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Index

CONTENTS Page no

1. Acknowledgement 2

2. Executive summary 3

3. Introduction 5

4. Objectives 7

5. Financial exclusion 8

6. The need for financial inclusion 12

7. The benefits of financial inclusion 13

8. The tools of financial inclusion and the methods 14

to achieve them.

9. Cross country experience 17

10. Indian scenario 20

11. The extent of financial inclusion in India 22

12. Survey : financial inclusion – then and now 30

13. The significance of financial inclusion in the 33

current financial crisis

14. Bibliography 35

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ACKNOWLEDGEMENT

Goal achievement is very difficult for any person, but there are motivations, which make this task very easier. It is our humble duty to acknowledge all of them, which made our task easier during my project.

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

helped us in one way or any other way for successful completion of this project.

We would like to thank Globsyn Business School, Ahemadabad for having provided us with a great opportunity to work and learn.

We are deeply indebted to and express our sincere appreciation & gratitude to Prof. Kalika Bansal for providing her valuable guidance & encouragement throughout the project for keeping our morale up & making it possible to complete and submit this project on time.

We are really thankful to the people of the village named “ Sukhjora,a village in Jharkhand” from where we have conducted our survey. Due to their support & valuable thoughts, we have successfully completed our survey.

Most of all, we thank to our colleagues for their help& coordination without which the work could never have been completed. They made us realize the importance of teamwork. We are grateful to all of them for standing with us & supporting us in this project.

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

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EXECUTIVE SUMMARY

Financial services actively contribute to the humane & economic

development of the society. These lead to social safety net & protect the people

from economic shocks. Hence, each & every individual should be provided with

affordable institutional financial products/services popularly called “Financial

Inclusion”.

Despite witnessing substantial progress in financial sector reforms in India, it is

disheartening to note that nearly half of the rural households even today do not have

any access to any source of funds- institutional or otherwise. Hardly one-fourth of

the rural households are assisted by banks. Hence the major task before banks is to

bring most of those excluded, i.e. 75% of the rural households, under banking fold.

There is a need for the formal financial system to look at increasing financial

literacy and financial counseling to focus on financial inclusion and distress

amongst farmers. Indian banks and financial market players should actively look at

promoting such programs as a part of their corporate social responsibility. Banks

should conduct full day programs for their clientele including farmers for

counseling small borrowers for making aware on the implications of the loan, how

interest is calculated, and so on, so that they are totally aware of its features. There

is a clearly a lot requires to be done in this area.

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

such bank accounts for social security services like health and calamity insurance

under various schemes for disadvantaged. From the bank’s point of view, having

such social security cover makes the financing of such persons less risky. Reduced

risk means more flow of funds at better rates.

Access to appropriate financial services can significantly improve the day-to-

day management of finances. For example, bills for daily utilities (municipality,

water, electricity, telephone) can be more easily paid by using cheques or through

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

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

and services such as short term credit facilities, overdraft facilities and credit card.

Further, a number of other financial products, such as insurance and pension

products, necessarily require the access to a bank account.

Employment Guarantee Scheme of the Government which is being rolled out

in 200 districts in the country would bring in large number of people through their

savings accounts into the banking system.

It paves the way for establishment of an account relationship which helps the poor to avail a variety of savings products and loan products for housing , consumption, etc

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INTRODUCTION

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

equity” clearly envisages that the growth spree of the globe in the 21st century

has left some people behind the time. Handful of the global populace are still

languishing in the vicious circle of poverty & are cast aside by those who are

economically stronger & swifter in the sway of globalization & liberalization. For

sustenance/better growth of the world, the deprived sections should be dragged into the

mainstream of growth. This is because of the fact that poverty any where is a grave

threat to prosperity everywhere. Financial services actively contribute to the humane &

economic development of the society. These lead to social safety net & protect the

people from economic shocks. Hence, each & every individual should be provided

with affordable institutional financial products/services popularly called “Financial

Inclusion”.

Financial inclusion may be defined as the process of ensuring access to financial

services and timely and adequate credit where needed by vulnerable groups such

as weaker sections and low income groups at an affordable cost. Financial products

& services are identified as basic banking services like deposits accounts, institutional

loans, access to payment, remittance facilities & also life & non life insurance services.

The following are the denotation & connotation of financial inclusion in India.

