29443419 Research Paper on Financial Inclusion

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I n d e x

CONTE NT S P ag e n o

1. Acknowledgement 2

2. Executive summary 3

3. Introduction 5

4. Objectives 7

5. Financ ial exclusion 8

6. The need fo r financia l inclusion 12

7. The benefits offinancia l inclusion 138.

9.

The tools offinancia l inclusio n a nd the

methods to achieve them.

Cross country experience

14

17

10.India n scenario 20

11. The exte nt offinancia l inclusio n in India 22

12. Survey : financia l inclusio n then and now 30

13. The sig nificance offinancia l inclusio n in the 33curre nt financia l crisis

14.Bibliog raphy 35

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ACKNOWLEDGEMENT

Goal achievement is very difficult for any person, but there are motivations,which make this task very eas ier. It is our humble duty to acknowledge all of

them, which made our task easier during myproject.

Before proceeding further, we would like to express our thanks to all those who

have helped us in one way or any otherway for successful completion of this

project.

We would like to thankG lobsyn Business School, Ahemadabad for havingprovided us with a great opportunity to workand learn.

We are deeply indebted to and express our sincere appreciation & gratitude toProf. Kalika Bansal for providing hervaluab le guidance & encouragementthroughoutthe 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 Sukhjora,a villagein Jharkhand from where we have conducted our survey. Due to their support& valuab le thoughts, we have successfully completed oursurvey.

Most of all, we thank to our colleagues for their help& coordination without whichthe work could never havebeen completed. They made us realize the importance ofteamwork. We are grateful to all of them for standing with us & supporting us inthis project.

Last but not the least we thank almighty God & our parents foreverything.

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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 financ ial products/services popularly called

Financial Inclusion.

Despite witnessing substantial progress in financial sector reforms in Ind ia, it

is disheartening to note that nearlyhalfof 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 mostof those excluded, i.e. 75% of the rural households, under

banking fold.

There is a need for the formal financ ial system to look at increas ing financ

ial literacy and financial counseling to focus on financial inclus ion and

distress amongst farmers. Indian banks and financ ial 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 includ ing farmers for counseling smallborrowers for making aware on the imp lications 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 banks point of

view, having such social security cover makes the financing of such persons lessrisky. Reduced risk means more flow of funds at betterrates.

Access to appropriate financial services can significantly improve the day-

today management of finances. For example, bills for daily utilities (munic

ipality, water, electric ity, telephone) can be more easily paid by using cheques

orthrough

internet banking, rather than standing in the queue in the offices of theservice.


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A bank account also provides a passport to a range of other financial

products and services such as short term credit fac ilities, overdraft facilities and

credit card. Further, a number of other financial products, such as insurance

and pension products, necessarily require the access to a bankaccount.

Employment Guarantee Scheme of the Government which is being rolled

out in 200 d istricts 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 poorto avail a variety of savings products and loan products for housing , consumption,etc

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T

INTRODUCTION

he prophecy of Millennium Development goals of U.N. i.e. growth

with equity clearly envisages thatthe 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. Theselead to social safety net & protect the people from economic shocks. Hence, each

& every ind ividual should be provided with affordable institutional financ ial

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.

Financ ialproducts

& 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 offinanc ial inc

lus ion in India.

1. Affordable credit

2. Savings bankaccount3. Payments & Remittance

4. Financial advice

5. Credit/debit cards6. Insurance facility7. Empowering SHGs(self help groups)

An inc lus ive financial system fac ilitates effic ient allocation of productive

resources and thus can potentially reduce the cost of capital. An all-inclusive financ

ial system enhances efficiency and welfare by provid ing avenues for secure and

safe saving practices and by facilitating a who le 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


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undergone certain

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fundamental changes over the last two decades. In fact, in order to address the issues

of financ ial inc lus ion, the Government of India constituted a Committee on

Financ ial Inclus ion under the Chairmanship of Dr. C. Rangarajan. Not only

in Ind ia, but financ ial inc lus ion has become an issue of worldwide concern,

relevant equally in economies of the underdeveloped, developing and developednations. Build ing an inclus ive financial sector has gained growing global

recognition bringing to the fore

the need for development strategies that touch all lives instead of a selectfew.

