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Contents

1. Introduction 02

2. Need for financialinclusion 03

3. Whatis financial exclusion? 05

4. Whoare Excluded? 06

5. Causesof Financial exclusion 07

6. FinancialInclusion 09

7. Why is financialinclusionimportant? 10

8. Initiativestaken by RBI 11

9. Initiativesof NABARD 21

10.Initiatives by NGOs 22

11.Institutionsand FinancialInclusion 23

12.Advantages, Disadvantages & Potential 25

13.Initiativestaken by othercountries 26

14.Suggestions 28

15.Conclusion 28

16.Bibliography 30


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Financial Inclusion

Introduction

Banking industry in India has travelled a long way to arrive at the present status. It has come

across various hurdles and undergone various changes to achieve the current status. The

banking industry has seen its evolution from unorganized and dis-intermediated levels to

organized and intermediation. Initially, there were the traditional money lenders in the market

who transacted in the financial markets. They used to keep money and provide credit. But

instead of being of any assistance to the poor and the needy, they squeezed money out of

them. This was a dire situation of our country.

Gradually, with the development of the banking industry the financial markets became more

organized. With the establishment of various financial institutions like IFCI, ICICI, IDBI, etc.

there was a change and steady growth in the system. Slowly, the concept of social inclusion

also evolved covering the majority of the deprived people. It facilitated in providing the

banking services to the deprived and unattended masses.

Prior to independence and in the early years of independence the banks and financial

institutions were not able to do much for the masses at large. The banking services were

meant only for the privileged and elite class. The poor, destitute and needy could not avail of

the banking facility. The situation was such that the poor people were not aware of the word

BANK. It was something like a very prestigious thing in those days. Having a bank account

was also treated as a status symbol. A person having a bank account was looked up. The

majorities of the people were still on the mercy of the traditional money-lenders for credit

requirements and were not able to avail of the banking facility. In those days, opening a bank

account was not that easy. If a person has a good status in the society, he is highly ranked,

and then only he could open a bank account.

India is basically an agrarian country. However, it is very sad to state here that from good

olden days it is quite ignored. The historic figures speak for themselves. They reveal the fact

that there was more concentration on the industrial sector than the agriculture sector. The

share in credit disbursed by the commercial banks to the industrial sector between 1951-1968

almost doubled from 34% to 68%. while agricultural sector received less than 2% of total


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credit. Other key areas such as credit to exports and small scale industries were also

neglected. Despite the Banking Regulation Act 1949 and establishment of State Bank of India

in 1955, the expansion of commercial banking largely excluded rural areas and small scale

borrowers.

The majority of the population of India is in the interiors, in the rural area. Inspite of this, the

agricultural sector was ignored. Leave alone, the rural population; a majority of people in the

urban areas were also not able to avail the banking facility. The banks were interested in

making profits and were not contributing much towards the growth of the nation as a whole.

The developmental and private banks were not fulfilling the social and developmental goals

of banking, essential for any industrializing economy.

This gave rise to the concept of Financial Inclusion. To put in simple words Financial

Inclusion is nothing but, delivery of banking services at affordable costs to vast section of

the disadvantaged and low income groups.

Need for Financial Inclusion

Before entering into the details of What is Financial Inclusion we must understand and

analyse the background and also understand the reasons behind financial inclusion. Financial

inclusion cannot be better understood without understanding, What is Financial Exclusion?

First let us try and understand the reasons behind the same.

As mentioned earlier, inspite of the various efforts and initiatives taken by the government to

reach out to the grass root levels of the country and to make the banking facilities available to

the masses at large, it was not that successful. Post-independence various measures were

taken by the government to bring about a financial stability and to remove the disparity. But,

the government did not achieve much success.

The government came out with the Banking Regulation Act 1949, through which the

government could regulate the working of the banks and in turn could also control the credit

system. But, that too did not help much.

Prior to nationalization, banking was concentrated in urban areas. It was clear that a better

banking system was needed to promote the economic goals of the new Indian state. Rural

markets for industrial goods could not be developed so long as money lenders, charging

usurious rates of interest, were the main source of rural credit. Moreover, the 'green


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revolution' depended on farmers finding substantial sources of credit to pay for fertilizers and

hybrid seeds. Later, during the regime of our late Prime Minister Indira Gandhi, a major

revolution happened in the history of banking industry, NATIONALIZATION.

Nationalisation of banks happened in 1969 and 1980. 14 large commercial banks were

nationalized in 1969 and 6 banks were nationalized in 1980. After nationalization the focus

of banking shifted from class banking to mass banking. The Nationalization has been one of

the major and significant economic, political and social events of the Post Independent India.

The merits of nationalization to name a few are as under:

1. It boosted the confidence of the savers because it created an impact that the banks are

being backed by sovereign authority and so the normal suspicion associated with the

capabilities of the bankers in the private sector were gone.

