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For the past three decades India’s banking system has several outstanding achievements to its
credit. The most striking is its extensive reach. 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 country. This is one of the main reasons of India’s growth process.
The government’s regular policy for Indian banks since 1969 has paid rich dividends with the
nationalization of 14 major private banks of India.
Phase 1
The General Bank of India was set up in the year 1786. Next came Bank of Hindustan and
Bengal Bank. The East India Company established Bank of Bengal (1809), Bank of Bombay
(1840) and Bank of Madras (1843) as independent units and called it Presidency banks. In
1865, Allahabad Bank was established and first time exclusively by Indians, Punjab National
Bank Ltd was set up in 1894 with headquarters at Lahore. Between 1906 and 1913, Bank of
India, Central Bank of India, Bank of Baroda, Canara Bank, Indian Bank, and Bank of
Mysore were set up.
During the first phase the growth was very slow and banks also experienced periodic failures
between 1913 and 1948. There were approximately 1100 banks, mostly small. The Banking
Companies Act, 1949 which later changed to Banking Regulation Act 1949 as per amending
act of 1965.
Phase 2
Government took major steps in this Indian Banking Sector reform after independence. In
1955, it nationalised Imperial Bank of India with extensive banking facilities on a large scale
especially in rural and semi-urban areas. It formed State Bank of India to act as the principal
agent of RBI and to handle banking transactions of the union and state governments all over
the country.
Seven banks forming subsidiary of State Bank of India was nationalised in 1960 on 19th July,
1969, major process of nationalisation was carried out. The efforts of then Prime Minister of
India, Mrs Indira Gandhi, 14 major commercial banks in the country were nationalised.
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Second phase of nationalisation Indian Banking Sector Reform was carried out in 1980 with
seven more banks. This step brought 80 per cent of the banking segment in India under
government ownership. The following steps taken by government of India to regulate banking
institutions in the country:
1980: Nationalisation of seven more banks with deposits of over 200 crores.
After the nationalisation of banks, the branches of the public sector bank India rose to
approximately 800 per cent in deposits and advances took a huge jump by 11,000 per cent.
Banking in the sunshine of Government ownership gave the public implicit faith and immense
confidence about the sustainability of these institutions.
PHASE 3
This phase has introduced many more products and facilities in the banking sector in its
reforms measure. In 1991, under the chairmanship of Narasimham, a committee was setup by
his name which worked for the liberalisation of banking practices. The country is flooded
with foreign banks and their ATM stations. Efforts are being put to give a satisfactory service
to customers. Phone banking and net banking was introduced. The entire system became more
convenient and swift. Time was given more importance than money.
The financial system of India has shown a great deal of resilience. It is sheltered from any
crisis triggered by any external macroeconomics shock as other East Asian Countries
suffered. This is all due to a flexible exchange rate regime, the foreign reserves are high, the
capital account is not yet fully convertible, and banks and their customers have limited
foreign exchange exposure.
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LITERATURE VIEW
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 budget deficit of
about 9 per cent of GDP. Reducing the government’s dependence on these funds would
require a change in the way the banking sector thinks and looks at itself, moving towards
participating more formally in financial inclusion. Currently, local banks have a long way to
go in bringing the unbanked areas within the banking fold. As competitive intensity hots up
and ripples from international competition touch the Indian shores in search of virgin markets,
banks will have to revisit their cost models. Some estimates indicate that the lack of financial
inclusion from the banking system reduces potential GDP by nearly 1.5 per cent.
Financial inclusion is one of the viable routes through which banks can maintain their
development and also survive the current financial crisis. But in order to do that there should
be extensive efforts both from the government’s side as well as the banks themselves. In
recent times financial inclusion has appeared as a major global agendum. At aggregate level,
the common measure of financial inclusion are the number of bank account per adult,
geographic branch penetration, demographic branch penetration, geographic and demographic
ATM penetration, income and credit ratio, cash deposit ratio etc.
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1.1 INTRODUCTION
Indian economy is recognized as one of the fastest moving economies of the world with an
annual average growth rate of eight to nine percent. Despite this rapid growth rate, it
continues to suffer from poverty, unemployment and many other socio-economic problems
which raises a question mark on its sustainability. The reason is that the benefits of the growth
is not being equally shared by all the sections of the society and is concentrated in hands of
limited people.
To accelerate the economic growth and to make it sustainable, it is required that the benefits
should trickle down to the poor and downtrodden sections of the society and also there should
be an active participation from all sections in the growth process. The concept of financial
inclusion as a strategy of economic development came into limelight and was placed as an
important objective in the Eleventh Five Year Plan in India because of the rising concern of
unequal distribution of the economic growth and the resulting consequences. Inclusive growth
is considered both as a process and outcome because it implies both the participation in the
growth process and also the sharing of the benefits of growth equally.
Financial inclusion is the process of facilitating the access to the formal financial system and
thereby various financial products and services such as deposits, credit, insurance, pension,
financial counselling, and remittances at affordable prices and with ease of access. There are
plethora definitions of financial inclusion based upon the nature and extent of financial
exclusion.
“Financial Inclusion refers to the process of ensuring access to timely and adequate credit and
financial services by vulnerable groups at an affordable cost.”