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OBJECTIVES

The research aims to cover the following objectives.

How financial inclus ion is the need of the hour for the sustainability and

maintenance of the growthprocess.

The victims of the financ ial exclusion and how they are the victims of this financ

ial exclusion.

How financ ial inclus ion can improve the day-to-day management offinances.

How it is one of important factor for the equitab le growth of the world economy.

The future of financial inclusion process in India

The extent of financial inclusion India.

The perception of people regard ing financ ial inclus ion services and itsbenefits.

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T

FINANCIAL EXCLUSION

he concept offinanc ial inc lusion and its imp lementation 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 brickand-mortar infrastructure like staffed branches to a system

supplemented by other channels like automated teller machines, debit andcredit 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 d ivide, 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, exclus ion on the grounds

of charges, exclus ion due to ignorance & also self exclus ion. One of the

oldest definitions by Leyshon and Thrift (1995) define financ ial exc lusion as

referring to those processes that serve to prevent certain social groups and ind

ividuals from gaining access to the financial system. According to Sinclair

(2001), financ ial exclus ion means the inab ility to access necessary financ ial

services in an appropriate form. Exc lusion can come about as a result of

problems with access, conditions, prices, marketing or self-exclus ion in

response to negative experiences or perceptions. Carbo et al.

(2005) have defined financial exc lus ion as broadly the inability (howeveroccasioned) of some societal groups to access the financial

system.

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Causes of Financialexclusion.

Some of the important factors responsible forfinanc ial exclus ion are given asunder

1. T e rms & co nditio ns.

Different types of terms & conditions imposed by the bankers often deterpeople 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 incomepeople.

Another area of obstacle is the conditions relating to the use of accounts. InBelgium 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 dont have driving license or passport. Inmany cases, wrong information are given in their ration cards & voter I-cards, which make them illegib le as proof. This problem is rife with therefugees & slum dwellers.

3. Psychological & cultural barriers.

Rural people & low income people think transacting through banks isa cumbersome affair & banks charge highly. Sometimes they think thatservices offered by the banks are not meant for them. Such type of Selfexclus ion is far more important than direct exclus ion by banks refusing toopening accounts.

In England the Pakistani & Bangladeshi communities face religious barriersto banking, because, accounts overdrawn (even if inadvertently) is harmful

under Islamic law.4. Bankers approach.

Bankers attitude towards the rural fo lk & the marginalized mass is also notconducive. Sometimes these people are d istracted by difficult financialterms used by the bankers & sometime by the apathetic attitude ofthebankers.

Absence of banks in the vic inity of rural area is also one of the causes ofexclusion.


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NO SAVINGS NO ASSETS

NOBANK

ACCOU

NT

FINANCIAL EXCLUSION NO ACCESSTO

MONEYADVICE

NO INSURANCE NO AFFORDABLE CREDIT

Eff ec t s of fi nanci al excl u

s i o n:

Living without financial service & products is disadvantageous when thecontemporary world is moving on cashless system depending on credit cards,debit cards, ATMs &Core Banking Solution (CBS systems). Exclusion imposesreal cost on the exc luded lot. The implication of the financial exclus ion is much

greater when the excluded mass is entrapped in the hydra headed cycles ofpoverty. This causes further social exclusion which is very much detrimental forthe equitab le growth of the world community. The following points describedisadvantages to the financially excluded mass:

a. They pay higher charges in the absence of financial transactions likemoney transfer & cheque cashing etc.

b. They take credit from non- institutional cred itors at exorbitantly higherrate which exacerbate the harm already caused due topoverty.