2. Banking ceased to be selective.

3. The reach of banking services widened. The banks expanded rapidly in un-banked

areas too and thereby the entire country was linked to banking industry.

4. A large employment base was created as many young men and women mostly from

middle and poor sections society who were qualified but jobless got jobs into the

banking sector.

5. The savings of the community had an efficient channel which otherwise would not

have had the benefit of aiding transactions.

After Nationalisation, there was a rapid change in the things. For more than 3 decades after

nationalization of major commercial banks, Indian banking has shown tremendous growth in

volume and outreach resulting in increase in the total number of branches of scheduled

commercial bank every year, but to the dismay the average population per branch office has

decreased during the same period. Still, banks have not been able to reach a vast segment of

the population and provide them with the basic banking services. Growth has also not been

uniform in all the regions / states of the country. There still continues to be gaps in the

availability of the banking services in the rural areas. While from the policy, it seems that the

banks might be laying somewhat less emphasis


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What is financial exclusion?

Financial Exclusion is the process by which a certain section of the population or a Certain

group of individuals is denied the access to basic financial services. The term Came to

prominence in the early 90s in Europe where the geographers found that a certain pockets or

regions of a particular country were behind the others in utilizing Financial services. It was

also found that these pockets or regions were poorer compared to regions which utilized more

of financial services. The term attained a wider connotation in the late 90s when it was

expanded to refer to individuals who were denied access to financial inclusion rather than

geographical areas. Financial Exclusion may not mean a social exclusion in INDIA as it does

in the developed Countries, but it is a problem that needs to be addressed. The large presence

of Informal credit could avoid social exclusion but the legal validity of such financial

Services pose an obstacle for creating a modern globalizing economy. Financial Exclusion

could be a hindrance to growth. Without a formal and a legally recognized Financial system

in which all sections of the population are a part of, it would be impossible even for the most

efficient of the governments to reach out to all sections of the people. A stable and healthy


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financial service sector creates trust among the people about the economy and only with this

trust (which has legal validity) could a strong, stable and an inclusive economy be created.

The term financial exclusion has a broad range of both implicit and explicit definitions.

Research carried out by reading experts leads us to propose the following definitions:

Financial exclusion refers to a process whereby people encounter difficulties

accessing and/or using financial services and products in the mainstream

market that are appropriate to their needs and enable them to lead a normal

social life in the society in which they belong.

Financial exclusion is the lack of access by certain consumers to appropriate

low cost, fair and safe financial product and services from main stream

providers.

Financial exclusion becomes of more concern in the community when it

applies to lower income consumers and/or those in financial hard ship.

Financial exclusion is observable at individual, family, or house hold level, but

can also be heavily concentrated in suburbs or regions.

Who Are Excluded?

There is still a vast majority of the Indian population that is unbanked. In India

individuals are mainly excluded because of these five reasons

y No assets

y No savings

y No account

y No affordable credit

y No access to financial advice (counseling)

About 73% of households in India are estimated to be located in the rural areas. Among the

rural households about 60% are cultivator households. Among the urban households about36% are self-employed households which are their major source of income during the last

365 days. Their income is from self-employment of the households members. In rural areas

there are large numbers of people who have no land and in urban areas many of them are

outside the purview of formal employment. No doubt, this is a typical case of Financial

Exclusion. The following section is excluded from basic banking:


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y Urban-slum dwellers

y Marginal farmers

y Landless labourers

y Self-employed and unorganized sector enterprises

y Migrants.

y Ethnic minorities, and

y Socially excluded groups, senior citizens, women and disabled people.

Causes of financial exclusion:

Financial Exclusion occurs in the society mainly due to the socio-economic standing of the

individual; however, there are also other reasons also which lead to financial exclusion.

They are as follows:(1)LOW INCOME: Most of the poor are low wage earners, for them opening an

account and withdrawing money is seemingly unviable. Most of the poor do not have

high spending that would require borrowing of credit from a formal agency like

banks. They would rather keep their daily income at their homes rather than in a bank.

(2)LACK OF FINANCIALAWARENESS: The lack of financial awareness

about the benefits of the banking and also illiteracy act as stumbling blocks to

financial inclusion.

(3)EASY ACCESS TO ALTERNATIVE CREDIT: For a good amount of low income

people, the alternative credit provided by the money lenders and pawn shop owners

are far more attractive and hassle free compared to getting a loan from a commercial

bank. Some of the poor, who do not have property, find it impossible to get credit

without the collateral. The uneducated poor would rather put their trust in

moneylenders who provide easy non-collateral credit than on the well established

commercial banks. There might also be traditional reasons for trusting a moneylender

rather than a bank.