Financial inclusion is integral to the inclusive growth process and sustainable development of
the country. It is a new paradigm in the economics of growth and development. The focus on
financial inclusion comes from the recognition that financial inclusion has several
externalities which can be exploited for the mutual benefit of those excluded, the banking
sector and the society at large .
An inclusive financial system facilitates efficient allocation of productive resources and thus
can potentially reduce the cost of capital. An all- inclusive financial system enhances
efficiency and welfare 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 government of India as well as the banking industry has
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recognized this imperative and has undergone certain fundamental changes over the last two
decades.
OBJECTIVE OF STUDY.
A modest attempt has been made in the present study to examine the level of financial
inclusion/exclusion India. The present work is based on primary as well as secondary data and
the broad objectives of the study are as follows:
2. To conduct a comparative analysis of the state of financial inclusion with reference to India
only.
3. To study the extent of financial inclusion between rural and urban India
4. To discuss various measures taken by the Reserve Bank of India and government of India
to accelerate the process of financial inclusion in the country.
5. To understand the policy measures from demand and supply side and its full impact on the
society.
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RESEARCH METHODOLOGY.
The study has been done using an exploratory research process and a structured questionnaire
was developed for this purpose. For the collection of PRIMARY DATA this was the only
method used.
•Since the information required was not of a very technical nature and also looking at the
scope of the project and the extent of the target segment, the sampling technique employed
was Convenience Sampling.
SAMPLE SIZE:
• The sample size consisted of 51 respondents, who are employees of various banks at various
different branches. This was done keeping in mind the number of required respondents, time
constraints and by the fact that it was felt that these numbers should be enough to serve the
information that is required to show the trends.
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) accurate information is obtained.
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The nationalization of 14 major commercial banks in 1969 and another 6 commercial banks in
1980, facilitated rapid expansion of the banking system to hitherto unbanked areas. In 1970,
the Lead Bank Scheme was introduced to coordinate the efforts of financial institutions in
meeting the credit needs of the economy.by the early mid 1970’s it was felt that commercial
banks were not attuned to the rural environment and rural banking involved high costs.
Establishment of regional rural banks in 1975, kisan credit card scheme in 2001 have
facilitated a technological breakthrough in financial products, services and delivery channels.
Financial inclusion gained importance in India since the early 2000’s and is a result of
findings about financial exclusion and its direct correlation to poverty. With a view to
enhancing the financial inclusion in India as a proactive measure, the RBI in its Annual Policy
Statement for the year 2005-06, while recognizing the concerns in regard to banking practices
that tend to exclude rather than attract vast sections of population, urged banks to review their
existing practices to align them with objectives in financial inclusion. Government of India
has also been aggressively pursuing the expansion and strengthening of the bank branch
network in the country, thereby providing access to financial services to all strata of the
society. However, the ground level reality is that the benefit of the banking facilities, financial
products and services and technology has been limited to the sophisticated and high income
group customer segments of the society whereas a significant section of the population still
lacks access to the most basic services. There has a been an increase in the number or rural
and semi- rural people availing the banking products and services as a result of efforts of the
banks, RBI and the Indian government. It is pertinent to note that the financial inclusion in
India has gathered momentum and today, it has taken the road and brought in considerable
changes, but still many miles remain to be travelled.
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It provides an avenue for bringing the savings of the poor into the form of formal
intermediation system, and channels them into investment. The large number of low cost
deposits offers banks as an opportunity to reduce their dependence on bulk deposits, and help
them to better manage both liquidity risks and asset liability mismatches. All these cast a
significant role of financial inclusion in the inclusive growth of a nation.
The benefits of inclusive financial growth in the context of Indian economy are multifaceted.
It helps achieve growth with equity. Inclusive finance is a means to get rid of poverty,
because when socially deprived people get the opportunity of availing financial services in the
form of taking loans for business or education or any other purposes, they become the part of
the mainstream of the society. Inclusive finance makes financial transactions easier and safe.
Financial inclusion has global benefits too. Better and efficient financial access attracts global
market players to our country that results in increasing employment and business
opportunities.
Therefore, channelizing the savings of the poor and inclusive financial growth attempts to
bridge the various divides in an economy and society, between the rich and poor, between the
rural and urban populace, and between one region and another. Financial inclusion is
designed to bring about the capability to participate and contribute among the economically
and socially excluded people by creating equal opportunities. Financial inclusion is thus, an
essential pre-condition to build uniform economic development, both spatially and
temporally, and ushering in greater economic and social equity.
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There is an ever increasing need and importance of financial inclusion in India because of its
ability to fulfil some social and political objectives which are as follows:
1. Equitable growth of the society which implies integrating everyone in the development
process.
2. Mobilization of savings towards the needy.
3. Larger markets for financial systems so that loans are available to the unprivileged class
easily.
4. Poverty elevation for the welfare of the general people.
5. Sustainable development programs implemented along with channelizing governments
programs in the right direction.
Thus to bring about an all-round development in the society we need to have a strong
financial structure. It is only possible with both government interventions and also
community indulgence at a very great extent. They have to come together and collaborate
with the banks and take part in their initiatives to promote financial inclusion. There are
innumerable loopholes which have to focus on and dealt with to bring about equitable
growth.
