.

1.0 Introduction
If the misery of the poor be caused not by the laws of nature, but by our
institutions, great is our sin. - Charles Darwin1

Efficient functioning of a financial system serve importance purpose which

includes:

offering

savings,

credit

loans,

payment

and

other

risk

management products to low income class people with heterogeneous

needs and requirements. Financial systems which take into consideration
the poor population allow them broad access to financial services, without
the burden of price or non- price barriers are very likely to benefit the poor
people and other disadvantaged groups. Without inclusive financial
structure the poor people will have to rely on their own meagre savings to
invest for education purposes for their children or to start their own
business, and the small enterprises must be dependent on their own
limited earnings to pursue promising growth opportunities. This can
further elevate the problem of income inequality and slow economic
growth. Globally, 50 percent people reported having an individual or joint
account at a formal financial institution. While account penetration is
nearly universal in high-income economies, with 89 percent reporting that
they have an account in a formal financial institution, it is only 41 percent
in developing economies. Globally, close to 2.5 billion people do not have
a formal account, most of them are in developing economies.
Therefore, to bring all the poor people in one umbrella requires a strong
framework of banking and financial institution. A framework which would
offer varied banking services to fulfill the requirements of all the people. It
also needs to improve its distribution framework to reach to the vast rural
population of India so that they can be optimum distribution of services
which would also lead to the economic upliftment of the poor people
residing in rural areas.

Voyage of the Beagle; 27th December 1831

.
Financial inclusion is poor in India as compared to other countries. For
instance, if we were to compare India to other BRICS countries and world
at large. Percentage of population having bank account in India is 53.10
percent while it is higher in Brazil, Russia, China and the world at large
68.10

percent,

67.40

percent,

78.90

percent

and

61.5

percent

respectively. **
Only 43.10 percent of Indian women have bank accounts in comparison
with China which has 76.4 percent .Also, for people in the rural areas
picture is not good either. As only 50 percent of people in rural India have
bank accounts while 74.3 percent Chinese rural people have bank
accounts. As per world bank report in 2011, In India 35.2 percent people
have had financial institute account and in 2015. Government of India and
reserve bank of India has played a major role by taking various measures
like no-frills accounts, simplification of ( Know Your Customer )KYC norms,
use of intermediaries, introduction of general credit cards, use of
technology, use of regional language, one time settlement and financial
education.
Regional disparity and gaping inequality
Committee on comprehensive financial services for small businesses and
low income households was setup by The Reserve Bank of India in
September 2013 under the chairmanship of Nachiket Mor, an RBI board
member (covered in details in Section # 2 ). As per the report submitted
by the committee financial inclusion in rural as well as urban area is poor.
Overall, 45 percent of the urban residents and 32 percent of the rural
residents have bank accounts. Moreover, there is significant contrast even
within district to district. In terms of urban areas the current penetration of
individual bank accounts ranges from 10 percent in Imphal east district of
Manipur to 688 percent in Wayanad district of Kerala, while in the rural
context it ranges from close to 0 percent in the districts of Nagaland to 89
percent in Solan in Himachal Pradesh.
2

THE LITTLE BOOK ON FINANCIAL INCLUSION 2015, WORLD BANK GROUP

1.1 Historical Milestones

YEAR

PARTICULARS

FI EFFECT

1954

All India rural credit survey committee

report was formed

positive

1963

Agriculture refinance corporation was

formed

positive

1969

14 major private banks were nationalized

positive

1972

Priority sector lending

positive

1975

Regional rural banks were established

positive

1980

6 more private banks were nationalized

positive

1982

Establishment of NABARD

CANT SAY

1990

Implementation of the concept of village

level credit

positive

2000

Reforms sharply focused on agricultural

credit

NONE*

TABLE 1.1 : The table 1.1 signifies the importance of the credit to
the agri / rural segment of the society . This research is intended
to further assess the situation of Financial Inclusion.

2.0 Committee(s) on Financial Inclusion

2.1 Khan Commission (2004)
The Khan commission was set up by the Reserve Bank of India in the year
2004 to see the state of the financial inclusion in India. It was set up to
see the financial affairs regarding the inclusiveness of financial services
and whether or not it is reaching people across the state to make sure
there is equal distribution or inclusiveness of financial services to the
unprivileged population of India. The recommendations provided by the
Khan commission were incorporated into the mid-term review of the policy
(2005-2006) and it ordered banks to review their existing practices to suit
the requirements in alignment to the requirements of financial inclusion
and keeping in mind the objective of financial inclusion. The Reserve bank
of India also urged the banks for the need of making available no frills
account either with NIL or very minimum balances as well as charges
3