(4)LACK OF INTEREST FROM COMMERCIAL BANKS: There is a lot of

criticism on the commercial banks because of their inherent tendency to think

that poor people are not worthy of being banked on. Banks are in business to

make profit and would like to only indulge in activities that give them profit.

Due to high transaction costs of smaller transactions and the speculated high

risk in lending credit to the lower strata of the society, they see banking with


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poor as unviable. Even if banks are concerned at the poor, they do it in a

manner of corporate social responsibility or social service and treat them

differently instead of trying to bring them into the mainstream.

(5)DISINCENTIVES FORTHE CONSUMER: This point is closely related to the

above one. The cost of maintaining an account (non-zero balance accounts) and

procedural problems in accessing formal credit act as disincentives for consumers

with weaker financial backgrounds. The consumers from the lower strata are more

likely to ask for smaller credit which banks have no enthusiasm to give. It would

rather give smaller number of large credits to middle and upper class individuals and

institutions, due to the lower cost involved in banking with them. The banks and other

financial service firms have fewer financial products which are attractive to the poor

and the socially disadvantaged. All these act against the interest of a consumer from a

poor background.

(6)Lack ofTechnology: This also adds to the disadvantage of the weaker sections. They

are technologically very weak and not able to cope up with the current electronic

system. Today, the banks have also become machine friendly rather to say,

technology friendly than human friendly. The weaker income group is yet to reach the

higher technological levels. This also acts as a hindrance many a times.

(7)Lack of confidence: Above all, most of the time it is the lack of confidence amongst

the people which keeps away from availing of the many benefits. Lack of awareness

and confidence are both not in favor of financial inclusion.


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Financial Inclusion

Financial inclusion could not have been best understood unless we would have learnt What is

Financial Exclusion?Now. Let us try and understand What Financial INCLUSION is?

As mentioned earlier, financial inclusion is an attempt to provide financial services at an

affordable cost to the people from all strata of the society, especially to the disadvantaged and

low income groups.

Financial inclusion is more of a process. It is a process by which mainstream financial

services are made accessible to all sections of the population. Its a conscious effort to bring

the un-banked people into banking network. To put in simple and lucid words, I must quote

here the words of Duvvuri Subbarao, Financial inclusion is all about giving people an

opportunity to build better lives for themselves and their children.He further said, That

impulse, if given a chance, can contribute to sustained improvements in the quality of life

at the community level and foster growth and poverty reduction at the national level.

To put it in other words, Financial Inclusion is delivery of banking services at an affordable

cost to the vast sections of disadvantaged and low income groups. Banking services today

have become one of the basic amenities so to say. The availability of banking and credit

facility to the society as a whole without discrimination is a must today. An inclusive

financial system has several merits. It facilitates efficient allocation of productive resources

and thus can potentially reduce the cost of capital. In addition, access to appropriate financial

services can significantly improve the day-to-day management of finances. An inclusive

financial system can help in reducing the growth of informal sources of credit (such as money

lenders), which are often found to be exploitative. Thus, 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.


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Why is Financial Inclusion important?

It is important simply because it is a necessary condition for sustaining equitable growth.

Needless to add, financial inclusion protects the poor from the clutches of the usurious money

lenders.

Financial inclusion will make it possible for governments to make payment such as social

security transfers, National Rural Employment Guarantee Programme (NREGA) wages into

the bank accounts of beneficiaries through the Electric Benefit Transfer (EBT) method.

This will minimize transaction costs including leakages. In parts of the country where such

EBT has already taken off, the results are impressive and the experience of both payers and

recipients extremely satisfying.

The more obvious benefit is that financial inclusions provides an avenue for bringing the

savings of the poor into the formal financial intermediation system and channel them into

investment. Secondly, the large number of low cost deposits will offer banks an opportunity

to reduce their dependence on bulk deposits and help them to better manage both liquidity

risks and asset-liability mismatches.

Financial Inclusion is no less important than social inclusion. As we see in our society,

millions of people are not considered for a fair treatment either from the social institutions or

from the financial institutions. It is commendable that, of late, the policy makers and banking

institutions have come forward to address the issue of banking exclusion.

It is estimated that globally over two billion people are excluded from access to financial

services, of which one third is in India. The Committee on Financial Inclusion (Rangarajan

Committee 2006) observed that in India 51.4% of farmer households are financially excluded

from both formal and informal sources and 73% of the farmer households do not access

formal sources of credit. To be specific, those excluded are marginal farmers who happen to

be women who are further excluded right from the first stage of perception.

Financial Inclusion is a complex issue, not simple. There are issues in our approach. When

the excluded sections approach formal financial institutions they are confronted with

problems of accessibility, timeliness, inadequacy of credit. For one reason or other, they are

compelled to approach the informal agencies to meet their credit demands as we all know. An

all out effort has to be taken to address these problems that are not simple.


