGRAM The SHG-Bank Linkage program can be regarded as the most p
owerful initiative since independence for providing financial services to the po
or in a sustainable manner. The program has been growing rapidly YOY basis. Curr
ently, 10 million SHGs are working across the country with a credit base of Rs. 1
00000 Crore. But this is not enough to reach the entire mass. This number needs
to be increased substantially. However, the spread of the SHG- Bank linkage prog
ram in different regions has been uneven with southern states accounting for the
major chunk of credit linkage. Many states with high incidence of poverty have
shown poor performance under the program. NABARD has identified 13 states with l
arge population of the poor, but exhibiting low performance in implementation of
the program. The ongoing efforts of NABARD to upscale the program need to be gi
ven a fresh impetus. NGOs have played a commendable role in promoting SHGs and l
inking them with banks. As of now, SHGs are operating as thrift and credit group
s. They may evolve to a higher level of commercial enterprise in future. Hence,
it becomes critical to examine the prospect of providing a simplified legal stat
us to the SHG. MICRO FINANCE INSTITUTIONS (MFIs) From the late 1980s, the emerge
nce of the Grameen Bank in Bangladesh drew attention to the role of micro- credi
t as a source of finance for micro-entrepreneurs. Lack of access to credit was s
een as a binding constraint on the economic activities of the poor. Microfinance
Institutions (MFIs) are those, which provide thrift, credit, and other financia
l services and products of very small amounts mainly to the poor in rural, semiurban or urban areas for enabling them to raise their income level and improve l
iving standards. Lately, the potential of MFIs as promising institutions to meet
the demands of the poor has been realized. The closer proximity with the people
at grassroots level and the mix of offering right products at right price based
on the actual needs of the masses makes their role very important in deepening
financial inclusion. However, there is exigency to upscale their outreach. In In
dia, out of some 400 million poor workers, less than 20 per cent have been linke
One of
d with financial services provided by MFIs. Steps needed to promote MFIs
the ways of expanding the successful operation of microfinance institutions in t
he informal sector is through strengthened linkages with their formal sector cou
nterparts.

Efforts are needed to make MFIs an integral part of mainstream banking and to br
ing down the rates of interest on microcredit to ensure the micro finance moveme
nt gets further impetus
A mutual beneficial partnership should be established be
tween MFIs and Banks contingent on comparative strength of each sector. For exam
ple, informal sector microfinance institutions have comparative advantage in ter
ms of small transaction cost achieved through adaptability and flexibility of op
erations. COOPERATIVE CREDIT INSTITUTIONS Rural credit cooperatives in India wer
e originally envisaged as a mechanism for pooling the resources of people with s
mall means and providing them with access to different financial services. It ha
s served as an effective institution for increasing productivity, providing food
security, generating employment opportunities in rural areas and ensuring socia
l and economic justice to the poor and vulnerable sections. Despite the phenomen
al outreach and volume of operations, the health of a very large proportion of t
hese credit cooperatives has deteriorated significantly. Various problems faced
by these institutions are: Low resource base
High dependence on external source
of funding Excessive government control
Huge accumulated losses and imbalances
oor business diversification
Taking all these facts in mind, there is an urgent need to address the structura
l deficiencies of these institutions in order to make them play an effective rol
e in meeting the financial inclusion goal. RRBs RRBs, post-merger, represent a p
owerful instrument for financial inclusion. RRBs account for 37% of total rural
offices of all scheduled commercial banks and 91% of their workforce is posted i
n rural and semi-urban areas. They account for 31% of deposit accounts and 37% o
f loan accounts in rural areas. RRBs have a large presence in regions marked by
financial exclusion of high order. RRBs are, thus, the best suited vehicles to w
iden and deepen the process of financial inclusion. However, they need to be ori
ented suitably to serve the rural population with a specific mandate to achieve
financial inclusion. THE BUSINESS CORRESPONDENT MODEL In January 2006, the Reser
ve bank permitted banks to utilize the services of non-government organizations
(NGOs/SHGs), micro-finance institutions and other rural organizations as interme
diaries in providing financial and banking services through the use of business
facilitator (BF) and business correspondent models (BC). The BC model allows ban
ks to do cash in cash out transactions at a location much closer to the rural popu
lation, thus addressing the last mile problem.

Banks are also entering into agreement with Indian Postal Authority for using th
e enormous network of post offices as business correspondents for increasing the
ir outreach and leveraging the postmans intimate knowledge of the local populatio
n and trust reposed in him. The intention behind the model is to promote the bus
iness of banking with low capital cost by enabling outsourcing of rural business
to agents on a commission basis. Recent guidelines issued by RBI to ensure adeq
uate supervision over operations of BCs:
Every BC to be attached to a certain ba
nk to be designated as the base branch The distance between the area of operatio
n of a BC and the base branch should not exceed 30 km in rural, semi-urban and u
rban areas.
Initiatives needed to be undertaken to promote BC model
Allow more entry to priv
ate well governed small finance banks. The intent is to bring local knowledge to
financial products that are needed locally. Facilitate the use of existing netw
orks like cell phone kiosks or kirana shops as business correspondents to delive
r products of large financial institutions.
Liberalize the business corresponden
t regulation so that a wide range of local agents can serve to extend financial
services.

