DISSERTATION REPORT – 2K19

ON
“FINANCIAL INCLUSION”
THE project is submitted for the partial fulfilment for the award of degree of Master of
Business Administration at Regional College of Management under BPUT.

Submitted by: Submitted to :

K SAGARIKA PATRA Prof. RAJESH SATAPATHY
MBA (2017-19) (Professor in marketing,RCM)
Reg. No.:1706247064
 ACKNOWLEDGEMENT

Goal achievement is very difficult for any person, but there are motivations,
which make this task very easier. It is our humble duty to acknowledge all of
them, which made our task easier during my project.
Before proceeding further, we would like to express our thanks to all those who have
helped us in one way or any other way for successful completion of this project.
We are deeply indebted to and express our sincere appreciation & gratitude to Prof.
RAJESH SATAPATHY for providing her valuable guidance & encouragement
throughout the project for keeping our morale up & making it possible to complete
and submit this project on time.
We are really thankful to the people of the village named “ Hirapur ,a village in
Bhubaneswar” from where we have conducted our survey. Due to their support
& valuable thoughts, we have successfully completed our survey.
Most of all, we thank to our colleagues for their help& coordination without which
the work could never have been completed. They made us realize the importance of
teamwork. We are grateful to all of them for standing with us & supporting us in
this project.
Last but not the least we thank almighty God & our parents for everything.

K,SAGARIKA PATRA
REGISTRATION NO: 1706247064
 Declaration

I hereby declare that the following project report titled

“FINANCIAL INCLUSION” is an authentic work done by me. This
is to declare that all the work indulged in the completion of this
work such as research, data collection, analysis is a profound and
honest work of mine.

Date: K.SAGARIKA PATRA

Place: Bhubaneswar (FW 2017-19)

 Index

CONTENTS

1. Acknowledgement
2. Executive summary
3. Introduction
4. Objectives
5. Financial exclusion
6. The need for financial inclusion
7. The benefits of financial inclusion
8. The tools of financial inclusion and the methods
to achieve them.
9. Cross country experience
10. Indian scenario
11. The extent of financial inclusion in India
12. Survey : financial inclusion – then and now
13. The significance of financial inclusion in the
current financial crisis
14. Bibliography
 EXECUTIVE SUMMARY
Financial services actively contribute to the humane & economic development of the society.
These lead to social safety net & protect the people from economic shocks. Hence, each & every
individual should be provided with affordable institutional financial products/services popularly
called “Financial Inclusion”.
Despite witnessing substantial progress in financial sector reforms in India, it is
disheartening to note that nearly half of the rural households even today do not have any access to
any source of funds- institutional or otherwise. Hardly one-fourth of the rural households are
assisted by banks. Hence the major task before banks is to bring most of those excluded, i.e. 75%
of the rural households, under banking fold.
There is a need for the formal financial system to look at increasing financial literacy and
financial counseling to focus on financial inclusion and distress amongst farmers. Indian banks and
financial market players should actively look at promoting such programs as a part of their
corporate social responsibility. Banks should conduct full day programs for their clientele
including farmers for counseling small borrowers for making aware on the implications of the
loan, how interest is calculated, and so on, so that they are totally aware of its features. There is a
clearly a lot requires to be done in this area.
This enables the customer to remit funds at low cost. The government can utilize such bank
accounts for social security services like health and calamity insurance under various schemes for
disadvantaged. From the bank’s point of view, having such social security cover makes the
financing of such persons less risky. Reduced risk means more flow of funds at better rates.
Access to appropriate financial services can significantly improve the day-to-day
management of finances. For example, bills for daily utilities (municipality, water, electricity,
telephone) can be more easily paid by using cheques or through internet banking, rather than
standing in the queue in the offices of the service.
A bank account also provides a passport to a range of other financial products and services
such as short term credit facilities, overdraft facilities and credit card. Further, a number of other
financial products, such as insurance and pension products, necessarily require the access to a bank
account.
Employment Guarantee Scheme of the Government which is being rolled out in 200 districts in
the country would bring in large number of people through their savings accounts into the banking
system.
It paves the way for establishment of an account relationship which helps the poor to avail a
variety of savings products and loan products for housing , consumption, etc.
 INTRODUCTION

The prophecy of Millennium Development goals of U.N. i.e. “growth with equity” clearly
envisages that the growth spree of the globe in the 21st century has left some people behind the
time. Handful of the global populace are still languishing in the vicious circle of poverty &
are cast aside by those who are economically stronger & swifter in the sway of globalization &
liberalization. For sustenance/better growth of the world, the deprived sections should be dragged into
the mainstream of growth. This is because of the fact that poverty any where is a grave threat to
prosperity everywhere. Financial services actively contribute to the humane & economic development
of the society. These lead to social safety net & protect the people from economic shocks. Hence,
each & every individual should be provided with affordable institutional financial products/services
popularly called “Financial Inclusion”.
Financial inclusion may be defined as the process of ensuring access to financial services and timely
and adequate credit where needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost.
Financial products and services are identified as basic banking services like deposits accounts,
institutional loans, access to payment, remittance facilities & also life & non-life insurance services.
The following are the denotation & connotation of financial inclusion in India.
1. Affordable credit
2. Savings bank account
3. Payments & Remittance
4. Financial advice
5. Credit/debit cards
6. Insurance facility
7. Empowering SHGs(self help groups)

