Documentos de Académico
Documentos de Profesional
Documentos de Cultura
IN URBAN AREAS
A Project Report on Financial Inclusion in the city of Thiruvananthapuram as a part of the
fulfilment of Young Scholar Award given under the patronage of the Reserve Bank of India
Panicker Harishanker
Manager,
Submitted to:
Scope of Study...................................................................................18
Limitations.........................................................................................19
Findings.............................................................................................19
Suggestions.............................. ..........................................28
Conclusion.............................. ............................................33
References............................................. .............................34
INTRODUCTION
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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). Wealth has been also generated by
Indian companies from global trade. 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 the 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. This 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 up 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; however, the
inefficiencies and the inadequacies of the government and its policies are equally
at fault for lack of reduction in poverty. 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.
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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 money lenders 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
money lenders 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 wouldn’t be denied of access to a basic
service such as banking.
FINANCIAL EXCLUSION
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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.
1. LOW INCOME: Most of the poor are low wage earners, for them opening
an account and withdrawing money is seemingly unviable. Most of the
poor do not have high spending that would require borrowing of credit from
a formal agency like banks. They would rather keep their daily income at
their homes rather than in a bank.
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4. LACK OF UNDERSTANDING OF PROPERTY RIGHTS: The concept of
property rights are still not clearly understood in most parts of India. It was
the Peruvian economist Hernando De Soto in the early 2000s that made
the world aware of the concept of dead capital. In most of the developing
nations, the poor and the weaker sections of the society have little or no
knowledge of property rights since most are uneducated. Since they do not
possess the documents necessary for the collateral such people are
denied credit. Their properties which they own, but have no legal authority
over come under the extralegal system and therefore remain as ‘dead
capital’. This in turns helps the rise of the informal economy which gives
the alternative credit. In such a situation the property which has no ‘legal’
rights over it, would not provide any meaningful credit for the owner. This
was the situation in the west prior to the advances in the 19 th and the 20th
century. The rapid development of property rights in these nations has
meant that credit could be easily given to those who could prove that they
were owners of some property. A formal acknowledgment of the property
and its owner guarantees that the collateral is valid. The institutionalization
of the financial services whether one likes it or not demands this sort of
formal acknowledgment. Property and property rights of the individual are
extremely important since the financial agencies are dealing with
individuals (includes businesses and other institutions) and not the society
ultimately. Only by guarantying property rights through simpler procedures
for ensuring the rights can the true financial inclusion start.
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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.
Financial Inclusion
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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. 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.
Financial Institutions, both large and small have an important role to play in
financial inclusion. With their organized structure and effective management
larger financial institutions could act as mentors for small financial services firm
by ensuring a strong financial backing.
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deal with the agencies like NGOs who are interested in helping out the
poor and the weaker sections.
6. POST OFFICE SAVINGS BANK: These along with their extensive network
could offer wide variety of small and micro financial services to the people.
The Post Office Savings bank could utilise their staff to deliver door-to-door
service to the people.
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with the poor and the weaker sections turn out to be a fruitful activity not
only for the people but also for the lending agencies.
The concept of micro-finance was championed in the 70s and since then has
become a global phenomenon. The concept of micro-lending existed in different
forms in the past and still does exist in many parts of the World. (Chit funds in
India are a form of micro lending). Microfinance is the process by which diverse
financial services are made available to the poor and the low income people.
MFIs include NGOs, private commercial banks, NBFCs, cooperative societies. It
has had far reaching impacts in the developing world especially Latin America,
South and South East Asia. It along with the SHG movement in India (for e.g.:
Kudumbasree in Kerala) has ensured micro credit to women entrepreneurs.
Microfinance through its innovative dealing has achieved to some extent the
target of ‘helping people help themselves’. It has also successfully debunked the
myth that poor people are not worthy of being banked upon because of the low
defaulting by the debtors especially women. The 2006 Nobel Peace Prize being
awarded to the Bangladeshi economist Muhammad Yunus shows the success
and relevance of a concept like Microfinance.
