Financial Inclusion

RURAL PLANNING & CREDIT DEPARTMENT

RESERVE BANK OF INDIA, NEW DELHI

PROJECT REPORT ON FINANCIAL INCLUSION

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES (UNIVERSITY OF DELHI)

VIVEK VIHAR, NEW DELHI-110095

F i n a n c i a l I n c l u s i o n P a g e | 1

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA, NEW DELHI

ACKNOWLEDGEMENT

I wish to express my gratitude to Reserve bank of India, New Delhi, for giving me an

opportunity to be a part of it and enhance my knowledge by granting permission to do my

summer project under RBI Young Scholar Award Scheme.

I’m grateful to my Mentor Dr. Dileep Singh (AGM,RPCD),Mr. S.Chaudhri (GM, RPCD), Mrs.

Usha Jain, Mrs. Harmesh Khanna (GM, HRDD), Mr. Rajul Naithani,Manager (HRDD), Mr.

Kulwant Singh (AM,HRDD),& Mr. Sandeep Kohli(AM, HRDD) for their invaluable guidance

and cooperation during the course of the project. They provided me with their assistance

and support whenever needed that has been instrumental in completion of this project.

The learning during the project was immense & invaluable. My work includes study of

Financial Inclusion, reason behind a large number of resident has no access to the banking

services, and how could we deliver Financial Services to excluded section of society, various

initiatives taken by Government of India and Reserve Bank Of India, strategical drivers for

enabling financial inclusion viz. Banks, Regional Rural Banks, Urban Co-Operative Banks

(UCBs), Microfinance Institutions, Design & Delivery Issues in Microfinance etc., I also

conducted survey to assess the impact of various policy initiative in Hari Nagar(west Delhi).

RAMAN KUMAR

RBI YOUNG SCHOLAR 2009

BFIA,

SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES,DU



CONTENT

CHAPTER TITLE PAGE NO.

1 FINANCIAL EXCLUSION

I. INTRODUCTION II. DEFINITION

III. THE INDIAN SCENARIO

3-8

2 FINANCIAL INCLUSION 9-12

3 CAUSES OF FINANCIAL EXCLUSIO

I. DEMAND SIDE BARRIERS II. SUPPLY SIDE BARRIERS

13-16

4 CONSEQUENCES OF FINANCIAL EXCLUSION 17-20

5 POLICY DEVELOPMENTS

I. FIRST PHASE DEVELOPMENTS (1969-1981) II. SECOND PHASE – ANNUAL POLICY (2005-2006)

III. RANGRAJAN COMMITTEE

21-29

6 HOW GOVERNMENT AND RBI CAN BUILD ON EXISTING BANKING

STRUCTURE TO PROVIDE FINANCIAL SERVICES TO ALL

30-33

7 PRESENT STATUS OF FINANCIAL INCLUSION IN THE COUNTRY 34-36

8 STUDY RESULT

I. HOUSEHOLD PROFILE II. FINANCIAL POSITION

III. BANKING HABITS IV. THOSE WHO DO NOT HAVE BANK ACCOUNT V. CREDIT PATTERN

VI. SUGGESTIONS

37

9 CONCLUSION 54

BIBLIOGRAPHY 55

GLOSSARY 56

QUESTIONNAIRE

MASTER CHART



Chapter -1

FINANCIAL EXCLUSION

INTRODUCTION

The World is moving at an amazing pace. Thanks to the advances in technologies, distances

have become meaningless. Globalization has enabled the rise of global trade leading to

wealth generation in developed as well as developing countries. Wealth can be created in

any part of the world with a single click of the mouse. Developing nations, like India have

immensely benefited from the globalizing economy. Wealth has been pouring into the

country as investments (both direct and institutional). Indian companies are acquiring

companies all over the world, hence benefitting from expansion. This has directly affected

the lives of many citizens in our country. For many, there has been a dramatic increase in

the disposable income. The savings, consumption and investment patterns have changed in

the past few years. This has meant that there has been an increase in demand for many

financial services from different financial firms.

The market has responded to this soaring demand with making attractive offers and services

for the customers at affordable rates. The liberalization of the economy in the 1990s has

brought in new players into the field which has not only brought in some much needed

fresh air to the stagnant financial sector but also competition for the same market space

which was relatively unknown in the financial sector till then. Since then, there have been

progressive reforms in the financial sector allowing for better and easier facilities and

options to the consumer. An increasing financially aware middle class have realized the

importance of financial services. Banks have streamlined and rationalized themselves to

meet with the changing demands of the people. Banks have become partners in growth for

many offering them a safer and secure future.

However, not all the reforms in the financial services sector have still been able to bring in

the other half of India’s population who are un-banked. There are many reasons that are

obvious for this kind of financial exclusion. The new surge in the economy has not yet

percolated into the lower strata of the society. It is easy to blame the capitalist growth for

this sort of income disparities. Even after 60 years of Indian independence, 1/3 of our

population is still illiterate (let alone financially literate) and at least 26% of the population

still lives under the poverty line. There are many statistics, which goes on to prove that for

even a developing nation India has a long way to go.

Most of the un-banked or financially excluded population of India live in rural areas;

nevertheless, there is also a significant amount of the urban population of India who face

the same situation even with easy access to banks. Many of the financially excluded in these



areas are illiterates earning a meagre income just enough to sustain their daily needs. For

such people, banking still remains an unknown phenomena or an elitist affair. It is easier for

them to keep their money at their house or with some moneylenders and easily make

immediate purchases (which make up most of their expenditure) rather than to follow the

cumbersome process at banks. A lot of the financially excluded populations are at the mercy

of moneylenders or pawn shop owners. They should be made a part of the formal banking

structure so that they could also have the benefits that the others enjoy. By making them

financially inclusive, we are making their financial position less volatile. At the same time,

we are treating them on an equal par with other members of the population so that they

would not be denied of access to a basic service such as banking.

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 1990’s 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.

DEFINITION

The definition of financial exclusion will range upon several dimensions, but the most

important dimension are the breadth & focus of financial exclusion and the concept of

relativity or degree i.e. Financial Exclusion is defined in relation to some predefined

standard(i.e. inclusion).

Breadth means the scope of definition; the broadest definitions of financial exclusion

recognize that there are many factors interacting between financial exclusion and social

exclusion and disadvantage. The type of such a broad definition is found in the seminal work

of Leyshon and Thrift, who define financial exclusion as “processes that prevent poor and

disadvantaged social groups from gaining access to the financial system”1.

The other end of extreme definitions are narrowed its scope, for example, while Rogaly has

a broad view of social exclusion, his working definition of financial exclusion is narrow which

he stated as

“Exclusion from particular sources of credit and other financial services (including insurance,

bill-payment services, and accessible and appropriate deposit accounts)”2

1

Leyshon & Thrift 1995 2 Rogaly 1999



Extreme definition may be seen as a somewhat sweeping definition, with its apparent

reference to access to the financial system as a whole, rather than access to specific

financial services or products and access to specific channels of distribution. The other

extreme of definitions of financial exclusion are those that take a very narrow perspective

based on a lack of ownership of, or access to, particular types of financial services or

products, including forms of credit and insurance.

A person transacting regularly with his saving fund bank account and availing very basic of

services i.e. payment and remittances or for saving some of part of his income to meet

future contingencies/future requirement is said to be financially included despite the fact

that he is not availing all/majority of other financial services such as Insurance, investment

schemes etc.

In other words, an individual having access to mainstream-necessary financially services is

considered to be financially included as opposed to the first extreme definition stated

above.

The focus here refers to the group of people (communities) to household, a region to the

specific type of business; this is more often implicitly rather than explicitly acknowledged in

the literature

Further study of literature suggest that the operational definitions have also evolved from

the underlying public policy concerns that many people, particularly those living on low

income, cannot access mainstream financial products such as bank accounts and low cost

loans, which, in turn, imposes real costs on them -often the most vulnerable people.3

Operational definitions are context-specific, originating from country-specific problems of

financial exclusion and socio-economic conditions. Thus, the contexts specific dimensions of

financial exclusion assume importance from the public policy perspective. In recent

development definitions have witnessed a shift in emphasis from the earlier ones, which

defined financial inclusion and exclusion largely in terms of physical access, to a wider

definition covering access to and use and understanding of products and services. This also

underscores the role of financial institutions or service providers involved in the process

Finally, definitions of financial exclusion vary considerably according to the dimensions such

as the concept of relativity, i.e., financial exclusion defined relative to some standard (i.e.,

inclusion). This line of thinking defines the problem of financial exclusion as that emanating

from increased inclusion, leaving a minority of individuals and households behind4.

3 H.M. Treasury,2004

4 Kempson et al., 2000



Figure 1: Anatomy of Various Financial Products or Services and the Institutional Structure

Thus, there exists duality of hyper inclusion with some having access to a range of financial

products and at the same time a minority lacking even the basic banking services. This

phenomenon is observed mostly in developed countries with high degree of financial

development.

