CHAPTER-1

INTRODUCTION
FINANCIAL INCLUSION IN INDIA-
An Assessment “overcoming poverty is not a gesture of charity. It is an act of justice.
It is the protection of a fundamental human right, the right to dignity and a decent
life. While poverty persists, there is no true freedom. Sometimes it falls upon a
generation to be great. You can be that great generation. Let your greatness blossom.
Of course, the task will not be easy. But not to do this would be a crime against
humanity, against which I ask all humanity now to rise up.”
– Nelson Mandela.
“Poverty is the worst form of violence.”
- Mahatma Gandhi.
“The test of our progress is not whether we add more to the abundance of those who
have much; it is whether we provide enough for those who have too little.
- Frankin D. Roosevelt.
“ If the misery of the poor be caused not by the laws of nature, but by our institution,
great is our sin.”
- Charles Darwin.

I. Financial inclusion
Financial Inclusion is defined “as the process of ensuring access to financial
services and timely and adequate credit where needed by vulnerable groups such as the
weaker sections and low income groups at an affordable cost”. Broadly speaking, financial
inclusion is the delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low income groups. The legal foundation for recognizing, implementing
and enforcing consumer protection is the primary prerequisite for any legal rights,
including consumer rights in banking. Similarly, supervision and enforcement of the
protection of consumer affairs in the financial system is critical for ensuring consumer
protection.
Financial inclusion aims at drawing the “unbanked” population into the formal
financial system so that they have the opportunity to access financial services ranging from
savings, payments, and transfers to credit and insurance. Over the past 15 years, advance
has broadened from the initial focus on microcredit to microfinance, to access- to-finance,
and most recently financial inclusion. Microfinance is now seen as an integral part of an
inclusive financial system. Financial inclusion has become an important policy goal that
complements the traditional pillars of monetary and financial stability, as well as other
regulatory objectives such as consumer protection.
Users of financial services can be distinguished from the non-users. There are
certain households in the society who do not use financial services for cultural or religious
reasons or they do not feel any need. These non-users have access to financial services but
they choose not to use them. On the other hand, the households intuitively excluded are
those who demand for the financial services but do not have access to them. These
involuntary exclusions may be due to insufficient income or high lending risks or there
might be discrimination against certain part of the population. Third the contractual or
informational framework may prevent financial institution to reach out to certain part of
the population. Finally the price of the financial services may be too high or the product
features might not be appropriate for certain population groups as shown in the following
Chart – 1.
Chart 1: Distinguishing between Access to Finance and Use

No Need
Users of formal Voluntary Self-
financial services exclusion
Cultural / religious
reasons not to use / Indirect
Access

Insufficient income
Population / high risk

Discrimination
Non-users of formal
financial services Involuntary
exclusion
Contractual /
informational
framework

Price / product
features

Note: Users of formal financial services have access to financial services and Non-users of
formal financial services have no access to finance.
II. Stylized Facts about Financial Inclusion:
According to the Consultative Group to Assist the Poor (CGAP), the absolute
number of savings accounts worldwide is reported to exceed the global population. Half of
the world’s adult population—2.5 billion people—does not, in fact, have access to savings
accounts and other formal financial services. Financial inclusion as a policy objective
represents the current consensus in a long-standing debate on the contribution of finance to
economic development and poverty reduction. It reflects the evolution of financial sector
policies in developing countries over the past decades, and embodies important insights
into the positive impact that financial services have on the (economic) lives of the poor.