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The importance of an inclusive financial system is widely recognized in the policy circle and

recently financial inclusion has become a policy priority in many countries. Initiatives for

financial inclusion have come from the financial regulators, the governments and the banking

industry. Legislative measures have been initiated in some countries. For example, in the

United States, the Community Reinvestment Act (1997) requires banks to offer credit

throughout their entire area of operation and prohibits them from targeting only the rich

neighbourhood. In France, the law on exclusion (1998) emphasizes an individuals right to

have a bank account. In the United Kingdom, a Financial Inclusion Task Force was

constituted by the government in 2005 in order to monitor the development of financial

inclusion.

The banking sector has also taken a lead role in promoting financial inclusion. In India, the

Reserve Bank of India (RBI) has initiated several measures to achieve greater financial

Inclusion, such as facilitating no-frills accounts and General Credit Cards for low deposit

and credit.

The German Bankers Association introduced a voluntary code in 1996 providing for an

everyman current banking account that facilitates basic banking transactions.

In South Africa, a low cost bank account called Mzansi was launched for financially

excluded people in 2004 by the South African Banking Association.

Alternate financial institutions such as micro-finance institutions and Self-Help Groups have

also been promoted in some countries in order to reach financial services to the excluded.

Initiatives taken by RBI for Financial Inclusion:

Various initiatives undertaken could broadly be categorised into three phases. In the first

phase starting in the late 1960s through the 1980s, the focus was on channelizing of credit to

the neglected sectors of the economy. Special emphasis was also laid on weaker sections of

the society. In the second phase spanning the early 1990s through March 2005, the focus was

mainly on strengthening the financial institutions as part of financial sector reforms. Financial

inclusion in this phase was encouraged mainly by the introduction of SHG-bank linkage

The efforts pursued by the Reserve Bank to further financial inclusion. Our approach to

financial inclusion aims at 'connecting people' with the banking system and not just opening

accounts. This includes meeting the small credit needs of the people, giving them access to

the payments system and providing remittance facilities. This has led to some notable

developments:


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(i) No Frills Accounts: In November 2005, RBI asked banks to offer a basic banking

no-frills account with low or zero minimum balances and minimum charges to

expand the outreach of such accounts to the low income groups.

Source: www.rbidocs.org..Report on Trend and Progress of Banking in India 2008-09

(ii) Easier Credit facility: Banks were asked to introduce a General Purpose Credit

Card (GCC) facility up to Rs. 25,000. Kisan Credit Card KCC is one of the types

of this type of card.


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(iii) Simpler KYC Norms: In order to ensure that people belonging to the low income

groups, both in urban and rural areas, do not encounter difficulties in opening bank accounts,

the 'Know Your Customer' (KYC) procedure for opening accounts was simplified for those

accounts with balances not exceeding Rs 50,000 and credits thereto not exceeding

Rs.100,000 in a year.

(iv) Use of Information Technology: Banks have been urged to scale up IT initiatives for

financial inclusion speedily while ensuring that solutions are highly secure, amenable to

audit, and follow widely-accepted open standards to ensure eventual inter-operability among

the different systems. Two of the important initiatives are:(a) Smart cards for opening bank accounts with biometric identification. These help the

customers get banking services near their doorstep.

(b) Link to mobile hand held electronic devices for banking transactions. In October

2008, the RBI advised banks on issues relating to technology, security standards, and

customer protection.


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(v) EBT through Banks: The Reserve Bank is in consultation with state governments to

encourage them to adopt Electronic Benefit Transfer (EBT) by banks.

(vi) 100% Financial Inclusion Drive: The Reserve Bank launched a financial inclusion

drive targeting one district in each state for 100% financial inclusion. In the light of the

experience gained, coverage has been extended to other areas/districts. On that basis, in

January 2009, banks were advised to: (i) ensure provision of banking services nearer to the

location of the no-frills account holders through a variety of channels; (ii) provide GCC/small

overdrafts along with no-frills accounts to encourage the account holders to actively operate

the accounts; (iii) conduct awareness drives of the facilities offered to the no-frills account

holders; (iv) review the extent of coverage in districts declared as 100 per cent financially

included; and (v) efficiently leverage on the available technology enabled financial inclusion

solutions.

Business Correspondent Model

Possibly the most important initiative of the Reserve Bank has been the Business

Correspondent (BC) model. The BC model ensures a closer relationship between poor people

and the organized financial system. Recognizing this, in 2006, banks were permitted to use

the services of non-governmental organizations, micro-finance institutions, retired bank

employees, ex-servicemen, retired government employees, Section 25 companies, and other

civil society organisations as Business Correspondents in providing financial and banking

services.