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c. Lack of security in hold ing & storing money.

d. The small business may suffer due to loss of access to middle class andhigher-income consumers, higher cash hand ling costs and

delays inremittances ofmoney.

e. Saving potential remains unexplo ited & unproductive from social pointof view.

f. General decline in

investments. g. Increase in

unemployment.

W ho a re the ex cl ud ed?

The financ ially excluded sections largely compriseof:

Marginal farmers

Land less labourers

Self employed and unorganized sectorenterprises

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 ofIndia.


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D

THE NEED FOR FINANCIAL INCLUSION

espite witnessing substantial progress in financial sector reforms in Ind ia, 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 exc luded, 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 helpof banks, NGOs and local developmental agencies. To start with, it is necessary to

develop a fairunderstand ing 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 financ ial counseling to focus on financ ial inc

lus ion and distress amongst farmers. Indian banks and financial market players

should actively look at promoting such programs as a part of theircorporate social responsibility. Banks should conduct full day programs for their

c lientele includ ing farmers for counseling small borrowers for making aware on

the imp lications 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.


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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 effic ient allocation of

productive resources and thus canpotentially reduce the cost ofcapital.

This also enables the customer to remit funds at low cost. The government

can utilize such bank accounts for social security services like health andcalamity insurance under various schemes for disadvantaged. From the

banks point of view, having such social security cover makes the financ ing

of such persons less risky. Reduced risk means more flow of funds at better

rates.

Access to appropriate financ ial services can significantly improve the day-

today management of finances. For example, bills for

daily utilities (munic ipality, water, electric ity, telephone) can

be more eas ily paid by us ing 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 internetbanking.

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 financ ial products, such as

insurance and pension products, necessarily require the access to a bank

account.

Lastly, the Emp loyment Guarantee Scheme of the Government which is

being rolled out in200 districts in the country would bring in large number

ofpeople

through their savings accounts into the banking system.

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TOOLS OF FINANCIAL INCLUSION AND THE METHODS TO

ACHIEVE THEM

To address the issue of financial exclus ion in a ho listic manner, it is essentialto ensure that a range of financial services is available to every ind ividual.These services are: `

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

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

household, (iii) money transferfacilities,

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

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


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Mee ti ng the nee ds:

To bring about a highly inclus ive financ ial 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 achievesuccess of the financ ialproducts.

Reducing barriers to access

Widening access requires overcoming the barriers presented by risk assessment as

well as improving physical access.Using intermed iaries to deliver financial

products can overcome the problems of physical access. Telephone and computer-

based services, however, are likely to reinforce financ ial exclus ion as many exc

luded households lackthesefacilities.

Productdesign

The requirements of people without financial products are not unrealistic. Forday- to-day money management they require a simp le account which would allow them to retain tight control over their money. It should offerbasic moneytransfer facilities, includ ing a fac ility for spreading the cost ofbills.Products offering longer-term financ ial security should be simple and transparentso 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 giverestricted access to the money saved. To reduce the likelihood of people cashingin long-term savings plans because of short-term needs for cash, long-termsavings 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 availab ility ofsimpler, cheaper products such as indemnity insurance (second-handreplacement value rather than new-for-old), or catastrophe-onlypolic ies couldalso widen access. Moreover short-term credit facilities should also be offered:small, one-off, fixed- term loans rather than ongo ing credit commitmentssuch as credit cards or overdrafts; fixed, automatic

repayments; and the use of technology in thedistribution of loans and collection of repayments, which could reduce costs andtherefore allow lower interest rates than are currently available from moneylenders.

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Delivery system

s

People on the margins of financ ial services want to deal with organizationswhich are financially secure, trustworthy and understand their needs. It is not,however, necessary for the same organization to both provide the product anddeliver it to the customer. Indeed, experience shows that the use of intermediaries offers many advantages. For example, many local authorities run insurewith rent schemes for tenants wanting home contents polic ies, 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 s imilar role as financ ial serviceintermediary, as are a small number of credit unions and housing associations.