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of the advantages of remaining with a formal financial agency. The Financial
Inclusion is therefore a step by step process involving the people as well as the
respective agencies. Financial inclusion takes the process of micro-finance a step
further by not just treating them as different or poor but by considering them as
credit-worthy citizens and bankable consumers. Financial Inclusion aims to bring
into contact the poorest of the poor with the big banks who have so far been
hesitant to deal with them.
The valuable experience of microfinance has shown that the doubts of poor
consumers defaulting payment of credit might not be valid after all. Microfinance
Institutions have been a big success because they have been able to come up
with financial products that the population in the lower economic strata want.
However there still remains to be seen how the transaction costs on the large
number of small credit can be lowered.
India has around 59% of the people who are in the financial system; the country
has a poverty rate of around 26% (2000). The rest are outside the financial
system due to low incomes or lack of pre-owned collaterals. There are around
40% landless and another 30% marginal land holder in India, access to financial
access still remains a distant reality for many of them. Financial Inclusion may not
be 100% even in many of the developed nations but the high level of access to
financial services do explain the necessity of a sound and inclusive financial
sector. Thus by creating a strong an inclusive financial sector the country would
be better at distributing the development and help achieve equity.
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. It came out with a report in 2005 (Khan Committee) and subsequently
RBI issued a circular in 2006 allowing the use of intermediaries for providing
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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. So far the campaign for 100% financial inclusion has been said to
be a success with many states now reaching near-total financial inclusion.
Compared to other states in India, Kerala has had a higher percentage of people
with banks accounts. The high level of banking among the population comes as
no surprise as the state has one of the highest literacy rates in the country
showing that banking increases with literacy and education (although the link
might not be direct). According to preliminary surveys done by LDMs in the state,
81.36% of the population already had access to banking facilities, meaning that
around 18.6% of the population did not have access to financial services. Kerala
has around 15% or 49.6 lakhs of people under poverty line, showing that the
number of poor and the un-banked have a direct correlation. The innovative SHG
movement in Kerala called the Kudumbasree has allowed much poor and
marginal family access to micro credit. However, it was decided that an active
propagation was necessary for the rest of the population to become financially
inclusive.
1
SLBC Report, 2007, Pg. 3
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implementation of the programme, the government had roped in five departments
which included; the agricultural department, the Revenue departments, the
Panchayats (Local Self-Governance), the D.R.D.A and the State Poverty
Eradication Mission (Kudumbasree). The success of the campaign prompted the
authorities to extend the campaign to other districts. It was decided to reach out
to the other 18.64% of the population who had no bank accounts.2 By September
2007, the banks had covered most of the districts in Kerala. With in a short period
of time, the state achieved complete financial inclusion and was declared as a
100% financially inclusive state. Kerala on September 30, 2007 became the
second major state after Haryana to achieve 100% financial inclusion in all of its
districts. The campaign managed to open more accounts than the number of
houses, thus exceeding the aims set out for the programme which was to attain
100% financial inclusion by opening an account for each house.
Although it is true that urban areas are better off when it comes to bank
connectivity and use of financial services compared to rural areas, a good share
of the urban population however remain financially excluded. The difference
between the rural-urban poverty rates in many of the states isn’t much. In at least
11 states the percentage of urban poverty was higher than the rural poverty. The
2
SLBC Report, Pg. 5
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plight of the urban poor is augmented by the high cost of living in urban areas and
the lack of resources. With increasing prosperity on one side and incrementing
poverty on the other the urban divide between the poor and the prosperous is
widening. Agriculture which could have provided them some level of sustenance
cannot be practiced in urban areas; this is the same with many of the activities.
Slums have come up in all the major cities of India characterized by the low levels
of sanitation and living conditions. The increasing urbanization will only
deteriorate the present situation. According to the 43rd round of NSS, it was found
that at least 41.8 million people were below the poverty line (the actual numbers
could be much higher). Therefore an urgent plan is needed to tackle the problems
in the slums. The rise of informal slums makes it hard for the authorities to plan
development for the cities. In cities like Mumbai almost half of the population now
live in slums.
The slum dwellers have come to the cities from villages looking for better
opportunities and live on meagre or no income. The unskilled and the uneducated
poor have no other choice but to go for menial jobs, sometimes into crime, or
remain unemployed. Most of the slum dwellers are poor and therefore are
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excluded from the financial system, and have to depend on informal credit.
