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A Study of Impact of Financial Inclusion on Rural Development Page 1
Chapter –I
Introduction and Conceptual Framework
1.0 Introduction:
The meaning of finance starts where there is a general acceptance of what
is being offered as services. The World Bank financial access (2009)
looked at the financial access from the view point of differences between
developed and under-developed countries. Their findings were very
distinctive and explorative. They discovered that the developed European
countries were better exposed to financial services and accounts ownership.
They collected some set of indicators of financial access in countries
around the world (Refer Chart 1.1). Such indicators included the number
of deposit accounts and loans, the number of deposit clients and borrowers,
and the number of financial access points, such as branches, agents, and
automated teller machines (ATMs).
The Italians studied, with the use of a survey on their different territories, it
was to better understand the new typology of customer who could be more
effectively integrated into society and the ordinary financial system. It is
also seen as a policy objective for national policymakers, multilateral
institutions, and others in the economic development field. According to
Mitchell, (2003), a developed financial system on its own cannot bring
about economic growth but it can contribute to it.
The Indian government has undertaken a social banking program as part of
its development efforts that has two main objectives. The first is to extend
formal credit and savings opportunities to the poor and marginalized
segments of the population. The second is to displace informal service
providers such as moneylenders. More recently, the opening of no-frills
savings accounts, with zero balances and low maintenance fees, has been a
crucial policy initiative. Such accounts are being offered at scale, and are
A Study of Impact of Financial Inclusion on Rural Development Page 2
part of a financial inclusion (FI) strategy that has an ambitious goal—to
ensure that all villages with a population of more than 2,000 had an access
to financial services by March 2011. Hence, to incorporate complete
population of India that is over 1.3 crore would not be an easy task.
To meet this goal, the Reserve Bank of India (RBI) is working with a
variety of financial institutions to cultivate branchless banking strategies.
Such strategies extend the reach of financial services beyond the physical
bank branches, which minimize the operational costs for the provider. It
also makes services more accessible to customers. Branchless banking
strategies rely on agents that operate outside of bank branches. In many
cases, the agents are located in places that are accessible to customers such
as local government offices. Currently, only non-government organizations
(NGOs), post offices, microfinance institutions (MFIs), and other civil
society organizations can operate as agents. Mobile operators are also
trying to enter this space, but regulatory restrictions discourage them from
doing so.
Financial Access of Developed and Developing Countries
Chart-1.1 (Source: World Bank Financial Access, 2009)
A Study of Impact of Financial Inclusion on Rural Development Page 3
By late 2000s, the significance of an inclusive financial system has been
extensively recognized, leading to becoming a priority policy in many
countries. Initiatives for building inclusive financial systems have come
from the financial regulators, the governments and the banking industry.
Several countries have initiated legislative measures, for example, The
Community Reinvestment; Act, 1997 of the United States of America
requires banks to offer credit throughout their area of operation and
prohibits them from targeting only the rich neighborhoods. The French law
against exclusion (Loi du, Juillet 1998 contre exclusion) emphasizes an
individual‘s 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 on financial inclusion.
Among several initiatives of the banking sector in promoting financial
inclusion are The German Bankers Association‟s Voluntary Codes,
1996 to provide for everyman a current banking account that facilitates
basic banking transactions, introduction of Mzansi, a low cost bank
account, in 2004 for financially excluded people by the South African
Banking Association and initiatives by the RBI to achieve greater
financial inclusion, such as facilitating no-frills accounts and ―General
Credit Cards‖ for low deposit and credit. Alternative financial institutions,
such as micro-finance institutions and Self-Help Groups are also promoted
in many countries in order to provide financial services to the excluded.
Multilateral organizations such as the World Bank (WB) and the
International Monetary Fund (IMF) have also paid focused attention to the
issue of financial inclusion through policy prescriptions and guidelines. In
addition, the IMF has recently initiated ―Financial Access Survey‖ in an
endeavor to put together cross country data and information relating to the
issue of financial inclusion.
A Study of Impact of Financial Inclusion on Rural Development Page 4
Technology service providers such as FINO and A Little World (ALW) are
key facilitators in this financial inclusion (FI) effort. These companies
provide the platform on which the remote transactions are processed and
they work with banks to open accounts at scale. The companies also have a
mandate to handle government to person (G2P) payments in certain areas.
As part of the G2P efforts, they are providing no-frills savings accounts to
millions of unbanked individuals.
Such FI efforts have been successful in terms of enrollment. Nearly 60% of
the adult population has a bank account. This is high when compared with
other developing countries such as South Africa (32%), Tanzania (6%) or
Colombia (39%) but low when compared with Denmark (99%), the UK
(88%) or the US (91%). An additional 584 million accounts, however,
must be added for India to reach its 100% inclusion target.
Technologies such as debit and credit cards, telephone and Internet
banking, automatic teller machines (ATMs), and biometric point of
transaction (POT) terminals have been vital to such success. They enable
remote accessibility to financial services and enhance security for
associated transactions. This has extended and accelerated the FI drive.
However, despite this success, evidence suggests that access has not
translated into usage. A study in Tamil Nadu found that 72% of poor
individuals had zero or minimum balances after holding their no-frills
accounts for one year. A study of G2P recipients found this number to be
even higher, with 85% of these accounts being dormant. The study further
noted that only 5% of G2P recipients made deposits into their no-frills
accounts. The remainder withdrew all funds and thereafter funneled their
wages into informal savings mechanisms.
Accessibility was noted as a major issue. Recipients paid nearly 50% of
their daily wage to travel to the bank. The queues were also long: 70% said
A Study of Impact of Financial Inclusion on Rural Development Page 5
that visiting a bank caused them to lose an entire work day. A lack of
attention from formal financial institutions also posed a barrier. 85% of
respondents said the benefits of the account were not explained by bank
staff during enrollment. Another 87% claimed the features of the account
were not made clear. A variety of other reasons have been given for such
low levels of usage, from lack of interest by the poor to inadequate design
of financial services .
The academic literature has adequately discussed the close relation
between financial development and economic growth. However, there has
not been much discussion on whether financial development implies
financial inclusion. It has been observed that even well-developed financial
systems have not succeeded to be all-inclusive and certain segments of the
population remain outside the formal financial systems. The importance of
an inclusive financial system is widely recognized in the policy circle and
financial inclusion is seen as a policy priority in many countries.
An inclusive financial system is desirable for many reasons. First, it
facilitates efficient allocation of productive resources. Second, access to
appropriate financial services can significantly improve the day-to-day
management of finances. And third, an all-inclusive financial system can
help reduce the growth of informal sources of credit (such as
moneylenders) which often tend 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.