THE INDIAN SCENARIO

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. There could be multiple

levels of financial inclusion and exclusion. At one extreme, it is possible to identify the

‘super-included’, i.e., those customers who are actively and persistently courted by the

financial services industry, and who have at their disposal a wide range of financial services

and products. At the other extreme, we may have the financially excluded, who are denied

access to even the most basic of financial products.

In between are those who use the banking services only for deposits and withdrawals of

money. But these persons may have only restricted access to the financial system, and may

not enjoy the flexibility of access offered to more affluent customers.

Further, Financial exclusion may not definitely 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.



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 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.

Financial exclusion could be looked at in two ways:

Lack of access to financial services mainly payment system, which could be due to

several reasons such as:

Lack of sources of financial services in our rural areas, which are popular for the

ubiquitous moneylenders but do not have (safe) saving deposit and insurance

services.

High information barriers and low awareness especially for women and in rural

areas.

Inadequate access to formal financial institutions that exist to the extent that the

banks could not extend their outreach to the poor due to various reasons like high

cost of operations, less volume and more number of clients, etc. among many

others.

Poor functioning and financial history of some beleaguered financial institutions such

as financial cooperatives in many states, which limit the effectiveness of their

outreach figures.

Primary Agricultural Cooperative Societies (PACS), which number around one lakh

are also often exclusionary, as their membership is restricted to persons with land

ownership. Even to their members, not many PACS offer saving services.

Lack of access to formal financial services in of both rural and urban areas, but is a larger

issue in cities and small towns. The distinction between access to formal and informal

services is crucial to understand, as informal financial markets suffer from several

imperfections, which the poor pay for in many ways.

Some attributes of informal financial services, due to which there is exclusion are:

A. High risks to saving: loss of savings is an easily discernible phenomenon in low-

income neighbourhoods in urban areas.

B. High cost of credit and exploitative terms: credit against collateral such as gold is

even more expensive than the effective interest rates, similarly, rates paid by

hawkers and vendors who repay on daily basis are very high.



C. High cost and leakages in money transfers: the delays in sending money home

through all informal channels add to these.

D. Near absence of insurance and pension services: life, asset, and health insurance

needs.

Another key aspect of financial exclusion is the lack of “financial education and advice”. In

India, as the basic literacy rate is low supporting basic financial capability is indeed not just

necessary, but also equally difficult.

Financial exclusion is often related to more complex social exclusion issues, which makes

financial literacy and access to basic financial services even more complex.



Chapter -2

FINANCIAL INCLUSION

The word Financial Inclusion could be described as being the opposite of financial exclusion.

However, financial inclusion is more of a process rather than a phenomenon.

It is a process by which financial services are made accessible to all sections of the

population. It is a conscious attempt to bring the un-banked people into banking.

“The process of ensuring access to financial services and timely and adequate credit where

needed by vulnerable groups such as weaker sections and low income groups at an

affordable cost”

(The Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan, 2008))

Financial Inclusion does not merely mean access to credit for the poor, but also other

financial services such as Insurance. Financial Inclusion allows the state to have an easier

access to its citizens, with an inclusive population, for e.g.: the government could reduce the

transaction cost of payments like pensions, or unemployment benefits.

It could prove to be a boon in a situation like a natural disaster, a financially included

population means the government will have much less headaches in ensuring that all the

people get the benefits. It allows for more transparency leading to curtailing corruption and

bureaucratic barriers in reaching out to the poor and weaker sections. An intelligent banking

population could go a long way by effectively securing themselves a safer future.

The objective of Financial Inclusion

The access to various mainstream financial services e.g. saving bank account, credit,

insurance, payments and remittance and financial and credit advisory services.

The main objective is to provide the benefit of vast formal financial market,& protect

them from exploitation of informal credit market, so that they can be brought into

the mainstream



WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL SERVICES

NECESSARY FOR FINANCIAL INCLUSION OF HOUSEHOLD?

Basic saving bank account- an account with all basic feature of saving account.

Payment and remittances services –

Immediate credit – in case of contingencies like accidents, medical treatment etc,

they should be provided immediate credit.

Entrepreneurial credit – this means, to run/expand small scale business/shop or any

economic activity, easy credit should be provided, so that financial dependence can

be created amongst households.

Housing finance- funding for purchasing new residential or reconstruction

Insurance – life\healthcare- to plan future better

Financial education\credit counselling centres – to guide them which product suits

them better, where to go credit needs, what are various services available to better

their personal financial planning.

BASIC SAVING BANK ACCOUNT

IMMEDIATE CREDIT

ENTREPRENEURIAL CREDIT

HOUSING FINANCE

PAYMENT & REMITTANCES SERVICES

INSURANCE – LIFE/HEALTHCARE

FINANCIAL EDUCATION/CREDIT COUNSELING

Figure 2: Mainstream Financial Services



Daily cash income

Frequently purchases stock, mainly in cash

Irregular income due to seasonality of occupation

No income, If he misses a day due ill health

To send money regularly to his family living in village

To make small, regular payment for fee for child’s education

Financial Inclusion therefore, is delivery of not only banking, but also other financial services

like insurance, pension, remittance, mutual funds, etc. delivered at affordable, though

market driven costs. Opening a no-frills account is just a beginning to a continuous process

of providing banking and financial services.

Once the first step of safety of savings is achieved, the poor require access to schemes and

products which allow their savings to grow at rates which provide them growth beyond

mere inflation protection.

To understand it better, let’s take life of migrant street vender living

in almost every part of Delhi, and his financial life will look like this-->

WHAT TYPE OF PRODUCT OR SERVICES IS

REQUIRED FOR THIS TYPE OF CUSTOMER5??

POSSIBLY

1. A bank account, where he/she can save small

amounts at regular intervals ideally with

savings being collected at their place of work or

a specified point of transaction (SPOT) in the

locality

2. Micro-Credit for working capital to increase

stock and business. This credit can be short

term and repayment to be configured at

regular intervals. Savings history and credibility

checks to be used as a proxy for collateral.

3. Insurance for life

4. Health Insurance for minor illnesses and

hospitalization

5. Investment plan for child's education

6. Pension for old age

Working or operational definitions of financial exclusion generally focus on ownership or

access to particular financial products and services. The focus narrows down mainly to the

5 As discussed in paper titled Universal Financial Inclusion in India: The Way Forward by S.Ramesh and Preeti

Sahai of BASIX



products and services provided by the mainstream financial service providers (Meadows et

al., 2004). Such financial products may include money transmission, home insurance, short

and long-term credit and savings6. Furthermore, the operational definitions have also

evolved from the underlying public policy concerns that many people, particularly those

living on low income, cannot access mainstream financial products such as bank accounts

and low cost loans, which, in turn, imposes real costs on them - often the most vulnerable

people7

More importantly, Financial Inclusion is imperative for creating an inclusive economy at all

fronts. This attains special importance at this stage of rising food and oil prices, without an

inclusive economy the country’s development will suffer. In the recently concluded G8

meeting in Hokkaido, Japan, the World Bank chief Robert Zoellick reiterated the importance

of creating an inclusive economy in an increasingly globalized World.

6 Bridgeman, 1999 7 H.M. Treasury, 2004



Chapter -3

CAUSES OF FINANCIAL EXCLUSION

Financial Exclusion may also have resulted from a variety of structural factors such as

unavailability of products suiting their requirements, stringent documentation and collateral

requirements and increased competition in financial services. The Causes of financial

exclusion can be identify broadly in two categories, first the demand side and the second

supply side.

A. DEMAND SIDE BARRIERS

The people who have the requirement\need but still not demanding\availing the financial

services\products which can be due to the following reasons:

i. Low Income: A higher share of population below the poverty line results in lower

demand for financial services as the poor may not have savings to place as deposit in

savings banks; hence the market lacks incentives in providing financial service/products.

Most the people belonging to financially excluded group are having irregular/seasonal

income. Hence opening of a bank account and operating it i.e. deposit and withdrawal in

very small denominations with high frequency will increase the cost of transaction,

adding to that they also anticipate that bank will refuse if they transact with so small

amount.

Further provided that, as they have low earning they cannot maintain minimum balance

requirements of a normal saving bank account which ranges from Rs. 500 to Rs 5000(Rs.

500 in case of PSB and Rs. 5000 for Pvt. Sector Banks) and various annual maintenance

charges(AMC) levied by banks.

ii. Transaction cost: Vast number of rural population resides in small villages which

are often located in remote areas devoid of financial services. Consequently, the overall

transaction cost to the customer in terms of both time and money proves to be a major

deterrent for visiting financial institutions. The excluded section of the society find

informal sector more reachable due to proximity and ease of transaction.

iii. Financial Services Being Very Complex In Nature: excluded sections of

the society find dealing with organized financial sector cumbersome.



iv. 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 that 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 cultural reasons for trusting a moneylender rather than a bank.