Even as the BC model has taken off, it needs to be fine tuned and monitored appropriately to

improve its efficacy, including by better training BCs. Recently, the scope of the BC model

was enlarged by permitting banks to appoint individual kirana/medical/fair price shop

owners, individual Public Call Office (PCO) operators, agents of Small Savings schemes and

insurance companies, individuals who own petrol pumps, retired teachers and self-help

groups linked to banks as BCs. With a view to ensuring the viability of the BC model, banks

have also been permitted to collect reasonable service charges from the customer in a

transparent manner. Going forward, the Reserve Bank will endeavour to give complete

flexibility to banks to appoint BCs with only a negative list of entities that would not be

eligible.


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Bank Branch andATM Expansion Liberalized

Last year, the Reserve Bank totally freed location of ATMs from prior authorization. In the

October 2009 Policy Review, the RBI took a further big step by freeing branch opening in

towns and villages with population below 50,000. Domestic scheduled commercial banks

(other than RRBs) are now free to open branches in towns and villages with less than 50,000

population and are enjoined to ensure that at least one-third of such branch expansion

happens in the underbanked districts of underbanked states. This will be one of the criteria in

the Reserve Banks consideration of proposals by banks to open branches in major city (tier 1

and tier 2) centres.

Expansion of Banks in the North-East

To improve banking penetration in the North-East, the Reserve Bank asked the State

Governments and banks to identify centres where there is a need for setting up either full

fledged branches or those offering forex facilities, handling government business or for

meeting currency requirements. RBI has also offered to fund the capital and running costs for

five years provided the State Government concerned is willing to make available the

premises and put in place appropriate security arrangements. Meghalaya has been the first off

the block, and eight centres have been allotted to three public sector banks, following a

bidding process. The Reserve Bank is working with other states in the north-east to institute

similar arrangements. The following figure will make it more clear the need for the expansion

the banks in these regions.



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Project Financial Literacy

Financial literacy is a stepping-stone toward financial inclusion. The Reserve Bank has

initiated a "Project Financial Literacy" with the objective of disseminating information

regarding the central bank and general banking concepts to various target groups. RBIs

website is also available in 13 languages.

RBIs Financial Education web site link offers basics of banking, finance and central

banking for children of all ages. In a comic book format, it simplifies the complexities of

banking, finance and central banking, with the goal of making the learning fun and

interesting.

Financial Literacy and Credit Counseling

RBI has advised the convenor-bank of each State Level Bankers Committee to set up a

financial literacy-cum-counseling centre in any one district on a pilot basis, and based on that

experience, to extend the facility to other districts in due course. So far, 154 credit counseling

centres have been set up in various states of the country. These centres are expected to

provide free financial education to people in rural and urban areas on the various financial

products and services, while maintaining an arm's-length relationship with the parent bank.

Financial Curriculum in Schools and Colleges

The Reserve Bank is furthering the financial literacy drive by collaborating with state

governments across the country to include financial literacy curriculum in the school

syllabus. RBI has launched a pilot project in Karnataka. RBI has given material on banking,

personal finance as well as on the Reserve Bank to the State Government. The Karnataka

Government has adapted, translated and included much of this material in the curriculum for

high school classes and this is slated to go on stream next academic year starting June 2010.

Based on this experience, RBI wants to mainstream this initiative across the country.

Priority Sector advances

As quoted by Duvvuri Subbarao, certain vital sectors of the economy are declared as priority

sectors by the Government / the RBI, from time to time in order to ensure that the credit

flows in an increasing measure to these sectors. Bank will continue to monitor its plans for

enhancing credit to all the segments of this Sector to remain in tune with the national

challenge.

Following are the different segments of priority sector advances subject to eligibility criteria

for individual segments fixed by the RBI / Bank from time to time.


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y Agriculture (Direct and Indirect)

y Small Enterprises (Direct and Indirect)

y Retail Trade

y State Sponsored organizations for Scheduled Castes and Scheduled Tribes

y Educational loans

y Housing

y Micro Credit

y Weaker Sections

Loan granted to staff members of the Bank for the purposes of acquiring dwelling unit on the

same terms and conditions of loans granted to the Banks customers for housing purposes can

be considered for classification under Priority Sector advances.

The definition, segments/sectors included and targets for lending to priority sector are based

on the guidelines issued by the RBI from time to time and communicated by the Bank

thereon. To address the needs of specific categories / group of segments in the above

mentioned broad sectors, Bank has developed various loan schemes. Bank shall continue to

devise appropriate schemes and attention shall be paid to monitor progress of lending under

these schemes to reach the levels targeted annually.