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
govt. of India as well as the banking industry has recognized this imperative and has undergone
certain
fundamental changes over the last two decades. In fact, in order to address the issues of financial
inclusion, the Government of India constituted a “Committee on Financial Inclusion” under the
Chairmanship of Dr. C. Rangarajan. Not only in India, but financial inclusion has become an issue of
worldwide concern, relevant equally in economies of the underdeveloped, developing and developed
nations. Building an inclusive financial sector has gained growing global recognition bringing to the
fore the need for development strategies that touch all lives instead of a select few.
OBJECTIVES
The research aims to cover the following objectives.

· How financial inclusion is the need of the hour for the sustainability and maintenance of the
growth process.
· The victims of the financial exclusion and how they are the victims of this financial exclusion.
· How financial inclusion can improve the day-to-day management of finances.

· How it is one of important factor for the equitable growth of the world economy.
· The future of financial inclusion process in India
· The extent of financial inclusion India.
 Literature Review
Shahul Hameedu (2014)in his study titled, “Financial Inclusion - Issues in Measurement
and Analysis”, explains that financial inclusion is delivery of banking services of an
affordable cost to the vast sections of disadvantaged and low income groups. As banking
services are in the nature of public good, it is essential that availability of banking and
payment services to the entire population without discrimination is the prime objective of the
public policy. The banking industry has shown tremendous growth in volume and
complexity during the last few decades. Despite making significant improvements in all the
areas relating to financial viability, profitability and competitiveness, there are concerns that
banks have not been able to include vast segment of the population, especially the
underprivileged sections of the society, into the fold of basic banking services.
Internationally efforts are being made to study the causes of financial exclusion and
designing strategies to ensure financial inclusion of the poor and disadvantaged.
Bhoomika Garg (2014) made a study titled, “Financial Inclusion and Rural Development”,
Nationalization of banks in 1969 and subsequent developments led to the expansion of
commercial banks, Regional Rural Banks and Co-operative credit institutions
geographically all over India. Banks policy aimed at “social” and “development bonding”
by providing credit to agriculture and other priority sectors. It may be noted that despite of
vast expansion, a large number of group remain excluded from the “opportunities and
services” provided by the financial sector. Such excluded groups include small and marginal
farmers, women, unorganized sector workers including artisans, self-employed and
pensioners. Against this background, the objective of this note is to bring out issues and
challenges for reducing financialexclusion.
Sayantani Banerjee and Greeshma Francis (2014) in their study entitled, “Financial
Inclusion and Social Development”, financial institutions are the catalyst in the economic
and social growth and progress in the modern era. In this respect, there is a rapid thrust for
financial inclusion, more so in emerging economies, such as, India. Society will progress
only if there is financial independence for all the stakeholders and thus the importance of
financial inclusion. Providing access to finance is a form of empowerment of the vulnerable
groups. This article emphasis the need of financial inclusion for social development. Access
to basic banking services provides congenial conditions for growth of individuals,
households and private institutions. Also, social factors like unemployment and illiteracy are
closely connected to the success of financial inclusion. Thus a sustainable social
development can be simultaneously achieved alongside financial inclusion17.
Nwankwo, Odi., Fcib and Nwankwo and Ogonna N. O. (2014) in their study titled,
“Sustainability of Financial Inclusion to Rural Dwellers in Nigeria: Problems and Way
Forward”, this study critically examines the sustainability of financial inclusion to rural
dwellers in Nigeria using descriptive study and content analysis. The study observed that the
sustainability of financial inclusion to rural dwellers in Nigeria remains the mainstream for
economic growth in any country. The implication of this study is that economy cannot grow
fast without proper implementation of financial inclusion to rural areas in Nigeria. The study
recommended that the promotion of collaboration between Deposit Money Banks (DMBs),
Microfinance Banks (MFBs) and Communication services providers for enhanced
intermediation of financial services should be encouraged; there is need to educate rural
dwellers on the importance of banking as it would facilitate the success of CBN financial
inclusion policy and that since some of the rural dwellers preferred to keep money under
their pillows at home, there should be proper enlightenment to change their orientation on
financial inclusion in Nigeria19.
Porkodi and Aravazhi (2013) in their study titled, “Role of Micro Finance and Self Help
Groups in Financial Inclusion”,the purpose of this paper is to examine the role of micro
finance in the empowerment of people and the realisation of financial inclusion in India.
While there are reservations about the efficacy of MFIs in handling public money, their
growth and achievements demand attention and appreciation. Today the MFIs want the
government to empower them for mobilising savings. With increasing demand for rural
finance, and the inadequacies of formal sources, the MFIs have immense opportunities in the
new avatar of micro credit in India. However, in the light of recent experiences, and the need
for qualitative growth, we suggest that MFIs should be managed with better scrutiny in
terms of finance and technology as well as social responsibility. This is of utmost
importance in order to upgrade MFIs from thrift and credit institutions to capacity building
and livelihood-sustaining associations of people. NGOs have played a commendable role in
promoting Self Help Groups linking them with banks. There is, therefore, a need to evolve
an incentive package which should motivate these NGOs to diversify into other backward
areas.
Kabita Kumari Sahu, (2013) made a study titled, “Commercial Banks, Financial Inclusion
and Economic Growth in India”, the objectives of the paper are to understand the present
status of India’s financial inclusion, to estimate the financial inclusion index for various
states in India and to study the relationship between Financial Inclusion Index and Socio-
economic Variables. It is found that 72.7 percent of India’s 89.3 million farmer households
are excluded from formal sources of finance. The C-D ratios of foreign banks is 85.0 per
cent, of regional rural banks is 59.9 per cent and of Private sector banks is 74.7 per cent
which have increased in 2011 from their levels in the previous year (72.9 per cent, 58.3 per
cent and 72.7 per cent respectively). No state in India belongs to high IFI group. The two
states namely Chandigarh and Delhi belong to medium IFI, and rest of the states have low
IFI values. The coefficients of PNSDP is positively associated with financial inclusion.
Regression results reveal that 34 percent of the change in financial inclusion index is
explained by per capita net state domestic product.
 FINANCIAL EXCLUSION