Distance from bank branch, branch timings, cumbersome documentation/procedures,

unsuitable products, language, staff attitude are common reasons – Higher transaction

cost

v. Low literacy level: The lack of financial awareness about the benefits of the

banking and also illiteracy act as stumbling blocks to financial inclusion. The lack of

financial awareness maybe the single most risk in financial inclusion as those who are

newly included in the financial sector have to maintained within the formal financial

sector.

vi. Legal identity: Lack of legal identities like identity cards, birth certificates or written

records often exclude women, ethnic minorities, economic and political refugees and

migrant workers from accessing financial services.

vii. Sophisticated Financial Terminologies: Bankers often use complex financial

terminologies, which the masses are unable to comprehend and hence do not

approach for financial services voluntarily.

viii. Terms and conditions: Terms and conditions attached to products such as

minimum balance requirements and conditions relating to the use of accounts as in the

case of saving bank account often dissuade people from using such products/services

Further, term and conditions and its framework is generally so tedious and detailed that

understanding it is not possible for those who cannot even write their name or are less

literate and do not understand English or Hindi(in case of some regional rural areas).

ix. Psychological and cultural barriers: The feeling that banks are not interested

to look into their cause has led to self-exclusion for many of the low income groups.

However, cultural and religious barriers to banking have also been observed in some of

the countries.



x. Disincentives for the consumer: 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 background.

The bank 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.

B. Supply side barriers

Some of the important causes of relatively low extension of institutional credit in the rural

areas are risk perception, cost of its assessment and management, lack of rural

infrastructure, and vast geographical spread of the rural areas with more than half a million

villages, some sparsely populated

i. Perception among banks about rural population: Generally, there exists a

perception among banks that large number of rural population is un-bankable as their

capacity to save is limited. Therefore, they do not look favourably at small loans often

required by marginalized section. Such loans are considered to be non-productive.

ii. Miniscule margin in handling small transactions: As the majority of rural

population resides in small villages that too in remote areas, banks find small

transactions cost ineffective.

iii. KYC requirements: The KYC requirements of independent documentary proof of

identity and address can be a very important barrier in having a bank account especially

for migrants and slum dwellers.

iv. Unsuitable products: One of the most important reasons for the majority of rural

population not approaching the formal sector for financial services is the unsuitability of

products and services being offered to them. For example, most of their credit needs are

in form of small lump sums and banks are reluctant to give small amounts of loan at

frequent intervals. Consequently, they have to resort to borrowing money from

moneylenders at uxorious rates.

v. Staff attitude: As public sector banks(PSBs) cater to more than 70% of banked

population and about 90% of rural banked population, a majority of staffs in these PSBs



remain insensitive to needs of customer and shirk away from duty. The situation is even

worst in rural branches where they behave with rural poor in a condescending manner.

vi. Poor market linkage: It is often argued that we may have been growing second

fastest in the world, but still our 40-55% of people living in rural and semi-urban areas

do not have access to basic necessities of life. 75% of villages in rural areas have no

electricity arrangement, so it can be imagined that how much penetration market would

be having especially when it comes to providing financial services/products, this may be

that they are reluctant or there is no institutional as well as physical. Therefore there is

no institutional infrastructure available in the rural area.

Poor market linkage or say penetration of service providers also constitutes the major

factors of financial exclusion.

vii. 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 on smaller

transactions and the speculated high risk in lending credit to the lower strata of the

society, they see banking with 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. Unless banks see any incentive in banking with the weaker sections

of the society, they would not be willing to do so.

xi. Poor credit record: Areas with poor credit record, bad past experience, socially

unstable and poor recovery of previous loan/credit given are observed to be highly

financially excluded, as banks blacklist such areas as the part of their risk management

strategy.



Chapter -4

CONSEQUENCES OF FINANCIAL

EXCLUSION

There are three dimensions of consequences that financial exclusion has on the people

affected:

Firstly, financial exclusion can generate financial consequences by affecting directly or

indirectly the way in which the individuals can raise, allocate, and use their monetary

resources.

Secondly, a wider dimension of financial exclusion can be identified as socio-economical

consequences i.e. groups which are socially excluded are mostly also found financially

excluded.

These consequences are affecting individuals’ patterns of consumption, the way they

participate to economic activities or access to social welfare and the distribution of incomes

and wealth. They impact the way in which people behave both in terms of purchase

decisions and the way in which they choose to spend their time, as well as their overall

quality of life.

Finally, a last dimension can be identified as the social consequences generated by financial

exclusion. These are the consequences affecting the various links that are binding the

individuals: link to corresponding to self esteem, links binding to the society and links

binding to community and/or relationships with other individual or groups.

Access to a bank account, credit and insurance are now widely regarded as essential

supports for personal financial management and for undertaking transactions in modern

societies (Speak and Graham, 1999). According to the Treasury Committee, UK (2006),

financial exclusion can impose significant costs on individuals, families and society as a

whole. These include

I. Barriers to employment as employers may require wages to be paid into a bank

account;

II. Opportunities to save and borrow can be difficult to access;

III. Owning or obtaining assets can be difficult;

IV. Difficulty in smoothening income to cope with shocks; and

V. Exclusion from mainstream society.



In terms of cost to the individuals, financial exclusion leads to higher charges for basic

financial transactions like money transfer and expensive credit, besides all round

impediments in basic/ minimum transactions involved in earning livelihood and day to day

living. It could also lead to denial of access to better products or services that may require a

bank account. It exposes the individual to the inherent risk in holding and storing money –

operating solely on a cash basis increases vulnerability to loss or theft. Individuals/families

could get sucked into a cycle of poverty and exclusion and turn to high cost credit from

moneylenders, resulting in greater financial strain and unmanageable debt.

At the wider level of the society and the nation, financial exclusion leads to social exclusion,

poverty as well as all the other associated economic and social problems. Thus, financial

exclusion is often a symptom as well as a cause of poverty. Financial exclusion is not evenly

distributed throughout society; it is concentrated among the most disadvantaged groups

and communities and, as a result, contributes to a much wider problem of social exclusion.

A significant portion of demand for credit by rural households arises in order to ease the

financial burden of crop failures, illness or death, and health care. In the case of

microenterprises, credit may be needed to achieve a reasonable and viable scale of

activities. The rising entrepreneurship spanning rural, semi-urban and urban areas,

particularly in the unorganized and informal sectors may give rise to large potential demand

for credit. The evidence on the demand for credit in India suggests that medical and

financial emergencies are the major reasons for household borrowings. Medical

emergencies were particularly high for the lowest income quartile (IIMS, 2007)8 . Thus, the

difficulty in obtaining finance from formal sources has major social implications.

Another cost of financial exclusion is the loss of business opportunity for banks, particularly

in the medium-term. Banks often avoid extending their services to lower income groups

because of initial cost of expanding the coverage may sometimes exceed the revenue

generated from such operations. These business related concerns of banks were, however,

meaningful when technology development was at a nascent stage and expanding the

coverage of financial services required substantial initial investment. The strides in

technology have now reduced the required initial investment in a significant manner. What

is required is to explore the appropriate technology which is suitable to socio-economic

conditions of the region under consideration. Moreover, availability and usage of financial

services by the otherwise excluded population groups would lead to increase in their

income levels and savings. This, in turn, would have the potential to increase savings

deposits as well as credit demand, implying profitable business for banks in the medium-

term.

8 Invest India Incomes and Savings Survey undertaken by Invest India Market Solutions (IIMS).



Two other factors have often been cited as the consequences of financial exclusion. First, it

complicates day-to-day cash flow management - being financially excluded means

households, and micro and small enterprises deal entirely in cash and are susceptible to

irregular cash flows. Second, lack of financial planning and security in the absence of access

to bank accounts and other saving opportunities for people in the unorganized sector limits

their options to make provisions for their old age. From the macroeconomic standpoint,

absence of formal savings can be problematic in two respects. First, people who save by

informal means rarely benefit from the interest rate and tax advantages that people using

formal methods of savings enjoy. Second, informal saving channels are much less secure

than formal saving facilities. The resultant lack of savings and saving avenues means

recourse to non-formal lenders such as moneylenders. This, in turn, could lead to two

adverse consequences –

a. Exposure to higher interest rates charged by informal lenders; and

b. The inability of customers to service the loans or to repay them

As loans from non-formal lenders are often secured against the borrower’s property, this

raises the problem of inter-linkage between two apparently separate markets. Judged in this

specific context, financial exclusion is a serious concern among low-income households,

mainly located in rural areas

To sum up, the nature and forms of exclusion and the factors responsible for it are varied

and, thus, no single factor could explain the phenomenon. The principal barriers in the

expansion of financial services are often identified as physical access, high charges and

penalties, conditions attached to products which make them inappropriate or complicated

and perceptions of financial service institutions which are thought to be unwelcoming to

low income people.