1. Affordable credit 2. Savings bank account 3. Payments & Remittance 4. Financial advice 5. Credit/debit cards 6. Insurance facility 7. Empowering SHGs(self help groups)

An inclusive financial system facilitates efficient allocation of productive resources

and thus can potentially reduce the cost of capital. An all-inclusive financial system

enhances efficiency and welfare by providing avenues for secure and safe saving

practices and by facilitating a whole range of efficient financial services like easy day-

to-day management of finances, safe money transfer etc. The govt. of India as well as

the banking industry has recognized this imperative and has undergone certain

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

financial inclusion, the Government of India constituted a “Committee on Financial

Inclusion” under the Chairmanship of Dr. C. Rangarajan. Not only in India, but

financial inclusion has become an issue of worldwide concern, relevant equally in

economies of the underdeveloped, developing and developed nations. Building an

inclusive financial sector has gained growing global recognition bringing to the fore

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

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OBJECTIVES

he research aims to cover the following objectives.

· How financial inclusion is the need of the hour for the sustainability and

maintenance of the growth process.

· The victims of the financial exclusion and how they are the victims of this financial

exclusion.

· How financial inclusion can improve the day-to-day management of finances.

· How it is one of important factor for the equitable growth of the world economy.

· The future of financial inclusion process in India

· The extent of financial inclusion India.

· The perception of people regarding financial inclusion services and its benefits.

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FINANCIAL EXCLUSION

he concept of financial inclusion and its implementation has come a long way

since the last two decades and the results are also quite fair. There has been

much technological advances that has transformed the banking industry from

traditional brick –and-mortar infrastructure like staffed branches to a system

supplemented by other channels like automated teller machines, debit and credit

cards, internet banking, online money transfer etc. The moot point, however, is that

access to such technology and services are restricted to only certain segments of the

society. There is a growing divide, with an increased range of personal finance

options for a segment of high and upper middle income population and a significantly

large section of the population who lack access to even the most basic banking

services. This is termed as “Financial exclusion”.

Financial exclusion can be geographical exclusion, exclusion on the grounds of

charges, exclusion due to ignorance & also self exclusion. One of the oldest

definitions by Leyshon and Thrift (1995) define financial exclusion as referring to

those processes that serve to prevent certain social groups and individuals from

gaining access to the financial system. According to Sinclair (2001), financial

exclusion means the inability to access necessary financial services in an appropriate

form. Exclusion can come about as a result of problems with access, conditions,

prices, marketing or self-exclusion in response to negative experiences or

perceptions. Carbo et al. (2005) have defined financial exclusion as broadly the

inability (however occasioned) of some societal groups to access the financial

system.

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Causes of Financial exclusion.

Some of the important factors responsible for financial exclusion are given as under

1. Terms & conditions.

Different types of terms & conditions imposed by the bankers often deter people with low income & rural areas from opening bank account. In Canada, USA, France & India strict regulation is imposed on Opening balance & Minimum balance required for an account. This often goes beyond the budget of the low income people.

Another area of obstacle is the conditions relating to the use of accounts. In Belgium for instance, accounts have been closed by banks because customers either use them too little or withdraw money too often.

2. Identity Requirements.

Primary requisite of opening bank account is identity proof & witness. People mostly from rural areas don’t have driving license or passport. In many cases, wrong information are given in their ration cards & voter I-cards, which make them illegible as proof. This problem is rife with the refugees & slum dwellers.

3. Psychological & cultural barriers.

Rural people & low income people think transacting through banks is a cumbersome affair & banks charge highly. Sometimes they think that services offered by the banks are not meant for them. Such type of “Self exclusion” is far more important than direct exclusion by banks refusing to opening accounts.

In England the Pakistani & Bangladeshi communities face religious barriers to banking, because, accounts overdrawn (even if inadvertently) is harmful under Islamic law.

4. Bankers’ approach.

Bankers’ attitude towards the rural folk & the marginalized mass is also not conducive. Sometimes these people are distracted by difficult financial terms used by the bankers & sometime by the apathetic attitude of the bankers.

Absence of banks in the vicinity of rural area is also one of the causes of exclusion.

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Effects of financial exclusion:

Living without financial service & products is disadvantageous when the contemporary world is moving on cashless system depending on credit cards, debit cards, ATMs &Core Banking Solution (CBS systems). Exclusion imposes real cost on the excluded lot. The implication of the financial exclusion is much greater when the excluded mass is entrapped in the hydra headed cycles of poverty. This causes further social exclusion which is very much detrimental for the equitable growth of the world community. The following points describe disadvantages to the financially excluded mass:

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

b. They take credit from non- institutional creditors at exorbitantly higher rate which exacerbate the harm already caused due to poverty.

FINANCIAL EXCLUSION

NO SAVINGS NO ASSETS

NO BANK

ACCOUNT

NO ACCESS TO

MONEY ADVICE

NO INSURANCE NO AFFORDABLE CREDIT

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c. Lack of security in holding & storing money.

d. The small business may suffer due to loss of access to middle class and

higher-income consumers, higher cash handling costs and delays in remittances of money.

e. Saving potential remains unexploited & unproductive from social point of

view.

f. General decline in investments.

g. Increase in unemployment.