New techno logy offers some opportunities for product delivery at the end of themarket. Electronic cards and electronic money transmissions are likely to be the

most acceptable.

Encouraging take-

up

Knowledge of and about financial products is remarkab ly low amonghouseholds that are without them. This is compounded by marketing policieswhich reinforce the belief that financial services are 'not for the poor'. Measures toencourage take-up must, therefore, tackle the widespread mistrust which suchhouseholds have of many financ ial providers, particularly those which aregeographically remote. Use of trusted intermediaries could overcome these

barriers. Targeted marketing and delivery of new products as they becomeavailab le would also increase take-up. Equally, the language and cultural barriersfaced by some potential users need to be taken into account.There is also a need for an independent information and advice service. Lackof

knowledge and experience offinanc ial products renders some householdsespecially vulnerab le to mis-selling, as well as deterring them from taking upfinancial

services.


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I

CROSS COUNTRYEXPERIENCE

t has been estimated by Consultative Group to Assist the Poor (CGAP) that about2.5 to 3billion people around the world are still exc luded from basic financial

services. The situation is particularly dire in the Least Developed countries. Inmost

of the developing countries like Ind ia & China the extent ofexclus ion is in therange of 25%-65%. So, taking into cognizance the importance of financial inclusion, the international community has taken a number of measures to mitigatethe hiatus between the financially exc luded & non- excluded. The followinganalysis describes the extent & measures taken by different countries to mitigatefinanc ial 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 Englands 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 financ ial exclusion. . An enhanced legis lative 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 financ ial literacy among housing associationtenants.


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Australia

Only 3% of adults lacked bank account in Australia till 2002-03. This has been

the result of continuous jo int effortsby government & the banks in educating the

people about the benefits offinanc ialproducts.

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 inc lusion. 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 theprogramme.

South Africa.

More than half of the population here are below poverty line. Only 4% of totalpopulace has bank accounts & 1% only avail credit from formal sources. To dealwith the situation Dakar Conference ha been organized under thebanner of U.N.In

2004, UNDP & UNCDF jointly lunched a program called Building FinancialSecurity inAfrica.

IMF, U.N. & World Bank have extended very good support forbuild ing an inclusive society in the world. U.N. has framed Blue Book in consultationwith the developed & underdeveloped countries as a tool & guide forpolicymakers who seek to build inclus ive financial growth.

In the first-ever Index of Financial Inclus ion (IFI) prepared by a New Delhi-based organization, ICRIER (Ind ian Council for Research on InternationalEconomic Relations), to find out the extent of the reach of banking services in100 countries worldwide pointed out that Spain has occupied the top position in

IFI, which is


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based on data from 2004, followed by Canada and Portugal, whilecountries includ ing Nepal, Zimbabwe and Botswana are at the bottom of the list.Among the important countries, Germany has been placed at 4th position, the UK17th, USA21st and Japan 22nd. India has been ranked poorly at 50th position, much above

Russia but below China, even below African countries such as Kenya andMorocco. Similarly, the report pointed out that domestic deposit as percentage ofGDP was

54.9 per cent in Ind ia, against 123.9 per cent inMalaysia


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I

INDIAN SCENARIO

ndian banking system has exhib ited tremendous growth in extend ing itsreach, coverage & delivery offinancial products to the mass evers ince 1881.The All India Rural Survey committee in 1954 recommended the creationof a state sponsored bank to promote rural penetration. Accordingly, SBI was

established in1955. 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 schemewas launched in 1970 to increase banking penetration with special focus on thedistricts. The emergence of RRBs in 1976 b lended the skills of commercial

banks with the grass root presence of the co-operative banks helped themass to access to institutional cred it. NABARD established in 1982 regulatedinstitutional credit for agriculture & rural development. Talwar committee &Goiporia committee in the early eighties have made many recommendations toimprove 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-frillaccounts without any collateral. The idea was that provis ion of suchoverdraft facilities provides a ready source of funding to the account holders whoare thereby inducted to open such accounts.