The concept of financial inclusion and its implementation has come a long way since the
last two decades and the results are also quite fair. There has been much technological advances that
has transformed the banking industry from traditional brick –and-mortar infrastructure like staffed
branches to a system supplemented by other channels like automated teller machines, debit and
credit cards, internet banking, online money transfer etc. The moot point, however, is that access to
such technology and services are restricted to only certain segments of the society. There is a
growing divide, with an increased range of personal finance options for a segment of high and
upper middle income population and a significantly large section of the population who lack access
to even the most basic banking services. This is termed as “Financial exclusion”.
Financial exclusion can be geographical exclusion, exclusion on the grounds of charges,
exclusion due to ignorance & also self exclusion. One of the oldest definitions by Leyshon and
Thrift (1995) define financial exclusion as referring to those processes that serve to prevent certain
social groups and individuals from gaining access to the financial system. According to Sinclair
(2001), financial exclusion means the inability to access necessary financial services in an
appropriate form. Exclusion can come about as a result of problems with access, conditions, prices,
marketing or self-exclusion in response to negative experiences or perceptions. Carbo et al. (2005)
have defined financial exclusion as broadly the inability (however occasioned) of some societal
groups to access the financial system.
Causes of Financial exclusion.
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.

3. Psychological & cultural barriers -

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.
 NO NO
SAVINGS ASSETS

NO ACCESS
NO BANK FINANCIAL EXCLUSION TO
MONEY
ACCOUNT ADVICE

NO
NO AFFORDABLE
INSURANCE CREDIT

Effects of financial exclusion:

Living without financial service & products is disadvantageous when the contemporary world is
moving on cashless system depending on credit cards, debit cards, ATMs &Core Banking Solution
(CBS systems). Exclusion imposes real cost on the excluded lot. The implication of the financial
exclusion is much greater when the excluded mass is entrapped in the hydra headed cycles of
poverty. This causes further social exclusion which is very much detrimental for the equitable
growth of the world community. The following points describe disadvantages to the financially
excluded mass:
a. They pay higher charges in the absence of financial transactions like money transfer &
cheque cashing etc.
b. They take credit from non- institutional creditors at exorbitantly higher rate which
exacerbate the harm already caused due to poverty. Lack of security in holding &
storing money.
c. The small business may suffer due to loss of access to middle class and higher-income
consumers, higher cash handling costs and delays in remittances of money.
d. Saving potential remains unexploited & unproductive from social point of view.
e. General decline in investments.
f. Increase in unemployment.
Who are the excluded?
The financially excluded sections largely comprise of:

· Marginal farmers
· Landless labourers
· Self employed and unorganized sector enterprises
· Urban slum dwellers
· Migrants
· Ethnic minorities and socially excluded groups
· Senior citizens and women, etc.
· Large pockets of population in North East, Eastern, and central regions of India.
 THE NEED FOR FINANCIAL
INCLUSION

Despite witnessing substantial progress in financial sector reforms in India, it is

disheartening to note that nearly half of the rural households even today do not have any access to
any source of funds- institutional or otherwise. Hardly one-fourth of the rural households are
assisted by banks. Hence the major task before banks is to bring most of those excluded, i.e. 75%
of the rural households, under banking fold. But the task is not so easy since they are illiterate,
poor and unorganized. They are also spread far and wide. What is needed is to improve their living
standards by initiating new/increased economic activities with the help of banks, NGO’s and local
developmental agencies. To start with, it is necessary to develop a fair understanding of their
profile. In addition, their perception about the bank and its services needs to be understood.

So there is a need for the formal financial system to look at increasing financial
literacy and financial counseling to focus on financial inclusion and distress amongst farmers.
Indian banks and financial market players should actively look at promoting such programs as a
part of their corporate social responsibility. Banks should conduct full day programs for their
clientele including farmers for counseling small borrowers for making aware on the implications of
the loan, how interest is calculated, and so on, so that they are totally aware of its features. There is
a clearly a lot requires to be done in this area.
 BENEFITS OF FINANCIAL
INCLUSION

Financial inclusion has many benefits. Following are some of the benefits summed up.