.
that would make it easy for the poor section of the population to access
bank accounts. Simplifying the banking services will enable a vast section
of population to come in the fold of bank accounts which would solve the
basic problems of the people such as availability of credit, deposits,
savings etc. also it introduced into the banking system business
correspondents. The banking system has started to implement the
business correspondent mechanism to facilitate banking services in those
areas where banks are unable to open branches because of high costs.
Business correspondents provide affordability and easy accessibility to
this disadvantaged population as they are armed with advanced
technology the business correspondents help in taking the banks to the
doorsteps of rural households. Also electronic benefits transfer (EBT) to
prevent the leakages that are present in transfer of payments through
various levels of bureaucracy, government has started to transfer
payment directly to accounts of beneficiaries. This mechanization is
expected to provide greater benefits and relief to the beneficiaries and
also reduces government cost of transfer and monitoring. Once the
benefits starts to accrue the masses government shall be looking towards
formal financial sector.

2.2

Rangarajan Committee (2006)

The Rangarajan committee was formed in 22 ND

June 2006 taking into

consideration the ineffective efforts on financial inclusion. Despite of

various measures taken by the government a vast section of population
were excluded from the fold of financial inclusion. Especially the
vulnerable groups, the vulnerable groups continued to be remained
excluded from the opportunities and services provided by the financial
sector. With a view to correct the situation and expand the reach of the
financial sector to such groups by eliminating the barriers to access
financial services as encountered by them the government of India
constituted this commission.
The committee was asked to take into consideration the following points
4

To study in detail the pattern of financial exclusion and the

disproportionate distribution of financial services in terms of region,

gender and occupational structure.

To identify the various barriers to the inclusion of the population of
the rural and poorly developed regions. Especially barriers faced by
the vulnerable groups in accessing credit and financial services,

including supply of credit, supply and institutional barriers.

To analyze the international experience in implementing policies of
financial inclusion and examining their importance with relevance to
India. It also aims at identifying the challenges faced by other
countries in financial inclusion and what measures have they taken

to counter the challenges faced by them.

A strategy to extend the financial activities to small and marginal
farmers

and other

streamline

and

vulnerable groups

simplify

procedures

including

reduce

measures

cost

and

to

make

operations transparent.
A monitoring mechanism to assess the quality and quantity of
financial inclusion including assessing the progress made.

2.3 Nachiket Mor Committee (2013)

The Nachiket Mor Committee was an expert committee formed by
Raghuram Rajan in September 2013 under the chairmanship of Mr.
Nachiket Mor who is an RBI board member. The objective of the
committee was to study the various aspects of financial inclusion in India.
The committee submitted its final report on 7 th January 2014. It was a
committee on comprehensive financial services for small businesses and
low income households.
Nachiket Mor committee's main recommendations were:

Opening of a universal bank account of all Indians above the age of

18 years by January 1, 2016. To achieve this, a vertically
differentiated banking system with payments banks for deposits and
payments.

Wholesale banks for a better credit reach so that it can reach into
every corner of the rural areas. These banks need to have Rs.50
crore by way of capital which is a tenth of what is applicable for new

banks that are to be licensed.

Aadhaar will be the main driver towards rapid expansion in the
number of bank accounts. It would be a percentage of gross
domestic product

(GDP) in terms of district level deposits and

advances.
The Nachiket Mor committee has recommended increasing the
priority sector lending from the current 40 percent to 50 percent.

Also the banks must be freed from all pricing and other restrictions.
Introducing and allowing differentiated licenses for the banks. It has
categorized three banks i.e. payment, wholesale investment and
wholesale consumer should be allowed. At the same time, the
regulations

for

non-banking

financial

companies

should

be

streamlined.

2.4 Deepak Mohanty Committee (2015)

The Reserve Bank of India (RBI) on 15th July 2015 formed a committee to
work out a five year action plan for financial inclusion. This commission is
headed by RBI executive director Deepak Mohanty. It was tasked to
suggest a plan on several components with regard to payments, deposits,
credit, social security transfers, pension and insurance.
The key recommendations were

Sukanya Shiksha Scheme Banks should make special efforts to

increase the account opening of females belonging to lower income

group.
Aadhaar linked credit account Aadhaar should be linked to each
individual credit account as a means of unique identifier which can
be shared with credit information bureau to enhance stability.

Crop insurance Government should introduce universal crop

insurance scheme covering all crops of the small and marginal

farmers.
Multiple guarantee agencies It should encourage to provide

credit in areas of small and medium enterprises.

Unique identification of MSME It should be introduced for all
MSME borrowers and information from it should be shared with

credit bureaus.
Nurturing self-help groups Corporate should be encouraged to

nurture and help the SHGs as their social responsibility.