Banks also have been advised to provide a General Purpose Credit Card (GCC) attheir rural & semi urban branches. From this revo lving card system the customercan withdraw money to a limited amount from the concernedbranch.

Bhumuheen credit card fac ility has been arranged apart from Kisan credit cardsfor the rural & semi urban tenant farmers, land less labourers whereby they can

be allowed hassle free credit limit up to 0.25 lac perperson.Special Agricultural branches have been opened by the PSBs to meet the financial

needs fore agricultural & alliedactivities.On the behest of the RBI, SHG & bank linkage programme has been initiatedwhich has been a major micro finance programme in the country.


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The micro finance and self help groups are also playing great role inproving financ ial services to a large mass of people in the rural and semiurban areas. Looking at the profitab ility side ofprovid ing newer financial

products the private sector organization is also entering into the market. RelianceCapital, the financ ial services arm ofAnil Dhirubhai Ambani Group, has fundedtwo microfinance

institutions in Gujarat - MAS Financial Services and Vardan Trust. TheSorosEconomic Development Fund (SEDF), Omidyar Network, and Google.org hosts a

Small to Med ium Enterprise Investment Company with an initial corpus of $17million targeted at Missing Middle between microfinance and commercialcapital markets in India. Hyderabad-based SKS Microfinance has attractedinvestors like Vinod Khosla, Sequoia Capital India, SIDBI and Units, among

others.


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T

THE EXTENT OFFINANCIAL INCLUSION IN INDIA

he extent of financial inclusion in Ind ia can be well studied from the analysisof the followingpoints.

A. No. of accounts per 100 population region-wise

The following table gives information about accounts per 100 population in sixdifferent regions of the country.

Table-1 No. of accounts per 100 population region-wise

Region No. ofAcounts

(current+saving)

(in000)

Population

(in 000)

No. of Accountsper

100population

2001 2005 2001 2005 2001 2005

Northern 50944 58777 132679 141599 38 42

N.Eastern 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

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SOUTH

E RN,

36

WESTE

R N,32

CENTR

A L,25

NORTH

E RN,38

N.EAS

TE

RN,20

EASTE

R N,21

Souther

n, 40

Wester

n,

35

N.East

er n,19

Eastern,

21

Centra

l,

25

2001 2005

P ie c hart rep res entat io n o f the d ata in the tab le

It can be seen from the table that in All-Ind ia level there was only 29 accountholders 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 whichis

paradoxically lower than 20 in 2001.

Table2

Number of Savings Accounts to Adult Population-2005

Region Percentage of savings account

Northern 80N.Eastern 37

Eastern 34

Central 52

Western 60

Southern 66


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80

8066

70 60

6052

5037

4034

30

20

10

0

Northern N.Eastern Eastern Central Western Southern

precentage of savings account

Percentage of savings account

Southern

20%

Wester

n

18%

Central

16%

Northern

24%

N.Eastern

11

%

Eastern

11%

Pie chart representation of the percentage of savingsaccount.

Going by the availab le 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 inother


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9

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 Population2005

Region Percentage of loan accounts

Northern 12

N.Eastern 7

Eastern 8

Central 9

Western 13

Southern 25

India 14

25

25

20

15 1213

10 78

5

0

Northern N.Eastern Eastern Central Western Southern

Percentage of loan accounts

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Percentage of loan accounts

Southern

34%

Northern

16

%

N.Easter

n

9%

Easter

n

11

%

Western

18%Centr

al

12

%

Pie chart representation of the percentage of loan

accounts.

The extent of exc lus ion from credit markets is much more, as number of

loan accounts constituted only14 percent of adult population (tab le-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 ofexclus ion from credit markets can be observed froma different

view point also. Out of 203

million households in the country, 147 millio n are in rural areas 89 million are

farmer households. 51.4per cent of farm households have no access to formalor 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


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urban areas the share of non institutional

sources has come down significantly from 40% in 1981 to around 25 %in 2002.