· It paves the way for establishment of an account relationship which helps the poor to avail
a variety of savings products and loan products for housing , consumption, etc.

· An inclusive financial system facilitates efficient allocation of productive resources and

thus can potentially reduce the cost of capital.

· This also enables the customer to remit funds at low cost. The government can utilize such
bank accounts for social security services like health and calamity insurance under various
schemes for disadvantaged. From the bank’s point of view, having such social security
cover makes the financing of such persons less risky. Reduced risk means more flow of
funds at better rates.

· Access to appropriate financial services can significantly improve the day-to-day

management of finances. For example, bills for daily utilities (municipality, water,
electricity, telephone) can be more easily paid by using cheques or through internet
banking, rather than standing in the queue in the offices of the service.

· Transfer of money can be done more safely and easily by using the cheque, demand draft
or through internet banking.

· A bank account also provides a passport to a range of other financial products and services
such as short term credit facilities, overdraft facilities and credit card. Further, a number of
other financial products, such as insurance and pension products, necessarily require the
access to a bank account.
· Lastly, the Employment Guarantee Scheme of the Government which is being rolled out
in200 districts in the country would bring in large number of people through their savings
accounts into the banking system.
 TOOLS OF FINANCIAL INCLUSION AND
THE METHODS TO ACHIEVE THEM
To address the issue of financial exclusion in a holistic manner, it is essential to
ensure that a range of financial services is available to every individual. These
services are: `

(i) a no-frills banking account for making and receiving payments,

(ii) a savings product suited to the pattern of cash flows of a poor household,

(iii) money transfer facilities,

(iv) small loans and overdrafts for productive, personal and other purposes, &

(v) micro-insurance (life and non-life)

Meeting the needs:
To bring about a highly inclusive financial system, it is highly necessary that the current
financial products are appropriate to the needs of low-income households. Following are some
of the major points that are required to achieve success of the financial products.

Reducing barriers to access

Widening access requires overcoming the barriers presented by risk assessment as well as
improving physical access. Using intermediaries to deliver financial products can overcome the
problems of physical access. Telephone and computer-based services, however, are likely to
reinforce financial exclusion as many excluded households lack these facilities.

Product design
The requirements of people without financial products are not unrealistic. For day-to-day money
management they require a simple account which would allow them to retain tight control over
their money. It should offer basic money transfer facilities, including a facility for spreading the
cost of bills.

Products offering longer-term financial security should be simple and transparent so that users
'know where they are' and the costs associated with regulation compliance are low. They should be
based on regular and automatic saving; flexible, so that products can be retained even during times
of hardship; and give restricted access to the money saved. To reduce the likelihood of people
cashing in long-term savings plans because of short-term needs for cash, long-term savings
products could be used as collateral for small loans.

The key issue for home contents insurance is affordability and, in particular, options for spreading
the cost of premiums across the year. Wider availability of simpler, cheaper products such as
indemnity insurance (second-hand replacement value rather than new-for-old), or catastrophe-only
policies could also widen access.

Moreover short-term credit facilities should also be offered: small, one-off, fixed-term loans rather
than ongoing credit commitments such as credit cards or overdrafts; fixed, automatic repayments;
and the use of technology in the distribution of loans and collection of repayments, which could
reduce costs and therefore allow lower interest rates than are currently available from
moneylenders.

Delivery systems
People on the margins of financial services want to deal with organizations which are financially
secure, trustworthy and understand their needs. It is not, however, necessary for the same
organization to both provide the product and deliver it to the customer. Indeed, experience shows
that the use of intermediaries offers many advantages. For example, many local authorities run
insure with rent schemes for tenants wanting home contents policies, which they are able to offer
at a substantial saving on similar policies bought direct or through a broker. The Post Office is also
exploring a similar role as financial service intermediary, as are a small number of credit unions
and housing associations. New technology offers some opportunities for product delivery at the
end of the market. Electronic cards and electronic money transmissions are likely to be the most
acceptable.

Encouraging take-up
Knowledge of and about financial products is remarkably low among households that are without
them. This is compounded by marketing policies which reinforce the belief that financial services
are 'not for the poor'. Measures to encourage take-up must, therefore, tackle the widespread
mistrust which such households have of many financial providers, particularly those which are
geographically remote. Use of trusted intermediaries could overcome these barriers. Targeted
marketing and delivery of new products as they become available would also increase take-up.
Equally, the language and cultural barriers faced by some potential users need to be taken into
account.

There is also a need for an independent information and advice service. Lack of knowledge and
experience of financial products renders some households especially vulnerable to mis-selling, as
well as deterring them from taking up financial services.
CROSS COUNTRY EXPERIENCE
It has been estimated by Consultative Group to Assist the Poor (CGAP) that about 2.5 to
3billion people around the world are still excluded from basic financial services. The situation is
particularly dire in the Least Developed countries. In most of the developing countries like India &
China the extent of exclusion is in the range of 25%-65%. So, taking into cognizance the
importance of financial inclusion, the international community has taken a number of measures to
mitigate the hiatus between the financially excluded & non- excluded. The following analysis
describes the extent & measures taken by different countries to mitigate financial exclusion.

