Title of the Paper : FINANCIAL INCLUSION IN INDIA

Abstract

Financial inclusion is delivery of banking services at an affordable cost to the vast

sections of disadvantaged and low income groups. The main focus of financial inclusion in
India is to promote sustainable development and generating employment in rural areas for
the rural population. Out of 19.9 crore households in India, only 6.82 crore households have
access to banking services. As far as rural areas are concerned, out of 13.83 crore rural
households in India, only 4.16 crore rural households have access to basic banking services.
In respect of urban areas, only 49.52% of urban households have access to banking services.
Over 41% of adult population in India does not have bank account. There are many factors
affecting access to financial services by weaker section of society in India. Several steps
have been taken by the Reserve Bank of India and the Government to bring the financially
excluded people to the fold of the formal banking services. The 100 per cent financial
inclusion drive is progressing all over the country. The State Level Bankers Committee
(SLBC) has been advised to identity one or more districts for 100 per cent financial
inclusion. So, far, the SLBC has identified 431 districts for 100 per cent financial inclusion.
As on 31st March 2009, 204 districts in 18 States and 5 Union Territories have reported
having achieved the target. Keeping in view the enormity of the task involved, the
Committee on Financial Inclusion 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.

Electronic copy available at: http://ssrn.com/abstract=1745467

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Title of the Paper: FINANCIAL INCLUSION IN INDIA (Full Paper)

Introduction
There are several factors affecting access to formal banking system in any country.
They include culture, financial literacy, gender, income and assets, proof of identity,
remoteness of residence, and so on. The Reserve Bank of India has taken several measures
since Independence to improve access to affordable financial services through financial
education, leveraging technology, and generating awareness.
The aim of financial inclusion is to promote sustainable development and generating
employment for a vast majority of the population especially in the rural areas. In the first-
ever Index of Financial Inclusion to find out the extent of reach of banking services among
100 countries, India has been ranked 50. At present, only 34% of the Indias population has
access to basic banking services. The latest National Sample Survey Organisation survey
reports that there are over 80 million poor people living in the cities and towns of India and
they lack access to the most basic banking services - such as savings accounts, credit,
remittances and payment services, financial advisory services, etc. Low-income groups do
not have access to the formal banking systems, as they usually do not have the documents
needed to open a bank account. As a result, they depend on the informal sector for their
savings and loan requirements. Recognising the importance of inclusive growth in India,
efforts are being taken to make the financial system more inclusive. The Report Committee
on Financial Inclusion headed by Dr.C.Rangarajan (2008) has observed that financial
inclusion must be taken up in a mission mode and suggested a National Mission on Financial
Inclusion (NMFI) comprising representation of all stakeholders for suggesting the overall
policy changes required, and supporting stakeholders in the domain of public, private and
NGO sectors in undertaking promotional initiatives.
Need for Financial Inclusion
Out of 19.9 crore households in India, only 6.82 crore households have access to
banking services. As far as rural areas are concerned, out of 13.83 crore rural households in
India, only 4.16 crore rural households have access to basic banking services. In respect of