In banking worldwide, the service environment is becoming very
competitive and is featured by many demanding customers and banks are
seeking various ways of getting more unreached areas. Even so, many parts
of the underdeveloped world do not share a similar view in terms of the
A Study of Impact of Financial Inclusion on Rural Development Page 6
availability of banking services at their disposal. Africa has been at the
center of attraction in terms of this. In some areas of concern, there is the
issue of long distances between communities and bank branches and also
the unavailability of cheaper banking facilities. Some of them incur some
amount of cost on wanting to have access to ATMs or other banking
services. Sometimes, the issue could be that some people do not see the
need for these services and so banks have to device several means of
easing off the pressures of accessing these services. Therefore, the quality
of service becomes an integral part of the financial institutions attempt to
reach the unbanked. The attitude of banks and non-banking institutions
should be channeled towards seeing these unreached areas as a competitive
edge as they constitute a majority of the population in underdeveloped
areas. There is a need to further look into the matter of financial
exclusion/inclusion, service quality and strategies that would help in
customer outreaching.
1.1 Understanding Financial Exclusion:
Financial products play an important part in today‘s society, being able to
access and use a wide range of financial products and services is now
necessary ‗to lead a normal social life‘ (Gloukoviezoff, 2007). This
‗financialisation‘ of British society entails significant consequences for
those who find it difficult to access and/or use these products. For example,
private service provision can be more expensive for those who pay utility
bills in cash and a bank account is now generally required for receiving
wages (Kempson, 1994; Kempson & Whyley, 1998). The requirement for
financial products also needs to be understood against the decline of social
welfare provision, which makes it increasingly necessary for individuals to
make their own provision against risk (Anderloni et. al., 2008) estimate
that while in the 15 ‗older‘ European Union countries, two out of ten of the
adult population do not have access to transaction banking services; three
in ten have no savings and four in ten have no credit facilities, this rises
A Study of Impact of Financial Inclusion on Rural Development Page 7
significantly in the new member states where more than half do not have
transaction accounts, a similar proportion have no savings and almost three
quarters have no immediate access to credit. Furthermore, there are
increasing fears that the current economic downturn has intensified levels
of exclusion partly attributable to a new phase of risk aversion and reduced
outreach by financial institutions, which has restricted the flow of
affordable credit particularly to those on lower incomes.
Certain social groups are especially vulnerable to financial exclusion
including the low paid, unemployed, the elderly, young people not in
education, training or employment and people with disabilities (Anderloni
et. al., 2008). The concept of financial exclusion, then, refers to this
inability of individuals to access and/or effectively use financial products
that help them to participate in the range of activities that constitute social
life.
Financial exclusion is a relatively new concept which was first used in
1994 to describe the process of withdrawal of financial institutions
predominantly from deprived areas (Leyshon, 1994). While this body of
literature refers to the spatial dimension of the financial exclusion process,
other publications have concentrated on different aspects of the
phenomenon including individual factors and preferences. Financial
exclusion is a phenomenon that often affects a significant minority of
predominantly vulnerable and otherwise disadvantaged people, such as
single parents, social tenants, the long-term unemployed, members of some
minority ethnic communities and those living on persistent low incomes
(Kempson & Whyley, 1999b).
According to the analysis of Kempson & Whyley (1999b), seven per cent
of households in Britain (around 1.5 million) were without any mainstream
financial products in the mid-1990s. In addition, 19% were only marginally
A Study of Impact of Financial Inclusion on Rural Development Page 8
included, having only one or two financial products. In terms of banking,
nearly two million adults were still without a bank account in 2006
(Treasury, 2007b). Some studies also give evidence of regional variations
in financial exclusion, for example, higher levels of banking exclusion in
Northern Ireland and Scotland (Kempson, 1994) and areas of deprivation
(Leyshon & Thrift, 1997). While these studies show that disadvantaged
individuals and households and deprived areas are more likely to be
affected by exclusion from the financial system, it is also associated with
both economic and social costs for those affected. Financial exclusion can
thus both contribute and be the outcome of processes of social exclusion.
Financial inclusion (or, alternatively, financial exclusion) has been defined
in the literature in the context of a larger issue of social inclusion (or
exclusion) in a society. One of the early attempts by Leyshon & Thrift
(1995) defined financial exclusion as referring to those processes that serve
to prevent certain social groups and individuals from gaining access to the
formal financial system. According to Sinclair (2001), financial exclusion
means the inability to access necessary financial services in an appropriate
form.
Exclusion can come about as a result of problems with access, conditions,
prices, marketing or self-exclusion in response to negative experiences or
perceptions. Carbo, et. al., (2005) have defined financial exclusion as
broadly the inability of some societal groups to access the financial system.
The Government of India‘s Committee on Financial Inclusion in India
began its report by defining financial inclusion as the process of ensuring
access to financial services and timely and adequate credit where needed
by vulnerable groups such as the weaker sections and low income groups at
an affordable cost (Rangarajan Committee Report, 2008).
A Study of Impact of Financial Inclusion on Rural Development Page 9
Thus, most definitions indicate that financial exclusion is manifestation of
a much broader issue of social exclusion of certain societal groups such as
the poor and the disadvantaged. For the purpose of this thesis, we define
financial inclusion ‗as a process that ensures the ease of access, availability
and usage of the formal financial system for all members of an economy‘.
This definition emphasizes several dimensions of financial inclusion, viz.,
accessibility, availability and usage of the financial system. These
dimensions together build an inclusive financial system. As banks are the
gateway to the most basic forms of financial services, banking
inclusion/exclusion is often used as analogous to financial
inclusion/exclusion.
1.1.1 Types of Financial Exclusion:
Kempson & Whyley (2000), in their study, established six types of
financial exclusion:
Physical Access Exclusion: It is brought about by the closure of
local banks or building societies and lack of reliable transport to
reach alternatives.
Access Exclusion: This type of access is restricted through risk
assessment, with people being denied a product or service as they
are perceived to be high risks.
Condition Exclusion: This is when conditions are attached to
products or services thereby making them inaccessible to some.
Price Exclusion: This occurs when products are available but at a
price that is unaffordable.
Marketing Exclusion: Where sales and marketing activity is
targeted on some groups, or areas, at the expense of others.
A Study of Impact of Financial Inclusion on Rural Development Page 10
Self Exclusion: When individuals do not seek financial products
and services for reasons including fear of failure, fear of temptation
or lack of awareness.
1.1.2 Causes of Financial Exclusion:
According to the World Bank, (cited in Honohan & King, (2009), the
causes of financial exclusion were broken down into: insufficient income;
discrimination; contractual/information framework; and price and product
features. In their research, they looked to see the reasons that none
financial user give for not using financial products. He asked if it could be
fixed by the financial providers in terms of quality of service, location or
relevance of product.
Kempson (2006) gave some explanations to the reasons why people are
financially excluded. He said that these reasons could vary from country to
country. He stated the importance of bank required identification and
documents, the terms and conditions of bank accounts, levels of bank
charges, physical access and cultural barriers in financial inclusion.