USA
In USA 10%-15% of total households & 22% of the low income households go without bank
accounts. Community Reinvestment act & Home Mortgage Disclosure act binds the banks there to
provide banking services to all the needy. Some states like New York made it mandatory for the
banks to provide accounts to all citizens.

U.K.
Nearly 12 percent of England’s households are unbanked. Free face to face money advice to
targeted groups in the areas of high exclusion is in vogue. The govt has set up a Financial Inclusion
fund of 120 mn pounds to support initiatives to tackle financial exclusion. . An enhanced
legislative environment for credit unions has been established, accompanied by tighter regulations
to ensure greater protection for investors. A Post Office Card Account (POCA) has been created
for those who are unable or unwilling to access a basic bank account. The concept of a Savings
Gateway has been piloted. This offers those on low-income employments £1 from the state for
every £1 they invest, up to a maximum of £25 per month. In addition the Community Finance
Learning Initiatives (CFLIs) were also introduced with a view to promoting basic financial
literacy among housing association tenants.

Australia
Only 3% of adults lacked bank account in Australia till 2002-03. This has been the result of
continuous joint efforts by government & the banks in educating the people about the benefits of
financial products.

France
In 1984 the bank of France through “Banking Act” made access to bank accounts a legal right in
France. In 1992 the banking industry in France signed a charter to provide bank account to all.

Bangladesh
Grameen bank of Bangladesh under the stalwartship of Md. Yunus has revolutionized the
movement of financial inclusion. It targeted low income people especially the women (97% of
total borrowers) who were denied credit by other com. Banks. It has successfully posted a recovery
rate of 98.85%. It has also recently included the beggars within its credit network under a special
program i.e. Struggling Members programmed. Approximately 81000 beggars have already been
benefited by the programme.

South Africa
More than half of the population here are below poverty line. Only 4% of total populace has bank
accounts & 1% only avail credit from formal sources. To deal with the situation Dakar Conference
ha been organized under the banner of U.N. In 2004, UNDP & UNCDF jointly lunched a program
called Building Financial Security in Africa.

IMF, U.N. & World Bank have extended very good support for building an inclusive society in the
world. U.N. has framed ‘Blue Book’ in consultation with the developed & underdeveloped
countries as a tool & guide for policy makers who seek to build inclusive financial growth.
In the first-ever Index of Financial Inclusion (IFI) prepared by a New Delhi-based organization,
ICRIER (Indian Council for Research on International Economic Relations), to find out the extent
of the reach of banking services in 100 countries worldwide pointed out that Spain has occupied
the top position in IFI, which is based on data from 2004, followed by Canada and Portugal, while
countries including Nepal, Zimbabwe and Botswana are at the bottom of the list. Among the
important countries, Germany has been placed at 4th position, the UK 17th, USA 21st and Japan
22nd. India has been ranked poorly at 50th position, much above Russia but below China, even
below African countries such as Kenya and Morocco. Similarly, the report pointed out that
domestic deposit as percentage of GDP was 54.9 per cent in India, against 123.9 per cent in
Malaysia.
INDIAN SCENARIO
Indian banking system has exhibited tremendous growth in extending its reach, coverage &
delivery of financial products to the mass ever since 1881. The All India Rural Survey committee
in 1954 recommended the creation of a state sponsored bank to promote rural penetration.
Accordingly, SBI was established in 1955. Another step in this direction was taken in 1969 when
14 major commercial banks were nationalized followed by six more in 1980. This strengthened the
concept of socialistic & welfare state stature of the country. Lead bank scheme was launched in
1970 to increase banking penetration with special focus on the districts. The emergence of RRBs
in 1976 blended the skills of commercial banks with the grass root presence of the co-operative
banks helped the mass to access to institutional credit. NABARD established in 1982 regulated
institutional credit for agriculture & rural development. Talwar committee & Goiporia committee
in the early eighties have made many recommendations to improve the customer services in India.
Following are some of the steps undertaken by RBI:
The RRBs have been advised to allow limited overdraft facilities in no-frill accounts without any
collateral. The idea was that provision of such overdraft facilities provides a ready source of
funding to the account holders who are thereby inducted to open such accounts.

Banks also have been advised to provide a General Purpose Credit Card (GCC) at their rural &
semi urban branches. From this revolving card system the customer can withdraw money to a
limited amount from the concerned branch.

Bhumuheen’ credit card facility has been arranged apart from Kisan credit cards for the rural &
semi urban tenant farmers, landless labourers whereby they can be allowed hassle free credit limit
up to 0.25 lac per person.

Special Agricultural branches have been opened by the PSBs to meet the financial needs fore
agricultural & allied activities.

On the behest of the RBI, SHG & bank linkage programme has been initiated which has been a
major micro finance programme in the country.