Priority Sector Advances Definition and Targets:

y Advances to Priority Sector 40% of Adjusted Net Bank Credit (ANBC) or Credit

equivalent amount of Off balance sheet exposure, whichever is higher

y Agriculture 18 % of Adjusted Net Bank Credit or Credit equivalent amount of Off

Balance sheet exposure, whichever is higher. Both direct and indirect (indirect

agricultural advance only up to 4.5% of ANBC or credit equivalent amount of Off

balance sheet exposure whichever is higher ) will be reckoned for this.

y Mircro & Small Enterprises:

(A). Advances to small Enterprises: Advances to small enterprises sector will be reckoned

in computing performance under the overall priority sector target of 40 per cent of ANBC

or credit equivalent amount of Off Balance Sheet Exposure, whichever is higher.

(B). Mirco Enterprises within Small Enterprise Sector:


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(i) 40 per cent of total advances to small enterprises should go to micro

(manufacturing) enterprises having investment in plant and machinery up to Rs 5 lakh

and micro (service) enterprises having investment in equipment up to RS. 2 lakh;

(ii) 20 per cent of total advances to small enterprises should go to micro

(manufacturing) enterprises with investment in plant and machinery above Rs 5 lakh

and up to Rs 25 lakh, and micro (service) enterprises with investment in equipment

above Rs. 2 lakh and up to Rs. 10 lakh.

(Thus, 60 per cent of small enterprises advances should go to the micro enterprises)

y Advances to weaker section: 10% of ANBC or credit equivalent amount of Off

Balance Sheet exposure, whichever is higher.

y DRI Scheme: 1 % of previous years Total Advances of which not less than 40%

of the total advances granted under the scheme should go to SCs/STs. At least two

third of DRI advances should be granted through rural and semi-urban branches.

[ANBC (Adjusted Net Bank Credit) or credit equivalent of Off Balance sheet

Exposures (as defined by Department of Banking Operations and Development of

the Reserve Bank of India from time to time) denotes the outstanding as on March

31 of the previous year. For this purpose, outstanding FCNR (B) and NRNR

deposits balances will no longer be deducted for computation of ANBC for

priority sector lending purposes. For the purpose of priority sector lending,

Adjusted NBC (ANBC) denotes NBC plus investments made by banks in non-

SLR Bonds held in HTM Category. Investments made by banks in the

Recapitalization bonds floated by Government of India will not be taken into

account for the purpose of calculation of ANBC].

y Norms for lending to priority Sector: The bank will adhere to the norms of lending

such as eligibility, viability, quantum of finance, margin, security norms, and rates

of interest etc., based on the guidelines evolved in this regard from time to time.


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Initiatives ofNABARD

NABARD has taken several initiatives that has significantly contributed not only to the

financial inclusion of poor but also improved their living conditions especially of poor

women.

(i) SHG Bank linkage System: Self Help Group is a voluntary association of poor formed

with the common goal of social and economic empowerment. The member volunteered to

organize themselves into a group for the eradication of poverty of the members. They agree

to save regularly and convert their savings into a common fund known as the group corpus.

The members of this group agree to use this common fund and such other funds that they

may receive as a group through a common management. This mechanism gave remarkable

momentum to banking finance. SHG Bank Linkage system means Link between the Self

Help Groups and the banks. As it is collection of money amongst themselves, to help

themselves, higher credit. This is called as Self Help Group Linkage System.

(ii) Tribal development through Wadi approach: NABARD has been closely associated

with implementation of an Adivasi Development Approach through Wadi approach in

Gujarat in collaboration with NGO since 1995 and in Maharashtra since 2000. The central

focus of the programme is on Wadi which means small orchard- with other development

interventions like soil conservation, water resource development, community health,


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sanitation and women development which are woven as supporting components. A special

feature of the programme is the blending of grant with credit not only to ensure participants

stake and involvement in the programme, but also for self-reliance of the participants.

(3) Initiatives by NGOs:

Micro Finance Institutions (MFIs): Financial intermediation by NGOs engaged in social

intervention by adopting innovative delivery approaches. They have an outreach of lakhs of

clients. Micro Finance Institutions or MFIs are created with the specific aim of

extending financial services to the poor and the weaker sections of the populations.

A MFI could be independent or as in most cases are promoted by NGOs,

government agencies, NBFCs, commercial banks and other institutions. Micro

Finance Institutions have so far been the most successful at ensuring basic financial

services to the unbanked sections of the populations. Along with the SHG

movement, the MFIs has enabled the wealth generation in many underdeveloped

rural as well as neglected urban areas in India.


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Institutions and Financial inclusion

Financial Institutions, both large and small have an important role to play in financial

inclusion. With their organized structure and effective management larger financial

institutions could act as mentors for small financial services firm by ensuring a strong

financial backing.