Chapter- 7
PRESENT STATUS OF FINANCIAL INCLUSION IN THE COUNTRY:Axis Bank to cover 12,000 villages under new financial inclusion plan. Axis Bank
, Indias third-largest private bank has begun implementing its rural expansion pl
ans and intends to cover 5,500 villages for financial inclusion by March 2011 an
d scale it up to 12,000 villages in five years time. Speaking to media, Mr. SK Ch
akrabarti, executive director Axis banks retail banking division said that the ba
nk is looking at several low cost delivery models such as the use of smart card,
mobile banking and point of transaction devices. Axis Bank has also set up sepa
rate financial inclusion team to implement its financial inclusion roadmap. It m
ay be recalled that Reserve Bank of India had asked all private and public secto
r banks to chart a road map on financial inclusion. The plan was expected to cov
er issues like the number of branches that banks would plan to open in rural Ind
ia, the number of no-frill accounts they plan and the number of business corresp
ondents they would appoint to achieve their financial inclusion target.
SBI plans financial inclusion of 50,000 villages this fiscal. The bank under fin
ancial inclusion initiative has planned to cover 50,000 unbanked villages during
2010-11 which will take total reach to 1, 50,000 villages," a senior official o
f SBI said. SBI to set up 600 financial inclusion centers. The move to set up FI
Cs is aimed at powering the bank's drive to reach basic and affordable banking s
ervices to 12,421 out of the 72,315 unbanked villages (identified according to 2
001 census) having a population of over 2,000 by March-end 2012. Under the finan
cial inclusion plan, our bank is currently providing basic banking services in 1
,300 villages. This number will jump to 5,300

by March-end 2011. We will complete the target of providing banking outreach in

12,421 villages by March-end 2012, said Mr. M.I. Dholakia, Deputy General Manager
, SBI.
IDBI Bank has a branch network of
Semi-urban and 73 branches are in
s The account can be opened with
010, 4, 34,512 such accounts have

702+ branches out of which 142 braches are in

rural areas. Inclusion through No Frill Account
a minimum balance of Rs.250/-. As at end-March 2
been opened.

ICICI Bank Ltd, Indias largest private sector Bank and Vodafone today announced a
joint initiative to drive financial inclusion in the country. Under this tie-up
, both entities will offer a bouquet of financial products such as savings accou
nts, pre-paid instruments and credit products through a mobile phone based platf
orm. This partnership is expected to bring the un-banked and under-banked popula
tion into the organized financial services framework and assist in furthering th
e electronic payments market in India. ICICI Bank will leverage the distribution
strength of Vodafone, which manages over 1.5 million retail points for acquirin
g customers and servicing them. The Reserve Bank of India (RBI) has over the pas
t few years come out with various measures to facilitate banks to achieve the fi
nancial inclusion agenda. RBI has allowed banks to appoint for-profit' companies
as Business Correspondents (BCs). This tie-up between ICICI Bank and Vodafone i
s a step in that direction.

DENA BANK
Dena Bank was founded on 26th May, 1938 by the family of Devkaran Nanjee under t
he name Devkaran Nanjee Banking Company Ltd.
It became a Public Ltd. Company in
December 1939 and later the name was changed to Dena Bank Ltd.
In July 1969 Dena
Bank Ltd. along with 13 other major banks was nationalized and is now a Public
Sector Bank constituted under the Banking Companies (Acquisition & Transfer of U
ndertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949
, in addition to the business of banking, the Bank can undertake other business
as specified in Section 6 of the Banking Regulations Act, 1949.
1.5.1 MISSION
DENA BANK provides its Customers - premier financial services of great value.
St
aff - positive work environment and opportunity for growth and achievement. Shar
eholders - superior financial returns. Community - economic growth.
1.5.2 VISION
DENA BANK will emerge as the most preferred Bank of customer choice in its area
of operations, by its reputation and performance.

1.6 DENA BANK HAS BEEN THE PIONEER IN:

Minor Savings Scheme. Credit card in rural India known as "DENA KRISHI SAKH PATR
A" (DKSP). Drive-in ATM counters of Juhu, Mumbai. Smart card at selected branche
s in Mumbai. Customer rating system for rating the Bank Services.
Financial Inclusion
The Bank has a Financial Inclusion Plan which envisages roadmap for provision of
banking services through banking outlet in770 villages allocated to it by vario
us SLBCs under Lead Bank Scheme. The number of villages allotted to Dena Bank ha
s now been reduced from 770 to 728 after re-allocation of the villages to other
Banks keeping in view the geographical areas. As per FIP, all these villages are
covered by end of March 2012.
The plan includes extension of facilities like Opening of No Frills Accounts, In
built Overdraft facility in the No Frills Accounts, Entrepreneurship Credit, Rem
ittance facilities and Micro-Insurance products. The Bank has engaged M/s Tata C
onsultancy Services (M/s TCS)as the Application Service Provider (ASP) for imple
mentation of FI Plan for a period of 3 years. Bank has engaged individual Busine
ss Correspondents (BCs) in FI villages. 3.6.2 Progress in coverage of villages:
Bank has covered all 728 villages by March 2012. Brick & Mortar Branch Model: Ba
nk has covered 41 villages by opening Brick & Mortar Branches. Ultra Small Branc
h Model: Bank has covered 34 villages by setting up of Ultra Small Branches. BC
Model: Bank has Covered 653 villages by engaging individual Business Corresponde
nts. 3.6.3 No Frills Accounts: Total 2.74 lakhs No Frills accounts have been ope
ned in the FI Villages by March 2012 against the target of2.62 lakhs accounts. H
owever, the Bank as a whole, the number of No Frills accounts is 12.60 lakhs as
of March 2012.