Who are the excluded?

The financially excluded sections largely comprise of:

· Marginal farmers

· Landless labourers

· Self employed and unorganized sector enterprises

· Urban slum dwellers

· Migrants

· Ethnic minorities and socially excluded groups

· Senior citizens and women, etc.

· Large pockets of population in North East, Eastern, and central regions

of India.

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THE NEED FOR FINANCIAL

INCLUSION

espite witnessing substantial progress in financial sector reforms in India, it is

disheartening to note that nearly half of the rural households even today do not

have any access to any source of funds- institutional or otherwise. Hardly one-fourth

of the rural households are assisted by banks. Hence the major task before banks is

to bring most of those excluded, i.e. 75% of the rural households, under banking

fold. But the task is not so easy since they are illiterate, poor and unorganized. They

are also spread far and wide. What is needed is to improve their living standards by

initiating new/increased economic activities with the help of banks, NGO’s and local

developmental agencies. To start with, it is necessary to develop a fair understanding

of their profile. In addition, their perception about the bank and its services needs to

be understood.

So there is a need for the formal financial system to look at

increasing financial literacy and financial counseling to focus on financial inclusion

and distress amongst farmers. Indian banks and financial market players should

actively look at promoting such programs as a part of their corporate social

responsibility. Banks should conduct full day programs for their clientele including

farmers for counseling small borrowers for making aware on the implications of the

loan, how interest is calculated, and so on, so that they are totally aware of its

features. There is a clearly a lot requires to be done in this area.

D

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BENEFITS OF FINANCIAL

INCLUSION.

inancial inclusion has many benefits. Following are some of the benefits

summed up.

· It paves the way for establishment of an account relationship which helps the

poor to avail a variety of savings products and loan products for housing ,

consumption, etc.

· An inclusive financial system facilitates efficient allocation of productive

resources and thus can potentially reduce the cost of capital.

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

utilize such bank accounts for social security services like health and calamity

insurance under various schemes for disadvantaged. From the bank’s point of

view, having such social security cover makes the financing of such persons

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

· Access to appropriate financial services can significantly improve the day-to-

day management of finances. For example, bills for daily utilities

(municipality, water, electricity, telephone) can be more easily paid by using

cheques or through internet banking, rather than standing in the queue in the

offices of the service.

· Transfer of money can be done more safely and easily by using the cheque,

demand draft or through internet banking.

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

and services such as short term credit facilities, overdraft facilities and credit

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

pension products, necessarily require the access to a bank account.

· Lastly, the Employment Guarantee Scheme of the Government which is being

rolled out in200 districts in the country would bring in large number of people

through their savings accounts into the banking system.

F

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TOOLS OF FINANCIAL INCLUSION AND

THE METHODS TO ACHIEVE THEM

To address the issue of financial exclusion in a holistic manner, it is essential to ensure that a range of financial services is available to every individual. These services are: ` (i) a no-frills banking account for making and receiving payments, (ii) a savings product suited to the pattern of cash flows of a poor household, (iii) money transfer facilities, (iv) small loans and overdrafts for productive, personal and other purposes, & (v) micro-insurance (life and non-life)

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Meeting the needs:

To bring about a highly inclusive financial system, it is highly necessary that the

current financial products are appropriate to the needs of low-income households.

Following are some of the major points that are required to achieve success of the

financial products.

Reducing barriers to access

Widening access requires overcoming the barriers presented by risk assessment as

well as improving physical access. Using intermediaries to deliver financial products

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

services, however, are likely to reinforce financial exclusion as many excluded

households lack these facilities.

Product design The requirements of people without financial products are not unrealistic. For day-to-day money management they require a simple account which would allow them to retain tight control over their money. It should offer basic money transfer facilities, including a facility for spreading the cost of bills. Products offering longer-term financial security should be simple and transparent so that users 'know where they are' and the costs associated with regulation compliance are low. They should be based on regular and automatic saving; flexible, so that products can be retained even during times of hardship; and give restricted access to the money saved. To reduce the likelihood of people cashing in long-term savings plans because of short-term needs for cash, long-term savings products could be used as collateral for small loans. The key issue for home contents insurance is affordability and, in particular, options for spreading the cost of premiums across the year. Wider availability of simpler, cheaper products such as indemnity insurance (second-hand replacement value rather than new-for-old), or catastrophe-only policies could also widen access. Moreover short-term credit facilities should also be offered: small, one-off, fixed-term loans rather than ongoing credit commitments such as credit cards or overdrafts; fixed, automatic repayments; and the use of technology in the distribution of loans and collection of repayments, which could reduce costs and therefore allow lower interest rates than are currently available from moneylenders.