1.1.2.1 Required Identification
Kempson (2006) stated that various types of people with the right means
of identifying themselves fail to meet the banks requirements to open an
account. People like the homeless and unemployed. Everywhere around the
world, banks require a certain proof of identity before some kinds of
services could be offered.
Leyshon & Thrift (1995, cited in the European Commission, 2008)
stated that people with limited income and with some disabilities represent
a high risk to the financial institutions, who then avoid such geographical
locations where these people reside.
A Study of Impact of Financial Inclusion on Rural Development Page 11
1.1.2.2 Financial Liberalization and Over-complexity:
Kempson et. al., (2000, cited in, The European Commission 2008) gave
financial liberalization as one of the societal factors that limits financial
inclusion. Shehzad & De Haan (2008) argued that financial liberalization
reduces the likelihood of financial crises. Contrary to this, it was stated in
the European Commission (2008) that financial liberalization has led to
an increase in the complexity of financial products and providers.
The liberalization of the financial system is comprised of high levels of
administrations of financial institutions, which according to Shehza d &De
Haan (2008) is measured with the presence of interest rate controls, credit
controls, entry barriers, capital account restrictions and supervision of the
banking sector.
Financial liberalization has brought about a striking shift in banking policy
in India and has led to changes in the regional and sectoral pattern of
banking in the country and there has been:
(a) a large-scale closure of commercial bank branches in rural areas;
(b) a widening of inter-State inequality in credit provision,
accompanied by a fall in the proportion of bank credit directed
towards rural areas as well as regions where banking has historically
been underdeveloped;
(c) a sharp fall in the growth of credit flow to agriculture followed by a
revival in the 2000s, but with a changed pattern of distribution of
agricultural credit in favour of urban-based borrowers and corporate
and institutional groups;
(d) the relative exclusion of the disadvantaged and dispossessed
sections of the rural population from the formal financial system;
and
A Study of Impact of Financial Inclusion on Rural Development Page 12
(e) the strengthening of money lending in the countryside
[Ramachandran & Swaminathan (2005), Shetty (2004),
Ramakumar & Chavan (2007), and Chavan (2005 & 2010)]
It is in the period of financial liberalization that the new term ―financial
inclusion‖ has been coined. Financial inclusion may appear similar in name
to the policy of social and development banking, but is inherently different
with respect to policy essentials. ―Financial inclusion‖ has been defined as
the provision of affordable financial services to those who have been left
unattended or under-attended by the formal agencies of the financial
system without compromising on commercial and profitability
considerations in order to ensure the ―long-term sustainability‖ of such
services (RBI, 2008).
The recent approach to financial inclusion is more individual-specific than
previous policy. It incorporates two main instruments: firstly, a no-frills
basic saving bank deposit account facility (including a small overdraft
facility); and secondly, a collateral-free small borrower facility under
microfinance at market-determined rates of interest (RBI, 2006b). Both
these instruments have been used rather rigorously by banks in the 2000s,
either directly or through intermediaries. Banks‘ intermediaries mainly
include Business Correspondents (BCs) and Micro-Finance Institutions
(including non-banking financial companies, trusts, and cooperative
societies). Further, there has been a growing emphasis on the introduction
of advanced technological solutions by banks and their intermediaries.
These solutions include hand-held devices and mobile phones, measures
intended to bring down the costs of administering the large numbers of
small-volume transactions required under financial inclusion. The RBI also
emphasized on designing market-based regulatory incentives for banks for
financial inclusion. The RBI has set targets of providing, by 2012, banking
A Study of Impact of Financial Inclusion on Rural Development Page 13
services through a banking outlet to every village with a population of over
2,000.
1.1.2.3 Terms and Conditions of Bank Accounts:
Different banks across the world have different terms and conditions for
opening accounts with them. Such terms as amount of money to open with,
the amount of minimum/maximum balance etc. This goes a long way to
having an effect on the extent of financial inclusion. Kempson (2006)
explained that these different types of terms and conditions can deter or
prevent people with low incomes to open an account. Some accounts come
with certain contracts that establish the rules on which the accounts are
controlled.
1.1.2.4 Income Inequality and Unemployment:
Kempson (2006) stated that countries with low levels of income inequality
tend to have lower levels of financial exclusion, whereas high financial
exclusion is found in least equal countries. In most areas of the world, a
person who is unemployed and with no source of income is most likely to
be excluded from the use of financial facilities. It is also likely that this will
be due to self-exclusion.
1.1.2.5 Levels of Bank Charges:
OFT (1999, cited in Wallace & Quilgars, 2005) stated that the fear of
getting overdrawn and incurring high bank charges was a major
discouraging factor for many people on low or modest incomes to
obtaining an account. Kempson et. al., (2000, cited in Wallace &
Quilgars, 2005) supported by saying that low income earners prefer bank
services that complies with the needs of low income households.
A Study of Impact of Financial Inclusion on Rural Development Page 14
1.1.2.6 Lack of Physical Access:
The inability to have access to certain financial services could be due to
various reasons like; travel distance, disabilities, or level of knowhow.
According to Kempson (2006), it can also be caused by bank closures
which are due to the intense level of competition and economics in
international banking. The World Bank financial access (2009) stated that
the main barrier to financial inclusion in rural areas is the great distances
that rural residents must travel to reach a bank branch.
1.1.2.7 Cultural Barriers:
―In countries with high levels of financial exclusion, self exclusion by
individuals with low or no income is more of the reason for lack of access
to banking services than direct exclusion by the banks refusing to open
accounts‖ (Kempson, 2006). Help the aged noted that cultural and
language barriers are one of the issues that minority community dwellers
face in accessing financial services.
1.1.2.8 Lack of Effective demand for Services:
Sinclair et. al., (2009) explained that low income means a lack of adequate
demand for services. He stated that such a lack of demand can be attributed
to the failures and limitations of services from current providers of such
services. According to The House of Commons Treasury Committee
2005-06, banking services are central to the challenge of financial
inclusion.
1.1.2.9 Lack of Financial Education:
―A credit union also has an obligation to educate their members in effective
and responsible management of money, and credit unions offer debt and
money advice to their members alongside financial goods and services and
insurance products‖ (Credit Unions Act, 1979 - cited in Commission of
A Study of Impact of Financial Inclusion on Rural Development Page 15
Rural Communities, 2007). The absence of this will inevitably lead to an
exclusion from financial facilities and services.
1.1.3 „Financial Exclusion‟ in Rural Areas:
Financial exclusion has been high on the Government agenda since 2004,
and has gained added impetus following high-profile cases such as the
collapse of the Farepak Christmas savings club and recent turmoil in the
financial markets.