Reaching out to them would take more time and perseverance compared to
reaching out to people in the rural areas. Most of the slum dwellers do not hold
proper identification cards, legal documents, etc. which might be necessary to
open an account even with the relaxed KYC norms.
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STUDY ON FINANCIAL
INCLUSION AMONG THE URBAN
POOR IN
THIRUVANANTHAPURAM
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THE STUDY
As a part of the financial inclusion in urban areas, a survey was conducted in the
slum or slum-like area of Thiruvananthapuram city to know the level of financial
exclusion and the progress that has been achieved by the 100% financial
inclusion campaign. According to a 1995 report of the Department of Town
Planning there were 37 slums in the city. However unofficial estimates say the
number of slums in the city and the urban agglomeration have swelled up to 355.
All the slums are on public land hindering developmental projects and town
planning thus making it imperative for the government to take action for slum
rehabilitation and welfare of the poor.
According to a press note issued by Indian Overseas Bank, the Lead Bank for
Thiruvananthapuram district, 2, 89,912 savings accounts were opened in the
district since October 1, 2006. Of these 90,999 were ‘no-frills accounts as a part
of the 100% Financial Inclusion Campaign. An amount of Rs.6.59 crore was given
out in the form of GCCs.
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Being a low lying area, the area is prone to deluges and constant water logging
during the Monsoon and the untreated sewage for most part of the year.
Thrivikramangalam is an area close to Poojapoora, it is not a slum or a slum-like
area like Chengalchoola, and but it does contain many pockets of shanty homes
and sub-standard housing. The sampling of the area was done to have a wider
perspective of financial inclusion.
The scope of the survey is to see the level of financial inclusion and the
awareness of the people about financial inclusion and the use of financial
services. The questionnaire consisted total of 15 questions divided into three
parts for ease. The following steps were done for obtaining the information.
SCOPE OF STUDY
• The occupation of the respondent, the source of income for the family and
whether the respondent had an account, if so the name of the bank and
the type of account.
• About the awareness of new measures for financial inclusion like no-frills
account, GCCs, and relaxation of KYC norms for accounts
• The reason for not opening the account and if aware about measures for
Financial Inclusion, the reason for not opening an account.
• Whether they had availed any credit (long term and short-term) from the
banks, and the type of credit that was availed to them by the banks.
• Whether any family member was a part of an SHG or had access to micro-
credits from MFIs.
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• The credit requirements and whether they were interested in availing credit
from banks and for what particular reason.
• About informal agencies and whether they were dealing with an informal
agency. If they had taken any credit from an informal agency, then the rate
of interest was also enquired.
• The use of financial services and instruments and also the frequency of
them going to banks to measure financial awareness.
LIMITATIONS
FINDINGS
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member employed and 22 were self-employed mainly working as auto
rickshaw drivers and
owning small businesses.
A small percentage were
either working in a private
company or as farmers.
2. LEVEL OF FINANCIAL
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An important analysis
with respect to the
number of bank
accounts is the average
distribution of accounts
among the different
occupational groups
show that most
occupational groups
including the Unemployed are better off. The cause of concern here is with
respect to the Manual Labourers. The percentage of manual labourers with
account to the total number of manual labourers is around 45%. This
means that more than half of the manual labourers in the survey were
financially excluded. The reason for the high number of manual labourers
remaining financially excluded is maybe due to the fact that they get daily
wages and spend most of what they earn on household items. There is a
need on part of the banks or the relevant agencies to reach out to this
segment of the population. There is a need to make them aware of the
uses of banking, and at the same time banking process should be made
easier (like depositing) for them to use the facilities. It would not make any
sense for them to do banking unless they see an incentive in dealing with
banks.
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An overwhelming 75% of the accounts were in public sector banks which
were the State Bank of Travancore, the Indian Bank, the Indian Overseas
Bank and the Union bank
of India. Interestingly in
Chengalchoola there
were no households with
bank accounts in private
banks. The number of
private banks having
branches in urban areas
is high, yet they have not had a major impact among the poor in the city.