Financial sector policies have evolved through three stylized stages: first,
fostering state-led industrial and agricultural development through directed credit;
second, market-led development through liberalization and deregulation; and third,
institution building that aims at balancing market and government failures.
At least until the 1980s, many developing countries channeled public funds to
target groups like farmers and small enterprises, and regulated the scope of activities for
which these funds could be used. These “directed credit” programs assumed that the
rural poor were unable to save or to afford market rates of interest, and therefore need
loans at subsidized rates to build capital. Hence development banks lent at below-market
rates to selected target groups. To fund cheap loans, deposit rates were often subject to
regulatory ceilings, undermining domestic resource mobilization. The results of
“financial repression” were typically shallow financial systems and institutions that had
little capacity to allocate resources efficiently according to risk-return characteristics. In
addition, poor targeting yielded transfers through highly repressive subsidized interest
rates, and subsidies weakened financial institution performance. Not only did these
programs typically prove to be unsustainable, they also did not improve outreach of
financial services to the poor, particularly in rural areas.
At the end of the 1980s, a new approach emerged that focused on the performance
of financial institutions in delivering their services to segments of the population with
little or no access to finance. The changes were substantial. The new approach shifted the
discussion away from individual firms and households onto institutions and their ability to
provide services on a sustainable and widespread basis. Initial experiences in Indonesia,
Bangladesh, Bolivia, and some other countries demonstrated that microfinance and rural
finance conceived as “banking with the poor” are indeed financially viable and may thus
increase outreach on a sustainable basis. These encouraging examples led to a new view
called the “financial system” paradigm.
Over the past few years, microfinance has undergone a rapid transformation as its
links to the formal financial system have been expanded. Growing theoretical and
empirical evidence suggests that financial systems that serve low-income people
promote pro-poor growth. The underlying assumptions of this approach were that poor
people can generate an economic surplus, which enables them to repay the real costs of
loans and to save. The term microfinance came to replace “microcredit,” the former
being used increasingly to refer to a variety of financial products such as loans, deposits,
insurance, payments, and remittances offered by a variety of regulated and unregulated
financial institutions.

With this increased attention to the poverty alleviation aspects of finance, policy
objectives are being constantly expanded to include more quality access to a wider range
of financial services. Lack of access to finance, therefore, adversely affects growth and
poverty alleviation. It makes it more difficult for the poor to accumulate savings and
build assets to protect against risks, as well as to invest in income-generating projects.
As a result, the interest in financial sector development has increasingly focused
on the factors that determine not only the depth but also breadth of access, in a move
toward inclusive financial systems.
This trend has been facilitated by the development and rapid diffusion of
information and communication technology that dramatically reduces the cost of
connecting users to formal financial institutions through payment systems, with potential
spill-overs into a broader range of services.
Against this background, financial services to the unbanked have become a major
area of interest for policymakers, practitioners, and academics who increasingly
emphasize financial inclusion as a policy objective. The notion of building inclusive
financial systems recognizes not only the goal of incorporating as many poor and
previously excluded people as possible into the formal financial system, but it also
assigns to mainstream financial institutions the role of reaching out to the unbanked.
From this perspective, microfinance is now seen as an integral part of an
inclusive financial system. As a result, financial inclusion has become an important
policy goal that complements the traditional pillars of monetary and financial stability,
as well as other regulatory objectives such as consumer protection. Policies to encourage
increased access for the previously unbanked must, however, take into consideration the
objectives of financial stability, especially in light of the economic and financial crisis.
All these policy changes were possible because at the micro-level, views on
household behaviour with respect to financial services have changed dramatically.
Today, it is understood that poor households rely on a variety of financial instruments in
the daily management of their cash flows and risks, and in their endeavours to build
assets through saving. Tools such as financial diaries show that the key challenge faced
by these low-income households is the irregularity of their cash flows.
The average income at the international poverty line of $2 a day translates in
practice into a highly variable flow that requires active management to smooth
consumption and reduce vulnerability to various shocks, such as health risks, as well as
to cope with major life cycle events.
Financial Inclusion has got the center stage of discussion in the arena of public
policy formulations, poverty alleviation and overall inclusive economic development of
India since the last several years. Inability to access mainstream banking and financial
services has been found to be one of the major inhibitors of overall growth of the nation
in several of the past studies. These inputs have led to serious considerations by policy
makers in making financial inclusion viable in the country.
Off late, financial exclusion and its strong impact on economic growth have generated a
lot of interest across the world. India in particular has a large segment of people with low-
income or from rural backgrounds who do not have access to financial services from
banks, societies etc. Hence it is imperative for policy makers and government agencies to
address the issue of financial exclusion by promoting initiatives on financial inclusion
thereby filling gaps between finance providers and people.
The significance of financial inclusion is growing in India, given the gaps that
exist for the people belonging to underprivileged groups of both urban and rural areas. A
large part of the country does not have access to the formalized basic banking and
financial services. This has resulted into the creation of a huge group of financially
excluded citizens across India. Such exclusion cripples the development and slows down
 the economic growth of any country.
Policymakers in India have been focusing on the issues and challenges of financial
exclusion in the country and urging mainstream banks to cater to these financially
excluded regions to pace up sustainable and inclusive growth initiatives. Other parties
who are also contributing to this drive of curbing the evils of financial exclusion include
government agencies, post offices, non-banking financial institutes, various types of
urban, rural and district cooperative banks and societies, micro finance institutions, self-
help groups and many non-government organizations, some of whom have been catering
to this financially excluded populace since long. However, given the current context of
such financial exclusion, the social context and the awareness of the target group, banks
and other financial institutions are expected to start providing the most basic banking
services to bridge the gaps and pull off the financial inclusion plan. Banks have identified
some technology initiatives, some of them in use, to cater to the unbanked customers.
Some of these include smart cards, kiosk banking, mobile-based channel, biometric
ATMs, mobile wallets, etc. But usage of these technologies also depends a lot on the
acceptance and readiness of people, keeping in mind the cost and security.
The major stakeholder groups are banks and financial institutions with the RBI as
the central bank and NABARD as the apex bank. All public, private and regional rural
banks and other micro-financing institutes are the service providers. The facilitating
organizations like NPCI (National Payments Corporation of India) and IDRBT (Institute
for Development and Research in Banking Technology) provide the technology framework
and help provide smooth transactions.
Financial Inclusion primarily focuses at making the financial services available at
affordable costs to the low income and disadvantaged groups of the society. In India the
nationalized banks played an important role in extending the banking services from the
classes to the masses. The financially excluded people in the past like the landless
labourers, marginal farmers, and those at the unorganized sectors, slum dwellers in the
urban areas, women amongst others, were targeted for providing financial services
through number of branches of the RRBs thus increasing the customer base per branch.
However, there are still a few states Jharkhand, the North-Eastern states, Bihar, Orissa,
Rajasthan, Uttar Pradesh, Chhattisgarh, West Bengal etc., where the extent of financial
inclusion is still very low.
III. Status of Financial Sector:

Achieving financial inclusion requires access and availability to the financial

services. Financial inclusion in Indian context implies provision of affordable financial
services i.e. access to payments and remittance facilities, savings, loans and insurance
services by the formal financial system to those who tend to be excluded.
Although the term ‘financial inclusion’ was not used earlier in India, several
initiatives have taken over time such as nationalization of banks, prescription of priority
sector targets, lending to weaker sections at concessional rates and initiation of lead bank
schemes. These initiatives were undertaken to expand the outreach of banking facilities and
increase the flow of credit to rural areas. However, the broad approach towards financial
inclusion followed in 1970s and the 1980s was more oriented towards credit requirements
of specific sectors / segments. There was also relatively low emphasis on individual /
household level inclusion.
The focus of banking policy during 1990s and up to early 2000s was more on creating a
strong and efficient banking system. However, once that has been achieved more attention
was paid again towards the promotion of financial inclusion. An important step to bring
financially excluded people within the fold of formal financial sector was the promotion
of microfinance in India. The Self-help group (SHG) – Bank linkage program was
launched by National Bank for Agriculture and Rural Development (NABARD) in 1992
with policy support from Reserve Bank of India (RBI). The objective of bringing
financially excluded people within the fold of the banking sector received renewed
emphasis in 2005-06 as the term ‘financial inclusion’ was explicitly used for the first time
in the Annual Policy Statement for 2005-06.
One of the indicators for measuring banking access is the population per branch.
Following the nationalization of the banks in 1969, branch network of scheduled
commercial banks expanded rapidly. As a result, the population per branch declined
significantly between 1969 and 2011 (Table-1). The number of total credit accounts per
100 persons / adults, which is one of the indicators of the expansion of credit delivery
services after declining between 1991 and 2001 increased significantly till 2011 (Table-
1).
 Table 1: Population per Bank Branch, Credit Accounts and Savings Accounts
with Scheduled Commercial Banks
Population Credit Account Savings Account
Year (End per Bank No. of Accounts No. of Accounts
March) Branch (in Accounts per 100 Accounts per 100
thousands) (in Millions) persons (in Millions) persons
1971 64 4.3 2.8 22.6 4.3
1981 19 20.7 3.0 97.8 14.3
1991 14 61.9 7.3 253.0 29.9
2001 16 52.4 5.1 280.0 27.2
2007 15 94.4 8.3 373.5 33.0
2011 13.4 120.7 9.9 810.1 66.9
Source: Basic Statistical Returns of Scheduled Commercial Banks (SCBs) in India,
RBI.