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Delivery systems People on the margins of financial services want to deal with organizations which are financially secure, trustworthy and understand their needs. It is not, however, necessary for the same organization to both provide the product and deliver it to the customer. Indeed, experience shows that the use of intermediaries offers many advantages. For example, many local authorities run insure with rent schemes for tenants wanting home contents policies, which they are able to offer at a substantial saving on similar policies bought direct or through a broker. The Post Office is also exploring a similar role as financial service intermediary, as are a small number of credit unions and housing associations. New technology offers some opportunities for product delivery at the end of the market. Electronic cards and electronic money transmissions are likely to be the most acceptable. Encouraging take-up Knowledge of and about financial products is remarkably low among households that are without them. This is compounded by marketing policies which reinforce the belief that financial services are 'not for the poor'. Measures to encourage take-up must, therefore, tackle the widespread mistrust which such households have of many financial providers, particularly those which are geographically remote. Use of trusted intermediaries could overcome these barriers. Targeted marketing and delivery of new products as they become available would also increase take-up. Equally, the language and cultural barriers faced by some potential users need to be taken into account. There is also a need for an independent information and advice service. Lack of knowledge and experience of financial products renders some households especially vulnerable to mis-selling, as well as deterring them from taking up financial services.

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CROSS COUNTRY EXPERIENCE

t has been estimated by Consultative Group to Assist the Poor (CGAP) that about 2.5 to 3billion people around the world are still excluded from basic financial

services. The situation is particularly dire in the Least Developed countries. In most of the developing countries like India & China the extent of exclusion is in the range of 25%-65%. So, taking into cognizance the importance of financial inclusion, the international community has taken a number of measures to mitigate the hiatus between the financially excluded & non- excluded. The following analysis describes the extent & measures taken by different countries to mitigate financial exclusion.

USA

In USA 10%-15% of total households & 22% of the low income households go

without bank accounts. Community Reinvestment act & Home Mortgage Disclosure

act binds the banks there to provide banking services to all the needy. Some states

like New York made it mandatory for the banks to provide accounts to all citizens.

U.K.

Nearly 12 percent of England’s households are unbanked. Free face to face money

advice to targeted groups in the areas of high exclusion is in vogue. The govt has set

up a Financial Inclusion fund of 120 mn pounds to support initiatives to tackle

financial exclusion. . An enhanced legislative environment for credit unions has

been established, accompanied by tighter regulations to ensure greater protection for

investors. A Post Office Card Account (POCA) has been created for those who are

unable or unwilling to access a basic bank account. The concept of a Savings

Gateway has been piloted. This offers those on low-income employments £1 from

the state for every £1 they invest, up to a maximum of £25 per month. In addition

the Community Finance Learning Initiatives (CFLIs) were also introduced with a

view to promoting basic financial literacy among housing association tenants.

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Australia

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

result of continuous joint efforts by government & the banks in educating the people

about the benefits of financial products.

France

In 1984 the bank of France through “Banking Act” made access to bank accounts a

legal right in France. In 1992 the banking industry in France signed a charter to

provide bank account to all.

Bangladesh.

Grameen bank of Bangladesh under the stalwartship of Md. Yunus has

revolutionized the movement of financial inclusion. It targeted low income people

especially the women (97% of total borrowers) who were denied credit by other

com. Banks. It has successfully posted a recovery rate of 98.85%. It has also recently

included the beggars within its credit network under a special program i.e.

Struggling Members programmed. Approximately 81000 beggars have already been

benefited by the programme.

South Africa.

More than half of the population here are below poverty line. Only 4% of total populace has bank accounts & 1% only avail credit from formal sources. To deal with the situation Dakar Conference ha been organized under the banner of U.N. In 2004, UNDP & UNCDF jointly lunched a program called Building Financial Security in Africa.