There has also been particular emphasis on socio-cultural factors that matter for an

individual to access financial services. The most conspicuous dimension of exclusion is that a

majority of the low-income population do not have access to the very basic financial

services. Even amongst those who have access to finance, most of them are underserved in

terms of quality and quantity of products and services.

The critical dimensions of financial exclusion include access exclusion, condition exclusion

(conditions attached to financial products), price exclusion, and self exclusion because of

the fear of refusal to access by the service providers. The financial exclusion process

becomes self-reinforcing and can often be an important factor in social exclusion, especially

for communities with limited access to financial products, particularly in rural areas. Apart

from the above mentioned supply side factors, demand side factors may also significantly

affect the extent of financial inclusion. For instance, low level of income and hence low



savings would result in lower deposits. Similarly, at low level of income, the ability to borrow

is affected because of low repayment capacity and inability to provide collateral. In the

Indian context, both demand and supply side factors have an important bearing on the

usage of financial/banking services.



•Nationalisation of banks

•presecription of priority sector targets

•lead bank scheme

1969-1991

•No Fril bank account

•simple KYC norms

•NGOs, SHGs, MFIs etc were allowed

•easier credit facilities

Annual Policy 2005-2006

•determining new model for effective reach

•leveraging on technology based solutions

•improvements in

•Credit absorption capcaility

•exisiting formal credit delivery system

Rangrajan Committee Report

Chapter - 5

Policy Developments

We have seen in the previous chapter that in our country the financial services has been\being used

by a very limited group of people\individuals. To enlarge the area and service sector, certain policy

measures have been taken by government.

Policy development in India for financial inclusion can be seen in three stages

I. FIRST PHASE DEVELOPMENTS (1969-1981)

In 1969, the banks were nationalised in order to spread bank’s branch network in order

to develop strong banking system which can mobilise res ources/deposits and

channel them into productive/needy sections of society and also government

wanted to use it as an important agent of change. So, the planning strategy recognized

the critical role of the availability of credit and financial services to the public at large in the

holistic development of the country with the benefits of economic growth being distributed

in a democratic manner. In recognition of this role, the authorities modified the policy

framework from time to time to ensure that the financial services needs of various

segments of the society were met satisfactorily

Before 1990, several initiatives were undertaken for enhancing the use of the banking

system for sustainable and equitable growth. These included



I. Nationalization of private sector banks,

II. Introduction of priority sector lending norms,

III. The Lead Bank Scheme,

IV. Branch licensing norms with focus on rural/semi-urban branches,

V. Interest rate ceilings for credit to the weaker sections and

VI. Creation of specialised financial institutions to cater to the requirement of the

agriculture and the rural sectors having bulk of the poor population.

SOCIAL NETWORKING APPROACH

The announcement of the policy of social control over banks was made in December 1967

with a view to securing a better alignment of the banking system with the needs of

economic policy. The National Credit Council was set up in February 1968 mainly to assess

periodically the demand for bank credit from various sectors of the economy and to

determine the priorities for grant of loans and advances. Social control of banking policy was

soon followed by the nationalisation of major Indian banks in 1969. The immediate tasks set

for the nationalised banks were mobilisation of deposits on a massive scale and lending of

funds for all productive activities. A special emphasis was laid on providing credit facilities to

the weaker sections of the economy.

THE PRIORITY SECTOR APPROACH

The administrative framework for rural lending in India was provided by the Lead Bank

Scheme introduced in 1969, which was an important step towards implementation of the

two-fold objectives of deposit mobilisation on an extensive scale and stepping up of lending

to weaker sections of the economy. Realising that the flow of credit to employment

oriented sectors was inadequate; the priority sector guidelines were issued to the banks by

the Reserve Bank in the late 1960s to step up the flow of bank credit to agriculture, small-

scale industry, self-employed, small business and the weaker sections within these sectors.

The target for priority sector lending was gradually increased to 40 per cent of advances in

the case of domestic banks (32 per cent, inclusive of export credit, in the case of foreign

banks) for specified priority sectors. Sub targets under the priority sector, along with other

guidelines including those relating to Government sponsored programmes, were used to

encourage the flow of credit to the identified vulnerable sections of the population such as

scheduled castes, religious minorities and scheduled tribes. The Differential Rate of Interest

(DRI) Scheme was instituted in 1972 to provide credit at concessional rate to low income

groups in the country

LEAD BANK SCHEME APPROACH

But all these measure were focused towards inclusion of a sector, regional areas etc., there

was a very less or no emphasis was on financial inclusion of Individual/household level. The



promotional aspects of banking policy have come into greater prominence. The major

emphasis of the branch licensing policy during the 1970s and the 1980s was on expansion of

commercial bank branches in rural areas, resulting in a significant expansion of bank

branches and decline in population per branch. The branch expansion policy was designed,

inter alia, as a tool for reducing inter-regional disparities in banking development,

deployment of credit and urban-rural pattern of credit distribution. In order to encourage

commercial banks and other institutions to grant loans to various categories of small

borrowers, the Reserve Bank promoted the establishment of the Credit Guarantee

Corporation of India in 1971 for providing guarantees against the risk of default in

repayment. The scheme, however, was subsequently discontinued.

II. SECOND PHASE – ANNUAL POLICY (2005-2006)

As the central bank of the country, the Reserve bank of India has taken steps to ensure

financial inclusion in the country. It has tried to make banking more attractive to citizens by

allowing for easier transactions with banks. In 2004 RBI appointed an internal group to look

into ways to improve Financial Inclusion in the country.

With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its

Annual Policy Statement for the year 2005-06, while recognizing the concerns in regard to

the banking practices that tend to exclude rather than attract vast sections of population,

urged banks to review their existing practices to align them with the objective of financial

inclusion. In the Mid Term Review of the Policy (2005-06),

It is observed that there were legitimate concerns in regard to the banking practices that

tended to exclude rather than attract vast sections of population, in particular pensioners,

self-employed and those employed in the unorganised sector. It also indicated that the

Reserve Bank would

1. Implement policies to encourage banks which provide extensive services, while dis-

incentivising those which were not responsive to the banking needs of the

community, including the underprivileged;

2. The nature, scope and cost of services would be monitored to assess whether there

was any denial, implicit or explicit, of basic banking services to the common person;

and

3. Banks urged to review their existing practices to align them with the objective of

financial inclusion.

RBI exhorted the banks, with a view to achieving greater financial inclusion, to make

available a basic banking ‘no frills’ account either with nil or very minimum balances as well

as charges that would make such accounts accessible to vast sections of the population. The

nature and number of transactions in such accounts would be restricted and made known



to customers in advance in a transparent manner. All banks are urged to give wide publicity

to the facility of such no frills account so as to ensure greater financial inclusion.

RBI came out with a report in 2005 (Khan Committee) and subsequently RBI issued a circular

in 2006 allowing the use of intermediaries for providing banking and financial services.

Through such policies the RBI has tried to improve Financial Inclusion. Financial Inclusion

offers immense potential not only for banks but for other businesses. Through an integrated

approach the businesses, the NGOs, the government agencies as well as the banks can be

partners in growth. RBI has realized that a push is needed to kick start the financial inclusion

process. Some of the steps taken by RBI include the directive to banks to offer No-frills

account, easier KYC norms, offering GCC cards to the poor, better customer services,

promoting the use of IT and intermediaries, and asking SLBCs and UTLBCs to start a

campaign to promote financial inclusion on a pilot basis.

Brief glimpses of main initiative are followings:-

a) No-Frill Accounts

It is a basic saving fund account having all the features of a normal saving fund account

which it differs in the following aspects

1. The holder is not required to maintain any minimum balance requirement and also

nothing is charged for opening this type of account

2. KYC norms have been simplified so that everyone can have this account

3. Transaction are limited to 5-10 free transactions per month

4. ATM facility is provided free of cost

5. There is no account maintenance cost

Similar types of accounts, though with different names, have also been extended by banks

in various other countries with a view to make financial services accessible to the common

man either at the behest of banks themselves or the respective Governments

b) Overdraft in Saving Bank Accounts

Bank were advised to give credit in form of overdraft on saving bank account to its customer

so that in case of small credit need like medical bill, any accidental charges etc. can be met

in.



c) KYC norms

The Know Your Customer (KYC) norms were revised in order to make it easy for people to

avail financial services on February 18, 2008. These guidelines include

1. In case of close relatives who find it difficult to furnish documents relating to place of

residence while opening accounts, banks can obtain an identity document and a

utility bill of the relative with whom the prospective customer is living, along with a

declaration from the relative that the said person (prospective customer) wanting to

open an account is a relative and is staying with him/her. Banks can also use any

supplementary evidence such as a letter received through post for further

verification of the address;

2. banks have been advised to keep in mind the spirit of the instructions and avoid

undue hardships to individuals who are otherwise classified as low risk customers;

3. Banks should review the risk categorization of customers at a periodicity of not less

than once in six months.