Apart from the availability of credit, the facility of deposits is another key
element of financial inclusion. This has its importance for the people with low and
irregular income. It enables such people to plan for their expenditure pattern with their
convenience. The number of savings account opened by Scheduled Commercial Banks
(SCBs) expanded significantly over the years, especially between the early 1970s and
1990s.
In view of the special thrust on financial inclusion in recent years, Cooperative
Banks as well as Regional Rural Banks have acquired renewed significance in the Indian
Financial System. Along with these, microfinance has emerged as an important mode of
credit delivery to the people, particularly who are excluded from the formal financial
system through the SHG-bank linkage model.
However, in reality we have failed to achieve complete financial inclusion in our
country. The major obstacles are:
a) Gigantic Nature of the Task
In India, almost half the country is unbanked. Of the 6 lakh villages in India only
approximately 50,000 have access to finance. India the highest number of households
(145 millions) excluded from banking. Only 10% of the population has any kind of life
insurance and 9.6% of the population has non-life insurance coverage.
b) Absence of Banking Technology
Non-availability of appropriate technology till a few years before, lack of proper
physical infrastructure etc. in some part of the country play the important role in
financial exclusion.
c) Absence of Viable Delivery Mechanism
When problems are encountered there is no facilitating and effective Delivery
Model to face those problems. Lack of appropriate Business Model is an important cause
behind it.
d) Lack of Efforts from all Stakeholders
Financial inclusion requires planned, strategic and concerned efforts from all
stakeholders. Rich should have compassion for poor which is lacking in our economy.

IV. Financial Sector and Multiplier Effect

The functioning of the financial system serve the vital purposes like offering
savings, credit, payments and risk management. Both the demand and supply side factors
have an important bearing on the use of banking services. The supply side factors
include distance from the branch, branch timing and documentation procedures etc. On
the demand side, the important factors determining the income level are infrastructure
development and financial literacy. The literature on financial inclusion implies that
financial inclusion is one of the major determinants of economic growth. Higher
economic growth and infrastructure play crucial role in achieving financial inclusion.
Inclusive financial systems are likely to benefit poor people and other disadvantaged
groups. Without inclusive financial systems, poor people must rely on their own limited
savings to invest in their education or become entrepreneurs. Small enterprises must rely
on their limited earnings to take advantage of promising growth opportunities.
The process of financial inclusion should benefit both the users and providers.
Efforts devoted to improve inclusion should also make business sense and translate into
profits for the providers of these services. The process involves costs and benefits to both
the providers and beneficiaries. Modern development theories increasingly
emphasize the key role of access to finance. Lack of finance is often critical element
underlying persistent income inequality as well as slower growth. Financial inclusion
helps to equalize opportunities and reduce costs.
The financial sector, if unleashed with proper regulation, has the potential to
generate millions of jobs. Also more important it has an enormous multiplier effect on
economic growth and inclusiveness of the financial system.
V. Initiatives for Financial Inclusion

In India, a number of initiatives have been taken by a number of authorities with

regard to financial inclusion. These are: a) Rangarajan Committee Report (2008)
instituted by the National Bank for Agriculture and Rural Development (NABARD); b)
Raghuram Rajan Committee Report (2009) set up by Planning Commission; c) Malegam
Committee Report (2011) to study issues and concern in the Microfinance Institute
(MFI) established by the Reserve Bank of India (RBI); and d) Microfinance Institutions
(Development and Regulations) Bill (2012) instituted by the Finance Department,
Government of India.
Rangarajan Committee outlines that by improving the supply side or the delivery
systems of the financial system, financial inclusion can be enhanced. In India many
regions, segments of the populations and sub-sections of the economy have limited or
weak demand for financial services. To improve their level of inclusion, demand side
efforts need to be undertaken. It includes improvement of human and physical
endowments, increasing productivity, mitigating risk and strengthening market linkages.
Microcredit should be linked with micro insurance and there should be a greater role for
NABARD for identifying new initiatives that will contribute effectively to reach the poor
through self-help groups (SHGs) and Microfinance Institutions.
Raghuram Rajan Committee Report, A Hundred Small Steps, states that the
proper role of the government today is to improve the financial sector, infrastructure and
its regulation. This report places inclusion, growth and stability as three objectives of any
reform process.
Malegam Committee gives special importance to NBFC-MFI category. It
recommends that a separate category be created for NBFCs operating in microfinance
sector and regulations for this category should be specified.