There is much evidence (and many recent reports) to show relative income
poverty (including, but not limited to, low wages) in rural areas,
particularly in sparse rural areas and coastal areas. At the same time,
expenditure on everyday commodities and services (such as heating fuel
and power, and transport) is demonstrably higher for rural residents and
there is evidence to suggest that the accessibility of banks and building
societies has reduced in rural areas8 alongside a trend towards fee-charging
cash machines in rural areas.
The term ‗financial exclusion‘ is used to encapsulate the issues around
financial disadvantage that reach beyond a simple focus on incomes,
although those on low incomes tend to be at particular risk of other forms
of financial disadvantage. For example those on low incomes are more
likely to borrow from ‗alternative lenders‘, incurring high rates of interest,
whilst on the other hand any savings made by those on low incomes are
likely to attract only the lowest tiers of interest rates and be subject to fixed
transaction costs.
A characteristic feature of rural life is a reluctance to seek help among the
rural population, which could mean that indebtedness amongst rural
residents is more difficult to detect. However, what is clear is that face-to-
face advice (which could be more effective than other forms of advice for
A Study of Impact of Financial Inclusion on Rural Development Page 16
the financially excluded) is likely to be harder to access for those in rural
areas, and that the accessibility of banks and building societies has reduced
still further in recent years. Nonetheless, the focus of many schemes and
policy initiatives to tackle financial exclusion to date has been on specific
(mostly urban) areas, at least in the initial stages.
1.2 Understanding Financial Inclusion:
In simple terms, Financial Inclusion means provision of banking services at
an affordable cost to the vast sections of disadvantaged and low-income
groups. These include access to savings, credit, insurance, payments and
remittance facilities by the formal financial system to those who tend to be
excluded. As banking services are viewed as services in public good, the
term financial inclusion means availability of banking services to the entire
population without discrimination. In short, financial inclusion means to
provide access to financial services to all the people in a fair, transparent
and equitable manner at an affordable cost.
A World Bank report states, ―Financial Inclusion, or broad access to
financial services, is defined as an absence of price or non price barrier in
the use of financial services.‖ It recognizes the fact that the financial
inclusion does not imply that all households and firms should be able to
borrow unlimited amounts or transmit funds across the world for some fee.
It makes the point that creditworthiness of the customer is critical in
providing financial services. The report also stresses that the distinction
between ‗access to‘ and ‗use of‘ financial services as it has implication for
policymakers. ‗Access‘ essentially refers to the supply of services, whereas
use is determined by demand and supply. Among the non- users of formal
financial services a clear distinction needs to be made between voluntary
and involuntary exclusion. The problem of financial inclusion addresses
the ‗involuntary excluded‘, as they are the ones who, despite demanding
financial services, do not have access to them.
A Study of Impact of Financial Inclusion on Rural Development Page 17
Sometime, it is easy to define a phenomenon, by stating what it is not, i.e.,
define financial exclusion rather than inclusion. A target group can be
considered as financially excluded if they do not have access to
mainstream formal financial services such as banking account, credit cards,
insurance, remittances, payment services and so on (Refer Model -1.1).
Financial Exclusion
Ineligible
Non-
Availability/
Discrimination
Financial
Illiteracy
Non- Affordability/
Others
Legend:
Financial Excluded
Financial Included
(Model-1.1) Source: Finance for All? Policies and Pitfalls in Expanding
Access. (World Bank Report, 2008)
Non-users of
Formal Financial
Services
Users of Formal Financial
Services
No Need
Population
Involuntary
Exclusion
Self Voluntary
Exclusion
Cultural/Religious
Barriers Indirect
access
A Study of Impact of Financial Inclusion on Rural Development Page 18
The financial inclusion needs to be interpreted in a relative dimension.
Depending on the stage of development, the degree of financial inclusion
differs among countries. For example, in a developed country non-payment
of utility bills through banks may be considered as a case of financial
exclusion, however, the same may not be considered as financial exclusion
in an underdeveloped nation as the financial system is not yet developed to
provide sophisticated services. Hence, while making any cross country
comparison due care need to be taken.
Financial Inclusion as defined by RBI, ―Financial Inclusion is the process
of ensuring access to appropriate financial products and services needed by
vulnerable groups such as weaker sections and low income groups at an
affordable cost in a fair and transparent manner by mainstream Institutional
players‖. Financial inclusion is the availability of banking services at an
affordable cost to disadvantaged and low-income groups. In India, the
basic concept of financial inclusion is having a savings or current account
with any bank. In reality, it includes loans, insurance services, and much
more (Refer Model -1.2).
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.
The Indian banking system will have to deliver on the plan for financial
inclusion, the system, which demonstrated its resilience in the face of the
recent global financial crisis, should adopt strong and urgent measures to
reach the unbanked segment of society and unlock their savings and
investment potentials.
A Study of Impact of Financial Inclusion on Rural Development Page 19
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 reduce the growth of informal sources of credit
Components of Financial Inclusion
Financial
Consultancy
& Literacy
Saving
Insurance
Product
Micro Credit
Remittance &
Payments
1. Micro Insurance,
Crops, Assets
Health, Accidents
2. Micro Pension
1. Saving Account
2. Term Deposit
Micro Loans
Electronic Transfer
(Model -1.2) Source: Karmakar K.G. 2010
A Study of Impact of Financial Inclusion on Rural Development Page 20
(such as money lenders), which are often found to be exploitative. Thus, an
all-inclusive financial system would enhance efficiency and welfare by
providing avenues for secure and safe saving practices and by facilitating a
whole range of efficient financial services.
In this context, it is imperative that any programme of financial inclusion
must include steps to remove most factors helping exclusion. As a first
step, the RBI devised guidelines exhorting banks to offer a basic ―no-frills‖
account scheme to the public as a step towards empowering the have-nots
and create awareness among them about banking. The very knowledge
about the existence and operation of such a scheme is bound to enthuse a
large number of people among the target sector to access banking and be
aware of the benefits available from banks. Basically, the thrust on
empowerment depends on the stage of development of a society. No-frills
accounts are persuasive initiatives aimed at empowering the excluded lot to
have access to bank accounts and facilitate their participation. In the
meantime, Reserve Bank is also laying significant stress on the expansion
of banking network in un-banked and under-banked areas in its efforts
towards empowerment.
Due to no small part to the stimulus provided by the United Nations Year
of Micro Credit 2005, policymakers across the world have begun to pay
closer attention to increasing financial inclusion. Financial inclusion herein
refers to the timely delivery of financial services to disadvantaged sections
of society. Research in the last decade led us to believe that a well-
functioning and inclusive financial system was linked to faster and
equitable growth (Honohan, 2004). However, despite the attention paid to
financial inclusion and policies devoted to enhancing access to finance,
there was a dearth of information regarding access to finance. The problem
of inadequate information was compounded by the fact that access did not
A Study of Impact of Financial Inclusion on Rural Development Page 21
always lead to usage. This knowledge gap posed a significant challenge in
designing effective policy interventions.
