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    CHAPTER TWO

    FINANCIAL INCLUSION:

    CONCEPTUAL ISSUES AND EMPIRICAL DEBATES

    2.1 The theoretical and empirical literature available on financial inclusion and

    financial exclusion deals with a number of dimensions. The present review of this

    literature has been organized under the following seven subheads, each dealing with

    one specific issue: concepts and definitions of financial inclusion/exclusion;

    determinants/factors of financial inclusion/exclusion; nature of demand for financial

    inclusion, consequences of financial exclusion, rationale for financial inclusion, role of

    financial inclusion in rural development and relevance of financial inclusion in the

    present day context.

    2.2 Financial Inclusion and Financial Exclusion: The Concepts and Definitions

    Defining financial inclusion is considered crucial from the viewpoint of developing a

    conceptual framework and identifying the underlying factors which affect it. A review

    of literature reveals that there is no universally accepted definition of financial

    inclusion. The definitional emphasis of financial inclusion varies across countries and

    geographies, depending on the level of social, economic and financial development of

    that place and priorities of social concerns. Broadly, financial inclusion means access to

    finance and financial services for all in a fair, transparent and equitable manner at an

    affordable cost (Thingalaya et al, 2010). The term financial inclusion was coined in

    the British lexicon as they found that nearly 7.5 million persons did not have a bank

    account (Raju, 2006). In the Indian context the concept emerged prominently in the

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    post-liberalization period with the rising exclusion in the country. Hence, it is necessary

    to understand the concept of financial exclusion before defining financial inclusion.

    One of the early definitions by Leyshon and Thrift (1995) describes financial exclusion

    as the process 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 due to

    problems associated with access, conditions, prices, marketing or self-exclusion in

    response to negative experiences or perceptions. Carbo et al. (2005) have defined

    financial exclusion as broadly the inability (however occasioned) of some societal

    groups to access the financial system. For Mohan (2006), it signifies the lack of access

    by certain segments of the society to appropriate, low-cost, fair and safe financial

    products and services from mainstream providers.

    RBI (2008) has categorized the definitions of financial exclusion in terms of various

    dimensions, such as breadth, focus and degree of exclusion. The breadth

    dimension is the broadest of all definition linking financial exclusion to social

    exclusion, whereas the focus dimension is in the middle of the spectrum that links

    financial exclusion to other dimensions of exclusion. The definitions laying emphasis

    on the focus also vary significantly to include various segments of population such as

    individuals, households, communities and businesses. The narrowest of all definitions,

    degree dimension defines financial exclusion as exclusion from particular sources of

    credit and other financial services. Moreover, there are certain definitions that define it

    in relative terms, i.e., the problem of financial exclusion emanating from increased

    inclusion, leaving a minority of individuals and households behinds. However, this

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    kind of phenomenon is observed mostly in developed economies with high degree of

    financial development.

    By default, in contrast to financial exclusion, financial inclusion broadly means

    universal access to a wide range of financial services at a reasonable cost (Raghuram

    Committee, 2008). In a more concise manner it can be defined as delivery of basic

    banking services at an affordable cost to all sections of the society, especially the vast

    sections of disadvantaged and low income groups who tend to be excluded (Leeladhar,

    2005). The Committee on Financial Inclusion in India defines 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, 2008). Along the similar lines, Chakravarty

    (2006) has defined financial inclusion as extending the benefits of banking to the have-

    nots. When put simply, it means that banks will offer a basic account to anyone who

    wants to have one (Raju, 2006).

    To put differently, financial inclusion implies a coordinated effort in order to deepen

    financial services among a large number of customers (ISED, 2006) and aims at

    providing appropriate, low-cost, fair and safe financial products and services or

    instruments like bank accounts, affordable credit, assets, savings, insurance, payments

    and remittance facility as well as money advice from mainstream providers to all

    (Mohan, 2006). Similar views have been expressed by Thorat (2007) to whom financial

    inclusion means the provision of affordable financial services (viz., access to payments

    and remittance facilities, savings, loans and insurance services) by the formal financial

    system to those who tend to be excluded.

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    Bernanke (2006) adds a new dimension to the understanding of financial inclusion by

    saying that it requires substantial efforts in understanding the needs of the customer,

    counseling, financial literacy, screening and monitoring. Dev (2006) in his definition

    broadens the scope of financial inclusion by emphasizing the role of new institutional

    partners such as SHG-linkage and microfinance institutions.

    In a broader sense, financial inclusion should not only focus on financial services like

    credit, savings, etc. but also on an increase in productivity and sustainability of farmers

    and other vulnerable groups (Dev, 2006). Arunachalam (2008) has also expressed the

    similar view. According to him, financial inclusion should be about going beyond

    savings bank accounts and consumption credit, to devise/deliver financial products that

    can help in overcoming market imperfections and facilitate risk/vulnerability

    management by (and for) the poor in the context of their fragile livelihoods and the

    vicious cycle of poverty, often caused by structural weaknesses and other factors.

    World Bank (2008) has presented the concept of financial inclusion in a comprehensive

    manner. It defines financial inclusion or broad access to financial services as absence of

    price or non price barriers in the use of financial services. It does not, however, mean

    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 stressed the

    distinction between access to and use of financial services as it has implications for

    policy makers. Access essentially refers to the supply of services, whereas use is

    determined by demand as well as supply. The Report also highlighted the need of a

    clear distinction to be made between voluntary and involuntary exclusion among the

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    non-users of formal financial services. Voluntary exclusion refers to those who claim

    that they do not want a financial service, even if they are not disallowed by the

    institutions. Whereas involuntary exclusion refers to all those who would like to avail

    the financial services but are unable to do so because of some barriers. The challenge of

    financial inclusion is the involuntarily excluded as they are the ones who, despite

    demanding financial services, do not have access to them (Bhavani and Bhanumurthy,

    2012; Mehrotra et al, 2009).