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1. Outreach. (low density areas and low income populations are not attractive for the
provision of financial services and are not financially sustainable under traditional
banking business model).
2. Regulation and frameworks are not always adopted to local contexts.
3. Business models are mostly fixed with higher costs and service providers provide
limited number and types of financial service providers.
4. Non-adapted products and services for low income populations and the informal
economy.
5. Financial service providers usually target the middle of the economically active
population, often overlooking the design of appropriate products for older or younger
potential customers
6. There are hardly any schemes or policies for the younger lot or the old people who have
retired, as the banks do not see any business from them.
7. In most of the countries, transaction is free as long as the account has sufficient funds
to cover the cost of transactions made.
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Following are the challenges that banks have to face in regard with financial inclusion:
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3. Moneylender’s influence.
Another challenge lying ahead of the banking industry is the need for further research on why
the moneylender despite persistent efforts by institutions in formal sector has continued to
flourish in the financial market.
Moneylenders continue to account for nearly 30 per cent of total banking business. In modern
times if the interest rate does matter, why do people prefer to go to moneylenders, despite a
network of banks, cooperatives, MFI’s and SHG’s. This has become one area which requires
grass-root level research.
Other challenges.
The challenge of changing attitudes to translate knowledge into behaviour in such a way that
it makes consumers understand their rights and responsibilities as clients of financial services.
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The RBI too has taken a number of measures with the objective of attracting the financially
excluded population into the formalised financial system. Some of the measures taken in this
direction are as follows:
1. No Frills Account.
RBI vide mid-term review of Annual Policy Statement for the year 2005-06, advised banks to
align their policies with the objective of financial inclusion. Banks were advised 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 population. Besides,
it was emphasized upon by the RBI for deepening and widening the reach of financial
services so as to cover a large segment of the rural and poor sections of population.
All the public and private sector banks as well as the foreign banks, except those not having
significant retail presence, are reported to have introduced the basic banking ‘No frills’
account.
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4. Passbook Facility.
The matter of issuing passbooks to the small depositors has been a nagging issue for
sometime past. Passbooks provide the account holders a ready reckoner of the transactions in
their accounts and is a convenient reference document which cannot be substituted by
periodical bank account statements, particularly by the small account holders. Since non-
issuance of the passbooks to the small customers could indirectly lead to their financial
exclusion, the RBI had advised the banks in October 2006 to invariably offer the passbook
facility to all its savings bank account holders (individuals) and not to levy any charge on the
customers thereof.
7. Use of technology.
Recognizing that technology has the potential to address the issues of outreach and credit
delivery in rural and remote areas in a viable manner, banks have been advised to make
effective use of information and communications technology, to provide doorstep banking
services through the business communication model where the accounts can be operated by
even illiterate customers by using biometrics, thus ensuring the security of transactions and
enhancing confidence in the banking system.
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To address the issue of uneven spread of bank branches, in December 2009, domestic
scheduled commercial banks were permitted to freely open branches in tier 3 to tier 6 centres
with a population of less than 50,000 under general permission, subject to reporting.
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Eligible institutions:
1. Financial institutions like NABARD, commercial banks, regional rural banks and
cooperative banks.
2. NGO’S, MFI’S, SHG’S, local level associations.
3. Training and research organisations, academic institutions, universities.
4. Service providers like insurance companies, post offices, railways, etc.
5. Any other organisation whose objectives
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Eligible institutions:
1. Financial institutions like NABARD, commercial banks, regional rural banks and
cooperative banks.
2. NGO’S, MFI’S, SHG’S, local level associations.
3. Technology service providers and other service providers like insurance companies,
post offices, railways, etc.
4. Any other institution/organisation whose objectives are in conformity with the overall
objectives of the FITF and are approved by the advisory board.
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The report viewed financial inclusion as a comprehensive and holistic process of ensuring
access to financial services and timely and adequate credit, particularly to vulnerable groups
such as weaker sections and low income groups at an affordable cost.
1. Target for providing access to credit to at least 250 excluded households per annum in
each rural/semi-urban branches.
2. Targeted branch expansion in identified districts in the next three years.
3. Provision of customised savings, credit and insurance products.
4. Incentivising human resources for providing inclusive financial services.
5. Simplification of procedures for agricultural loans.
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Many models have been developed as alternatives to traditional branch banking namely
the micro finance model, BC/BF model, mobile banking, product diversification, ICT etc.
the steps taken by banks considering financial inclusion are as follows:
But amongst all these, the main concern is the high operational costs and low business
volumes in rural areas. Due to this, the banks have been permitted by RBI to use the
business correspondence and business facilitator model for the expansion of branches.
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A. SHG-Bank Linkage (SBL) Model: SBL Model is the largest, fastest growing and cost
effective model for providing financial financial services to the underserved poor. The
model was conceptualized and initiated by NABARD in 1992.
But despite the unique characteristics and notable achievements, there are some challenges
faced by this model. These include, limited banker interface and monitoring, inadequate
outreach in many regions, delays in account opening and loan disbursement, multiple
membership, lack of credit diversity and so on.