Since 2005, the RBI has promulgated a drive for financial inclusion,
whereby banks promote the participation of every household at the district-
level via savings accounts for the ‗unbanked.‘ This study was an attempt to
arrive at a deeper understanding of the processes behind financial
inclusion. Namely, it proposed to uncover perceptions and dynamics
behind financial inclusion, such as those within unbanked households, as
well as study whether financial inclusion led to usage and/or influences
financial behavior.
It would demonstrate the on-the-ground realities and results of current
initiatives and provide evidence that informs future policies for law
makers. This information would also facilitate the design of appropriate
products driven by client needs to financial institutes. In the case of
microfinance institutions, the evidence herein may help them increase
outreach and hence, financial viability.
The opening of ‗No-frills Accounts‘ is fast emerging as a crucial policy
initiative. The Committee on Financial Inclusion, headed by Dr. C.
Rangarajan, Chairman of the Prime Minister‘s Economic Advisory
Committee, recommended that each semi-urban/rural bank branch opened
roughly 250 bank accounts annually which, if successful, would result in
approximately 11.5 million accounts across the country. As of September
2008, approximately 15.8 million bank accounts have already been opened
as part of the drive. To achieve 100% financial inclusion, however, an
additional 584 million accounts would need to be opened (‗RBI asks banks
to offer credit through no-frill accounts‘, The Economic Times, 12 Sep
2008). Given these developments, it is both timely and pertinent to
A Study of Impact of Financial Inclusion on Rural Development Page 22
examine the implementation of the drive, the utility of accounts to users,
and levels of usage.
The Report viewed financial inclusion as a comprehensive and holistic
process of ensuring access to financial services and timely and adequate
credit, particularly by vulnerable groups such as weaker sections and low
income groups at an affordable cost. Financial inclusion, therefore,
according to the Committee, should include access to mainstream financial
products such as bank accounts, credit, remittances and payment services,
financial advisory services and insurance facilities. Several steps have been
taken by the various banks, NGOs and government to bring the financially
excluded people to the fold of the formal banking services. The cent per
cent financial inclusion drive is progressing all over the country. The
financial inclusion in rural areas is necessary and profitable for banking
sectors.
No doubt, the banking sector in the country is playing its role in reducing
the disparities and is geared up to meet the challenges faced from financial
exclusion. But in future, the bankers need to shoulder more responsibility
because of the challenge to bring all the disadvantaged section of people to
the mainstream of development. The bankers have to pool all available
resources including technology and expertise to take banking to the bottom
of the pyramid, as there are big opportunities to be exploited. In this
background, the present study is an attempt towards evaluating the
outreach of bankers and their level of involvement in promoting financial
inclusion in the district of Indore in Madhya Pradesh.
1.3 Financial Reforms and Rural Credit:
Finance is an extraordinary effective tool in spreading economic
opportunity and fighting against poverty. Wider access to finance helps
both the producers as well as consumers in raising their welfare status.
A Study of Impact of Financial Inclusion on Rural Development Page 23
Access to finance allows the poor to use their rich talents or opens avenue
for greater opportunities. A composite set of services like credit, savings,
and insurance protects from the unexpected shocks or fluctuations.
Therefore, the role of finance has been critical in economic growth and
development as observed in many of the countries over the years. In one of
the early expositions, Schumpeter (1911) argued that the functions and
role of finance are essential for technological innovation and economic
development. A number of studies have found that the poor need financial
services to help them, manage their lives and livelihoods that are complex,
diverse, dynamic and vulnerable, and the poor want their financial services
to respond by being reliable, flexible, continuous and convenient
(Morduch & Rutherford, 2003). Financial system affects growth by
altering the savings rate sometimes by their allocation of savings for capital
producing technologies (Romer, 1986). Credit or other resource allocation
processes of financial institutions can, in principle, lead to efficient
financial management and enhanced growth. Provision of finance
facilitates entrepreneurship, innovation, and improvement of economic
productivity and thus finally contributes to both economic development
and growth.
In India, in the pre-reform period, the commercial banks were nationalized
(between 1969 and 1980) with an objective of extending the financial
services to rural areas. These banks played a vital role in providing
financial services to the rural areas for long period. However, the
introduction of financial reforms had an instantaneous, direct and
remarkable effect on rural credit system. The policies of liberalization have
generated shocks to financial sector and there has been a decline in rural
banking in general, and in priority sector and preferential lending to the
poor in particular (Ramachandran & Swaminathan, 2002). These
changes in pre- and post-economic reforms are explained through
indicators such as the number of rural bank offices, the rural credit
A Study of Impact of Financial Inclusion on Rural Development Page 24
outstanding and deposits, Credit-Deposit (C-D) ratio, credit share in favor
of agriculture and small-scale industries, and credit to the priority sectors.
In the post-reform period, banks were allowed to convert their non-viable
rural branches into satellite offices, or to close down branches at rural
centers served by two or more commercial banks. At the same time, the
regional rural banks were allowed to relocate their loss-making branches to
new places that may be outside the rural areas (Shetty, 2004). It is relevant
here to look at the RBI's (1997) policy on this subject-"Banks were given
the operational freedom to open and relocate branches at semi-urban, urban
and metropolitan centers subject to the approval of respective Boards and
ensuring track record of profit in the last three years‖. The entire scheduled
commercial banking sector was reluctant to opening of rural branches and
the new policy in banking totally arrested the growth of banking in rural
areas. Thus, branch network in rural areas was downsized after the
commencement of financial liberalization.
In the pre-reform period (1991), in India, the percentage of rural bank
branches to the total bank branches was as high as 56.92%. However, in
the post-reform period, there was an ongoing decline in the share of the
rural bank offices which fell below 50% in 1998 and thereafter. In fact, the
present share (percent) of rural bank offices to total bank offices was equal
to that of the 1980s, i.e., 45.69% in 2005 and 45.72% in 1980s. It was clear
that more than 10% of rural bank offices were either closed down or
shifted to more 'profitable' zones for several reasons. However, 'poor
repayment' was cited as the root cause for relocating many rural banks. The
tendency to shift from rural areas had an adverse effect on vulnerable
sector in obtaining credit. This gave an opportunity to the MFIs to feed the
thinning financial services in the rural areas.
There was a sluggish growth of rural deposits and credit in the pre- and
post-reforms period. Before the liberalization of banking sector in India,
A Study of Impact of Financial Inclusion on Rural Development Page 25
the share of rural deposits to the total credit was as high as 15.46% in 1991,
which declined steadily after the reforms to as low as 12.20% in 2005
(relatively deposits in 2005 and 1980 were the same). The C-D ratios have
fallen sharply since the beginning of 1991, both in terms of the amount
sanctioned and amount utilized (Ramachandran & Swaminathan, 2005).