Electronic copy available at: http://ssrn.com/abstract=1745467

 3

urban areas, only 49.52% of urban households have access to banking services. Over 41% of
adult population in India does not have bank account. There are number of factors affecting
access to financial services by weaker section of society in India. The lack of awareness, low
incomes and assets, social exclusion, illiteracy are the barriers from demand side. The
distance from bank branch, branch timings, cumbersome banking procedure and
requirements of documents for opening bank accounts, unsuitable banking
products/schemes, language, high transaction costs and attitudes of bank officials are the
barriers from supply side. Hence, there is a need for financial inclusion to build uniform
economic development, both spatially and temporally, and ushering in greater economic and
social equity.
A sample study carried out by the Banking Codes and Standards Board of India in
Mumbai revealed the poor awareness about no-frills accounts and relaxed KYC norms
amongst the bank staff itself, a general unwillingness by the bank staff to open no-frills
accounts for persons of small means, the account opening forms were not simplified and did
not contain any information about the required documents under simplified KYC norms and
none of the branches the staff were in a position to offer any guidance in case the prospective
customer was not in a position to produce required documents in proof of identity and
address. As a result, the weaker sections of India hesitate to take part in financial inclusion
and help to increase economic growth of the country.
The Eleventh Five Year Plan (2007-12) envisions inclusive growth as a key objective.
The inclusive growth implies an equitable allocation of resources with benefits accruing to
every section of society. It is aimed at poverty reduction, human development, health and
provides opportunity to work and be creative. Achieving inclusive growth in India is the
biggest challenge as it is very difficult to bring 600 million people living in rural India into
the mainstream. One of the best ways to achieve inclusive growth is through financial
inclusion.
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Review of Literature
In recent years, Indian banking sector is grappling with the issue of financial
inclusion. But, it is not altogether a new exercise. Financial inclusion was envisaged and
embedded in Indian credit policies in the earlier decades also, though in a disguised form
and without the same nomenclature (Rao, 2007).
Banks would have to evolve specific strategies to expand the outreach of their
services in order to promote financial inclusion. One of the ways in which this can be
achieved in a cost-effective manner is through forging linkages with micro finance
institutions and local communities. Banks should give wide publicity of no frills account.
Banks need to redesign their business strategies to incorporate specific plans to promote
financial inclusion of low income group treating it both a business opportunity as well as a
corporate social responsibility (V.Leeladhar, 2005).
Micro-finance offers significant potential for achieving financial inclusion. The
experience of the bank in this segment has been quite encouraging. In the words of
Prof.C.K.Prahalad If we stop thinking of the poor as victims or as a burden and start
recognizing them as resilient and creative entrepreneurs and value conscious consumers, a
whole world of opportunity will open up (K.C.Chakrabarty, 2008).
In the paper by Laveesh Bhandari and Sumitha Kale (2008) titled Digital Payments
and Financial Inclusion enough emphasis has been given to the present scenario and the
paper has brought out the importance of embracing technology as a cost effective measure to
improve financial inclusion. Payments through mobile phones have been suggested as the
most appropriate measure.
Access to financial services allows lower income groups to save money outside the
house safely, prevents concentration of economic power with a few individuals and mitigates
the risks that poor people face as a result of economic shocks (Beck, Demirguc-Kunt &
Peria, 2006). The breadth of financial inclusion in a region or a country is usually measured
by the percentage of people in the region who have access to bank accounts (Beck & De la
Torre, 2006). This is primarily because a bank account enables poor households to perform
important financial functioning such as saving money safely outside the house, accessing
 5