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a) No. of Banks branches in population groups

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

Banks Noof

Bank

s

No. of Branches

As on June 30, 2004 As on June 30, 2005

Rural SemiUrban

Urban Metro Total Rural SemiUrban

Urban Metr o

Total

SBI 1 4068

(45%)

2462

(27%)

1499

(16%)

1010

(11%)

8989

(100%)

4068

(45%)

2475

(27%)

1470

(16%)

1023

(11%)

9036

(100%)

Associates

OfSBI

7 1409

(30%)

1588

(35%)

849

(19%)

732

(16%)

4578

(100%)

1412

(31%)

1605

(35%)

864

(19%)

744

(16)

4625

(100%)

Nationalized 19 13582

(41%)

7190

(22%)

6801

(21%)

5668

(17%)

33241

(100%)

13587

(40%)

7291

(22%

)

6935

(21%)

5812

(17

%)

33625

(100%

)OtherPSUs 1 NA NA NA NA NA 5

(3%)26(16%

)

68(43%)

60(38

%)

159(100%

)PSBs 28 19059

(41%)11240(24%)

9099(19%)

7410(16%)

46808(100%)

19072(40%)

11397

(24%)

9337(20%)

7639(16

%)

47445(100%

)

Pvt. Sector 29 1106

(19%)

1768

(31%)

1537

(27%)

1383

(24%)

5794

(100%)

1097

(18%)

1831

(30%)

1714

(28%)

1479

(24%)

6121

(100%)

Foreign Banks 31 Nil Nil 31(14%)

188(86%)

219(100%)

Nil 1(0%)

42(17%)

206(83

%)

249(100%

)RRBs 196 11922

(82%)2134(15%)

396(3%)

20(0%)

14472(100%)

11922(82%)

2158(15%

)

401(3%)

20(0%)

14501(100%

)Scheduled

Co m. Banks

284 32087(48%)

15142(23%)

11063(16%)

9001(13%)

67293(100%)

32091(47%)

15387

(23%)

11494(17%)

9344(14

%)

68316(100%

)

Non-scheduledBanks

4 4

(20%)

9

(45%)

7

(35%)

Nil 20

(100%)

4

(17%)

9

(39%)

10

(44%)

Nil 23

(100%)

Total 288 32091(48%)

15151(23%)

11070(16%)

9001(13%)

67313(100%)

32095(47%)

15396

(23%)

11504(17%)

9344(14

%)

68339(100%

)

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Table-4 shows number & percentage of branches of different banks present indifferent areas/population groups.

Table-4 ind icates that 47% of total scheduled commercial bank branches arepresent in rural area where as 17% inUrban &14% in metropolitan areas as on

June 2005. The rural presence of the nationalized banks (40%) & RRBs (82%)helped India

positively in the d irection of financial inclusion.The spread of private banks (18%) & foreign banks (0%) in rural areas is not veryencouraging. The presence ofprivate sector banks in rural areas has declinedfrom

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 financ ially 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 ofcredit.

(b) Region-wise :

Exclusion is most acute in Central, Eastern and North-Eastern regions - having a

concentration of 64% of all financ ially exc luded 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% ofthese 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.


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(d) Social Groups :

Only 36% of ST farmer households are indebted (SCs and Other Backward Classes

- OBC - 51%) mostly to informalsources.

Analysis of the data provided by RBI thru' its Basic Statistical Returns reveal

that critical exc lusion (in terms ofcredit) is manifest in 256 districts, spreadacross 17

States and 1 UT, with a credit gap of 95% and above. This is in respectof

commercial banks andRRBs.

As per CMIE (March 2006), there are 11.56 crore land hold ings. 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 ho ldings by formal sources. Furtherdata with NABARD on the doubling of agricultural credit ind icates that

agricultural loan disbursements during 2006-07 covered 3.97 crore accounts. Thus,

there are d ifferent 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, NewDelhi,.