    It is evident from most of the definitions that availability and accessibility are two

    important dimensions of financial inclusion/exclusion. However, an inclusive financial

    system does not only imply availability and accessibility. It should also take into

    account the usage of the services available and accessible. Sarma (2008) also

    emphasizes these three aspects of financial inclusion. According to her, financial

    inclusion is a process that ensures the ease of access, availability and usage of the

    formal financial system for all members of an economy. However, unless a service is

    available, the question of accessing the service does not arise. Hence, financial

    inclusion can be redefined as a process that enhances availability, smoothens

    accessibility and ensures usage of the basic financial products and services for all

    sections of the society. It is this definition that has been used as a yardstick throughout

    this study.

    The literature also points out that there are gradations of financial exclusion/inclusion.

    These range from those who are hyper-included to those who are unbanked. The

    unbanked are excluded by the banks and are without any form of transactional bank

    account and have no access to mainstream financial services. In between these

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    extremes, there are underbanked or the marginally banked ones, i.e. those who have a

    bank account but do not use it regularly or adequately to manage their money

    (Kempson, 2006). A report on financial exclusion in Australia in 2004 by ANZ

    Banking Group has highlighted another group who are included, but using

    inappropriate products these individuals are sometimes victims of inappropriate

    financial products.

    According to Leeladhar (2005), there may be various degrees of financial inclusion or

    exclusion. There may be some people who are denied access to even the most basic

    financial services. They may be called as super excluded. On the other hand, there

    may be some super included people who have access to a wide range of financial

    services and products. In between are those who use the banking services only for

    deposits and withdrawals of money, who may have only restricted access to the

    financial system, and may not enjoy the flexibility of access offered to more affluent

    customers.

    In view of the above discussion, the term financial inclusion in the context of present

    study has been defined as a process that enhances availability, smoothens accessibility

    and ensures usage of the basic financial products and services for all sections of the

    society. During the course of study, the extent of financial inclusion/exclusion will be

    measured keeping all these dimensions in perspective.

    2.3 Determinants of Financial Inclusion/Exclusion

    The nature and forms of financial inclusion/exclusion are varied and so are the factors

    responsible for it. Therefore, no single factor explains the phenomenon. The nature and

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    extent of financial inclusion/exclusion are influenced by several factors which can be

    classified broadly into supply and demand side factors. The Reserve Banks Committee

    on the Financial Sector Plan for Northeastern Region (RBI, 2006) highlighting some of

    the major issues holds that the low level of financial inclusion in the region including

    Assam is mostly related to supply related issues, i.e. lack of appropriate financial

    services. Dev (2006) has expressed the similar view that there are many supply side

    problems for commercial banks, RRBs and cooperative banks. The number of bank

    branches in the state has increased marginally whereas population has increased at an

    alarming rate leading to high APPBO in the state. The distribution of bank branches in

    the states has been quite inadequate and uneven, and mostly located in and around the

    state capital and district headquarters. The unviable branch-intensive banking in rural

    areas, which happens due to a number of reasons, such as, the high cost of posting bank

    personnel to rural areas, the lack of local knowledge of bank staff, infrastructural and

    technology problems in rural areas, bureaucratic procedures, corruptions, political

    interference, non-performing assets, especially in lending to small-scale industries etc.

    also plays an important part in limiting the expansion of branch network in the rural

    areas. Further, the peculiar geographical topography having large hilly area with sparse

    population, scattered villages and poor and costly and sometimes ineffective transport

    also curtails possibilities of approaching a formal sector branch. Then, the poor services

    at bank branches also play an important part. Inconvenient timings, delay in services

    because of cumbersome documentation and procedures, unsuitable products, linguistic

    incomprehensibility, etc. are some of the important factors which make the poor and

    needy people take resort to the informal sources. And to all these, the indifferent

    approach of the individual service providers and insensitivity towards the needy add to

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    the low credibility of the banking sector in the eyes of the deprived class. Moreover, in

    the hilly region, which comprises some parts of Assam, the penetration of bank credit is

    also hindered by non-establishment of transferable property rights on land

    (Chakravarty, 2006; Dev, 2006; RBI, 2006).

    The poor people do have demand for financial services; in fact, they often bear the high

    costs charged by the informal financial markets for various types of services, apart from

    the risk involved in such products (RBI, 2006). The fact that the poor are capable of

    weekly repayments shows that the poor are capable of savings, even if it is only in

    small amounts. However, one of the reasons why the poor might not save in financial

    form might be the lack of appropriate products.

    According to Thingalaya et al (2010), appropriateness of the financial products/services

    and how their availability is marketed are crucial in financial inclusion. Exclusion

    occurs because the products are inconvenient, inflexible, not customized and are of low

    quality (Arunachalam, 2008; Basu and Srivastava, 2005). Sinha and Subramanian

    (2007) express the similar view that the consumer/clients dont want to settle for cheap,

    stripped-down versions of mainstream products. They want attractive offers. The poor

    economics of serving this group, however, undercuts the formal sectors ability to

    develop products for them. Many offerings in the informal sector provide features like

    suitability, timeliness, convenience, flexibility, adequacy and better understanding of

    the demands of the needy, etc., whereas most offerings in formal sector are

    comparatively rigid, unsuitable and inconvenient. This gives the informal sources an

    edge over the formal sources.

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    Even if the products are appropriate, terms and conditions attached to products such as

    minimum balance requirements and conditions relating to the use of accounts, often

    dissuade people from using such products/services. In addition, many banks have n...

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