There was a steady decline in the C-D ratios in rural branches from over
73% to around 61% in 1984 and 1991, respectively. After 1991, there was
a sharp decline in the ratio for the rural branches, i.e., as low as 39% in
2001. This was the most miserable facet of banking development in the
past decade (Shetty, 2005). Decline in the C-D ratio was the result of
slowdown of banking activity (low profitability with high non-performing
assets) by the public sector commercial banks in rural areas. There was
relatively a sharp decline in the number of rural and semi-urban bank
offices and in the credit disbursed in the pre- and post-reform periods.
Similar trends were true of total commercial bank credit to agriculture
(Chavan, 2001).
One of the prime objectives of bank nationalization (1969 and 1980) was to
inflate the flow of credit to agriculture and small industries, or this
direction of lending was termed as 'priority sector' lending
(Ramachandran & Swaminathan, 2002 & 2005). The share of these
sectors in the total advances of scheduled commercial banks rose from
14% in 1969 to 33% in 1980. In the mid-1980s, the RBI had set a target of
40% for priority sector lending and this target was over achieved during the
period 1986-89. From 1991 to 1996, the share of priority sector advances
fell in line with the recommendations of the Narasimham Committee.
From 1990-91 to 1996-97, loan accounts to agriculture fell by 5 million
(Narayana, 2000). While 52% of bank credit in rural areas went towards
agriculture in 1985, the proportion fell to 38% in 1998 (Nair, 1999). In the
post-economic reform period, there was a sharp decline in the priority
sector lending, and the same trend continued until the end of March 2003.
A Study of Impact of Financial Inclusion on Rural Development Page 26
However, the situation changed after 2004; there was a slight increase in
the priority sector advances. It is interesting to observe that the reforms
introduced since 1991 in the banking system have had a heavy toll on small
borrowers. The spread of banking credit facilities has not only halted but
the number of small borrowers getting financial facilities too sharply
declined in the post-liberalization period.
The World Bank indicated that no official survey of rural access to finance
had been conducted since 1991. However, a survey conducted jointly by
the World Bank and the National Council of Applied Economic
Research (NCAER), the Rural Finance Access Survey (RFAS) 2003
allowed for analysis of some trends between 1991 and 2003 (World Bank,
2004; and Basu & Srivastava, 2005). Following bank nationalization, the
share of banks in rural household debt increased to approximately 61.2% in
1991. Despite these achievements, there still had been little progress in
providing the rural poor with access to formal finance. Rural banks served
primarily the needs of well-off rural borrowers with around 66% of large
farmers having a deposit account and 44% with access to credit, in contrast
to 70% of marginal/landless farmers who did not have a bank account and
87% who are without access to credit. Access to other financial services
like insurance was even more limited for the rural poor. Inadequacies and
incompetence in access to formal financial institutions and the seemingly
extort terms of informal finance for the poor provide a strong need and
ample space for innovative approaches to serve the financial needs of
India's poor. Over the past decade, government, financial institutions and
NGOs have made efforts in partnership, to develop novel financial delivery
approaches. These microfinance approaches have been designed to
combine the safety and reliability of formal finance with the convenience
and flexibility that are typically associated with informal finance (Basu &
Srivastava, 2005).
A Study of Impact of Financial Inclusion on Rural Development Page 27
Against this backdrop, the present study made an attempt to examine the
nature and type of new institutions that have emerged in the Indian
financial system to include the excluded poor. The study also analyzed the
outreach of two dominant microfinance models in India, viz., SHG-Bank
Linkage Program (SBLP) and private MFIs. The study analyzed the
financial inclusion in terms of credit outstanding as well as the number of
clients served over the years, by the new institutions. The major source of
secondary data included the RBI publications, National Bank for
Agriculture and Rural Development (NABARD), MIX (Microfinance
Information exchange) market, Sa-Dhan used for analyzing the outreach
of microfinance models, over the years.
Financial inclusion in developing economies is different than that of
developed economies. In latter where inclusion is a minority, informer it
could be a majority. Elaine Kempson in his research (2006) showed that
in Sweden lower than two per cent of adults did not have an account in
2000 and in Germany, the figure was around three per cent. Another
research by (Buckland et. al., 2005) showed that less than four per cent of
adults in Canada and five per cent in Belgium lacked a bank account.
Therefore, it was also mentioned in academia that a better way to analyze
financial inclusion in developing economies is to actually see financial
exclusion.
1.4 Financial Inclusion in India:
In India, the focus of the financial inclusion at present is confined to
ensuring a bare minimum access to a savings bank account without frills,
to all. Internationally, the financial inclusion has been viewed in a much
wider perspective. Having a current account / savings account on its own,
is not regarded as an accurate indicator of financial inclusion.
A Study of Impact of Financial Inclusion on Rural Development Page 28
'Financial Inclusion' efforts should offer at a minimum, access to a range
of financial services including savings, long and short term credit,
insurance, pensions, mortgages, money transfers, etc. and all this at a
reasonable cost. Out of 19.9 crore households in India, only 6.82 crore
households have access to banking services. As far as rural areas are
concerned; out of 13.83 crore rural households in India, only 4.16 crore
rural households have access to basic banking services. In respect of urban
areas, only 49.52% of urban households have access to banking services.
Over 41% of adult population in India did not have bank account.
The Report Committee on Financial Inclusion headed by Dr. C.
Rangarajan (2008) has observed that financial inclusion must be taken up
in a mission mode and suggested a National Mission on Financial Inclusion
(NMFI) comprising representation of all stakeholders for suggesting the
overall policy changes required, and supporting stakeholders in the domain
of public, private and NGO sectors in undertaking promotional initiatives.
A sample study carried out by the Banking Codes and Standards Board
of India in Mumbai revealed the poor awareness about ‗no-frills‘ accounts
and relaxed Know Your Customers (KYC) norms amongst the bank staff
itself, a general unwillingness by the bank staff to open ‗no-frills‘ accounts
for persons of small means, the account opening forms were not simplified
and did not contain any information about the required documents under
simplified KYC norms and none of the branches the staff were in a
position to offer any guidance in case the prospective customer was not in
a position to produce required documents in proof of identity and address.
As a result, the weaker sections of India hesitate to take part in financial
inclusion and help to increase economic growth of the country.
A Study of Impact of Financial Inclusion on Rural Development Page 29
All India level: Chart.-1.2 shows that rural and Semi-urban offices
constitute a majority of the Commercial Bank offices in India. Rural bank
offices total have increased from 2011 to 2012. This is mainly because of
the inclusive focus of the policymakers mentioned above.