To address these challenges, NABARD has given revised guidelines, popularly known as
SHG2. The major features of SHG2 are as follows:
3. Cash credit/overdraft system of lending for SHGs for a longer operational tenure to
minimise the problems of inadequate finance and non-availability of repeat loans.
4. Enabling creation of joint liability groups (JLGs) within SHGs to scale up economic
activities by more entrepreneurial members of the group.
5. Improving risk mitigation systems by bringing self-rating mechanisms and the third
party audit.
6. Meeting the training/capacity building requirements of the
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B. MFI Model: The MFIs or micro-finance movement since the 1990's is a new avenue of
reaching the poor for their micro-credit needs. Micro finance institutions are playing a
leading role in financial inclusion by providing credit facilities,
to the population segment otherwise called as unbankable through the network of
SHGs/JLGs. MFIs in India register themselves either as societies (under the Societies
Registration Act, 1960), as trusts under the Trust Acts, as non-anking financial companies
(NBFCs), or as local area banks (LABS). NBFCs led MFI model is more effective in
financial deepening and expanding the reach. MFIs generally source credit from donors,
banks and other institutional sources to finance their lending operations. But some of the
characteristics of MFIs raise question mark on the sustainability of this model. These
include: (i) the commercial nature of most of the MFIs bypass the ultimate goal of poverty
eradication; and (ii) high operating costs in the day-to-day running of MFIs which is
transferred to the end client in the form of high interest rates and processing charges.
Therefore, the MFIs need to change their conceptual framework to overcome the
challenges and make it sustainable. The business model of these institutions should be
restructured so that it will become economically viable for them and at the same time will
support the income earning capacity of the borrowers. Other grass roots organizations like
NGOs, PACs can also be deployed in offering microfinance service.
The BC model offers a significant opportunity to scale-up and deepen financial access by
creating an extensive network of village level touch points. Under the model, agents are
appointed to take the banking services to the people. The agents generally work on
commission basis. The activities performed by the BCS include collection and
disbursement of small deposi s and loans under General Credit Card/Kisan Credit Card,
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receipt and delivery of small value remittances, recovery of bad loans, selling of micro
insurance and pension products, etc. The Government of India also decided to make use of
the BC model for payment of wages under different developmental programmes like
Mahatma Gandhi National Rural Employment Guarantee Act (MGNREGA) through the
electronic benefit transfer (EBT) method, payment of social security benefits, direct
subsidies, etc. The BC model also uses some of the technology solutions like smart cards,
point of service device, biometric reader and mobile phones.
The BC model provides a better alternative channel to the traditional branch banking
network. It enables the banks to extend the banking services to the unreached areas by
providing doorstep banking and ensuring better quality of assets.
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Before 1990, several initiatives were undertaken for enhancing the use of the banking
system for sustainable and equitable growth. These included;
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tasks set for the nationalised banks were mobilization of deposits on a massive scale and
lending of funds for all productive activities. A special emphasis was laid on providing
credit facilities to the weaker sections of the economy.
The target for priority sector lending was 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 specified priority sectors. Sub targets under the priority sector, along with other
guidelines including those relating to Government sponsored programmed, were used to
encourage the flow of credit to the identified vulnerable sections of the population such as
scheduled castes, religious minorities and scheduled tribes. The Differential Rate of
Interest (DRI) Scheme was instituted in 1972 to provide credit at concessional rate to low
income groups in the country.
The branch expansion policy was designed, inter alia, as a tool for reducing inter-regional
disparities in banking development, deployment of credit and urban-rural 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 India in 1971 for providing guarantees against the risk
of default in repayment. The scheme, however, was subsequently discontinued.
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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 measure, the RBI in its
Annual Policy Statement for the year 2005-06, while recognizing the concerns in regard to
the banking practices that tend to exclude rather than attract vast sections of population,
urged banks to review their existing 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 concerns in regard to the banking practices that
tended to exclude rather than attract vast sections of population, in particular pensioners,
self-employed and those employed in the unorganized sector. It also indicated that the
Reserve Bank would
1. Implement policies to encourage banks which provide extensive services, while dis-
incentivising those which were not responsive to the banking needs of the community,
including the underprivileged;
2. The nature, scope and cost of services would be monitored to assess whether there was
any denial, implicit or explicit, of basic banking services to the common person; and
3. Banks urged to review their existing practices to align them with the objective of
financial inclusion.
RBI exhorted the banks, with a view to achieving greater financial inclusion, 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 accounts would be restricted
and made known to customers in advance in a transparent manner. All banks are urged to
give wide publicity to the facility of such no 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. Financial
Inclusion offers immense potential not only for banks but for other businesses. Through an
integrated approach the businesses, the NGOs, the government agencies as well as the
banks can be partners in growth.
The Report 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, Eastern and North-
eastern regions with 64 per cent of all financially excluded farmer households.
According to the Report, the overall strategy for building an inclusive financial sector
should be based on:
•Effecting improvements within the existing formal credit delivery mechanism;
•Suggesting measures for improving credit absorption capacity especially amongst
marginal and sub-marginal farmers and poor non-cultivator households;
•Evolving new models for effective outreach; and
•Leveraging on technology-based solutions.