The micro finance and self help groups are also playing great role in proving financial services to a
large mass of people in the rural and semi urban areas. Looking at the profitability side of
providing newer financial products the private sector organization is also entering into the market.
Reliance Capital, the financial services arm of Anil Dhirubhai Ambani Group, has funded two
microfinance

institutions in Gujarat - MAS Financial Services and Vardan Trust. The Soros Economic
Development Fund (SEDF), Omidyar Network, and Google.org hosts a ‘Small to Medium
Enterprise Investment Company’ with an initial corpus of $17 million targeted at “Missing
Middle” between microfinance and commercial capital markets in India. Hyderabad-based SKS
Microfinance has attracted investors like Vinod Khosla, Sequoia Capital India, SIDBI and Units,
among others.
 THE EXTENT OF FINANCIAL

INCLUSION IN INDIA

The extent of financial inclusion in India can be well studied from the analysis of the
following points.
A. No. of accounts per 100 population region-wise
The following table gives information about accounts per 100 population in six different regions
of the country.
Table-
1 No. of accounts per 100 population region-wise

No. of Account
Region Acounts Population No. of s
(current+saving (in per
) ’000)
100 population
(in ’000)

2001 2005 2001 2005 2001 2005

Northern 50944 58777 132679 141599 38 42

N.Easter
n 7536 7729 34495 411083 20 19

Eastern 47838 51888 227617 242920 21 21

Central 63498 69424 255714 272906 25 25

Western 48120 55178 149073 159095 32 35

Southern 79531 94725 223437 238459 36 40

All India 297467 337721 1027015 1096063 29 31

It can be seen from the table that in All-India level there was only 29 account holders per 100 in
2001 which inched up to 31 in 2005.Northern region has highest no. of accounts i.e. 42 per 100
population in 2005. North Eastern region recorded lowest figure of only 19 42 per 100 in 2005
which is paradoxically lower than 20 in 2001.

Table—2

Number of Savings Accounts to Adult Population-2005

Percentage of savings
Region account

Northern 80
N.Eastern 37
Eastern 34
Central 52
Western 60
Southern 66

Going by the available data on the number of savings bank accounts and assuming that one person
has only one account, (which assumption may not be correct as many persons could have more
than one bank account) we find that on an all India basis 59 per cent of adult population in the
country have bank accounts – in other words 41 per cent of the population is unbanked. In rural
areas the coverage is 39per cent against 60 per cent in urban areas. The unbanked population is
higher in the North Eastern and Eastern regions.
 .
Table –3 - Number of Loan Accounts to Adult Population 2005

Region Percentage of loan accounts

Northern 12
N.Eastern 7
Eastern 8
Central 9
Western 13
Southern 25
India 14

The extent of exclusion from credit markets is much more, as number of loan accounts constituted
only14 per cent of adult population (table-3) In rural areas, the coverage is 9.5 per cent against 14 per
cenin urban areas. Regional differences are significant with the credit coverage at 25 per cent for the
Southern Region and as low as 7, 8 and 9 per cent respectively in North Eastern, Eastern and Central
Regions.

The extent of exclusion from credit markets can be observed from a different view point also. Out
of 203 million households in the country, 147 million are in rural areas – 89 million are farmer
households. 51.4per cent of farm households have no access to formal or informal sources of credit
while 73 per cent have no access to formal sources of credit. Similar data are not available for non
farm and urban households. Looking at the different sources of credit, it is observed that the share of
non institutional sources reduced from 70.8% in 1971 to 42.9% in 2002. However after 1991, the
share of non institutional sources has increased; specifically, the share of moneylenders in the debt of
rural households increased from 17.5 % in 1991 to 29.6% in 2002. In urban areas the share of non
institutional sources has come down significantly from 40% in 1981 to around 25 % in 2002.
 a) No. of Banks’ branches in population groups

Table-4 No & %age of Branches in Population Groups

Banks No No. of Branches
of As on June 30, 2004 As on June 30, 2005
Ba Rural Semi Urban Metro Total Rural Semi Urban Metr Total
nk Urban Urba o
s n
SBI 1 4068 2462 1499 1010 8989 4068 2475 1470 1023 9036
(45%) (27%) (16%) (11%) (100%) (45%) (27% (16%) (11 (100%
) %) )
Associates 7 1409 1588 849 732 4578 1412 1605 864 744 4625
Of SBI (30%) (35%) (19%) (16%) (100%) (31%) (35% (19%) (16) (100%
) )
Nationalized 19 13582 7190 6801 5668 33241 13587 7291 6935 5812 33625
(41%) (22%) (21%) (17%) (100%) (40%) (22% (21%) (17 (100%
) %) )
Other PSUs 1 NA NA NA NA NA 5 26 68 60 159
(3%) (16% (43%) (38 (100%
) %) )
PSBs 28 19059 11240 9099 7410 46808 19072 1139 9337 7639 47445
(41%) (24%) (19%) (16%) (100%) (40%) 7 (20%) (16 (100%
(24% %) )
)
Pvt. Sector 29 1106 1768 1537 1383 5794 1097 1831 1714 1479 6121
(19%) (31%) (27%) (24%) (100%) (18%) (30% (28%) (24 (100%
) %) )
Foreign Banks 31 Nil Nil 31 188 219 Nil 1 42 206 249
(14%) (86%) (100%) (0%) (17%) (83 (100%
%) )
RRBs 196 11922 2134 396 20 14472 11922 2158 401 20 14501
(82%) (15%) (3%) (0%) (100%) (82%) (15% (3%) (0%) (100%
) )
Scheduled 284 32087 15142 11063 9001 67293 32091 1538 11494 9344 68316
Co m. Banks (48%) (23%) (16%) (13%) (100%) (47%) 7 (17%) (14 (100%
(23% %) )
)
4 4 9 7 Nil 20 4 9 10 Nil 23
Non-scheduled (20%) (45%) (35%) (100%) (17%) (39% (44%) (100%
Banks ) )
Total 288 32091 15151 11070 9001 67313 32095 1539 11504 9344 68339
(48%) (23%) (16%) (13%) (100%) (47%) 6 (17%) (14 (100%
(23% %) )
)
 Table-4 shows number & percentage of branches of different banks present in different
areas/population groups.