(Chart-1.2) Source: Reserve Bank of India
0
5000
10000
15000
20000
25000
30000
35000
40000
Rural Semi Urban Urban Metropolitan
POPULATION GROUP WISE DISTRIBUTION OF NUMBER OF OFFICES OF COMMERCIAL BANK - 2011 and 2012 As on
March 31
2011
2012
A Study of Impact of Financial Inclusion on Rural Development Page 30
Population Group-Wise Distribution of Deposits and Credit of
Scheduled
Commercial Banks - 2008 to 2012
(Amount in ` Billion)
Popul
-ation
Grou
p
As on March 31
8-Mar 9-Mar 10-Mar 11-Mar 12-Mar
D C D C D C D C D C
-1 -2 -3 -4 -5 -6 -7 -8 -9 -10
Rural 3030.3 1831 3654.9 2087 4235.02 2498 4968.6 2941 5782.11 4182
-9.4 -7.6 -9.3 -7.3 -9.2 -7.5 -9.2 -7.2 -9.4 -8.7
Semi-
Urban 4293.8 2306 5319.4 2667 6182.07 3204 7212 3831 8484.46 4569
-13.3 -9.6 -13.5 -9.6 -13.4 -9.6 -13.3 -9.4 -13.7 -9.5
Urban 6576.2 3836 8244.6 4619 9511.16 5593 11164 6850 12809 7809
-20.4 -16 -20.9 -16.2 -20.7
-
16.7 -20.6
-
16.8 -20.7 -16.2
Metro
polita
n 18388 15973 22154 19202 26091
2216
1 30921
2714
7 34665.9 31654
-56.9 -66.7 -56.3 -67.2 -56.7
-
66.2 -57
-
66.6 -56.1 -65.7
All
India 32288 23946 39373 28575 46019.3
3345
6 54265
4076
9 61741.5 48215
-100 -100 -100 -100 -100 -100 -100 -100 -100 -100
Note: Figures in bracket indicate percent share in All-India total.
(Table 1.1) Source: Quarterly Statistics on Deposits and Credit of
Scheduled Commercial Banks, RBI
Table 1.1, provides further clarity providing a break-up of the deposit
accounts. Both the deposit and credit accounts are lower in rural
households than urban households. Hence despite the rural-push, the rural
population has not come forward and avail even basic banking services.
A Study of Impact of Financial Inclusion on Rural Development Page 31
Key Statistics on Financial Inclusion in India: A Survey
(Per cent)
Share with an
account at a
formal
financial
institution
Adults saving
in the past
year
Adults
originating a
new loan in
the past year
Adults
with a
credit
card
Adults
with
an
outsta
nding
mortg
age
Adults
paying
personall
y for
health
insurance
Al
l
ad
ul
ts
Poor
est
inco
me
quint
ile
W
o
m
en
Usi
ng a
for
mal
a/c
Using
a
comm
unity-
based
metho
d
Fro
m a
form
al
finan
cial
instit
ution
From
famil
y or
friend
s
1 2 3 4 5 6 7 8 9 10 11
India 35 21 26 12 3 8 20 2 2 7
World 50 38 47 22 5 9 23 15 7 17
(Table-1.2) Source: Asli Demirguc - Kunt and Klapper, L. (2012):
„Measuring Financial Inclusion‟, Policy Research Working Paper, 6025,
World Bank, April.
A financial inclusion survey was conducted by World Bank team in India
between April-June, 2011 which included face to face interviews of 3,518
respondents. The sample excluded the North-Eastern states and remote
islands representing approximately 10 per cent of the total adult
population. The results of the survey suggest that India lags behind
developing countries in opening bank accounts, but is much closer to the
global average when it comes to borrowing from formal institutions. In
India, 35 per cent of people had formal accounts versus the global average
of 50 per cent and the average of 41 per cent in developing economies. The
survey also points to the ‗slow growth of mobile money in India, where
only 4 per cent of adults in the Global Index sample report having used a
mobile phone in the past 12 months to pay bills or send or receive money‘.
The RBI recently came up with a State-wise Index of Financial Inclusion.
RBI considered three basic dimensions of an inclusive financial system --
A Study of Impact of Financial Inclusion on Rural Development Page 32
banking penetration, availability of the banking services and usage of the
banking system. In the group of 23 states for which a 3-dimensional IFI
(Index of Financial Inclusion) has been estimated by using data on three
dimensions of financial inclusion, Kerala led with the highest value of IFI
followed by Maharashtra and Karnataka. Gujarat lagged behind at 11th
place. In an Index of Financial Inclusion, India has been ranked 50 out of
100 countries. At present, only 34% of the India‘s population has access to
basic banking services. The latest National Sample Survey Organisation
survey reports that there are over 80 million poor people living in the cities
and towns of India and they lack access to the most basic banking services
(Refer table 1.2).
1.5 Financial Inclusion in India – Policy Perspective:
Financial Inclusion has become a buzzword now but in India it has been
practiced for quite some time. RBI has made endeavor to make commercial
banks to open branches in rural areas. Priority sector lending was instituted
to provide loans to small and medium enterprises and agricultural sector.
Further, special banks were set up for rural areas like Rural Cooperative
Banks, Regional Rural Banks. The government also set up national level
institutions like NABARD, SIDBI to empower credit to rural areas and
small and medium enterprises.
Despite the rural policy-push, above statistics suggest majority of the
population continues to be financially excluded. The efforts were further
intensified by RBI and its Annual Policy (2005-06) mentioned:
RBI will implement policies to encourage banks which provide
extensive services while dis-incentivising those which are not
responsive to the banking needs of the community, including the
underprivileged.
A Study of Impact of Financial Inclusion on Rural Development Page 33
The nature, scope and cost of services will be monitored to assess
whether there is any denial, implicit or explicit, of basic banking
services to the common person.
Banks are urged to review their existing practices to align them with
the objective of financial inclusion.
Thus RBI focus led to a few key developments:
No-Frill Accounts: In November 2005, RBI asked banks to offer
no-frills savings account which enables excluded people to open a
savings account. Normally, the savings account requires people to
maintain a minimum balance and most banks now even offer
various facilities with the same. No-frills account requires no (or
negligible) balance and is without any other facilities leading to
lower costs both for the bank and the individual. The number of no-
frills account increased mainly in public sector banks from about 0.4
million to 6 million between March 2006 and March 2007. The
number of No-frill accounts in private sector banks also increased
from 0.2 million to 1 million in the same period. No significant
increases were there in foreign banks. This is understandably so as
majority of rural and sub-urban bank offices are in public sector
banks.
Usage of Regional Language: The Banks were required to provide
all the material related to opening accounts, disclosures etc. in the
regional languages.
Simple KYC Norms: In order to ensure that persons belonging to
low income group both in urban and rural areas do not face
difficulty in opening the bank accounts due to the procedural
hassles, the Know Your Customer procedure for opening accounts
has been simplified for those persons who intend to keep balances
A Study of Impact of Financial Inclusion on Rural Development Page 34
not exceeding rupees fifty thousand (Rs. 50,000/-) in all their
accounts taken together and the total credit in all the accounts taken
together is not expected to exceed rupees one lakh (Rs.1, 00,000/-)
in a year.