Keeping in view the enormity of the task involved, the Committee recommended the
setting up of a mission mode National Rural Financial Inclusion Plan (NRFIP) with a
target of providing access to comprehensive financial services to at least 50 per cent (55.77
million) of the excluded 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 Financial Inclusion (NaMFI)
comprising representatives of all stakeholders for suggesting the overall policy changes
required, and supporting stakeholders in the domain of public, private and NGO sectors in
undertaking promotional initiatives.
The major recommendations relating to commercial banks included target for providing
access to credit to at least 250 excluded rural households per annum in each rural/semi
urban branches; targeted branch expansion in identified districts in the next three years;
provision of customized savings, credit and insurance products; incentivizing human
resources for providing inclusive financial services and 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 regions to be drawn up by RRBs and strengthening of their
boards.
In the case of co-operative banks, the major recommendations were early implementation
of Vaidyanathan Committee Revival Package; use of PACS and other primary co-
operatives as BCs and co-operatives to adopt group approach for financing excluded
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groups. Other important recommendations of the Committee are encouraging SHGs in
excluded regions; legal status for SHGs; measures for urban micro-finance and separate
category of MFIs.
The Union Finance Minister, in his Budget Speech for 2007-08 announced the constitution
of the Financial Inclusion Fund (FIF) and the FITF, with an overall corpus of Rs.500 Crore
each 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 Government, RBI and NABARD in the
ratio 40:40:20. The final report of the Committee has been submitted to the Government in
January 2008.
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FINANCIAL EXCLUSION
Financial Exclusion is the process by which a certain section of the population or a certain
group of individuals is denied the access to basic financial services. The term came to
prominence in the early 1990’s in Europe where the geographers found that a certain
pockets or regions of a particular country were behind the others in utilizing financial
services. It was also found that these pockets or regions were poorer compared to regions
which utilized more of financial services.
DEFINITION
The definition of financial exclusion will range upon several dimensions, but the most
important dimension are the breadth & focus of financial exclusion 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 scope of definition; the broadest definitions of financial exclusion
recognize that there are many factors interacting between financial exclusion and social
exclusion and disadvantage. The type of such a broad definition is found in the seminal
work of Leyshon and Thrift, who define financial exclusion as “processes that prevent 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 financial exclusion is narrow
which he stated as,
“Exclusion from particular sources of credit and other financial services (including
insurance, bill-payment services, and accessible and appropriate deposit accounts)”
Extreme definition may be seen as a somewhat sweeping definition, with its apparent
reference to access to the financial system as a whole, rather than access to specific
financial services or products and access to specific channels of distribution. The other
extreme of definitions of financial exclusion are those that 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 and insurance.
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Some of the important factors responsible for financial exclusion are given as under:
1. Terms & conditions.
Different types of terms & conditions imposed by the bankers often deter people with low
income & rural areas from opening bank account. In Canada, USA, France & India strict
regulation is imposed on Opening balance & Minimum balance required for an account.
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
instance, accounts have been closed by banks because customers either use them too little
or withdraw money too often.
2. Identity Requirements.
Primary requisite of opening bank account is identity proof & witness. People mostly from
rural areas don’t have driving license or passport. In many cases, wrong information are
given in their ration cards & voter I-cards, which make them illegible as proof. This
problem is rife with the refugees & slum dwellers.
Rural people & low income people think transacting through banks is a cumbersome affair
& banks charge highly. Sometimes they think that services offered by the banks are not
meant for them. Such type of “Self exclusion” is far more important than direct exclusion
by banks refusing to opening accounts. In England 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 financial terms used by the bankers &
sometime by the apathetic attitude of the bankers. Absence of banks in the vicinity of rural
area is also one of the causes of exclusion.
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TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
2008: RBI issued operative guidelines for mobile banking and amended the same in
December 2009 to ease the various transaction limits and security norms.
2009: Kirana stores, gas stations, public call offices (PCOs) etc. were allowed to participate as
BCS. Further, BCS were allowed to operate up to 30 kilometres from the nearest bank
branches.
2009: Banks were allowed to apply reasonable service charges from customers to ensure
viability of the BC model, and to pay a reasonable commission/fee to the BCS to incentivize
them.
2010: In June the RBI and Telecom Regulatory Authority of India (TRAI) were able to reach
an initial agreement regarding the rollout of mobile banking, whereby TRAI would deal with
all interconnection issues and RBI would handle the banking aspects such as Know Your
Customer (KYC) checks, transaction limits etc.
•2010: In September, all companies listed under the Companies Act (1956) were allowed to
act as BCS, with the exception of non-banking financial companies. 2010: The same
directive determined that the distance rule was open to relaxation in certain cases, based on
the decision of the State Level Bankers' Committees.
•2011: In January, TRAI announced its intent to fix mobile tariffs for financial services as
against their current market pricing, with a view to ensuring affordability.
•2011: RBI issued guidelines for opening Aadhaar-enabled Bank Accounts to facilitate
routing of MGNREGA wages and other social benefits into the accounts of beneficiaries.
•2012: RBI permitted Aadhaar letter as a proof of both identity and address for the purpose of
opening of bank accounts.
•2012: Government of India introduced Sub-Service Area (SSA) approach for opening of
banking outlet and for Direct Cash Transfer.
•2012: Aadhaar Payment Bridge System (APBS) was introduced for centralised credit of
social benefits.