Mobile technology The traditional business model of the banks
should be replaced by mobile technology to improve the services
and make it fast and efficient.

The task of financial inclusion is enormous and the process of reaching the
rural and semi-urban customers is long and complex. The Committee
believes that by focusing on key financial reforms and policies the
government can deliver to the needs of the rural and unbanked areas in a
sustainable and stable manner. The committee came to a conclusion that
significant leap towards banking access has taken place but still a
reasonable percentage of areas are still excluded for various reasons that
need to be focused addressed to by increasing financial inclusion drive in
the areas which need it the most such as north-eastern states, central
states to achieve overall financial inclusion. This will also call for a change
in the traditional business model and functioning of the banks to adapt to
the needs and requirements of the rural people and also introducing
mobile technology in banking services to increase the reach and achieve
fast and reliable services. Further the government has an important role
to play to increase the mobile connectivity to increase the reach of
financial inclusion. There is also a significant exclusion of the women from
the financial inclusion program the banks must be prepared to step up the
efforts and bringing awareness to promote bank account of women. Given
the increase in the welfare of the girl child committee suggested the
sukanya siksha scheme. The scheme will make sure that the girl child is

.
educated and is aware of the basic financial services. This will also ensure
gender equality and make them independent.
The committee also recommends a unique biometric device like the
aadhaar card which would be used in identifying multiple accounts and
also will help in eliminating in-debtness of the individuals. The credit
information companies can then keep a record of the borrowers and
prevent the risks of default. The committee also recommends use of
mobile services to bring down the costs associated with banking. One of
the important points the committee recommends is the credit delivery
services

towards

the

underprivileged

especially

millions

of

poor

agricultural households so to ensure a steady flow of credit to make

progress in financial inclusion which would ultimately benefit the overall
development of the rural areas. The committee observed that despite
improved financial access the bank usage remains low because of various
reasons. There is a need of better usage of technology to prevent the
leakages in the process of financial inclusion.

3.0 Importance of the Study

3.1

Why Financial Inclusion is important?

Financial inclusion is very important for India for a number of reasons. It is

a gateway to the economic growth and development of a country. Most of
Indias population live in rural areas and are poverty stricken because of
lack of banking facilities and infrastructure. The poor and vulnerable
groups are excluded and left behind as a result of urbanization. To develop
the rural areas and make them financially independent there is a need to
be financially inclusive and bring everyone under one umbrella so that
there is equal distribution of financial services which will in turn reduce
income inequality among the rural and the urban people. Making available
financial services will also enable the farmers to be free of the clutches of
the moneylenders who charge high interest rate and is a burden for the
farmer whereas bank will charge a much low interest rate. It makes sure
that the small households and business are provided with effective
financial services to improve their life. It makes sure everyone irrespective
of income level is made available to the services and is benefitted. It will
make sending and receiving money very much easy for the rural people. It
inculcates the habits of savings and helps them to start a business and
which gives people opportunities through micro-financing schemes for
long term growth. It also makes easy payment for education of the
children which increases the literacy rate. Investment in the rural areas
boosts employment, status and ones outlook to life. It leads to economic
and social welfare of the rural people. The introduction of banking services
will enable the people to be free of the burden of the moneylender as
banks are reliable and charge a low interest rate. Financial inclusion
promotes all round development of economy.
Financial

inclusion

is

the

prime

driver

of

economic

growth

and

development. It brings everyone in one umbrella and helps realize the full
potential of the economy. As the majority of the population of India lives in
the rural area it is of utmost importance that we develop the banking

.
infrastructure of the rural areas to increase employment, increase welfare
of the people, reduce income inequality, improve standard of living,
improving literacy rates, setting up of industries etc.

3.2

Causes of Financial Exclusion

Low income of rural people

Majority of Indian people stay in the rural areas because of
which many people are poor and low wage earners. For them
opening an account and depositing or withdrawing is of no use.
Most of the people have low standard of living therefore they do
not spend much and also dont require borrowing from banks.
They have limited incomes which they keep at home rather than
in a bank.

Lot of terms and conditions

Opening a bank account requires a lot of terms and conditions
and documentation. This discourages people to open a bank
account.

Lack of awareness
The rural people are not aware of the financial services provided
by banks and financial institutions the main reason for this might
be illiteracy. People lack awareness about the financial services
and the advantages of banking. Further illiteracy becomes a big
hurdle in financial inclusion.

Difficulty to access to credit

Many people in the rural areas find it difficult to get a loan from
a commercial bank. Many poor people do not have any security
against a loan and find it difficult to get credit. The uneducated
poor mostly trust the moneylenders who provide credit without
the requirement of any security.