1. COMMERCIAL BANKS: Commercial banks could act as an important part of the

process to achieve full financial inclusion. Especially with simplified savings bank accounts

(including no-frills account), relaxed KYC procedures, primary sector lending and even

microfinance.


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2. COOPERATIVE BANKS: The Urban and Rural cooperative banks could cater to

populations that are generally neglected by the commercial banks. Their position allows them

to reach out to the people far easier than the more formal commercial banks. Since they are

operated by the members of the banks themselves, there would be more involvement from the

people of such cooperatives.

3. REGIONALRURAL BANKS: Through priority sector lending, KCCs and GCCS the

RRBs could ensure a steady flow of credit to the rural poor especially the marginal farmers.

The RRBs like the commercial banks can deal with the agencies like NGOs who are

interested in helping out the poor and the weaker sections.

4. NON-BANKING FINANCIAL COMPANIES (NBFCS): The NBFCs could include

both large and small financial firms which provide financial services. They could offer

specific financial products to the poor and low income people such as micro-insurance,

micro-credit, etc. The NBFCs could create financial awareness among the people by not only

offering alternative financial services but also spreading financial literacy by providing

financial advices.

5. MICRO FINANCE INSTITUTIONS (MFIS): Micro Finance Institutions or MFIs are

created with the specific aim of extending financial services to the poor and the weaker

sections of the populations. A MFI could be independent or as in most cases are promoted by

NGOs, government agencies, NBFCs, commercial banks and other institutions. Micro

Finance Institutions have so far been the most successful at ensuring basic financial services

to the unbanked sections of the populations. Along with the SHG movement, the MFIs has

enabled the wealth generation in many underdeveloped rural as well as neglected urban areas

in India.

6. POST OFFICE SAVINGS BANK: These along with their extensive network could offer

wide variety of small and micro financial services to the people. The Post Office Savings

bank could utilise their staff to deliver door-to-door service to the people.

7. NON-GOVERNMENTAL ORGANIZATIONS (NGOS):NGOs could provide financial

assistance to the poor and the weaker sections through NGO promoted MFIs or by providing

financial advice. NGOs working for the poor and the economically deprived can more closely

analyze their spending patterns and credit requirements. Commercial banks and other large

financial agencies can work closely with NGOs to ensure that the dealings with the poor and

the weaker sections turn out to be a fruitful activity not only for the people but also for the

lending agencies.


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Advantages of Financial Inclusion

Necessary for sustainable growth

Protects poor from clutches of usurious moneylenders

Facilitate government to make payment

Mobilizing and channelizing savings of the poor

Opportunity to banks

Social inclusion

Disadvantages of Financial Inclusion:

Enormous Tasks

Used Target Groups

Vast Geographical Spread

Small Value and High Transaction cost

Limited Outreach

Technology

Infrastructure-Technological, Administrative, Organizational

Business Model

Challenges in Financial Inclusion:

y lack of access

y lack of physical and social infrastructure

y lack of understanding and knowledge

y lack of technology;

y lack of support, lack of confidence, among others.

Potential Exists For:

Investment in agri. & allied activities

Contract farming

Growth in newer activities such as horticulture, floriculture, organic farming,

Supply chain activities like sorting, grading, storage, etc

Increasing rural incomes leading to opportunities for mass consumption

Higher consumer financing in rural markets

Huge opportunities in insurance to cover all kinds of risks faced by farmers.


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INITIATIVES TAKEN BY OTHERCOUNTRIES:

United Kingdom

y Identification of 3 priority areas for the purpose of financial inclusion, namely access

to banking services, access to affordable credit, access to free face-to-face money

advice

y Establishment of a Financial Inclusion Fund to promote financial inclusion

y Assignment of responsibility to banks and credit unions to remove financial exclusion

y Introduction of a No Frills basic bank account

y Creation of Post Office Current Account for those unable or unwilling to access a

basic bank account.

y Introduction of a Savings Gateway for those on low-income employment. Under this

arrangement, for every BP 1 saved by those on low-income employment, the state

will put an equivalent BP 1 upto BP 25.

y Setting up of Community Finance Learning initiatives to promote basic financial

literacy among housing association tenants.

United States ofAmerica

Varying from State to State, 10 to 20 % ofUS households lack a bank account. Among the

low-income families, 22% do not have either a current or savings account. The Government

has taken various measures to deal with the problem of financial exclusion. The Community

Reinvestment Act (CRA) prohibits discrimination by banks against low and moderate income

groups.

Germany

The banking industry has endorsed a joint recommendation entitled Current Accounts for

Everyone undertaking to provide current accounts on demand. The results of such voluntary

undertaking have been quite encouraging.