3.6.4 Inbuilt OD facility in the No Frills Accounts: All No Frills Accounts in F

I villages i.e. 2.74 lakhs No Frills Accounts have been extended OD facility by
March 2012, against the target of 2.62 lakhs accounts. However, the Bank as a wh
ole, the number of inbuilt OD facility extended in the No Frills Accounts is 5.5
3 lakhs. Dena Kisan Credit Cards and Dena General Credit Cards are also issued u
nder Financial Inclusion Plan.
3.6.5 Training to Individual BCs: Training has been provided to all individual B
Cs. However, Bank shall provide training to BCs on continuous basis through pool
of officers identified for training.
3.6.6 FIP for Regional Rural Banks (RRBs): Dena Bank has sponsored two RRBs name
ly Dena Gujarat Gramin Bank (DGGB) in the State of Gujarat and Durg Rajnandgaon
Gramin Bank (DRGB) in the State of Chhattisgarh. DGGB has been allocated 245 vil
lages and DRGB has been allocated 26 villages. In all, both the RRBs have been a
llocated 271villages having population above 2000.Both the RRBs have covered all
the villages allotted to it by March2012.
3.6.7 FIP for the State of Gujarat: A total of 3502 villages having population a
bove 2000 were allotted to Banks and all have been covered by Banks by March 201
2.Banks have covered 101 villages through Brick & Mortar Branch Model, 673 villa
ges through Ultra Small Branch Model, 16 villages through Mobile Van model and 2
712 villages through BC model. Dena Bank has covered all 493 villages allotted t
o it in the State of Gujarat. All Banks have opened 9.99 lakhs accounts under Fi
nancial Inclusion. (Dena Bank has opened 1.67 lakhs accounts).

Inclusion Process:

Chapter-8
Resaerch Methodology
OBJECTIVE OF RESEARCH
The ability of banks to offer clients access to several markets for different cl
asses of financial instruments has become a valuable competitive edge. With the
phenomenal increase in the country's population and the increased demand for ban
king services; speed, service quality and customer satisfaction are going to be
key differentiators for each bank's future success. Thus it is imperative for ba
nks to get tap the rural market by including them financially, which in turn wil
l help them take positive steps to maintain a competitive edge.
To study the cus
tomer awareness with respect to banking services. To identify the gaps of financ
ial inclusion and exclusion.
DATA COLLECTION TECHNIQUES:
The study has been done using an exploratory research process
uestionnaire was developed for this purpose. For the collection
this was the only method used.
The reason we used this method
was felt for the free influx of information about the products.
allowed the use of skills gained in class.

and a structured q
of PRIMARY DATA
is because a need
Also this method

4.4 SAMPLE DESIGN:

The population considered for the purpose of the survey was people having an acc
ount in Dena Bank in the Branches of Gandhinagar District.
The extensive researc
h is done with customer of banks located in Por, Koba and Bhat area of Gandhinag
ar.

4.5 SAMPLING TECHNIQUE USED:

Since the information required was not of a very technical nature and also looki
ng at the scope of the project and the extent of the target segment, the samplin
g technique employed was Convenience Sampling. We administered the questionnaire
s.
4.6 SAMPLE SIZE:
We restricted the sample size to 20 respondents per branch, who are valued custo
mers of the bank from each branch of different age groups. This was done keeping
in mind the time constraints and the fact that we felt that this number would b
e enough to serve the information needs required to show the trends.
Total Sampl
e- 60 Customers
4.7 DATA ANALYSIS
After data collection, we were able to analyze customers views, ideas and opinion
s related to Products & Services of the Bank, which will enable the Bank to get
a clear picture about the Customers perception and requirements.
4.8 DATA INTERPRETATION
Interpretation of data is done by using statistical tools like Pie diagrams, Bar
graphs, and also using quantitative techniques (by using these techniques) accu
rate information is obtained.
4.9 CLASSIFICATION & TABULATION OF DATA:
The data thus collected were classified according to the categories, counting sh
eets & the summary tables were prepared. The resultant tables were one dimension
al, two dimensional.
4.10 STATISTICAL TOOLS USED FOR ANALYSIS:

Out of the total respondents, the respondents who responded logically were taken
into account while going into statistical details & analysis of data. The tools
that have been used for analyzing data & inference drawing are mainly statistic
al tools like percentage, ranking, averages, etc.

As per questionnaire and market surveys we have find out different responses fro
m different people. According to their responses we have analyzed the findings a
nd draw certain remarks.