Lack of interest by the commercial banks

10

.
Commercial banks think that people in rural areas are not
suitable for banking services. The main aim of commercial banks
is to earn profit and in rural areas it is difficult to earn profit that
is why bank does not take any interest in providing services to
the rural areas. Also the cost of credit is very high in commercial
banks and people cannot afford it.

4.0 Objective(s) of the Study

To find out if unbanked region wise and gender wise

heterogeneity has transformed in the recent years.

Compare financial inclusion between India and the other BRICS
nations efforts.

5.0 Results and Findings

5.1

Number of New Bank Branches Opened by Area from

(2013-14 TO 2016-17)
Between 2013-14 a total of 24,374 new bank branches were opened by
the public sector banks and the private sector banks. Majority of the
number of banks were opened in the rural areas which was 35 % of the
branches which stands at (8,588) followed by (7,035) in the semi-urban
and (4,222) in the urban areas. As of 30 th September 2017, there were a
total of (84,389) bank branches in rural areas.

11

Figure 5.1 : there has been increase in the number of Rural

brances as compared to Urban.

12

5.2 Number of New Bank Branches Opened by Year from

(2013-14 TO 2016-17)
Most number of bank branches were opened during the period of 2013-14
which is about 42%. After that there is a continuous fall in the bank
branches from 10269 in 2013-14 to 5992 in 2015-16. Southern region was
the region where most number of bank branches was opened. More than
25 % banks were opened in the southern region comprising states of
Andhra Pradesh, Tamil Nadu, Karnataka, Kerala, Telangana, Pondicherry
and UT of Lakshadweep. The northeastern region was the neglected
area where only 3 % of new bank branches were opened.

Figure 5.2 : The figure suggest there has been decrease in the
number of new branches across the years. The two-point Moving
Average (shown by dotted lines) shows downward decline.

5.3

Number of New Bank Branches Opened by Region

from (2013-14 TO 2016-17)

South India leads in terms of bank branches opened between 2013-14 and
2015-16 (up to June), 6643 branches which is more than 27% were
opened in the south. More than 4000 branches were opened in the central

13

.
and northern region. The least number of bank branches were in the north
east.

Figure 5.3 : the region wise decrement shows a marked biased

towards North-east region.

5.4

Financial Institutions that are Helpful in Financial

Inclusion

REGIONAL RURAL BANKS

Role of regional rural banks is very important in the financial
inclusion. They can play a greater role than commercial banks in
achieving

financial

inclusion.

They

are

meant

for

the

development of the rural economy by pooling the credit gap by

providing credit so that it is used for the purpose of development
of agriculture, trade commerce, industry and other productive
fields in the rural area.

COOPERATIVE BANKS
The cooperative banks have very good network in the rural areas.
The main benefit of a cooperative bank is that the staff in the

14

.
bank is made up of local people therefore they are tailor-made to
understand the needs and requirements of the rural people. They
are better placed to solve the problem of rural poverty by
strengthening supply side of financial inclusion.

MICRO FINANCE INSTITUTIONS

Micro finance plays a significant role in bridging the gap between
financial institutions and the rural poor. The micro-finance
institutions accesses financial resources from other banks and
provide financial support system to the rural poor. They operate
in a limited geographical area and have a better understanding of
the issues relating to the rural people.

NON-BANKING FINANCIAL COMPANIES

The non-banking financial company is a financial institution. A
non-banking financial company plays a major role in deposit
mobilization and credit availability. The main function of the
NBFCs are strong customer relationship, excellent understanding
of the rural environment and personalized services.

NON GOVERNMENT ORGANISATION

Non-government
increasing

organizations

financial

literacy

help

through

in

financial

education

of

inclusion
banking

services. To achieve true financial inclusion the NGOS needed to

partner with private sector. Also NGOS can ally with banks to
identify and create the various banking services according to the
needs and requirements of the rural population. It is very
important to have differentiated products and services for the
farmers.

5.5

RBI Initiatives for Financial Inclusion

USE OF TECHNOLOGY
The Reserve Bank of India has promoted the use of advanced
technology to tackle the problems of reach and delivery time
15

.
taken. The business correspondents use electronic devices to
give services at the doorstep of the rural people which becomes
convenient for them as there is a lack of banking infrastructure in
the rural areas of India. Also, with the help of smart card the
account holder can access banking services and also ensure
safety of transaction.

OPENING OF NO-FRILLS ACCOUNT

A no-frills account is a saving account which is the same as a
regular bank account and can have zero balance in the account.
A no frills account can be opened for free without any charge or
expenses and also there is no need to maintain a minimum
balance as in the case previously. There is no need to submit any
documentations or proof required along with no transaction cost.
People opening no frills account get an ATM card only if they
maintain the required balance in the account.