credit, making loan or premium payment and transferring money within the country. Thus,
although a bank account covers only one aspect of financial inclusion, it may determine
access for many other financial services (Littefield et al, 2006).
Financial Inclusion Global Scenario
An interesting feature which emerges from the international practice is that the more
developed the society is, the greater the thrust on empowerment of the common man and low
income groups. It may be worthwhile to have a look at the international experience in
tackling the problem of financial exclusion so that we can learn from the international
experience.
In United Kingdom, one out of 12 households do not have basic current account with
any bank. The Financial Inclusion Task Force in UK has identified three priority areas for
the purpose of financial inclusion, viz., access to banking, access to affordable credit and
access to free face-to-face money advice. UK has established a Financial Inclusion Fund to
promote financial inclusion and assigned responsibility to banks and credit unions in
removing financial inclusion. Basic bank no frills accounts have been introduced. 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 unable or unwilling to access a basic bank account.
The concept of a Savings Gateway was introduced to encourage availing of financial
services by the disadvantaged groups. The Community Finance Learning Initiatives (CFLIs)
were also introduced with a view to promoting basic financial literacy among housing
association tenants.
In USA, varying from State to State, 10 to 20 per cent of US households lack a bank
account. Among the low income families, 22 per cent do not have either a current or savings
account. The Government has taken various measures to deal with the problem of financial
inclusion. A civil rights law, namely the Community Reinvestment Act (CRA) prohibits
discrimination by banks against low and moderate income neighborhoods. The CRA imposes
an affirmative and continuing obligation on banks to serve the needs for credit and banking
services of all the communities in which they are chartered. In fact, numerous studies
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conducted by Federal Reserve and Harvard University demonstrated that CRA lending is a
win-win proposition and profitable to banks. In this context, it is also interesting to know the
other initiatives taken by a State in the United States. Apart from the CRA experiment,
armed with the sanction of Banking Law, the State of New York Banking Department, with
the objective of making available the low cost banking services to consumers, made
mandatory that each banking institution shall offer basic banking account and in case of
credit unions the basic share draft account, which is in the nature of low cost account with
minimum facilities.
In France, as per the 1984 Banking Act, any person refused a bank account can
approach the Bank of France, which will identify and nominate an institution to provide the
bank account. In 1992, French banks signed a charter undertaking to open bank accounts at
an affordable cost with related payment facilities to all.
Thus, it is observed that even in developed countries, the State has accepted financial
inclusion as an important measure for socio-economic development of the poor and
disadvantaged groups. Various proactive and positive actions have been initiated by the
Governments to deal with the problem of financial exclusion.
Status of Financial Inclusion in India
The status of financial inclusion in India has been assessed by various committees in
terms of her peoples access to avail banking and insurance services. Only 34% of the Indias
population has access to banking services. The Eleventh Five Year Plan (2007-12) envisions
inclusive growth as a key objective. Achieving inclusive growth in India is the biggest
challenge as it is very difficult to bring 600 million people living in rural India into the
mainstream. One of the best ways to achieve inclusive growth is through financial inclusion.
The process of financial inclusion in India can broadly be classified into three phases.
During the First Phase (1960-1990), the focus was on channeling of credit to the neglected
sectors of the economy. Special emphasis was also laid on weaker sections of the society.
Second Phase (1990-2005) focused mainly on strengthening the financial institutions as part
of financial sector reforms. Financial inclusion in this phase was encouraged mainly by the
introduction of Self- Help Group (SHG)-bank linkage programme in the early 1990s and
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Kisan Credit Cards (KCCs) for providing credit to farmers. The SHG-bank linkage
programme was launched by National Bank for Agriculture and Rural Development
(NABARD) in 1992, with policy support from the Reserve Bank, to facilitate collective
decision making by the poor and provide door step banking. During the Third Phase (2005
onwards), the financial inclusion was explicitly made as a policy objective and thrust was
on providing safe facility of savings deposits through no frills accounts.
The Report Committee on Financial Inclusion headed by Dr.C.Rangarajan (2008) has
observed that financial inclusion must be taken up in a mission mode and suggested a
National Mission on Financial Inclusion (NMFI) comprising representation of all
stakeholders for suggesting the overall policy changes required, and supporting stakeholders
in the domain of public, private and NGO sectors in undertaking promotional initiatives.
Several steps have been taken by the Reserve Bank of India and the Government to
bring the financially excluded people to the fold of the formal banking services. They
include the following:

Introduction of No-Frills account

Relaxing 'Know Your Customer' (KYC) norms

General Purpose Credit Card (GCC) Schemes

Role NGOs, SHGs and MFIs

Business Facilitator (BF) and Business Correspondent (BC) Models.

Nationwide Electronic Financial Inclusion System (NEFIS)

Project Financial Literacy

Financial Literacy and Credit Counseling (FLCC) centers

National Rural Financial Inclusion Plan (NRFIP)

Financial Inclusion Fund (FIF)

Financial Inclusion Technology Fund (FITF)
With a view to enhancing the financial inclusion, in the Mid Term Review of the
Policy (2005-06), the RBI advised all banks in November 2005 to make available a basic
banking no-frills account either with nil or very low minimum balances as well as charges
that would make such accounts accessible to vast sections of the population.
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The 100 per cent financial inclusion drive is progressing all over the country. The
State Level Bankers Committee (SLBC) has been advised to identity one or more districts
for 100 per cent financial inclusion. So, far, the SLBC has identified 431 districts for 100 per
cent financial inclusion. As on 31st March 2009, 204 districts in 18 States and 5 Union
Territories have reported having achieved the target.
The success of the financial inclusion can be measured by the actual quantity and
quality of usage of the newly opened No Frill accounts. The number of no frills accounts
increased from 4,89,497 on 31st March 2006 to 3,30,24,761 on 31st March 2009. The lead
bank in each district has been asked by RBI to draw a roadmap by the end of March 31, 2010
for ensuring that all villages with a population of over 2,000 will have access to financial
services through a banking outlet, not necessarily a bank branch, by March 31, 2012. There
will be an intermediate target to be achieved by March 31, 2011.
Keeping in view the enormity of the task involved, the Committee on Financial
Inclusion 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.
Conclusion:
In achieving inclusive growth in India, the Financial Inclusion will play a vital role
and help the nation to drive away the not only rural poverty but also urban poverty in India.
It is the duty of every Indian citizen to ensure that all the Indian will have bank account and
everybody should take part actively in achieving 100% financial inclusion in India.
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