Parliament has passed the Microfinance Institutions Bill, 2012 for the purpose of
facilitating access to credit and other microfinance services to the rural and urban poor
and disadvantaged sections of the society. The objective behind this is to achieve
financial inclusion of the economy through these institutions.
VI. Regulation and Financial Inclusion

The objective of Financial Inclusion is to extend financial services to the large

un- served population of the country to unlock its growth potential. In addition, it strives
towards a more inclusive growth by making finances available to the poor in particular.
The Microfinance Bill (2012) published by the Ministry of Finance, represents a major
step forward in the government’s engagement with the microfinance sector. In its
circular of 3rd May 2011 the Reserve Bank of India made a clear statement of the
decision to regulate the microfinance sector as a separate category.
The change in the thinking of the government in terms of introducing the
comprehensive microfinance bill to replace the old one and emphasizing the supremacy
of the regulator, the Reserve Bank of India (RBI) is a consequence of the events in
Andhra Pradesh where the State Government has introduced a State level Act to regulate
MFIs. It thus is best if we look at the Bill from that perspective and comment on its
ability to answer the key challenges it had identified to resolve.
Three key issues that the government was grappling with and it wants to use the
bill to address them comprehensively; These are:
a) To establish the supremacy of RBI as the key regulator for the Microfinance
Sector and to resolve all political and regulatory ambiguity. The action of the Andhra
Pradesh Government in bringing about the State level act that crippled the microfinance
movement was a key trigger and the bill is an attempt to resolve the issue of multiplicity
of regulation in microfinance.
b) Acknowledge that poor, needy, and underserved clients in the microfinance
domain need extra protection and hence introduce measures that would make sure that
the client is protected.
c) Microfinance as a business must have limits to profitability and while scale is
important, the investors must not make disproportionate profits.
Without going into a debate on the merits of these assumptions, it would be
worthwhile to see if the bill addresses some of the concerns or challenges.
One Regulator
The Microfinance Bill seems to say enough to clearly dissuade state governments
to try and replicate the Andhra Pradesh bill. It clearly lays down the rights of RBI as a
regulator and clearly treats microfinance as an extension of the banking sector. The bill
makes a mention of thrift, remittances, pension, insurance and other services to clearly
indicate a departure in treating microfinance as credit alone business and through this it
is clearly making a distinction between microfinance industry and money lenders.
The Bill goes a step further to address any confusion that may arise due to
multiplicity of regulation by asking every institution involved in microfinance to register
with RBI under the act even if they are already registered with RBI as an NBFC. The
Bill has not only tried to address concerns expressed by states but has created provision
for them to participate through the State Advisory Council and provide inputs to the
regulator.
There is a wide array of institutions and classifications that overlap in the Indian
microfinance sector, making analysis difficult and identification of appropriate regulators
confusing. Furthermore, the scope and reach of microfinance in India is hard to capture
because direct bank lending is usually not included in microfinance analysis.
Commercial banks in India are required to make a certain percentage of loans to
designated "priority sectors." Microfinance is one of the priority sectors banks may
choose from, and loans are made to institutions as well as individuals in order to fulfill
the requirement. As of April 2011, microfinance loans must meet certain prudential
requirements in order to qualify for priority sector status. The majority of microfinance is
provided by commercial banks, regional rural banks (RRBs), self-help groups (SHGs)
(with special linkage programs to banks), cooperative societies, and microfinance
institutions (MFIs) that take a variety of forms, including NGOs (registered as societies,
trusts or Section 25 companies) and non-bank financial companies (NBFCs).
Banks and NBFCs are regulated by the Reserve Bank of India (RBI) with the
National Bank for Agriculture and Rural Development (NABARD) supervising and
inspecting RRBs; SHGs are regulated by NABARD; cooperative societies are regulated
by the state-appointed Registrar of Cooperative Societies (RCS) and state government
(with NABARD conducting supervision and inspections); and cooperative banks are
regulated by RBI and RCS.
The widely-debated Micro Financial Sector (Development and Regulation) Bill
was introduced in 2007, proposing important changes to the microfinance industry, but
was never passed. In 2010, the Andhra Pradesh government issued the Microfinance
Institutions Ordinance (later, the Andhra Pradesh Micro Finance Institutions (Regulation
 of Money Lending) Act), which requires all MFIs to register as well as adhere to other
rules set forth in the ordinance. In response, RBI formed the Malegam Sub-Committee
to make recommendations on how RBI ought to regulate the microfinance industry. In
response to the Malegam Committee report, RBI issued a May 2011 circular
implementing some of the Malegam recommendations through prudential requirements
for microfinance loans to qualify for priority sector status. RBI subsequently created a
new category of NBFC-MFIs in December 2011 and issued directions aimed at
addressing responsible pricing, transparency and over-indebtedness.