PERMISSION TO OPEN BANK WITHOUT PERMISSION OF RBI

The RBI has approved the opening of the bank branches in the
rural and semi urban areas without notification of the RBI. This
step taken by the RBI has led to expansion of banking
infrastructure which would take a long time without the approval
of the RBI.

OPENING OF BRANCHES IN UNBANKED RURAL AREAS

The RBI has made it compulsory to open branches in the rural
areas and provide them with the financial services to the rural
people. Twenty five percent of their branches must be in the rural
unbanked areas.

USE OF BUSINESS CORRESPONDENTS

Business correspondents are like agencies or middlemen who
provide door to door financial services in the rural areas. People
can access banking services at their doorstep which becomes

16

.
very convenient for them. Also it simplifies the procedure as
through business correspondents any misinformation or doubt
regarding banking by the rural people is eliminated.

5.6

Contribution of Financial Inclusion to Economic

Development

FINANCING AGRICULTURE
The agriculture sector is greatly developed because of financial
inclusion. The farmers are provided banking services by which
they can get credit easily at lower interest rate and do not have
the burden of moneylender charging high interest rate. It has
greatly improved the welfare of farmers. The Regional Rural bank,
financial institutions, public sector banks provide credit facilities
to farmers to assist them in purchasing good quality seeds and
agricultural equipment. Also they are provided advisory services
to start dairy, poultry farming, animal husbandry, sheep breeding
etc. The unemployed people, farmers, artisan etc. are provided
credit for their development. Agriculture is the main occupation
of India and fifty five percent of people are farmers therefore
providing finance to farmers will definitely (**SOURCE)boost the
economic growth and also improve the quality of farming.

FINANCING INDUSTRY AND TRADE

Banking is the lifeline of the industrial sector without which
industry and trading may not exist. The banking sector provides
short term, medium term and long term loans for the sound
functioning of the industrial sector. It also helps in internal as well
as external trade. The making available of banking services and
bringing equality has brought a change in the rural landscape.
Availability of credit helps to ward off unemployment and
encourages people to start their own small-scale enterprise to
improve their livelihood.

17

FINANCING EMPLOYMENT GENERATING ACTIVITIES

The

regional

rural

banks,

public

sector

banks,

financial

institutions etc. are doing a great job of by taking steps to

provide financial education so that each and every person of the
rural population at least has the basic knowledge of banking and
its advantages. It is a literacy program for individual development
and employment. Banks provides loans to people who cannot
afford education so that they go for higher studies. It also grants
loans to creative individuals to start their own business.
Therefore banks encourage entrepreneurship and increases
employment.

MOBILISATION OF SAVINGS FOR CAPITAL FORMATION

The banks promote savings as naturally Indians are good at
saving their income. The banks by providing account facilities
and various deposit schemes promote savings. Mobilization the
savings the banks can use it for investing in development
projects which indirectly leads to capital formation.

5.7

Difficulties Faced in Rural Banking

UNCERTAINTY AND DEFAULT RISK

Lending to certain segments especially the poor is surrounded with

uncertainty about repayment. The rural poor people dont have a fixed
flow of income and there are fluctuations. Moreover they are surrounded
by risks such as crop failures, fluctuations in commodity prices, irregular
weather. So therefore banks have genuine concerns regarding the rural
poor and their ability to payback. One of the prime factors for risk is
commodity prices.

LACK OF CREDIT INFORMATION

The lack of information about the credit history of the borrowers makes it
even more difficult to lend money. There are a number of sources of credit
rating agency which makes available the information about the borrowers
but none of them focuses on the rural small borrowers. Credit information

18

.
about these borrowers is difficult to gather as these rural borrowers
borrow from moneylenders.

THE TYRANNY OF COLLATERAL

The lender can reduce the risks through a security or collateral if in case
the borrower defaults the lender can at least recover a part of the amount.
The defaulter therefore thinks twice before taking a loan. Hence the
collateral requirement to a certain extent stems out defaulting during
payment. The main problem in the rural areas is that the rural people do
not have collateral as majority of them are very poor so this is a drawback
for the banking institutions during lending. Most of Indias rural poor do
not have fixed collateral so therefore only those people having some
assets in hand can avail credit from the bank.

GOVERNMENT POLICY

The financial environment is not supportive to lending in general and

especially to rural banks. High fiscal deficits, the government intervention
in the rural finance institutions, weakness in the regulatory and legal
framework, and formation of policies which are aimed at political favors
has resulted in distortion of risk and return indicators and inefficiency and
incompetency in the delivery of rural financial services. The result of this
is ineffective credit generation of rural banks. The higher fiscal deficit
compels the government to take the larger share of the financial savings
for itself by which the credit availability to private sector is reduced. The
measures taken for lending purpose that require the commercial banks to
allocate 40 percent of their total lending to priority sector which includes
agriculture have unfortunately not produced the expected results as most
banks avoid this by subscribing to various financial instruments such as
bonds issued by NABARD

and SIDBI. And interest rate policies make

commercial banks incompetent to lend at lower interest rate to small,

rural clients as their main aim is to generate profit and these interest rate
policies are against their objectives.