Table-4 indicates that 47% of total scheduled commercial bank branches are present in rural area
where as 17% in Urban &14% in metropolitan areas as on June 2005. The rural presence of the
nationalized banks (40%) & RRBs (82%) helped India positively in the direction of financial
inclusion.

The spread of private banks (18%) & foreign banks (0%) in rural areas is not very encouraging.
The presence of private sector banks in rural areas has declined from 19% in 2004 to 18% in
June 2005.

Summary of the financial inclusion statistics in India(2005)

(a) General :
51.4% of farmer households are financially excluded from both formal / informal
sources.Of the total farmer households, only 27% access formal sources of credit; one third of
this group also borrow from non-formal sources.
Overall, 73% of farmer households have no access to formal sources of credit.

(b) Region-wise :
Exclusion is most acute in Central, Eastern and North-Eastern regions - having a concentration
of 64% of all financially excluded farmer households in the country. Overall indebtedness to
formal sources of finance alone is only 19.66% in these three regions.

(c) Occupational Groups:

Marginal farmer households constitute 66% of total farm households. Only 45% of these
households are indebted to either formal or non formal sources of finance. About 20% of indebted
marginal farmer households have access to formal sources of credit. Among non-cultivator
households nearly 80% do not access credit from any source.
(d) Social Groups :
Only 36% of ST farmer households are indebted (SCs and Other Backward Classes - OBC - 51%)
mostly to informal sources.

Analysis of the data provided by RBI thru' its Basic Statistical Returns reveal that critical
exclusion (in terms of credit) is manifest in 256 districts, spread across 17 States and 1 UT,
with a credit gap of 95% and above. This is in respect of commercial banks and RRBs.

As per CMIE (March 2006), there are 11.56 crore land holdings. 5.91 crore KCCs have been
issued as at the end of March 2006, which translated into a credit coverage of more than 51% of
land holdings by formal sources. Further data with NABARD on the doubling of agricultural credit
indicates that agricultural loan disbursements during 2006-07 covered 3.97 crore accounts. Thus,
there are different estimates of the extent of inclusion thru' formal sources, as the reference period
of the data is not uniform.

Consequently, this has had an impact on quantifying the extent of levels of exclusion.

REFERENCES FOR THIS SECTION

1. Central Statistical Organisation

National Accounts Statistics, Ministry of Statistics and Programme Implementation,
Government of India, New Delhi,.
2. National Sample Survey Organisation (NSSO),, “Informal Sector in India, - Salient
Features”, NSSO, Ministry of Statistics and Programme Implementation, Government of
India, New Delhi,.
3. National Statistical Commission
Report of the National Statistical Commission, Vol.I, II , Government of India, New Delhi,

SURVEY : FINANCIAL INCLUSION –

THEN AND NOW

To understand the extent of financial inclusion in a general context and the perception of
people regarding financial inclusion a survey was conducted. The details of the survey are as
follows.

Place of survey: Hirapur, a rural village in Bhubaneswar.

No of people surveyed: 50

Age group of people surveyed: Above 65.(this age group was chosen so as to know the condition
of financial inclusion 40 years back)

The survey was conducted through a questionnaire containing five questions. There were no fixed
answers to the questions, rather we made it a point to note down their answers. The questions are
as follows.

1. Where did you keep your earnings then OR what did you do with your earnings after
fulfilling the basic needs?

2. How did you attain credit or avail money at the time of need?

3. Where do keep or invest your money now?

 4. How do you avail credit now?

5. How do you rate the financial inclusion services now?

The answers to the questions received and the percentage of people that answered the various
answers are as follows:

PERCENTAGE OF
ANS TO Q –1 PEOPLE

1. At home. 36%
2. In the post-office 20%
3. Saved in provident fund 12%
4. Invested in land and gold 64%
Lend money to others at high
5. interest 21%

PERCENTAGE OF
ANS TO Q –2 PEOPLE

1. From family members 35%

2. From money lenders at high interest 27%
Through mortgage of land to
3. zamindars 40%
By selling land or gold or household
4. items. 38%
From the above answers to Q—1&2 it is clear that the concept of financial inclusion was very low
in those days. People did not have access to banks .The only profitable investment people thought in
those days were of investing in land and gold and the only official method of saving in the area was
the village post-office.