4. Further, 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 KYC procedure for opening accounts has been simplified for

those persons who intend to keep balances 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.

d) SHG Model

A Self Help Group (SHG) is a group of about 15 to 20 people from a homogenous class who

join together to address common issues. They involve voluntary thrift activities on a regular

basis, and use of the pooled resource to make interest-bearing loans to the members of the

group. In the course of this process, they imbibe the essentials of financial intermediation

and also the basics of account keeping. The members also learn to handle resources of size,

much beyond their individual capacities. They begin to appreciate the fact that the

resources are limited and have a cost.

Once the group is stabilized, and shows mature financial behavior, which generally takes up

to six months to 1 year, it is considered for linking to banks. Banks are encouraged to

provide loans to SHGs in certain multiples of the accumulated savings of the SHGs. Loans are

given without any collateral and at interest rates as decided by banks. Banks find it

comfortable to lend money to the groups as the members have already achieved some

financial discipline through their thrift and internal lending activities. The groups decide the

terms and conditions of loan to their own members. The peer pressure in the group ensures

timely repayment and becomes social collateral for the bank loans.



Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and nurture

them. These SHPIs include various NGOs, banks, farmers’ clubs, government agencies, self-

employed individuals and federations of SHGs. However, some SHGs have also been formed

without any assistance from such SHPIs. There are three different models that have

emerged under the linkage programme-

I. Model I: This involves lending by banks directly to SHGs without

intervention/facilitation by any NGO.

II. Model II: This envisages lending by banks directly to SHGs with facilitation by

NGOs and other agencies.

III. Model III: This involves lending, with an NGO acting as a facilitator and financing

agency.

Model II accounted for around 74 per cent of the total linkage at end-March 2007, while

Models I and III accounted for around 20 per cent and 6 per cent, respectively.

e) KCC / GCC Guidelines

A. GCC SCHEME

With a view to providing credit card like facilities in the rural areas, with limited point-of-

sale (POS) and limited ATM facilities, the Reserve Bank advised all scheduled commercial

banks, including RRBs, in December 2005 to introduce a General Credit Card (GCC) Scheme

for issuing GCC to their constituents in rural and semi-urban areas, based on the assessment

of income and cash flow of the household similar to that prevailing under a normal credit

card.

The Reserve Bank also advised banks to classify fifty per cent of the credit outstanding

under loans for general purposes under General Credit Cards (GCC), as indirect finance to

agriculture under priority sector. The Reserve Bank further advised banks in May 2008 to

classify 100 per cent of the credit outstanding under GCCs as indirect finance to agriculture

sector under the priority sector with immediate effect.

B. KCC Scheme

Eligible farmer will be provided a Kishan Credit Card and a Pass Book or a Card-cum-

Passbook.

Revolving cash credit facility allowing any number of withdrawals and repayments

within the limit.



Entire production credit needs for full year plus ancillary activities related to crop

production to be considered while fixing limit. In due course, allied activities and

non- farm short term credit needs may also be covered.

Limit to be fixed on the basis of operational land holding, cropping pattern and

scales of finance.

Seasonal sub limits may be fixed at the discretion of banks.

Limit of valid for 3 years subject to annual review.

Conversion /re-schedulement of loans also permissible in case of damage to crops

due to natural calamities.

As incentive for good performance, credit limits could be enhanced to take cares of

increase in costs, changing in cropping pattern etc.

Security, margin and rate of interest as per RBI norms.

Operations may be through issuing branch / PACS or through other designated

branches at the discretion of bank.

Withdrawals through slips /cheques accompanies by card and passbook.

Personal Accident Insurance of Rs. 50,000 for death and permanent disability and Rs.

25,000/- for partial disability available to Kishan Credit Card holder at an annual

premia of Rs. 15/- per annum.

f) Financial Literacy Program

Recognizing that lack of awareness is a major factor for financial exclusion, the Reserve Bank

has taken a number of measures towards imparting financial literacy and promotion of

credit counseling services. The Reserve Bank has undertaken a project titled “Project

Financial Literacy”.

The objective of the project is to disseminate information regarding the central bank and

general banking concepts to various target groups, including, school and college going

children, women, rural and urban poor, defense personnel and senior citizens. The banking

information would be disseminated to the target audience with the help of, among others,

banks, local government machinery, schools/colleges using pamphlets, brochures, films, as

also, the Reserve Bank’s website.

Various initiatives taken by the Reserve Bank in order to promulgate Financial Literacy:

A multilingual website in 13 Indian languages on all matters concerning banking and

the common person has been launched by the Reserve Bank on June 18, 2007.

Comic type books introducing banking to schoolchildren have already been put on

the website. Similar books will be prepared for different target groups such as rural

households, urban poor, defence personnel, women and small entrepreneurs.



Financial literacy programs are being launched in each state with the active

involvement of the state government and the SLBC. Each SLBC convener has been

asked to set up a credit counselling centre in one district as a pilot project and

extend it to all other districts in due course.

The ‘Financial Inclusion and Financial Literacy Cell’ has been established the college

of Agricultural Banking, which would act as a resource centre in this field.

III. THIRD PHASE - RANGRAJAN COMMITEE

The Government of India (Chairman Dr. C. Rangarajan) constituted the Committee on

Financial Inclusion on June 26, 2006 to prepare a strategy of financial inclusion. The

Committee submitted its final Report on January 4, 2008. 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 cost9. 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.

The Report observed that in India 51.4 per cent of farmer households are financially

excluded from both formal/informal sources and 73 per cent of farmer households do not

access formal sources of credit. Exclusion is most acute in Central, Eastern and North-

eastern regions with 64 per cent of all financially excluded farmer households. According to

the Report, the overall strategy for building an inclusive financial sector should be based on

Effecting improvements within the existing formal credit delivery mechanism;

Suggesting measures for improving credit absorption capacity especially amongst

marginal and sub-marginal farmers and poor non-cultivator households;

Evolving new models for effective outreach; and

Leveraging on technology-based solutions.

Keeping in view the enormity of the task involved, the Committee recommended the setting

up of a mission mode National Rural Financial Inclusion Plan (NRFIP) with a target of

providing access to comprehensive financial services to at least 50 per cent (55.77 million)

of the excluded rural households by 2012 and the remaining by 2015. This would require

semi-urban and rural branches of commercial banks and RRBs to cover a minimum of 250

new cultivator and non-cultivator households per branch per annum. The Report of the

Committee on Financial Inclusion Committee has also recommended that the Government

should constitute a National Mission on Financial Inclusion (NaMFI) comprising

9 “The process of ensuring access to financial services and timely and adequate credit where needed by

vulnerable groups such as weaker sections and low income groups at an affordable cost”



representatives 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.

The major recommendations relating to commercial banks included target for providing

access to credit to at least 250 excluded rural households per annum in each rural/semi

urban branches; targeted branch expansion in identified districts in the next three years;

provision of customised savings, credit and insurance products; incentivising human

resources for providing inclusive financial services and simplification of procedures for

agricultural loans. The major recommendations relating to RRBs are extending their services

to unbanked areas and increasing their credit-deposit ratios; no further merger of RRBs;

widening of network and expanding coverage in a time bound manner; separate credit plans

for excluded regions to be drawn up by RRBs and strengthening of their boards.

In the case of co-operative banks, the major recommendations were early implementation

of Vaidyanathan Committee Revival Package; use of PACS and other primary co-operatives

as BCs and co-operatives to adopt group approach for financing excluded groups. Other

important recommendations of the Committee are encouraging SHGs in excluded regions;

legal status for SHGs; measures for urban micro-finance and separate category of MFIs.

CREATION OF SPECIAL FUNDS

The “Committee on Financial Inclusion” set up by the Government of India (Chairman: Dr. C.

Rangarajan) in its Interim Report recommended the establishment of two Funds, namely the

“Financial Inclusion Promotion and Development Fund” for meeting the cost of

developmental and promotional interventions for ensuring financial inclusion, and the

“Financial Inclusion Technology Fund (FITF)” to meet the cost of technology adoption.

The Union Finance Minister, in his Budget Speech for 2007-08 announced the constitution of

the Financial Inclusion Fund (FIF) and the FITF, with an overall corpus of Rs.500 crore each at

NABARD.

The Government advised that for the year 2007-08 it was decided to initially contribute

Rs.25 Crore each in the two funds by the Central Government, RBI and NABARD in the ratio

40:40:20. The final report of the Committee has been submitted to the Government in

January 2008.



Chapter - 6

HOW GOVERNMENT AND RBI CAN

BUILD ON EXISTING BANKING

STRUCTURE TO PROVIDE FINANCIAL

SERVICES TO ALL

Banking system is like a team, which constitutes from various entities which are different in

nature, form, structure and its working but together they makes system in which they

efficiently work for a common motive.