19

5.8

Agricultural Credit across India

The agricultural sector is a vital component for the Indian economy and
improving agriculture will directly translate to a better economy. As it
provides food security and employment to a vast number of Indians. The
priority sector lending concentrate more on rural agriculture. The target
for the commercial banks for the priority sector lending towards
agriculture is 18 percent of commercial bank credit and lending to small
and marginal farmers at 7-8 percent. Also government has initiated
various programs which aim at providing agricultural credit to farmers.
Despite of the efforts of the government a large number of farmers are
neglected formal finance and therefore rely on informal sources such as
the moneylenders, family and friends.
As per the 2011 survey by World Bank agriculture provides livelihood to
60 percent and it provides employment to 55 percent of the workforce of
the nation. There is a need to increase the productivity of the agricultural
sector to contribute to economic development. And the basic step towards
this is availability of credit and even distribution of financial credit so that
every farmer is covered. This will not only increase productivity but also
improve agricultural output quality as it will improve the quality of the
inputs used in agriculture. And remittance facility is important like local
and international money transfers through which farm workers and urban
immigrants can support their families monetarily which they have left
behind. As per the survey conducted by intermedia which is a global
research consultancy 43 percent of the agricultural workers do not have
bank account. One of the most important factors for the well-being of a
farmer is the risk arising out of weather fluctuations which can lead to
huge losses for the farmers so to mitigate these risk insurance services in
the agricultural sector is necessary for the well-being of the farmers.

5.9

Financing for Micro, Small and Medium Enterprises

(MSME)

20

.
Micro,

small

and

medium

enterprises

are

important

drivers

and

contributors towards the manufacturing sector. The micro, small and

medium enterprises is responsible for 45 percent of manufacturing sector
output and 40 percent of the total exports of the nation. The Deepak
Mohanty committee is of the view that MSMES is the vehicle for
eliminating and reduction of unemployment as it plays a major role in
employment generation as there are an estimated 48 million MSMES in
the country which provides employment to 111 million people. Not to
mention the various measures taken for providing adequate credit to the
MSMES which is still not enough and there is a need of something
innovative. There are many challenges an MSME has to face. Firstly they
are hungry for credit to function efficiently and banks do not trust them in
their payback ability. Neither does bank has the required skills, resources
and time to assess the creditworthiness of MSMES. A sound credit risk
MSME often does not involve them with banking services because of the
complicated documentation process. Some MSMES also do not come
forward with their financial requirements because of the fear of income
tax authorities and harassment by bureaucracy. Secondly monitoring of
these organizations is not sufficient because of the power of credit
guarantee provides the borrower a comfort. Eventually limited knowledge
and insufficient methods of assessment creates a way for high credit risk,
high costs and low credit.
The introduction of credit guarantee trust came into force in the year
2000. The trust is introducing various credit guarantee schemes which are
helping many financial lending institutions to extend credit to enterprises
for the development of the manufacturing sector. This scheme seeks to
guarantee the lender that incase the borrower defaults on the loan which
is collateral free credit facility, the guarantee trust will take the
responsibility of making good the losses of the lender by 70-80 percent of
the credit given.

21

5.10 Financial Literacy and Protection of Consumer

In order to ensure financial soundness and stability in the economy the
most basic as well as important factor is financially educating the people
about

the

various

financial

products

and

the

advantages

and

disadvantages as well as the risks involved in the finance. Educating the

people about the banking and finance sector and the pros and cons of it
will make the people to better understand risks, will make the markets
more competitive and provide greater stability. Educating about financial
terms and consumer protection can improve the banking system as
people realize the advantages of banking services the participation will
increase and so will the capital and economic development. One of the
important factors after setting up of financial institutions and distribution
of banking services is to make people aware of at least the basic banking
services and how it works. This will increase participation and involve a
broader population in the economy to contribute towards solving
problems of illiteracy, employment and greater welfare and opportunities
to grow. There are efforts by the Reserve Bank of India to increase
providence of financial inclusion. A national center of financial inclusion
was established for implementing the strategy made to counter ignorance
of financial education. Awareness programs are also organized in the form
of national financial literacy assessment test, education training events
for teachers and greater use of social networks is stressed upon.

22

Figure 5.5 : the region wise biased in the northeastern states has
been there across years.