2013: To ease the account opening process, RBI permitted the use of e-KYC.
34
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
New and innovative financial instruments (both for credit and savings) have been devised to
cater to diversified needs. The policy for priority sector lending is one such endeavour in this
direction. This policy carries a compulsion clause for the commercial banks to provide a
sizeable portion of their loanable funds (40 percent) for rural development which includes
agriculture and allied activities.
Nonetheless, this policy has exposed the banking operations to surmountable risks of
incurring bad debts. Likewise, adherence to the prudential norms as per the international
guidelines (Basel norms) has further tightened the scope of banking services. More exposure
to the areas having higher probability of bad debts may strain their capital adequacy ratio and
asset quality.
Bringing the larger population within the structured and organised financial system has to be
an important item on the development agenda of a government. While several central banks
focus solely on inflation, many in developed and emerging economies alike, including India,
also focus on growth. The RBI has, therefore, introduced various new measures to encourage
the expansion of financial coverage in the country. Financial inclusion is considered essential
for fostering economic growth in a more inclusive fashion.
India Post has a network of 154,866 post offices (as on March 3 1, 2011) scattered through
out the length and breadth of the country which is larger than the outreach of all commercial
banks and regional rural banks taken together (93,659 branches as on March 31, 2012). The
Post Office Savings Bank has emerged as a significant component of India Post operations
and its revenue from financial services as a share of its total revenue has shown an increasing
trend over the years.
Realizing the potential strength of India Post in the direction of financial inclusion, an expert
committee was constituted by the Finance Ministry to examine the potential synergies
between the efforts at broad based banking and financial services delivery through India Post
and the larger policy goal of financial inclusion. This committee is of the opinion that
succeeding with universal access to financial services will require a considerable role for the
post offices, as revealed from the consultation with key stakeholders. This committee
examined the role of postal network in financial inclusion in the context of the presently
35
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
unmet demand for financial services, the core strength and capabilities of India Post, as well
as the emerging policy, regulatory and business environment in this area.
India Post has been offering a host of financial services to the citizens of the country for
several decades. They are as follows.
Banking Services: Access to banking services that permit citizen to receive and make
payments in a secure environment is the first important step to financial inclusion. But in spite
of a persistent attack on the problem, bank penetration rate in the country is not very
satisfactory. IP is at an advantage to ensure universal banking coverage and is already in the
business, offering the following services at a low cost to all citizens, particularly in rural areas
where banks still hesitate to venture.
India Post has a network of 154,866 post offices (as on March 3 1, 2011) scattered through
out the length and breadth of the country which is larger than the outreach of all commercial
banks and regional rural banks taken together (93,659 branches as on March 31, 2012). The
Post Office Savings Bank has emerged as a significant component of India Post operations
and its revenue from financial services as a share of its total revenue has shown an increasing
trend over the years.
Realizing the potential strength of India Post in the direction of financial inclusion, an expert
committee was constituted by the Finance Ministry to examine the potential synergies
between the efforts at broad based banking and financial services delivery through India Post
and the larger policy goal of financial inclusion. This committee is of the opinion that
succeeding with universal access to financial services will require a considerable role for the
post offices, as revealed from the consultation with key stakeholders. This committee
examined the role of postal network in financial inclusion in the context of the presently
unmet demand for financial services, the core strength and capabilities of India Post, as well
as the emerging policy, regulatory and business environment in this area.
India Post has been offering a host of financial services to the citizens of the country for
several decades. They are as follows.
Banking Services: Access to banking services that permit citizen to receive and make
payments in a secure environment is the first important step to financial inclusion. But in spite
of a persistent attack on the problem, bank penetration rate in the country is not very
satisfactory. IP is at an advantage to ensure universal banking coverage and is already in the
business, offering the following services at a low venture.
36
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
1. Has your bank updated its products or is providing different services for the
financially excluded?
RESPONSES-51
22%
Yes
No
Maybe
78%
INTERPRETATION:
From the above graph it is clear that majority of the respondents i.e 78% have stated that their
banks have updated their products or are providing different services for the financially
excluded population, whereas 22% of the respondents said maybe, as they are not completely
aware of the current improvement in the banking products of their respective banks.
37
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
2. What are the products that your bank provides for financial inclusion?
no. of respondents-51
cheaper loans
67%
more interest on savings
2% account
0% all of the above
INTERPRETATION:
From the above graph it is clear that maximum number of respondents i.e 67% say their banks
provide minimum zero balance accounts, whereas 31% of the respondents say their banks
provide all of the above i.e minimum zero balance accounts, cheaper loans and more interest
on savings account, and only 2% of the respondents say that their banks provide only more
interest on savings account.
38
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
3. Do you think providing minimum zero balance accounts will help in financially
including the poor?
no. of respondents- 51
0% 14%
Yes
No
Maybe
86%
INTERPRETAION:
From the above graph, 86% of the respondents feel that providing minimum zero balance
accounts will help in financially including the poor, whereas only 14% of the respondents say
maybe, as they are not sure to what extent it will financially include the poor.