SHG BANK LINKAGE PROGRAM

The SHG-Bank Linkage program can be regarded as the most powerful initiative since

independence for providing financial services to the poor in a sustainable manner. The

program has been growing rapidly YOY basis. Currently, 10 million SHG’s are working across

the country with a credit base of Rs. 100000 Crore. But this is not enough to reach the entire

mass. This number needs to be increased substantially.

However, the spread of the SHG- Bank linkage program in different regions has been uneven

with southern states accounting for the major chunk of credit linkage. Many states with high

incidence of poverty have shown poor performance under the program. NABARD has

identified 13 states with large population of the poor, but exhibiting low performance in

implementation of the programme. The ongoing efforts of NABARD to upscale the

programme need to be given a fresh impetus. NGOs have played a commendable role in

promoting SHGs and linking them with banks.

As of now, SHGs are operating as thrift and credit groups. They may evolve to a higher level

of commercial enterprise in future. Hence, it becomes critical to examine the prospect of

providing a simplified legal status to the SHG

MICRO FINANCE INSTITUTIONS (MFIs)

From the late 1980s, the emergence of the Grameen Bank in Bangladesh drew attention to

the role of microcredit as a source of finance for micro-entrepreneurs. Lack of access to

credit was seen as a binding constraint on the economic activities of the poor.



Microfinance Institutions (MFIs) are those, which provide thrift, credit, and other financial

services and products of very small amounts mainly to the poor in rural, semi-urban or

urban areas for enabling them to raise their income level and improve living standards.

Lately, the potential of MFIs as promising institutions to meet the demands of the poor has

been realized. The closer proximity with the people at grassroots level and the mix of

offering right products at right price based on the actual needs of the masses makes their

role very important in deepening financial inclusion.

However, there is exigency to upscale their outreach. In India, out of some 400 million poor

workers, less than 20 per cent have been linked with financial services provided by MFIs.

Steps needed to promote MFIs

One of the ways of expanding the successful operation of microfinance institutions in

the informal sector is through strengthened linkages with their formal sector

counterparts.

Efforts are needed to make MFIs an integral part of mainstream banking and to bring

down the rates of interest on microcredit to ensure the micro finance movement

gets further impetus

A mutual beneficial partnership should be established between MFIs and Banks

contingent on comparative strength of each sector. For example, informal sector

microfinance institutions have comparative advantage in terms of small transaction

cost achieved through adaptability and flexibility of operations.

COOPERATIVE CREDIT INSTITUTIONS

Rural credit cooperatives in India were originally envisaged as a mechanism for pooling the

resources of people with small means and providing them with access to different financial

services. It has served as an effective institution for increasing productivity, providing food

security, generating employment opportunities in rural areas and ensuring social and

economic justice to the poor and vulnerable sections.

Despite the phenomenal outreach and volume of operations, the health of a very large

proportion of these credit cooperatives has deteriorated significantly. Various problems

faced by these institutions are:

Low resource base

High dependence on external source of funding

Excessive government control

Huge accumulated losses and imbalances

Poor business diversification

Low recovery



Taking all these facts in mind, there is an urgent need to address the structural deficiencies

of these institutions in order to make them play an effective role in meeting the financial

inclusion goal.

RRBs

RRBs, post-merger, represent a powerful instrument for financial inclusion. RRBs account for

37% of total rural offices of all scheduled commercial banks and 91% of their workforce is

posted in rural and semi-urban areas. They account for 31% of deposit accounts and 37% of

loan accounts in rural areas. RRBs have a large presence in regions marked by financial

exclusion of high order.

RRBs are, thus, the best suited vehicles to widen and deepen the process of financial

inclusion. However, they need to be oriented suitably to serve the rural population with a

specific mandate to achieve financial inclusion. It is hoped that recent regulatory changes

and fresh impetus provided by the regulator will help in making RRBs front institution in

achieving the target of reaching out to financially excluded people.

THE BUSINESS CORRESPONDENT MODEL

In January 2006, the Reserve bank permitted banks to utilize the services of non-

government organizations (NGOs/SHGs), micro-finance institutions and other rural

organizations as intermediaries in providing financial and banking services through the use

of business facilitator (BF) and business correspondent models(BC). The BC model allows

banks to do ‘cash in cash out’ transactions at a location much closer to the rural population,

thus addressing the last mile problem.

Banks are also entering into agreement with Indian Postal Authority for using the enormous

network of post offices as business correspondents for increasing their outreach and

leveraging the postman’s intimate knowledge of the local population and trust reposed in

him. The intention behind the model is to promote the business of banking with low capital

cost by enabling outsourcing of rural business to agents on a commission basis.

Recent guidelines issued by RBI to ensure adequate supervision over operations of BCs:

Every BC to be attached to a certain bank to be designated as the base branch

The distance between the area of operation of a BC and the base branch should not

exceed 30 km in rural, semi-urban and urban areas.



Initiatives needed to be undertaken to promote BC model

Allow more entry to private well governed small finance banks. The intent is to bring

local knowledge to financial products that are needed locally.

Facilitate the use of existing networks like cell phone kiosks or kirana shops as

business correspondents to deliver products of large financial institutions.

Liberalize the business correspondent regulation so that a wide range of local agents

can serve to extend financial services.

ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION

According to recent Boston Consulting Group report, with cost of funds today at 9%,

provision for bad debts at 10% and cost of operation and transaction at 13% for poor

customers in far flung areas, banking for the poor by formal sector becomes unviable. The

key role the technology is expected to play is to reduce the last two components drastically.

Unfortunately, public sector banks (PSBs), which account for 70% of assets, have been slow

in making use of modern technology to bring down transaction costs.

How technology can lower operating costs as well as lending rates?

In rural areas, different villages are separated by large distances and poor

connectivity. Consequently, communication technology could play an important role

in bridging the last miles between the customer and the provider thus facilitating

faster transactions.

The telecom network in India is expanding rapidly as more and more private

operators are entering in the telecom sector. Banks could leverage the network for

expanding operations, reducing costs and increase reliability of their operations.

As more than one million new mobile users are being added every month in India,

Mobile Banking can become the most promising front end technology for facilitating

financial inclusion in India. As mobile phones have reached out to segments and

geographies but not yet penetrated by banking sector, this may be one of the most

preferred choices for banks for spreading their network in unbanked areas.

However, banks need to consider certain facts before leveraging technology to bring more

and more population under the net of financial inclusion

Cost effectiveness of technology

Security of accounts

Financial viability of technology in rural areas

Ability of potential beneficiaries to use the technology



Chapter- 7

PRESENT STATUS OF FINANCIAL

INCLUSION IN THE COUNTRY

A GLIMPSE OF EXTENT OF FINANCIAL INCLUSION IN THE COUNTRY

Number of No-Frill Accounts –28.23 million (as on Dec. 31, 2008)

Number of rural bank branches –31,727 constituting 39.7% of total bank branches (as

of June. 31, 2009)

Number of ATMs –44,857 (as on May 31, 2009)

Number of POS –4,70,237 (as on May 31, 2009)

Number of Cards –167.09 million (as on May 31, 2009)

Number of Kisan Credit cards –76 million (Source: CMIE publication 2007-08)

Number of Mobile phones–403 million (as on Apr.30, 2009) out of which 187 million

(46%) do not have a bank account (Source: Cellular Operators Association of India)

Measure of access to banking services in India

SOURCE: PRESENT STATUS OF VARIOUS FINANCIAL SERVICES AS DISCUSSED BY DR.

K.C.CHAKRABARTY, DY GOVERNOR, RBI AT 20TH SKOCH SUMMIT 2009, MUMBAI ON JULY 17,

2009

40.00%

10.00%

0.60% 2.00%

13.00%

0.00%

10.00%

20.00%

30.00%

40.00%

50.00%

Check in accounts

Life Insurance Non-Life Insurance

Credit Card ATM + Debit Card

PRESENT LEVEL OF ACCESS TO VARIOUS FIANANCIAL SERVICES



0

10

20

30

40

50

60

70

80

90

1969 1981 1991 2001 2007

Rural

Urban

Total

POPULATION PER BANK BRANCH (SCHEDULED COMMERCIAL BANKS)

YEARS (ENDING MARCH)

Note: figures are in thousands

OBSERVATIONS

Less penetration of banks in rural areas is resulted in very high population per branch.

Even though it has come down significantly but population per bank branch is still very

high especially in rural areas.