From the above chart it is clear that southern region has the highest
number of financial literacy centers. And the northeast and the western
region have the lowest. These regions require attention in terms of
financial infrastructure. The number of financial centers has grown over
the years for southern region making it the most financially literate region.

5.11 Why do Small Borrowers find Rural Banks Unattractive?

From the point of view of the rural borrowers there are several reasons for
finding the rural banks unattractive.

ABSENCE OF FLEXIBLE PRODUCTS AND SERVICES

The needs and requirements of the rural people are completely
different form that of the urban people. The rural banks are not
flexible in this matter they do not cater to the exact needs of the
rural customers. They do not meet the income and expenditure
requirements of the rural people. As we know the rural people

23

.
dont have a consistent and fixed flow of income and therefore
they need to borrow more frequently to fulfill their needs and
then pay in small installments. But contrary to the needs of the
rural customers the banks do not provide products that suit the
requirement of the rural population. Therefore because of the
inflexible nature of the rural banks they find it unattractive.

PROBLEM OF COLLATERAL
Once again as we mentioned earlier the problem of collateral
hinders the smooth flow of credit as the banks demand collateral
for the amount of credit provided the rural people are unable to
provide a security against their loan. Most of the people have low
income and no fixed income therefore providing collateral is not
possible for them and most of the borrowers are therefore
rejected and excluded from the credit availability.

TRANSACTION COST
Another problem of the rural people is the transaction cost which
is associated while reaching for the banking services. The banks
or financial institution is located far away. The average distance
to the nearest financial institution is 2-5 kilometers away. These
costs are a big burden for them and also it is very inconvenient.
Procedures for opening accounts or taking a loan are also difficult
with high rejection rates. They also have to pay bribes in order to
get a loan. On average 27 percent of households who have
borrowed from regional rural bank reported to have paid a bribe
to access loans. And longer processing time of the loan along
with bribes increases the costs further. On an average it takes
around thirty-three weeks for a loan to be approved by a
commercial bank.

24

5.12 Comparison on Performance of BRICS Countries in

Terms of Financial Inclusion
COMPARISON OF FINANCIAL LITERACY ACROSS BRICS NATIONS

Figure 5.6: Position of India compared to other BRICS

FINANCIAL LITERACY GENDER-WISE

Figure 5.7 : Financial Literacy , gender wise in BRICS

In the above two figures (5.6 and 5.7) we see how much a country is
financially educated. South Africa is the most financially literate country
among the BRICS nations followed by Russia and Brazil. India is the least
3

AUTHOR: K. RACCANELLO

25

.
financially literate country in the BRICS nations. When comparing financial
literacy among male and female we see that males have outperformed
the females. The males have performed better than the women among all
the BRICS nations except for South Africa. If we compare financial literacy
in the top 60% of rich households with the 40 % of poor households the
former scores better among all the BRICS countries. Thus the poor
households are also vulnerable from the education point of view.

FINANCIAL INCLUSION HOUSEHOLD INCOME ACROSS BRICS

NATIONS

Figure 5.8 : Wealth distribution across BRICS

According to the age group we find that people over 55 years of age have
lower income as compared to people between 15- 34 years of age. South
Africa has the highest household income followed by Russia and Brazil.
India has the lowest household income among the BRICS nations.

ACCOUNT OPENED AT A FINANCIAL INSTITUTION

26

TABLE 5.1: Comparative Assessment based on World Bank Data

on BRIC (2011/2014)
This table above shows the accounts opened at financial institutions by
poor and the rich people of the BRICS nations. It shows the comparison
between the BRICS nations in terms of account opened at a financial
institution in order to measure the financial inclusion among the BRICS
nations. It shows that account opening increases mostly because of a
saving need. It shows the relationship between financial inclusion and
income inequality in the countries. The percentage of the poor people for
the period of 2011-2014 in all the countries except China has increased to
a great extent. Especially if we look at India the poor population has
increased from 27.34 percent to 72.04 percent in a period of three years.
Whereas the population of the rich people in all the BRIC countries except
for China has decreased. In India the population of rich people has gone
down from 72.66 percent to 27.96 percent which hints at the income
equality of the country. Therefore we see that the present condition of
India in terms of financial inclusion is not too good whereas china is
moving ahead in this front. The upward movement of poor people and
downward movement of rich people is shown with the help of trend lines
in the table 1.2 above. The lines indicate the increase of poor population
by going upwards whereas the decrease in rich population is indicated by
going downwards for the period of (2011-2014).

27

.
Particulars

Indi
a

Braz
il

Russ
ia

China

Sent remittances

9.9

5.8

12.9

15.5

Sent remittances via a financial

institution

...

48.5

34.3

Sent remittances via a mobile phone

...

10.1

Sent remittances via a money

transfer operator

...