IMF, U.N. & World Bank have extended very good support for building an inclusive society in the world. U.N. has framed ‘Blue Book’ in consultation with the developed & underdeveloped countries as a tool & guide for policy makers who seek to build inclusive financial growth. In the first-ever Index of Financial Inclusion (IFI) prepared by a New Delhi-based organization, ICRIER (Indian Council for Research on International Economic Relations), to find out the extent of the reach of banking services in 100 countries worldwide pointed out that Spain has occupied the top position in IFI, which is

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based on data from 2004, followed by Canada and Portugal, while countries including Nepal, Zimbabwe and Botswana are at the bottom of the list. Among the important countries, Germany has been placed at 4th position, the UK 17th, USA 21st and Japan 22nd. India has been ranked poorly at 50th position, much above Russia but below China, even below African countries such as Kenya and Morocco. Similarly, the report pointed out that domestic deposit as percentage of GDP was 54.9 per cent in India, against 123.9 per cent in Malaysia

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INDIAN SCENARIO

ndian banking system has exhibited tremendous growth in extending its reach, coverage & delivery of financial products to the mass ever since 1881. The All

India Rural Survey committee in 1954 recommended the creation of a state sponsored bank to promote rural penetration. Accordingly, SBI was established in 1955. Another step in this direction was taken in 1969 when 14 major commercial banks were nationalized followed by six more in 1980. This strengthened the concept of socialistic & welfare state stature of the country. Lead bank scheme was launched in 1970 to increase banking penetration with special focus on the districts. The emergence of RRBs in 1976 blended the skills of commercial banks with the grass root presence of the co-operative banks helped the mass to access to institutional credit. NABARD established in 1982 regulated institutional credit for agriculture & rural development. Talwar committee & Goiporia committee in the early eighties have made many recommendations to improve the customer services in India. Following are some of the steps undertaken by RBI:

The RRBs have been advised to allow limited overdraft facilities in no-frill accounts without any collateral. The idea was that provision of such overdraft facilities provides a ready source of funding to the account holders who are thereby inducted to open such accounts. Banks also have been advised to provide a General Purpose Credit Card (GCC) at their rural & semi urban branches. From this revolving card system the customer can withdraw money to a limited amount from the concerned branch. Bhumuheen’ credit card facility has been arranged apart from Kisan credit cards for the rural & semi urban tenant farmers, landless labourers whereby they can be allowed hassle free credit limit up to 0.25 lac per person. Special Agricultural branches have been opened by the PSBs to meet the financial needs fore agricultural & allied activities. On the behest of the RBI, SHG & bank linkage programme has been initiated which has been a major micro finance programme in the country.

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The micro finance and self help groups are also playing great role in proving financial services to a large mass of people in the rural and semi urban areas. Looking at the profitability side of providing newer financial products the private sector organization is also entering into the market. Reliance Capital, the financial services arm of Anil Dhirubhai Ambani Group, has funded two microfinance institutions in Gujarat - MAS Financial Services and Vardan Trust. The Soros Economic Development Fund (SEDF), Omidyar Network, and Google.org hosts a ‘Small to Medium Enterprise Investment Company’ with an initial corpus of $17 million targeted at “Missing Middle” between microfinance and commercial capital markets in India. Hyderabad-based SKS Microfinance has attracted investors like Vinod Khosla, Sequoia Capital India, SIDBI and Units, among others.

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THE EXTENT OF FINANCIAL

INCLUSION IN INDIA

he extent of financial inclusion in India can be well studied from the analysis of the following points.

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

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

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

Region No. of Acounts

(current+saving)

(in ’000)

Population

(in ’000)

No. of Accounts

per

100 population

2001 2005 2001 2005 2001 2005

Northern 50944 58777 132679 141599 38 42

N.Eastern 7536 7729 34495 411083 20 19

Eastern 47838 51888 227617 242920 21 21

Central 63498 69424 255714 272906 25 25

Western 48120 55178 149073 159095 32 35

Southern 79531 94725 223437 238459 36 40

All India 297467 337721 1027015 1096063 29 31

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2001 2005

Pie chart representation of the data in the table

It can be seen from the table that in All-India level there was only 29 account holders per 100 in 2001 which inched up to 31 in 2005. Northern region has highest no. of accounts i.e. 42 per 100 population in 2005. North Eastern region recorded lowest figure of only 19 42 per 100 in 2005 which is paradoxically lower than 20 in 2001.

Table—2

Number of Savings Accounts to Adult Population-2005

Region Percentage of savings account

Northern 80 N.Eastern 37 Eastern 34 Central 52 Western 60 Southern 66

N.Eastern, 19

Eastern, 21

Central, 25

Western,35

Southern, 40

NORTHERN, 38

N.EASTERN, 20

EASTERN, 21CENTRA

L, 25

WESTERN, 32

SOUTHERN, 36

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Pie chart representation of the percentage of savings account.

Going by the available data on the number of savings bank accounts and assuming

that one person has only one account, (which assumption may not be correct as

many persons could have more than one bank account) we find that on an all India

basis 59 per cent of adult population in the country have bank accounts – in other

0

10

20

30

40

50

60

70

80

Northern N.Eastern Eastern Central Western Southern

80

37 34

52

6066

precentage of savings account

Northern24%

N.Eastern11%

Eastern11%Central

16%

Western18%

Southern20%

Percentage of savings account

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words 41 per cent of the population is unbanked. In rural areas the coverage is 39per

cent against 60 per cent in urban areas. The unbanked population is higher in the

North Eastern and Eastern regions.