End March Rural Urban Total

1969 82 33 63

1981 20 17 19

1991 14 16 14

2001 16 15 16

2007 17 13 16

PO

PU

LATIO

N (IN

THO

USA

ND

)



0.00

100.00

200.00

300.00

400.00

500.00

600.00

700.00

1993 2002 2007

Total Account

SCBs

RRBs

PACs

UCBs

Post offices

Per 100 persons

NUMBER OF SAVINGS ACCOUNTS

INSTITUTION 1993 2002 2007 SCBs 246.00 246.50 320.90

RRBs 30.50 36.70 52.70

PACS 89.00 102.10 125.80

UCBs 41.60 42.00 50.00

Post Offices 47.50 60.20 60.80

Total 454.60 454.60 610.30

Total A/C per 100 persons 51.00 46.00 54.00

Years

Growth in bank accounts State wise growth in bank accounts suggests that during post reform period, Andhra

Pradesh achieved the highest growth rate of 5.69% in rural areas, followed by Kerala and

Gujarat, constituting top three states in India. States where negative growth in bank

accounts is observed are Chandigarh (-.96%), Delhi (-.94%), Andaman and Nicobar island (-

.69%) and West Bengal (-.01%).

The growth in bank outreach in urban areas in various states during the post reform period

is much better as compared to rural areas. The highest growth is observed in Jammu and

Kashmir (6.61%), followed by Pondicherry (6.07%) and Andhra Pradesh (5.93%). Among all

urban areas, only West Bengal witnessed a negative growth rate in bank accounts of -0.01%

No

. of savin

g Acco

un

t (in m

illion

s)



Chapter 8

Study result

Population of Delhi consist a big group of migrants, labour coming from other part of

country in search of employment, education and other purposes. This groups being

financially weak due to low literacy, low income; generally do not have access to financial

services.

In order to assess the level of financial inclusion in New Delhi, a survey was conducted in

area of Hari Nagar (West Delhi) through a questionnaire.

Target group were labourers, small shopkeepers migrant, i.e. people employed in

unorganized sector who are unbanked

Objective

To assess the impact of policy initiatives on financial inclusion in Delhi

Survey brief

Survey Sample size: 40 Households

Area: MS Block, Mayapuri Phase-II, Hari Nagar B Block (west Delhi)

Methodology

40 household were randomly surveyed regarding financial inclusion/financial literacy

through a well constructed questionnaire (annexure I) in surrounding area of Hari Nagar

(Slums nearby MS Block, B-Block & Mayapuri Phase-II) in West Delhi.

Of the total sample, 34 were males and 6 were females (the low numbers of females was

due to reluctance in answering questions).



FZ=37%

FZ=442%

FZ=523%

FZ=618%

FZ=710%

FZ=3

FZ=4

FZ=5

FZ=6

FZ=7

75%

17%

8%

Earning members 1 Earning members=2

Earning members=3

PART I - HOUSEHOLD PROFILE

I. Size

II. How many of them are earning?

Figure 1: Family Size of Sample surveyed

Earning members Nos.

Families having 1 Earning members 30



30 (75%) families were having Sole earning

member, family having 2 earning member

were 7(17%) and only 3 families (8%) were

having earning members more than 2 earning

members (as shown in the figure)

When asked about their how

many members they have in

their family?

The Response Was As Follows

Majority of them were having

family size of 4 were 17(42%)

and family size of 3 was the

lowest 3(7%)

Family size of 5,6 and 7 were

9(23%),7(18%) ,4(10%)

respectively

Figure 2: Earning members in the Family



III. Literacy level

Of the total sample, Majority were school dropout (20 i.e. 50%), High school (5 i.e. 12.5%)

and Sr. Secondary (8 i.e. 20%) (As Shown In Figure 3) which implies that their literacy level

was not enough to understand a financial product, or the complications attached with

opening a saving bank account or operating it conveniently.

It also means that as they are not very educated they won’t be having fixed income as most

of them are working daily wages and are underpaid, hence they cannot afford high charges

and penalties.

Figure 3: Literacy level

Graduates consisted 6(15%) People who were the main constituents of Cat II and Cat. IV of

earning group (Figure 5), & 1 respondent didn’t answer this question.

0

5

10

15

20

25

School Dropout High School Sr. Secondary Graduate PG or Above NA



IV. Employment

Figure 4: Employment

Of the total 40 people surveyed 2 were found working in organized sector and 38 were

found working in unorganized sector (Figure 4).

To understand the financial position of household they were further asked further about

their employability or the nature of employment, out of the 40 respondent 16 were

labourers working in Factories in nearby areas; 10 were self employed i.e. shopkeepers and

running small scale business activities; 6 were engaged in service in unorganized sector(as

depicted in Figure 5)

Figure 5: Unorganized Sector

2(7%)

38(90%)

1(3%)

Organised Sector

Un-organised

NA

0

2

4

6

8

10

12

14

16

Self Employed

Labour Service Student NA

10

16

6

3 3



22%

0%

68%

10%

Daily Weekly Monthly NA

PART II - FINANCIAL POSITION

I. Earnings

In figure 6, Cat. I consist of respondent whose earning is in the range of Rs 0-4000, similarly

Cat. II=Rs. 4000-8000, Cat III = Rs. 8000-12000, Cat IV =Rs. 12000-16000 & Cat V = Rs. 16000

& above

The observation indicates that Cat. I consist mainly the labors and household working on

daily wages (32.5%), and Cat. II & Cat III (42.5% &12.5% respectively) consist mainly those

who are self employed i.e. shopkeepers, Students (3) etc.

Cat. IV and Cat. V people engaged in organized sector and those who are having business

which is stable in nature.

Figure 3: Earnings

It may be seen from the above that nearly 75% (cat. I & cat. II) of the respondent pertains to

low income group.

II. Earning pattern

On the further question about earning pattern, 68% of the respondent were earning monthly whereas 22% had earning on daily basis and 10 i.e. 4 respondent did not answered on this.

0

5

10

15

20

Cat.I Cat.II Cat. III Cat.IV Cat. V

Earn

ings

(in

tho

usa

nd

s)

Figure 7: Earning pattern



III. Saving

Out of the 20 respondent who have saving habit, 14 were saving on monthly basis, this can

be contributed to the fact that 70% of them were earning on monthly basis; 3 respondent

are saving weekly and there was no one saving on quarterly basis, 2 didn’t replied to this.

Figure 9: Saving Frequency

3

14

01

2

0

2

4

6

8

10

12

14

16

Weekly Monthly Quarterly Semi-annually NA

Yes50%No

45%

NA5%

Figure 8: Saving

Q. Do you save?

50 %( 20) of respondent said that

they are saving some part of their

income, 45 %( 18) of respondent are

not saving anything and 5% (2)

didn’t responded to this question

It was interesting to see that all

those who were earning on daily

basis were saving on regular basis



Q. How much?

Out of 20 respondent 12(60%) said that

they save 0-5% of their income which

means they generally have very small

amount of savings which implies that

they will be transacting on regular basis

but with very little amount which

Commercial banks generally found to

be reluctant.

3(15%) and 4(20%) were saving 10-15%

and 15% and above respectively of

their earnings.

Q. Where do you keep your savings?

Figure 11: Where do you keep your saving?

Majority of the respondent were either keeping their saving in saving bank account or cash at home (45% each) and only 5% were putting it in investment alternatives.

45%

5%

45%

5%

WHERE DO YOU KEEP YOUR SAVING

Bank Insurance Scheme In cash at Home PO/NSC/FD

60%

5%

15%

20%

0-5% 5-10% 10-15% 15% & Above

Figure 10: How much?



47%

53%

DO YOU HAVE BANK ACCOUNT?

Yes No

PART III - BANKING HABITS

Q. Do you have bank account?

Of the 40 respondent, 19(47%) are having

saving bank account and 21(53%) are not

having bank account.

Out of 19 respondent, 11(74%) were

having only 1 bank account & 2(11%) were

having 2 and 4 bank account.

Provided further, Out of 19 respondent,

17 were having saving bank account and 2

among them also having fixed deposit

account, 1 recurring deposit account.

Q. Did you face any problem while opening account?

Figure 13: Did you face any problem while opening bank account

Yes 26%

No74%

Out of the 19 respondent, who have

bank account 74% of the respondent

didn’t faced any problem while

opening bank account, while 26%

said they faced.

The general problems faced were

Not finding an introductory

to open a normal saving

bank account

Not having document

regarding proof of address

those who were putting up

on rent.

Figure 12: Do you have bank Account



79%

14%

7%

0-2KM 2-5KM 10-12KM

Q. How far is the bank branch from your residence?

The majority of respondents have no

problem of distance of bank branch

from their residence as 79%

respondent have bank branch within

range of 0-5 Km and 14% within 2-5

Km.

Q. What are the services\product you avail along with your bank account?

Figure 15: Product and Services Availed

19(47%) respondent were having bank account (figure 12), among them 5 respondent were

using 1 service/product, 11 respondent were using 2 services, 1 respondent were using 3

services\product on his two bank accounts and 2 respondent skipped this question.