In the case of taking credit and managing finance in times of emergency we see the people had to
take pains. Mortgage loans from zamindars were common phenomena. Unlawful money lenders
also had a good time. People expressed their sorrows and woes which they had to face particularly
during their daughters marriage and in times of sickness.
Thus financial inclusion services were still a dream in those days.

PERCENTAGE OF
ANS TO Q –3 PEOPLE
1. Post offices 16%
2. At homes 12%
3. In co-operative banks and local banks 70%
4. In private sector banks 11%
5. In equity shares 2%
6. In gold and land 24%
7. In kishan bikas patra &alike 18%

PERCENTAGE OF
ANS TO Q –4 PEOPLE

1. From banks (PSBs) 63%

2. From relatives and friends 22%
3. From money lenders 12%
4. From private sector banks 10%
5. By selling land or gold 21%
6. From self saved money 37%
 PERCENTAGE OF
ANS TO Q –5 PEOPLE

1. Good 36%
2. Average 42%
3. Below average 14%
4. Needs a lot of improvement 8%

From the answers of Q—3&4 it is clear that financial inclusion services are in services now. We
see people have bank accounts now. Though the spread of the public sector banks are more but the
spread of private sector banks are also happening. On surveying the area , it is found that what was
a nil bank area has now five banks and in each of the banks the no. of customers have exceeded
their limits.
In case of credit taking banks have become the priority.But the rating of financial services by the
people are still average. One of the prime causes of this reason is that people have become educated
about the financial services in the urban areas. Thus, they feel that less development has taken place
in their area.

(For question no. 1,2,3&4 the total of the percentage of people giving the answers is not 100
because more than one option of answer has been given as a response )
 THE SIGNIFICANCE OF FINANCIAL
INCLUSION IN THE CURRENT
FINANCIAL CRISIS

The current ‘tsunami’ in the financial sector triggered by the subprime crisis has had a telling
impact on the global economy from which it will take some time to recover. The role of the
banking sector will be vital for India if it were to stay as one of the fastest growing economies. The
multilayered Indian banking system— compromising 82 scheduled commercial banks (SCBs) , 92
regional rural banks (RRBs), four local area banks (LABs), 1813 urban cooperative banks (UCBs)
and 109497 rural co-operative credit institutions has the ability to convert what was largely
perceived as a social responsibility into a viable growth : providing access to finance to all ,
irrespective of geography , income or education.

According to a study ‘Banking in 2050’ shows that the structure of global ranking will undergo a
complete realignment with the E7 (Brazil, Russia India, China, Indonesia, Mexico and Turkey )
driving growth.

· Over the next 25 years, banking sectors will grow much faster than the GDP of these
countries.
· Total domestic product in the E7 will exceed those of G7 countries in the next 40 years.
· India is likely to emerge as the third-largest domestic banking market by 2040, and could
even grow faster than China.

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.

As per the Planning Commission’s India ‘Vision 2020’ document, the growth of banking is likely
to be more qualitative than quantitative. While reliance on borrowed funds has increased for many
of the global banks, the pace of deposit
growth among local banks over the last couple of years has been encouraging. But it needs to be
sustained with constant monitoring of quality of the deposit base.

The present trend shows a strong shift among younger consumers from traditional branch-banking
to alternate channels. Electronic delivery channels, such as the internet, ATMs and phones, have
emerged as effective channels for distribution of products and services. Branches though will
continue to be used more for cross-selling products and managing client relationship. The business
challenge would be to ensure continuous compliance with cyber laws and other regulatory
directives.

Thus, it can be summed up that 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. According to the Boston Consulting Group’s 2007 report, The Next
Billion Banking Customers — the most effective marketing campaigns will have to include equal
parts of education and sales pitch. To include their next customers, bank will have to access them,
and be accessible.

(The entire information on this particular section has been extracted from Businessworld Issue 18-
24 Nov 2008)
 BIBLIOGRAPHY
WEBSITES

1. www.npi.org.uk
2. www.nationalcentrefordiversity.com
3. www.bbcnews.com
4. www.nssoresults .co in
5. www.nabard.org
6. www.indian-bank.com
7. www.rbi.org.in
8. www.innoviti.com
9. www.egovonline.net

NEWSPAPERS

1. The Economic Times

2. The Hindu
3. The Telegraph
4. The Times of India
5. The Hindu Business Line

SPEECHES AND REPORTS

1. The need for financial inclusion with an Indian perspective , IDBI Gilts ltd.

2. Report of the committee on informal financial sector statistics,

Dr. C Rangarajan, chairman of the National Statistical Commission

3. The Next Billion Consumers, report on financial inclusion by Boston Consulting

group.
4. Treating bank customers fairly, speech by Usha Throat, governer, RBI organized by
the Financial Standards Planning Board , India.

5. Taking Banking Services to the Common Man – Financial Inclusion, Commemorative

Lecture by Shri V. Leeladhar, Deputy Governor Reserve bank of India at the Fedbank
Hormis Memorial Foundation at Ernakulam on December 2, 2005

6. Index of Financial Inclusion , Mandira Sharma, Indian Council for Research on

International Economic Relations

7. National Conference on Financial Inclusion, Press Information Bureau, Govt. of

India ,Friday 14th November.2008