Table –3 - Number of Loan Accounts to Adult Population 2005

Region Percentage of loan accounts Northern 12 N.Eastern 7 Eastern 8 Central 9 Western 13 Southern 25 India 14

0

5

10

15

20

25

Northern N.Eastern Eastern Central Western Southern

12

7 8 9

13

25

Percentage of loan accounts

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Pie chart representation of the percentage of loan accounts.

The extent of exclusion from credit markets is much more, as number of loan

accounts constituted only14 per cent of adult population (table-3) In rural areas, the

coverage is 9.5 per cent against 14 per cenin urban areas. Regional differences are

significant with the credit coverage at 25 per cent for the Southern Region and as

low as 7, 8 and 9 per cent respectively in North Eastern, Eastern and Central

Regions.

**The extent of exclusion from credit markets can be observed from a different view

point also. Out of 203 million households in the country, 147 million are in rural

areas – 89 million are farmer households. 51.4per cent of farm households have no

access to formal or informal sources of credit while 73 per cent have no access to

formal sources of credit. Similar data are not available for non farm and urban

households. Looking at the different sources of credit, it is observed that the share

of non institutional sources reduced from 70.8% in 1971 to 42.9% in 2002.

However after 1991, the share of non institutional sources has increased;

specifically, the share of moneylenders in the debt of rural households increased

from 17.5 % in 1991 to 29.6% in 2002. In urban areas the share of non institutional

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

Northern16%

N.Eastern9%

Eastern11%

Central12%

Western18%

Southern34%

Percentage of loan accounts

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a) No. of Banks’ branches in population groups

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

of Banks

No. of Branches As on June 30, 2004 As on June 30, 2005 Rural Semi

Urban Urban Metro Total Rural Semi

Urban

Urban Metro

Total

SBI 1 4068 (45%)

2462 (27%)

1499 (16%)

1010 (11%)

8989 (100%)

4068 (45%)

2475 (27%)

1470 (16%)

1023 (11%)

9036 (100%)

Associates Of SBI

7 1409 (30%)

1588 (35%)

849 (19%)

732 (16%)

4578 (100%)

1412 (31%)

1605 (35%)

864 (19%)

744 (16)

4625 (100%)

Nationalized 19 13582 (41%)

7190 (22%)

6801 (21%)

5668 (17%)

33241 (100%)

13587 (40%)

7291 (22%)

6935 (21%)

5812 (17%)

33625 (100%)

Other PSUs 1 NA NA NA NA NA 5 (3%)

26 (16%)

68 (43%)

60 (38%)

159 (100%)

PSBs 28 19059 (41%)

11240 (24%)

9099 (19%)

7410 (16%)

46808 (100%)

19072 (40%)

11397 (24%)

9337 (20%)

7639 (16%)

47445 (100%)

Pvt. Sector 29 1106 (19%)

1768 (31%)

1537 (27%)

1383 (24%)

5794 (100%)

1097 (18%)

1831 (30%)

1714 (28%)

1479 (24%)

6121 (100%)

Foreign Banks 31 Nil Nil 31 (14%)

188 (86%)

219 (100%)

Nil 1 (0%)

42 (17%)

206 (83%)

249 (100%)

RRBs 196 11922 (82%)

2134 (15%)

396 (3%)

20 (0%)

14472 (100%)

11922 (82%)

2158 (15%)

401 (3%)

20 (0%)

14501 (100%)

Scheduled Com. Banks

284 32087 (48%)

15142 (23%)

11063 (16%)

9001 (13%)

67293 (100%)

32091 (47%)

15387 (23%)

11494 (17%)

9344 (14%)

68316 (100%)

Non-scheduled Banks

4 4 (20%)

9 (45%)

7 (35%)

Nil 20 (100%)

4 (17%)

9 (39%)

10 (44%)

Nil 23 (100%)

Total 288 32091 (48%)

15151 (23%)

11070 (16%)

9001 (13%)

67313 (100%)

32095 (47%)

15396 (23%)

11504 (17%)

9344 (14%)

68339 (100%)

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

Table-4 indicates that 47% of total scheduled commercial bank branches are present in rural area where as 17% in Urban &14% in metropolitan areas as on June 2005. The rural presence of the nationalized banks (40%) & RRBs (82%) helped India positively in the direction of financial inclusion. The spread of private banks (18%) & foreign banks (0%) in rural areas is not very encouraging. The presence of private sector banks in rural areas has declined from 19% in 2004 to 18% in June 2005. Summary of the financial inclusion statistics in India(2005) (a) General :

51.4% of farmer households are financially excluded from both formal / informal

sources.Of the total farmer households, only 27% access formal sources of credit;

one third of this group also borrow from non-formal sources.