2. National Sample Survey Organisation (NSSO),, Informal Sector in India, -

Salient Features, NSSO, Ministry of Statistics and ProgrammeImplementation, Government ofIndia, NewDelhi,.

3. National Statistical

Commission

Report of the National Statistical Commission, Vol.I, II , Government of

India, NewDelhi,


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T

SURVEY : FINANCIAL INCLUSION THEN AND NOW

o understand the extent of financ ial inclusion in a general context and the

perception ofpeople regarding financ ial inclus ion a survey wasconducted.

The details of the survey are asfollows.

Place of survey: Sukhjora, a rural village inJharkhand.

No of people surveyed:

50

Age group of people surveyed: Above 65.(this age group was chosen so as toknow the condition offinanc ial inclusion 40 yearsback)

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 notedown 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 thebasicneeds?

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

3. Where do keep or invest your money now?

4. How do you avail credit now?

5. How do you rate the financial inclus ion services now?

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


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ANS TO Q1 PERCENTAGE OF PEOPLE

1. At home. 36%

2. In thepos t-office 20%

3. Saved in provident fund 12%

4. Invested in land and gold 64%5. Lend money to others at high interest 21%


1. From family members 35%

2. From money lenders at high interest 27%

3. Through mortgage of land to zamindars 40%

4. By selling land or gold or household items. 38%

From the above answers to Q1&2 it is clear that the concept of financial inclus ion wasvery low in those days. People d id not have access to banks .Theonly profitable investment people thought in those days were of investing in landand 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 commonphenomena. Unlawful money lenders also had a good time. People expressedtheirsorrows and woes which they had to face particularly during their daughtersmarriage and in times ofsickness.Thus financ ial inclus ion services were still a dream in thosedays.


1. Post offices 16%2. At homes 12%

3. In co-operative banks and localbanks 70%

4. In private sectorbanks 11%

5. In equity shares 2%

6. In gold and land 24%

7. In kishan bikas patra &alike 18%

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1. From banks (PSBs) 63%

2. From relatives and friends 22%

3. From money lenders 12%

4. From private sectorbanks 10%

5. By selling land orgold 21%

6. From self saved money 37%


1. Good 36%

2. Average 42%

3. Below average 14%

4. Needs a lot ofimprovement 8%

From the answers of Q3&4 it is clear that financ ial inclusion services are inservices 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 hasnow five banks and in each of the banks the no. of customers have exceeded theirlimits.

In case of credit taking banks have become thepriority.

But the rating of financial services by the people are still average. One of theprime causes of this reason is that people have become educated about thefinanc ial services in the urban areas. Thus, they feel that less development has

taken place in theirarea.

(For question no. 1,2,3&4 the total of the percentage of people giving the answers is not 100 because m ore than one option ofansw er has been given as aresponse)


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T

THE SIGNIFICANCE OF FINANCIAL INCLUSION IN THECURRENT FINANCIAL CRISIS

he current tsunami in the financ ial sector triggered by the subprime cris ishas had a telling impact on the global economy from which it will take sometime to

recover. The role of the banking sector will be vital for India if it were to stay asone of the fastest growing economies. The multilayered Indian bankingsystem compromising 82 scheduled commercial banks (SCBs) , 92 regionalrural 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 waslargely perceived as a social responsibility into a viable growth : providing access

to finance to all , irrespective of geography , income oreducation.According to a study Banking in 2050 shows that the structure of globalranking

will undergo a complete realignment with the E7 (Brazil, Russia Ind ia,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 Ind ia, government-owned banks channel about 70 per cent of the net savingsof the economy into government- and state-owned enterprises, and finance ahuge budget deficit of about 9 per cent of GDP. Reducing the governmentsdependence on these funds would require a change in the way the banking sectorthinks and looks at itself, moving towards participating more formally in financ ialinclus ion. Currently, local banks have a long way to go in bringing the unbankedareas within the banking fo ld. As competitive intensity hots up and ripples frominternational competition touch the Ind ian shores in search of virgin markets,

banks will have to revisit their cost models. Some estimates ind icate that the lackof financial inclus ion from the banking system reduces potential GDP by nearly1.5percent.