Canada:

A legislation entitled Access to Basic Banking Services Regulations was introduced in

2003 whereby all banks/financial institutions are required to open personal bank accounts and


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encash most Government cheques at no charge for any citizen who meets the basic

requirements. The Federal Government also introduced legislation requiring banks to offer a

standard low cost bank account with a basket of services. Memoranda ofUnderstanding were

signed between the Federal Government and eight financial institutions to ensure that all

Canandians have access to affordable banking services.

France:

As per the 1984 Banking Act, any person refused a bank account can approach the Bank of

France, which will identify and nominate an institution to provide the bank account. In 1992,

French banks signed a charter undertaking to open bank accounts at an affordable cost with

related payment facilities to all.


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Suggestions

y Bank should encourage households to open account by reaching the

doorstep of excluded households.

y Financial literacy should be part of schooling for educating children the

importance of banking services in their daily life.

y There should be a separate bank branches in urban slum areas.

y Mass media should be effectively used for educating the poor

households for participating in the programmes.

y Banks should adopt fast processing for better service.

y More public awareness should be created.

y RBI should organize camps in remote and urban slums for spreading

y Financial literacy to excluded households.

Conclusion

While there is evidence of an increase in financial deepening, particularly during the present

decade, the increase in the breadth and coverage of formal finance has been less than

adequate. Deepening the financial system and widening its reach is crucial for both

accelerating growth and for equitable distribution, given the present stage of development of

our country.

As poverty levels decline and households have greater levels of discretionary incomes, they

will be first time financial savers. They will, therefore, need to have easy access to formal

financial systems to get into the banking habit. Banks will need to innovate and devise newer

methods of including such customers into their fold. The importance of 'no-frills' account and

expanding the range of identity documents that is acceptable to open an account without

sacrificing objectivity of the process in this milieu can never be over-emphasized. Banks will

need to go to their customers, rather than the other way around.

The micro-credit and the Self Help Group movements are in their infancy but are gathering

force. More innovation in the form of business facilitators and correspondents will be needed

for banks to increase their outreach for banks to ensure financial inclusion. New entrants to

the banking system need households at their doorstep.


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The future of rural financial markets, financial inclusion, and other such efforts require

therefore, unparalleled effort. Any intervention in this arena will require much more than

opening branches or designing products. Two decades of state interventions has shown that

these efforts can only bring about cosmetic impact in improving the access to such services

by poor households. Should there be a desire to ensure that the results fundamentally change

the nature of the poor households access to financial services, it will require a sustained

focus. The most significant change public policy can do, is to switch from having committee

on inclusion to setting up a permanent standing committee that is empowered to announce

policy changes in the institutions that work in these rural areas, and regularly monitors

advances in this field.

The story, hence, so far is that with a right mix of investments in rural infrastructure,

technology, and other common goods, it is possible to expect that the vast infrastructure of

Indias banking organizations can be revitalized to deliver critical financial inclusion services

to the poor. At the same time, it can stand up to the competition that the private sector too

could be incentivized to offer in this field.

To conclude, I wish to stress that with increasing liberalisation and higher economic growth,

the role of banking sector is poised to increase in the financing pattern of economic activities

within the country. To meet the growing credit demand, the banks need to mobilise resources

from a wider deposit base and extend credit to activities hitherto not financed by banks. The

trend of increasing commercialisation of agriculture and rural activities should generate

greener pastures, and banks should examine the benefits of increasing penetration therein.

Financial inclusion will strengthen financial deepening and provide resources to the banks to

expand credit delivery. Thus, financial inclusion will lead to financial development in our

country which will help to accelerate economic growth.


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Bibliography:

1. Article from book:- Financial Inclusion Role of Indian Banking System What

more ?

2. Article: Economic growth, financial deepening and financial inclusion Dr.

Rakesh Mohan, Dy. Governnor of RBI

3. Article: Report On Trend And Progress of Banking In India 2008-

09..www.rbidocs.rbi.org.in

4. Book: Readings on Financial Inclusion Taxmann Publication (Indian Institute of

Banking & Finance)

5. Book: Principles and Practices of Banking by Indian Institute of Banking & Finance

6. Canarabank Handbook

7. Duvvuri Subbaraos Speech on Financial Inclusionwww.rbi.org.in8. From article Financial Inclusion by Dr. Y.S.P.Thorat

9. http://www.bis.org/review/r080917d.pdf...link

10.http://www.unu.edu/unupress/unupbooks/uu37we/uu37we0i.htm#the%20banking%20

industry,%20history%20and%20technological%20changes

11.Inaugural Speech By Smt.Elaben Bhatt On The Seminar On Financial Inclusion In

Ahmedabad On 22nd January 2009 Organized By Indian Institute Of Banking &

Finance And The School

12.Usha Thorats speech on Financial Inclusionwww.rbi.org.in

13.www.rbidocs. rbi.org.in...16.12.09...8 p.m.

14.www.nabard.org

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