Payment & remittances

Mobile banking

ATM/DEBIT CARD

Loan & Advances

Credit Card Net banking

10

1

15

21 1

Figure 14: Distance of Bank Branch



Q. For what purposes you use your account

Figure 16: Usage of bank account

The majority of sample population,57% uses bank account for managing their cash flow as they get their salary or earning in beginning of month but expenditure is over the month,

19% uses bank account for accumulating funds and interest thereon for meeting future contingencies, and other 19% uses bank account for making and receiving payment

And rest 5% uses bank account as means of becoming eligible for other financial services.

57%19%

19%5%

Depositing and withdrawing money so that cash flow is managed

accumulating funds/interest earning for future requirement

making and receiving payment

to become eligible for other services



PART IV -THOSE WHO DO NOT HAVE BANK ACCOUNT

(21 RESPONDENT, 52.5%)

There was no respondent having anticipated rejection from bank or those who have voluntarily excluded himself from banking system.

Further when asked about whether they have been approached by anyone to open a saving bank account, 7(33.33%) said yes they have been approached by various people like friends, family and specifically by their employer; 16(76.19%) respondent said that they have never been approached by anyone to open saving bank account in Hari Nagar area.

Figure17: Reasons for not having bank account

not aware of benefits a bank

account29%

lack of awareness and

guidance19%

low level of literacy

13%

tedious procedure/paper

work7%

cannot meet MBR* and

service charges26%

tried but refused6%

REASONS FOR NOT HAVING BANK ACCOUNT



Q. Perception towards banking

Figure 18: Perception towards banking

35% of the respondent felt that banking means trust, 32% felt that the banking is their need whereas on the contrary 27% said that banking is only meant for High Net worth Individuals (HNI) and privileged group of society, 6% said they are connected to banking system due to time and cost constraints (figure 18).

Those who were not having bank account were further asked whether they are know

anything about “No Frills Account” or “zero balance bank account” 6 respondent said yes,

They know about this sort of bank account offered by banks as they came to know about it

from newspapers, bank officials, friends & relatives; but majority of the respondent (29)

were not aware about this kind of bank account.

trust 35%

need32%

only for HNI* and priveledged group

27%

time and cost contraint

6%

PERCEPTION TOWARDS BANKING



PART V - CREDIT PATTERN

This part of questionnaire was to evaluate the credit and advance pattern of the sample,

people were not willing to reveal their information regarding how much debt they have,

what the last occasion they borrowed, and other questions related to their indebtness and

credit as they consider it personal and many of them were afraid that this can be used to

evaluate their creditworthiness when they visit banks for loan and advance.

The first question was the last three occasions they borrowed but no one replied to this

question. On further asking about the purpose of borrowing and other related things, the

responded were conservative.

Q. Purpose of borrowing

Total of 17 who responded to this question 65% said that they have borrowed money for personal purpose, 17% said they have borrowed money for education of children, 12% for residential house purchase, 6% for funding business.

ON ASKING FURTHER IF PERSONAL, THEN

Food and clothing 12%

Celebrations or social obligations 12%

Day to day living expenses or bills 18%

To repay older debts 23%

Figure 19: Purpose of borrowings

Personal 65%

Education of children

17%

residential house purchase

12%

for funding business

6%

PURPOSE OF BORROWING



Q. Source of borrowing

Majority of respondent, borrowed from their friends and relatives and whereas only 36%

borrowed from bank and moneylender in both categories.

Figure 4: Source of Borrowings

If they borrowed from money lender then further they were asked why they preferred

moneylender over banks for credit needs, response was that from money lender they get

instant cash without any mortgage.

0

2

4

6

8

10

12

moneylenders NGOs Friends/relatives Bank

No

. of

resp

on

den

t



Q. Total amount outstanding

14 respondent who filled this question, the average debt was Rs. 37571 with avg. rate of interest of

10.05%,the debt was ranging from Rs. 6000 to the highest 0f Rs. 300000, interest rate ranged from

lowest of 8.00% to 20.00%.

AWARENESS ASPECT

Q. Do you know about banking credit?

54% of the respondents do not

know what is banking credit,

whereas 46% knows what is

banking credit.

Figure 5: Awareness of banking credit

8.50%

11.50%10.50%

10%

8.00% 14%

20%

10%

8.00%

0 0 00

00

50000

100000

150000

200000

250000

300000

350000

1 2 3 4 5 6 7 8 9 10 11 12 13 14Am

ou

nt o

uts

tan

din

g\In

tere

st c

har

ges

No. of respondent

TOTAL AMOUNT OUTSTANDING & RATE OF INTEREST

46%

54%

Yes No



Q. Have you ever approached any bank for credit need?

Figure 6: Approached for banking credit needs

It is revealed from the above that only 5% of the respondents have approached banks for credit

needs.

Q.Have you purchased any insurance scheme?

Out of 37, only 3 people have purchased some insurance scheme, where 34 people have not

purchased any insurance scheme as they are not aware about what is insurance.

Q .Over the past couple of years, have you been anywhere for advice

about money matters?

Majority with 33 respondent said no they never been to anyone for financial advice, whereas 3

responded that they have been to financial advisor for their credit guidance and financial planning.

Further they were asked, is there any credit counselling centre in their area? Only one respondent

said yes and rest 30 said no.

Yes 5%

No95%



PART VI - SUGGESTIONS

Q. Do you think that every bank should have the following things in

place to enable financial inclusion?

Customer care/reception/may I help you counter

Credit counseling centers

Compulsory No Frill Account offering from every bank

Any suggestion

(specify)____________________________________________________

Majority with 53% of respondent felt that establishing customer care counter/may I help

you counter should be made compulsory, When told about what is “no frills account, 24%

felt that every bank should be made to offer “No Frill account” and 23% said there should be

atleast one credit counselling centre/financial education centre in their area.

Figure 7: suggestions

compulsory customer care

counter53%

credit counseling center23%

compulsory no frill account

offering from every bank

24%

Suggestions



Chapter - 9

Conclusion

Steps taken towards bringing lower income groups to the banking system has been

successful to a significant extent, as the main causes observed earlier like distance of bank

branch, unawareness about banking services has improved.

While doing survey it was found that people are not voluntarily excluding themselves from

banking system, most of them have faith in banking and feels that they need banking

services. The need varies from managing cash flow as they earn on daily basis or irregular

basis.

The reasons behind not approaching banks are mainly the minimum balance requirements

which have been taken care by No Frills Bank Account but most of the respondent was not

aware about this type of account. Hence it needs to be advertised; literacy level and

awareness about various other products/services.

It was also found that people prefer to borrow from personal/informal sources when the

purpose is personal or consumption. Where the amount to be borrowed is generally small,

the people found to be reluctant to approach banks, whereas for other productive purposes

they borrow from banks.

In other words, it may be said as per the study conducted in Hari Nagar Area. Despite the

thrust given to financial inclusion, the desired results have not come up.

Suggestions

Every bank should be forced to establish a customer care /May I help you Counter at

every branch so that new customer should be guided and relevant information is

provided.

To increase the awareness, there is a good scope of having financial literacy cell or

credit counselling centres in each district so that it can take care of

uneducated/illiterate individuals.

Every bank should be made to offer No frill saving account with basic services

without terms & conditions which are class/group specific but are applicable to all.

Private sector should be involved in process of financial inclusion and they should be

made realise that it is not only a business opportunity for them but corporate social

responsibility too.



BIBLIOGRAPHY

Annual Policy report 2005-2006

Report on currency and Finance 2006-08

Ranjrajan Committee report on Financial Inclusion(2008)

Universal Financial Inclusion in India: The Way Forward by S.Ramesh and

Preeti Sahai

The need for financial inclusion with an Indian perspective by Amol

Aggarwal, IDBI

Pushing Financial Inclusion – Issues, Challenges and Way Forward - A

Presentation by Dr. K.C.Chakrabarty Deputy Governor, RBI

Presentation on Financial Inclusion & Banking System by S K Kale, General

Manager, NABARD

Working paper on social, economical and financial Consequences of

financial exclusion by Bernard Bayot

Internet

o www.wikipedia.com

o www.rbi.org.in

o http://aryavart-rrb.com/

o www.grameen-info.org

o http://cab.org.in

http://www.wikipedia.com/

http://www.rbi.org.in/

http://aryavart-rrb.com/

http://www.grameen-info.org/



GLOSSARY

MBR- Minimum balance requirement

AMC – Annual maintenances charges

HNI – High Net worth Individuals

KYC norms- Know Your Customer Norms

SLBC – State levels banker committee

GCC- General credit card

KCC-Kisan Credit Card

SHGs – Self Help groups

SHPIs – Self help Promoting Institutions

POS – Point of sale

RRB’s – Regional Rural Banks

UCB’s – Urban Cooperative banks

MFIs – Micro-finance Institutions

PACS – Primary Agricultural Cooperative Societies

No Frill Bank Account- a zero balance saving bank account with no annual maintenance charges

Documents

Financial Inclusion