Easier Credit Facilities: Banks have been asked to consider
introducing General Purpose Credit Card (GCC) facility up to Rs.
25,000/- at their rural and semi urban branches. GCC is in the nature
of revolving credit entitling the holder to withdraw up to the limit
sanctioned. The limit for the purpose can be set based on assessment
of household cash flows; the limits are sanctioned without insistence
on security or purpose. The interest rate on the facility is completely
deregulated. A simplified mechanism for one-time settlement of
overdue loans up to Rs.25,000/- has been suggested for adoption.
Banks have been specifically advised that borrowers with loans
settled under the one time settlement scheme will be eligible to re-
access the formal financial system for fresh credit.
Other Rural Intermediaries: Banks were permitted in January
2006, to use other rural organizations like Nongovernmental
organizations, self-help groups, micro-finance institutions etc for
furthering the cause of financial inclusion.
Using Information Technology: A few Pilot projects have been
initiated to test how technology can be used to increase financial
inclusion. Usha Thorat in her speech (June 19, 2007) pointed to a
few measures: Smart cards for opening bank accounts with
biometric identification. Link to mobile or hand held connectivity
devices ensure that the transactions are recorded in the bank's books
on real time basis. Some State Governments are routing social
security payments as also payments under the National Rural
A Study of Impact of Financial Inclusion on Rural Development Page 35
Employment Guarantee Scheme through such smart cards. The
same delivery channel can be used to provide other financial
services like low cost remittances and insurance. The use of IT also
enables banks to handle the enormous increase in the volume of
transactions for millions of households for processing, credit
scoring, credit record and follow up.
Financial Education: RBI has taken number of measures to
increase financial literacy in the country. It has set up a multilingual
website in 13 languages explaining about banking, money etc. It has
started putting up comic strips to explain various difficult subjects
like importance of saving, RBI's functions and so on. These comics
explain myriad and complex concepts in an entertaining manner.
1.6 Committee on Financial Inclusion (CFI):
Government of India constituted a Committee to enhance financial
inclusion in India on 22 June 2006. The Committee presented its report in
January 2008. The report has analyzed financial inclusion in detail and
confirms the statistics presented below in (Table-1.3)
Financial Inclusion Statistics in India
(a) General :
51.4% of farmer households are financially excluded from both
formal/ informal sources.
Of the total farmer households, only 27% access formal sources of
credit; one third of this group also borrows from non-formal
sources.
Overall, 73% of farmer households have no access to formal
sources of credit.
(b) Region-wise :
A Study of Impact of Financial Inclusion on Rural Development Page 36
Exclusion is most acute in Central, Eastern and North-Eastern
regions - having a concentration of 64% of all financially
excluded farmer households in the country.
Overall indebtedness to formal sources of finance alone is only
19.66% in these three regions.
(c) Occupational Groups:
Marginal farmer households constitute 66% of total farm
households. Only 45% of these households are indebted to either
formal or non formal sources of finance.
About 20% of indebted marginal farmer households have access
to formal sources of credit
Among non-cultivator households nearly 80% do not access credit
from any source.
(d) Social Groups :
Only 36% of ST Farmer households are indebted (SCs and Other
Backward Classes - OBC - 51%) mostly to informal sources.
Analysis of the data provided by RBI thru' its Basic Statistical
Returns reveal that critical exclusion (in terms of credit) is
manifest in 256 districts, spread across 17 States and 1 UT, with a
credit gap of 95% and above. This is in respect of commercial
banks and RRBs.
As per CMIE (March 2006), there are 11.56 crore land holdings.
5.91 crore KCCs have been issued as at the end of March 2006,
which translated into a credit coverage of more than 51% of land
holdings by formal sources. Further data with NABARD on the
doubling of agricultural credit indicates that agricultural loan
disbursements during 2006-07 covered 3.97 crore accounts. Thus,
there are different estimates of the extent of inclusion thru' formal
sources, as the reference period of the data is not uniform
consequently, this has had an impact on quantifying the extent of
A Study of Impact of Financial Inclusion on Rural Development Page 37
levels of exclusion.
(Table-1.3) Source: Committee on Financial Inclusion, IDBI Gilts Ltd
CFI has initiated a mission called National Rural Financial Inclusion plan.
It has set targets to increase FI in the country across regions and across
institutions (banks, rural regional banks etc.). It has suggested measures to
address both, supply and demand constraints in increasing financial
inclusion. The measures to address supply constraints aim to provide
finance (via banks, micro-finance etc). Demand constraints imply that
despite the supply people do not come forward because of number of
factors.
The report says:
It is widely recognized in economic literature that there are at least
five different types of capitals - Physical (roads, buildings, plant and
machinery, infrastructure), Natural (land, water, forests, livestock,
and weather), Human (nutrition, health, education, skills, and
competencies), Social (kinship groups, associations, trust, norms,
institutions) and Financial. One of the causes as well as
consequences of poverty and backwardness is inadequate access to
all these forms of capital. Thus, to look at financial inclusion in an
isolated way is problematic.
The report also suggests measures to address demand constraints in
all the other forms of capital as well. To address human capital it
stresses on health and education; for natural capital - enhance access
to land which could provide collateral; for physical capital- improve
infrastructure; social capital- develop institutions like gram
panchayats etc. The interim report was presented before the Budget
(2007-08). The Finance Minister in the Budget decided to
implement, immediately, two recommendations. The first was to
A Study of Impact of Financial Inclusion on Rural Development Page 38
establish a Financial Inclusion Fund with NABARD for meeting the
cost of developmental and promotional interventions. The second
was to establish a Financial Inclusion Technology Fund to meet the
costs of technology adoption. The overall corpus for each fund was
Rs.500 crore, with initial funding to be contributed by the Central
Government, RBI and NABARD.
In the 2008-09-budget statement, the Finance Minister proposed two
more measures: one to add at least 250 rural household accounts
every year at each of their rural and semi-urban branches of
commercial banks (including regional rural banks) and two, to allow
individuals such as retired bank officers, ex-servicemen etc to be
appointed as business facilitator or business correspondent or credit
counselor. The Finance Minister also proposed to expand the reach
of NABARD, SIDBI and NHB.
1.7 Research Structure:
The research is structured in the following format for better
comprehensiveness of the study. Chapter one is to give a general
introduction and conceptual framework to the topic by defining terms and
explaining topics. Chapter two is a capture of literatures on the topic to
further validate the study. Chapter three is for rationale, objective and
hypothesis for the study. Chapter four is an outline of the methods and
analytical approach of the research. Chapter five is data analysis and
a description of the findings and discussion, and chapter six is for
summary, conclusions and recommendations. Finally, chapter seven is for
the implication of the study.