39
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
4. Have RBI’s regulations regarding financial inclusion affected the working of banks?
no. of respondents-51
16%
33%
Yes
No
Maybe
51%
INTERPRETATION:
From the above graph, we can notice that just more than half of the respondents i.e 51% have
said RBI’s regulation have not affected the working of their banks, 16% of the respondents
say there was no change in the working of their banks, whereas one third of the respondents
i.e 33% say there might be a possibility that would have changed the working of their banks
because of the regulations laid down by RBI.
40
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
5. Do you think the banking products will help the financially excluded to save more?
no. of respondents- 51
35%
Yes
65% No
Maybe
0%
INTERPRETATION:
From the above graph we can see that, 65% of the respondents have stated that the new
banking products will help the financially excluded (poor) to save more, whereas 35% are not
sure whether these banking products will prove to be enough to suffice their needs and help
the financially excluded lot to save more.
41
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
6. Why do you think the poor population doesn’t opt for banking products?
no. of respondents- 51
14% Illiteracy
10% Poverty
INTERPRETATION:
From the above graph we can see that, 14% of the respondents feel that illiteracy is the cause
for the poor not moving towards banking products, whereas 19% of the respondents feel lack
of awareness of the banking products and services is the main cause, while only 10% of the
respondents feel poverty is the major cause and more than half of the respondents i.e 57% feel
all the above 3 factors are responsible for the poor population not opting for banking products.
42
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
7. Does your bank have branches in the rural and semi-urban areas?
no. of respondents- 51
41%
Yes
No
59% Maybe
0%
INTERPRETATION:
From the above graph, it is clear that 59% of the respondents have stated that their banks do
have branches in the rural and semi-urban areas, whereas 41% say maybe, as they are not
aware whether their banks have sufficient number of branches in the rural and semi-urban
areas.
43
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
8. Are there any upcoming schemes which your bank will provide to include the
financially poor?
no. of respondents- 51
45%
55% Yes
No
Maybe
0%
INTERPRETATION:
From the above graph it is clear that, more than half of the respondents i.e 55% say their bank
is coming up with new schemes and banking products for the financially poor, whereas 45%
say maybe as they are not yet completely sure of their banks current agenda on financial
inclusion.
44
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
9. What other measures do you feel can be taken by banks for financial inclusion?
no. of respondents- 51
0%
37%
open more branches in rural
and semi-urban areas
other
INTERPRETATION:
From the above graph we can see that, 63% of the respondents say that opening more
branches in the rural and semi-urban areas will help more population I getting financially
included, whereas 37% of the respondents say that providing more cheaper from of credit to
the poor will help in financially including them.
45
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
10. According to you is more population in our country getting covered under the
financially included lot?
no. of respondents- 51
26%
0%
Yes
No
74% Maybe
INTERPRETATION:
From the above graph it is clear that nearly two-third of the respondents i.e 74% say that more
population is getting financially included, whereas 26% of the respondents say maybe as there
are not aware of the current scenario of financially included lot.
46
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
11. Did your bank face any difficulties while acting upon the regulations laid down by
RBI?
no. of respondents- 51
0%
29%
Yes
No
71%
Maybe
INTERPRETATION:
From the above graph we can clearly see that, 71% of the respondents say that their respective
banks did not face any problems while acting upon the regulations laid down by the RBI,
whereas 29% of the respondents say maybe, as there might or might not have been a few
internal problems faced by their banks.
47
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
12. According to you has the committee set up for financial inclusion brought any positive
changes in the economy?
no. of respondents- 51
39%
Yes
61%
No
Maybe
0%
INTERPRETATION:
From the above graph it is clear that, 61% of the respondents say yes as they feel the
committee has brought positive changes in the country’s economy, whereas 39% say maybe
as they are not sure as to the committee’s contribution to overall development of the
economy.
48
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
no. of respondents- 51
0%
25%
More creditworthiness
More customers
75%
other
INTERPRETATION:
From the above graph it is clear that, two-third of the respondents i.e 75% say that financial
income gives their bank more creditworthiness, whereas 25% of the respondents say that
financial income gives them the advantage of gaining more customers.
49
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
no. of respondents-51
Yes
No
Maybe
INTERPRETATION:
From the above graph it is clear that, just above two-third of the respondents i.e 72% say that
financial inclusion does not have any disadvantages on banks, whereas 28% say maybe as
they feel there may or may not be a few disadvantages which haven’t been looked upon
completely as in yet.
50
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
15. Do you think financial inclusion contributes highly to the overall development of a
country’s economy?
no. of respondents- 51
0%
Yes
No
Maybe
100%
INTERPRETATION:
From the above graph we can clearly see that, all the respondents are of the opinion that
financial inclusion contributes highly to the overall development of a country’s economy.
51
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
CONCLUSION
1. From the discussion of the models of financial inclusion, it is clear that financial
inclusion is a very complex issue and efficient and low cost models are critical for
achieving it.
2. It is a long journey to go to achieve 100 percent financial inclusion where along with more
than 50 per cent of the population out of the formal financial institutions there also exists
other issues which need to be addressed like the regional diversities, lack of literacy, low
income, lack of infrastructure etc.
3. Financial inclusion has multiplier effect on the growth of the country. All the initiatives
are in place to achieve target of providing access to financial services to at least 50 percent
of excluded rural households by 2012 and the remaining by 2015.