All those with accounts in private banks came from the Thrivikramangalam
area.
5. CREDIT AND TYPE OF CREDIT: Of those who have accounts, around 55.5%
have taken credit from banks (mostly long term credit). Most of those who
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haven’t taken (68%) credit have told that they were interested in taking
credit but do not feel the banks will give them the credit. Some had
previously applied for loans but were rejected due to the lack of necessary
documents. An impediment to those who want to access credit (not only for
those with account but also those without accounts) is the lack of important
documents.
The pie-chart on the types of credit taken shows how much of different
types of credit the
households have
availed from the
banks. Housing
loans, loans for self-
employment and
loans for family
reasons (mostly
marriage) make up the majority of loans taken. Loans taken for housing
and self-employment can be taken as good indications as these show a
confidence among the debtors. However the loans taken for family reasons
(marriage, other family needs) cannot be seen as good signs of credit
usage. The risks of defaulting for such loans could be higher as the
families are already somewhat in a weaker financial position.
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6. AWARENESS ABOUT NEW INCENTIVES OR MEASURES BY RBI: The survey
has shown a dismal
performance by banks in
reaching out to the
people and making them
aware about the new
initiatives taken for
financial inclusion. It
was found that only in 8
out of the total 120 households the people had any knowledge about the
new measures. Those who knew had some idea about no- frills account
but not about the relaxation of the KYC norms, or the GCCs. The low
awareness about the steps taken by RBI and the financial institutions
shows that there is an urgent need to reach out to them and to spread the
awareness about the initiatives. It seems that merely displaying posters
informing consumers about no-frills account will not by itself increase the
awareness about the new measures.
7. SELF-HELP GROUPS AND MFIS: In the survey it was found that only around
40% of the households had members in an SHG or access to credit from a
MFI. Most of the other 60% of the respondents belong to families who can
become members of SHGs, but voluntarily decided to remain financially
excluded. Interestingly about 80% of those who are part of the SHGs
(Kudumbasree) are account holders, showing that those who are
unbanked were at a serious disadvantage.
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9. CREDIT REQUIREMENTS:
The above table shows the different occupation and the number of
respondents who showed interest in taking credit from banks. In this also,
the manual labourers
are the most hesitant.
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respondents (64%) had taken no interest in informal credit. However there
is no correlation between taking informal credit and the awareness of the
risks associated with informal credit. Around 44 respondents accepted that
they had taken informal credit mostly of sums between Rs 5,000-10,000.
The unemployed showed the most interest in taking credit from the
informal money lenders with 70% of them having taken credit from them.
The largest occupational groups that has taken money from the money
lenders are the manual labourers and Self-employed making around 38%
and 27% of the total number of those who have taken informal credit. The
minimum rate of interest charged on credit from informal money lender
was 3.5% on a Rs. 28,000 loan. Most of the rate of interest (mode) was
around 5% or 5 rupee interest as it is known among the slum dwellers. In
at least 22% of the cases there are instances of 10% interest being
charged on the people, which is the highest among the different interest
rates. However there are hidden costs associated with dealing with
informal money lenders which do not come under the rate of interest.
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It was seen that Government employees had a higher level of financial
awareness when compared to other income groups. It is natural that
Government employees being larger in number would have more
financially aware people, but when compared to Self-employed and
Manual Labourers there is a clear correlation between occupation and
financial awareness. Manual Labourers fare the worst when it comes to
financial awareness. The number of manual labourers without any financial
awareness is more than the number of manual labourers with average
financial awareness. Government employees and self-employed are the
occupational groups that fare better when compared to other groups.
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However the percentage of people with low awareness about informal
credit is not uniform. Manual Labourers fare worse in terms of awareness
SUGGESTIONS
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financially inclusive, it could result in even more financial exclusion. People
would chose to be voluntarily excluded since their experience with banking
had not brought them any specific benefits. Wrong financial decisions in
the absence of financial advice can lead to severe consequences like in-
debtedness and permanent financial exclusion. The first phase of helping
every one access to financial services should be supplemented by a
programme of equal vigour to spread financial literacy and advice on the
proper use of financial services.