vii) THE INDIAN SCENARIO

In India the focus of the financial inclusion at present is confined to ensuring a bare
minimum access to a savings bank account without frills, to all. There could be multiple
levels of financial inclusion and exclusion. At one extreme, it is possible to identify the
‘super-included’, i.e., those customers who are actively and persistently courted by the
financial services industry, and who have at their disposal a wide range of financial
services and products. At the other extreme, we may have the financially excluded, who
are denied access to even the most basic of financial products.

In between are those who use the banking services only for deposits and withdrawals of
money. But these persons may have only restricted access to the financial system, and
may not enjoy the flexibility of access offered to more affluent customers.

Further, Financial exclusion may not definitely mean a social exclusion in India as it does
in the developed countries, but it is a problem that needs to be addressed. The large
presence of informal credit, could avoid social exclusion but the legal validity of such
financial services pose an obstacle for creating a modern globalizing economy.

Without a formal and a legally recognized financial system in which all sections of the
population are a part of, it would be impossible even for the most efficient of the
governments to reach out to all sections of the people. A stable and healthy financial
service sector creates trust among the people about the economy and only with this trust
(which has legal validity) could a strong, stable and an inclusive economy be created.

Financial exclusion could be looked at in two ways:

Lack of access to financial services mainly payment system, which could be due to
several reasons such as:
 Lack of sources of financial services in our rural areas, which are popular for the
ubiquitous moneylenders but do not have (safe) saving deposit and insurance
services.

 High information barriers and low awareness especially for women and in rural
areas.

 Inadequate access to formal financial institutions that exist to the extent that the
banks could not extend their outreach to the poor due to various reasons like high
cost of operations, less volume and more number of clients, etc. among many
others.

 Poor functioning and financial history of some beleaguered financial institutions

such as financial cooperatives in many states, which limit the effectiveness of
their outreach figures.

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

lakh are also often exclusionary, as their membership is restricted to persons with
land ownership. Even to their members, not many PACS offer saving services.

Lack of access to formal financial services in of both rural and urban areas, but is a
larger issue in cities and small towns. The distinction between access to formal and
informal services is crucial to understand, as informal financial markets suffer from
several imperfections, which the poor pay for in many ways.

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

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

income neighbourhoods in urban areas.

B. High cost of credit and exploitative terms: credit against collateral such as gold is
even more expensive than the effective interest rates, similarly, rates paid by
 hawkers and vendors who repay on daily basis are very high.

C. High cost and leakages in money transfers: the delays in sending money home
through all informal channels add to these.

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

Another key aspect of financial exclusion is the lack of “financial education and advice”.
In India, as the basic literacy rate is low supporting basic financial capability is indeed not
just necessary, but also equally difficult.

Financial exclusion is often related to more complex social exclusion issues, which
makes financial literacy and access to basic financial services even more complex.
WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL SERVICES
NECESSARY FOR FINANCIAL INCLUSION OF HOUSEHOLD?

 Basic saving bank account- an account with all basic feature of saving account.
 Payment and remittances services –
 Immediate credit – in case of contingencies like accidents, medical treatment etc,
they should be provided immediate credit.

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

any economic activity, easy credit should be provided, so that financial
dependence can be created amongst households.