28

15.0

Received remittances

9.8

6.4

12

17.6

Received remittances via a financial

institution

...

36.2

27.3

Received remittances via mobile

phone

...

6.9

6.0

Received remittances via a money

transfer operator

...

19.1

12.3

TABLE 5.2 : DOMESTIC REMITTANCES FOR THE YEAR (2014-15)

In the above table we see statistics of the remittances sent and received
by the BRIC nations. Among the Indian population 9.9 percent people sent
remittances and 9.8 percent received remittances. Similarly China has a
much better system of sending and receiving remittances. Among the
Chinese population 15.5 percent people sent remittances and 17.6
percent received remittances. In order to improve domestic remittances
payments banks can be of great help by making it easier for anyone to
get a bank account. That is why the cash limit is set to Rs 1Lakh
payments can provide ATM cards to improve the payments channel.

28

.
Particulars

Indi
a

Braz
il

Russi
a

Chin
a

Used an account to receive wages

4.0

22.9

37.9

17.7

Used an account to receive government

wages

3.6

13.2

14.1

9.5

9.4

12.2

15.1

Used a financial institution account to pay 3.4

utility bills

TABLE 5.3 : USE OF BANK ACCOUNTS IN THE YEAR (2014-15)

In this table we see the statistics of the BRIC nations as to how many
people use their bank account in order to receive wages. 4 percent of the
Indian population used their bank account to receive wages and 3.6
percent to receive government transfers. While other BRIC nations are far
ahead in the count of bank account with Russia standing at 37.9 percent,
Brazil at 22.9 percent and China at 17.7 percent.

Particulars

Indi
a

Braz
il

Russi
a

China

Has debit card

22.
1

59.2

44.3

48.6

Has debit card, 2011

8.4

41.2

37.0

41.0

ATM is the main mode of

withdrawal

33.
1

75.4

67.9

51.2

ATM is the main mode of

withdrawal, 2011

18.
4

57.5

65.2

33.4

29

.
TABLE 5.4 : ACCESS TO FINANCIAL INSTITUTION ACCOUNT FOR
THE YEAR (2014-15)

In this table we see the availability of financial institution in the BRIC

nations. It shows us that only 8.4 percent Indians had debit cards and only
18.4 percent people used ATM for money withdrawals. The measures
taken by the government has increased financial inclusion from 22.1
percent to 33.1 percent. Whereas China is far ahead at 48.36 percent
using ATM cards and 51.2 percent people used ATM for withdrawals. The
ability to issue an ATM card enables to close all the loopholes and makes it
easier to convert virtual money into cash and vice-versa. This is important
from the view of financial inclusion as anyone can deposit cash and
anywhere and withdraw cash using his debit card.

Particulars

India

Brazil

China

Russia

Borrowed from a financial

institution

6.4

11.9

9.6

10.3

Borrowed from a financial

institution, 2011

7.7

6.3

7.3

7.7

Borrowed from family or

friends

32.3

5.9

25.1

17

Borrowed from a private

informal lender

12.6

1.1

1.1

0.9

borrowed any money

46.3

22.3

36.3

30.2

Borrowed for a farm or

business

3.5

1.3

30

.
Borrowed for education or
school fees

9.7

1.7

4.9

2.1

Outstanding mortgage at a
financial institution

3.7

10.5

8.5

18.4

TABLE 5.5: CREDIT IN THE PAST YEAR (2014-15)

In this table we see the statistics of the BRIC nations in terms of money
borrowed from a financial institution. It shows us how many people are
made available the services of a financial institution to take loans or
credit. Only about 6.4 percent of Indian population borrowed from a
financial institution while 12.6 percent borrowed from moneylenders in
contrast only 1.1 percent Chinese people borrowed from a private
moneylender4. It therefore shows us that the un-banked populations found
it difficult to obtain credit and are exploited by the moneylender.

RBI Annual Report (2014/15)

31

6.0 Scope for Further Research

Financial inclusion is a big subject which involves many factors to fulfill it.
There are some areas which need to be addressed further some of them
are noted as under:

The most suitable and efficient way of distributing banking

services according to different geographical areas and their
unique characteristics and taking into consideration the different

need and requirements of the people.

The looking into the unbanked sectors irrespective of the rural,
urban or metropolitan areas which are mostly served by the
unorganized sector. Research of these unorganized sectors can
give an idea of the working and also give insights into the

understanding of the different sectors.

In order to keep a check on the moneylenders in the rural areas
there should be empirical research should be conducted to know
the intensity of moneylenders in the rural areas. This will give an
idea as to how to take the rural borrowers into the fold of banking
system.

32

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http://www.allbanking-solutions.com/Articles/Articles-AB-

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2017

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35