Overall, 73% of farmer households have no access to formal sources of credit.

(b) Region-wise :

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

concentration of 64% of all financially excluded farmer households in the country.

Overall indebtedness to formal sources of finance alone is only 19.66% in these

three regions.

(c) Occupational Groups:

Marginal farmer households constitute 66% of total farm households. Only 45% of

these households are indebted to either formal or non formal sources of finance.

About 20% of indebted marginal farmer households have access to formal sources of

credit. Among non-cultivator households nearly 80% do not access credit from any

source.

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(d) Social Groups :

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

OBC - 51%) mostly to informal sources.

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

critical exclusion (in terms of credit) is manifest in 256 districts, spread across 17

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

commercial banks and RRBs.

As per CMIE (March 2006), there are 11.56 crore land holdings. 5.91 crore KCCs

have been issued as at the end of March 2006, which translated into a credit

coverage of more than 51% of land holdings by formal sources. Further data with

NABARD on the doubling of agricultural credit indicates that agricultural loan

disbursements during 2006-07 covered 3.97 crore accounts. Thus, there are different

estimates of the extent of inclusion thru' formal sources, as the reference period of

the data is not uniform.

Consequently, this has had an impact on quantifying the extent of levels of exclusion.

REFERENCES FOR THIS SECTION

1. Central Statistical Organisation

National Accounts Statistics, Ministry of Statistics and Programme

Implementation, Government of India, New Delhi,.

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

Salient Features”, NSSO, Ministry of Statistics and Programme

Implementation, Government of India, New Delhi,.

3. National Statistical Commission

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

New Delhi,

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SURVEY : FINANCIAL INCLUSION –

THEN AND NOW

o understand the extent of financial inclusion in a general context and the perception of people regarding financial inclusion a survey was conducted.

The details of the survey are as follows. Place of survey: Sukhjora, a rural village in Jharkhand. No of people surveyed: 50 Age group of people surveyed: Above 65.(this age group was chosen so as to know the condition of financial inclusion 40 years back) The survey was conducted through a questionnaire containing five questions. There were no fixed answers to the questions, rather we made it a point to note down their answers. The questions are as follows.

1. Where did you keep your earnings then OR what did you do with your earnings after fulfilling the basic needs?

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

3. Where do keep or invest your money now?

4. How do you avail credit now?

5. How do you rate the financial inclusion services now? The answers to the questions received and the percentage of people that answered the various answers are as follows:

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ANS TO Q –1 PERCENTAGE OF PEOPLE

1. At home. 36% 2. In the post-office 20% 3. Saved in provident fund 12% 4. Invested in land and gold 64% 5. Lend money to others at high interest 21%

ANS TO Q –2 PERCENTAGE OF PEOPLE

1. From family members 35% 2. From money lenders at high interest 27% 3. Through mortgage of land to zamindars 40% 4. By selling land or gold or household items. 38%

From the above answers to Q—1&2 it is clear that the concept of financial inclusion was very low in those days. People did not have access to banks .The only profitable investment people thought in those days were of investing in land and gold and the only official method of saving in the area was the village post-office. In the case of taking credit and managing finance in times of emergency we see the people had to take pains. Mortgage loans from zamindars were common phenomena. Unlawful money lenders also had a good time. People expressed their sorrows and woes which they had to face particularly during their daughters marriage and in times of sickness. Thus financial inclusion services were still a dream in those days. ANS TO Q –3 PERCENTAGE OF PEOPLE

1. Post offices 16% 2. At homes 12% 3. In co-operative banks and local banks 70% 4. In private sector banks 11% 5. In equity shares 2% 6. In gold and land 24% 7. In kishan bikas patra &alike 18%

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ANS TO Q –4 PERCENTAGE OF PEOPLE

1. From banks (PSBs) 63% 2. From relatives and friends 22% 3. From money lenders 12% 4. From private sector banks 10% 5. By selling land or gold 21% 6. From self saved money 37%