3
“The Next Billion Customers: A road map for expanding Financial Inclusion in India”, Sinha J.
and A. Subramaniam – Boston Consulting Group, 2007
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increasing competition, a lackadaisical outlook would certainly spell doom
for the banks; therefore banks have an incentive to perform well. In the
case of MFIs they should be allowed to offer more facilities to the poor and
the marginal customers. MFIs need to upgrade to Small Commercial Bank
status to function and to offer normal banking facilities. A major problem
with respect to all the MFIs is the low amount of total assets. If all the 54
MFIs are combined together their total assets would add up to less than
300 crores which is the minimum required to be considered as SCBs.4 It
would require another 5 to 10 years for the bigger MFIs to become SCBs.
Flexibility and independence are needed to make small banking viable.
The experiences in the developed countries show that the small banks can
successfully exist among the large banks and credit organizations by
catering to certain communities rather than the whole population. Targeted
banking by SCBs is one of the ways in which the small banks can compete
with the larger commercial banks.
4
Draft Report of Committee on Financial Sector Reforms, Planning Commission, 2008.
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5. CATERING TO SPECIFIC NEEDS OF THE EXCLUDED: The credit needs and
amount of credit needed by the poor or the financially excluded differs from
the middle class and the upper class needs hence require adoption of new
strategies. Most of the self-employed and the daily wage earners find it
cumbersome to go to banks and cash their money; therefore, the use of
Business Correspondents (BC) could bring in such occupational groups
who have little time for the conventional system of banking. It would
require person-to-person interactions to make banking and the use of
financial services a part of their lifestyle.
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at affordable rates. Small private banks can be encouraged to practice
targeted banking aimed at delivering services to certain communities
rather than the society as a whole. This would not only ensure a steady
number of banking customers for the small banks but also a chance to do
business in a market dominated by large commercial banks. By doing so,
the chances of financial exclusion are reduced as small banks would try to
bring in as much customers as possible.
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labourers and other with the pension fund can use it as collateral for
getting loans such as for housing.
CONCLUSION
Financial Inclusion has been a catch phrase for the past few years. Delivering
financial services to all sections of the population will remain a challenge that
central banks around the world will face over the next few years. Increasing
educational level means more financial inclusion; therefore a literate population
must be created in order to create a meaningful financially included population.
Innovation and out-of-the-box thinking are what has made the World what it is
today. We can never be complacent with what we have or what we have
achieved, the human life is an endeavour for progress and a better life. This
should be the case with Financial Inclusion; we cannot become complacent and
become victims of our own success. Not only should people have access to basic
financial services but should also actively use them. A modern and a globalized
economy cannot be successful unless it is inclusive. With enthusiasm and
foresight this challenge would be overcome rather simply. We should not lose the
enthusiasm with which we started and that mediocrity or partial success cannot
considered as same as success.
……………………………………………….
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REFERENCES
4. How India Earns, Spends and Saves, Max-New York Life -NCAER, 2007
5. Draft Report of the Committee on Financial Sector Reforms (CFSR), ch.3, Planning
Commission, 2008
8. Financial Inclusion – The Indian Experience, Text of speech by Smt. Usha Thorat,
Reserve Bank of India, 2007.
9. “The Next Billion Customers: A road map for expanding Financial Inclusion in India”,
Sinha J. and A. Subramanian – Boston Consulting Group, 2007
11. Financial Inclusion & Financial Literacy: SBI Initiatives, V. Ramkumar, pg. 49-53, CAB
Calling, July-Sept. 2007.
12. Financial Inclusion for Sustainable Development: Role of IT and Intermediaries, Smt.
Usha Thorat, Reserve Bank of India, 2007.
15. Finance for all, Column, Sanjay Nayar, Mint, September, 2007
16. Will financial inclusion ever be executed?, Column, Rajrishi Singhal, The Economic
Times, 2007
17. Financial inclusion and micro-credit, Column, Manoj Pant, The Economic Times, 2007
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18. SLBC( for the region of Kerala)Report, 2007
19. Govt aims for financial inclusion in 5 years: FM - Daily News & Analysis, 2008
21. Report on Trends and Progress of Banking in India, 2006-07, Reserve Bank of India,
2007
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