4. But in the presence of a number of barriers on its way, there is need of a coordinated
action from all the stakeholders. Formal financial institutions will have to join hands with
small NGOs, MFIs and technology providers to make simultaneous improvement of both
the demand and supply side factors.
5. The models of financial inclusion should also be developed and revived keeping in view
the complexities and need of the rural areas.
Any model of financial inclusion to be successful, should be based upon the parameters like
low cost, usage of technology to get a distribution reach, collaboration across industry
boundaries and use of the Aadhar platform—the new unique identification system of India.
52
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
Considering the reasons of financial exclusion, the following steps need to be taken for
making financial exclusion sustainable in the State.
1. Financial inclusion drive should not be short-lived. Systematic effort should be made to
make it sustainable.
2. Financially excluded people are not merely a specific group of clientele who have no
access to banks but all those who are ignorant of banking facilities. Creating awareness on
financial availability is possible through financial literacy and counselling. Extensive use of
cooperatives and RRBs, particularly PACs (primary agricultural cooperatives) having access
to remote areas can make it possible.
3. Banks to make their product available to all those who want to make use of it. Product
modification and designing according to needs of specific groups is a challenging task
before banks. But it must be achieved by banks in a phasewise manner. Technology can
make it possible.
4. As financially excluded people mostly live in rural areas, rural credit mechanism should be
strengthened. Financial inclusion drive can be commercially viable and hence sustainable if
stakeholders involved would try to enhance the capabilities of their clients through livelihood
development.
5. Simplification of procedures like Saral documentation for agricultural loans can make the
products popular and acceptable to all.
53
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
1. BIBLIOGRAPHY:
BOOKS REFERRED:
1. Financial inclusion in India- N. MANI.
2. Financial inclusion, inclusive growth and the poor- PADMAJA MISHRA, ALOK
RANJAN BEHRA, HIMANSHU SHEKHAR ROUT.
2. WEBLIOGRAPHY:
1. www.caixabankresearch.com
2. www.pn.ispirt.com
3. www.nelito.com
4. www.thehindubusinessline.com
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TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
ANNEXURE
AXIS BANK.
Axis Bank to cover 12,000 villages under new financial inclusion plan. Axis Bank, India’s
third-largest private bank has begun implementing its rural expansion plans and intends to
cover 5,500 villages for financial inclusion by March 2011 and scale it up to 12,000 villages
in five years’ time.
Speaking to media, Mr. SK Chakrabarti, executive director Axis bank’s retail banking
division said that the bank 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
separate financial inclusion team to implement its financial inclusion roadmap.
It may be recalled that Reserve Bank of India had asked all private and public sector banks to
chart a road map on financial inclusion. The plan was expected to cover issues like the
number of branches that banks would plan to open in rural India, the number of no-frill
accounts they plan and the number of business correspondents they would appoint to achieve
their financial inclusion target.
55
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
SBI to set up 600 financial inclusion centers. The move to set up FICs is aimed at powering
the bank's drive to reach basic and affordable banking services to 12,421 out of the 72,315
unbanked villages (identified according to 2001 census) having a population of over 2,000 by
March-end 2012. Under the financial 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.
56
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
ICICI BANK.
ICICI Bank Ltd, India’s 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 accounts, pre-paid instruments and credit
products through a mobile phone based platform.
This partnership is expected to bring the un-banked and under-banked population into the
organized financial services framework and assist in furthering the electronic payments
market in India. ICICI Bank will leverage the distribution strength of Vodafone, which
manages over 1.5 million retail points for acquiring customers and servicing them.
The Reserve Bank of India (RBI) has over the past few years come out with various measures
to facilitate banks to achieve the financial inclusion agenda. RBI has allowed banks to appoint
for-profit' companies as Business Correspondents (BCs). This tie-up between ICICI Bank and
Vodafone is a step in that direction.
57
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
3. Do you think providing minimum zero balance accounts will help in financially
including the poor?
o Yes
o No
o Maybe
4. Have RBI’s regulations regarding the financial inclusion affected the working of
banks?
o Yes
o No
o Maybe
5. Do you think these banking products will help the financially excluded to save more?
o Yes
o No
o Maybe
6. Why do you think the poor population doesn’t opt for banking products?
o Illiteracy
o Lack of awareness of banking products and services
o Poverty
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TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
o All of the above
7. Does your bank have branches in the rural and semi-urban areas?
o Yes
o No
o Maybe
8. Are there any upcoming schemes which your bank will provide to try and financially
include the poor?
o Yes
o No
o Maybe
9. What other measures do you feel can be taken for financial inclusion?
o Opening more branches in rural and semi-urban areas
o Cheaper from of credit
o Other
10. According to you is more population in our country getting included in the financial
lot?
o Yes
o No
o Maybe
11. Did your bank face any problems while acting upon the regulations laid down by the
RBI?
o Yes
o No
o Maybe
12. According to you has the committee set up on financial inclusion brought any positive
changes in the economy?
o Yes
o No
o Maybe
59
TYBBI FINANCIAL INCLUSION IN
PUBLIC AND PRIVATE BANKS.
15. Do you think financial inclusion highly contributes to the overall development of a
country’s economy?
o Yes
o No
o Maybe
60