ANS TO Q –5 PERCENTAGE OF PEOPLE

1. Good 36% 2. Average 42% 3. Below average 14% 4. Needs a lot of improvement 8%

From the answers of Q—3&4 it is clear that financial inclusion services are in services now. We see people have bank accounts now. Though the spread of the public sector banks are more but the spread of private sector banks are also happening. On surveying the area , it is found that what was a nil bank area has now five banks and in each of the banks the no. of customers have exceeded their limits. In case of credit taking banks have become the priority. But the rating of financial services by the people are still average. One of the prime causes of this reason is that people have become educated about the financial services in the urban areas. Thus, they feel that less development has taken place in their area. (For question no. 1,2,3&4 the total of the percentage of people giving the answers is not 100 because more than one option of answer has been given as a response )

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THE SIGNIFICANCE OF FINANCIAL

INCLUSION IN THE CURRENT FINANCIAL CRISIS

he current ‘tsunami’ in the financial sector triggered by the subprime crisis has had a telling impact on the global economy from which it will take some time to

recover. The role of the banking sector will be vital for India if it were to stay as one of the fastest growing economies. The multilayered Indian banking system—compromising 82 scheduled commercial banks (SCBs) , 92 regional rural banks (RRBs), four local area banks (LABs), 1813 urban cooperative banks (UCBs) and 109497 rural co-operative credit institutions has the ability to convert what was largely perceived as a social responsibility into a viable growth : providing access to finance to all , irrespective of geography , income or education. According to a study ‘Banking in 2050’ shows that the structure of global ranking will undergo a complete realignment with the E7 (Brazil, Russia India, China, Indonesia, Mexico and Turkey ) driving growth.

· Over the next 25 years, banking sectors will grow much faster than the GDP of these countries.

· Total domestic product in the E7 will exceed those of G7 countries in the next 40 years.

· India is likely to emerge as the third-largest domestic banking market by 2040, and could even grow faster than China.

In India, government-owned banks channel about 70 per cent of the net savings of the economy into government- and state-owned enterprises, and finance a huge budget deficit of about 9 per cent of GDP. Reducing the government’s dependence on these funds would require a change in the way the banking sector thinks and looks at itself, moving towards participating more formally in financial inclusion. Currently, local banks have a long way to go in bringing the unbanked areas within the banking fold. As competitive intensity hots up and ripples from international competition touch the Indian shores in search of ‘virgin’ markets, banks will have to revisit their cost models. Some estimates indicate that the lack of financial inclusion from the banking system reduces potential GDP by nearly 1.5 per cent. As per the Planning Commission’s India ‘Vision 2020’ document, the growth of banking is likely to be more qualitative than quantitative. While reliance on borrowed funds has increased for many of the global banks, the pace of deposit

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growth among local banks over the last couple of years has been encouraging. But it needs to be sustained with constant monitoring of quality of the deposit base. The present trend shows a strong shift among younger consumers from traditional branch-banking to alternate channels. Electronic delivery channels, such as the internet, ATMs and phones, have emerged as effective channels for distribution of products and services. Branches though will continue to be used more for cross-selling products and managing client relationship. The business challenge would be to ensure continuous compliance with cyber laws and other regulatory directives. Thus, it can be summed up that financial inclusion is one of the viable routes through which banks can maintain their development and also survive the current financial crisis. But in order to do that there should be extensive efforts both from the government’s side as well as the banks themselves. According to the Boston Consulting Group’s 2007 report, The Next Billion Banking Customers — the most effective marketing campaigns will have to include equal parts of education and sales pitch. To include their next customers, bank will have to access them, and be accessible. (The entire information on this particular section has been extracted from Businessworld Issue 18-24 Nov 2008)

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BIBLIOGRAPHY WEBSITES

1. www.npi.org.uk 2. www.nationalcentrefordiversity.com 3. www.bbcnews.com 4. www.nssoresults .co in 5. www.nabard.org

6. www.indian-bank.com

7. www.rbi.org.in

8. www.innoviti.com

9. www.egovonline.net

NEWSPAPERS

1. The Economic Times 2. The Hindu 3. The Telegraph 4. The Times of India 5. The Hindu Business Line

SPEECHES AND REPORTS

1. The need for financial inclusion with an Indian perspective , IDBI Gilts ltd.

2. Report of the committee on informal financial sector statistics, Dr. C Rangarajan, chairman of the National Statistical Commission

3. The Next Billion Consumers, report on financial inclusion by Boston Consulting group.

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

5. Taking Banking Services to the Common Man – Financial Inclusion,

Commemorative Lecture by Shri V. Leeladhar, Deputy Governor Reserve bank of India at the Fedbank Hormis Memorial Foundation at Ernakulam on December 2, 2005

6. Index of Financial Inclusion , Mandira Sharma, Indian Council for

Research on International Economic Relations

7. National Conference on Financial Inclusion, Press Information Bureau,

Govt. of India ,Friday 14th November.2008