As per the Planning Commissions India Vis ion 2020 document, the growth ofbanking is likely to be more qualitative than quantitative. While relianceon borrowed funds has increased for many of the global banks, the pace of

deposit


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growth among local banks over the last couple of years has been encouraging. Butit needs to be sustained with constant monitoring of quality of the depositbase.

The present trend shows a strong shift among younger consumers fromtraditional branch-banking to alternate channels. Electronic delivery channels,such as the internet, ATMs and phones, have emerged as effective channels fordistribution of products and services. Branches though will continue to be usedmore for cross- selling products and managing c lient relationship. The businesschallenge would be to ensure continuous compliance with cyber laws and otherregulatory directives.

Thus, it can be summed up that financ ial inclusion is one ofthe viable routes through which banks can maintain their development and alsosurvive the current financ ial crisis. But in order to do that there should be extensive efforts both from the governments side as well as the banks themselves.

According to the Boston Consulting Groups 2007 report, The Next BillionBanking Customers the most effective marketing campaigns will have toinclude equal parts of education and sales p itch. To inc lude 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 Nov2008)

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BIBLIOGRAPHY

WE BS ITE S

1. w w w .npi. o rg . u k2. w w w .nation alce ntr efo r dive r sity . co m

3. w w w .bb c n e w s .c o m4. w w w .n ss o r e s u lt s . co in

5. w w w .n ab a r d . o rg

6. w w w .in dian - b a n k . co m

7. w w w . r bi. o rg .in

8. w w w .in n oviti. co m

9. w w w . eg ovo nlin e .n et

N E WSP AP ER S

1. The Economic Times

2. The Hindu3. The Telegraph4. The Times ofIndia

5. The Hindu Business Line

S PE EC HE S AN D RE PO RT S

1. The need forfinanc ial inclus ion with an Indian perspective , IDBI G iltsltd.

2. Report of the committee on informal financ ial sectorstatistics,Dr. C Rangarajan, chairman of the National Statistical Commission

3. The Next Billio n Consumers, report on financial inclusion by Boston

Consulting group.

35 | P a g e
http://www.npi.org.uk/http://www.npi.org.uk/http://www.npi.org.uk/http://www.npi.org.uk/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.nationalcentrefordiversity.com/http://www.bbcnews.com/http://www.nssoresults/http://www.nabard.org/http://www.nabard.org/http://www.indian-bank.com/http://www.indian-bank.com/http://www.indian-bank.com/http://www.indian-bank.com/http://www.indian-bank.com/http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.rbi.org.in/http://www.innoviti.com/http://www.innoviti.com/http://www.innoviti.com/http://www.innoviti.com/http://www.innoviti.com/http://www.egovonline.net/http://www.egovonline.net/http://www.egovonline.net/http://www.egovonline.net/http://www.egovonline.net/http://www.nationalcentrefordiversity.com/http://www.bbcnews.com/http://www.nssoresults/http://www.nabard.org/http://www.indian-bank.com/http://www.rbi.org.in/http://www.innoviti.com/http://www.egovonline.net/http://www.npi.org.uk/


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

5. Taking Banking Services to the Common Man Financial Inclusion,Commemorative Lecture by Shri V. Leeladhar, Deputy GovernorReserve bank of India at the Fedbank Hormis Memorial Foundation atErnakulam on December 2, 2005

6. Index of Financial Inc lusion , Mand ira Sharma, Ind ian Council for

Research on International Economic Relations

7. National Conference on Financial Inclusion, Press Information

Bureau, Govt. of India ,Friday 14th

November.2008

Documents

29443419 Research Paper on Financial Inclusion