 Housing finance- funding for purchasing new residential or reconstruction

 Insurance – life\healthcare- to plan future better

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

them better, where to go credit needs, what are various services available to better
their personal financial planning.
 BASIC SAVING BANK ACCOUNT

IMMEDIATE CREDIT

ENTREPRENEURIAL CREDIT

HOUSING FINANCE

PAYMENT & REMITTANCES SERVICES

INSURANCE – LIFE/HEALTHCARE

FINANCIAL EDUCATION/CREDIT
COUNSELING

Financial Inclusion therefore, is delivery of not only banking, but also other financial
services like insurance, pension, remittance, mutual funds, etc. delivered at affordable,
though market driven costs. Opening a no-frills account is just a beginning to a
continuous process of providing banking and financial services.

Once the first step of safety of savings is achieved, the poor require access to schemes and
products which allow their savings to grow at rates which provide them growth beyond
mere inflation protection.
To understand it better, let’s take life of migrant street vender living in
almost every part of Delhi, and his financial life will look like this-->

WHAT TYPE OF PRODUCT OR

SERVICES IS REQUIRED FOR THIS
TYPE OF CUSTOMER?? Daily cash income

POSSIBLY
Frequently purchases
1. A bank account, where he/she can save stock, mainly in cash

small amounts at regular intervals ideally

with savings being collected at their Irregular income due to
place of work or a specified point of seasonality of occupation

transaction (SPOT) in the locality

2. Micro-Credit for working capital to No income, If he misses a day
increase stock and business. This credit due ill health

can be short term and repayment to be

configured at regular intervals. Savings To send money regularly to his
history and credibility checks to be used family living in village
as a proxy for collateral.
3. Insurance for life To make small, regular payment
4. Health Insurance for minor illnesses for fee for child’s education

and hospitalization
5. Investment plan for child's education

6. Pension for old age

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

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

the
products and services provided by the mainstream financial service providers
 (Meadows et al., 2004). Such financial products may include money transmission, home
insurance, short and long-term credit and savings. Furthermore, the operational
definitions have also evolved from the underlying public policy concerns that many
people, particularly those living on low income, cannot access mainstream financial
products such as bank accounts and low cost loans, which, in turn, imposes real costs on
them - often the most vulnerable people

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.

CAUSES OF FINANCIAL EXCLUSION

Financial Exclusion may also have resulted from a variety of structural factors such as
unavailability of products suiting their requirements, stringent documentation and
collateral requirements and increased competition in financial services. The Causes of
financial exclusion can be identify broadly in two categories, first the demand side and
the second supply side.

A. DEMAND SIDE BARRIERS

The people who have the requirement\need but still not demanding\availing the financial
services\products which can be due to the following reasons:
i.Low Income: A higher share of population below the poverty line results in lower
demand for financial services as the poor may not have savings to place as deposit in
savings banks; hence the market lacks incentives in providing financial
service/products.

Most the people belonging to financially excluded group are having irregular/seasonal
income. Hence opening of a bank account and operating it i.e. deposit and withdrawal
in very small denominations with high frequency will increase the cost of transaction,
 adding to that they also anticipate that bank will refuse if they transact with so small
amount.

Further provided that, as they have low earning they cannot maintain minimum
balance requirements of a normal saving bank account which ranges from Rs. 500 to
Rs 5000(Rs. 500 in case of PSB and Rs. 5000 for Pvt. Sector Banks) and various
annual maintenance charges(AMC) levied by banks.

ii.Transaction cost: Vast number of rural population resides in small villages which are
often located in remote areas devoid of financial services. Consequently, the overall
transaction cost to the customer in terms of both time and money proves to be a major
deterrent for visiting financial institutions. The excluded section of the society find
informal sector more reachable due to proximity and ease of transaction.

iii. Financial Services Being Very Complex In Nature: excluded sections of the
society find dealing with organized financial sector cumbersome.

iv. Easy access to alternative credit: For a good amount of low income people, the
alternative credit provided by the money lenders and pawn shop owners are far more
attractive and hassle free compared to getting a loan from a commercial bank.

Some of the poor that do not have property find it impossible to get credit without the
collateral. The uneducated poor would rather put their trust in moneylenders who
provide easy non-collateral credit than on the well established commercial banks.
There might also be cultural reasons for trusting a moneylender rather than a bank.

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

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

v. Low literacy level: The lack of financial awareness about the benefits of the banking
and also illiteracy act as stumbling blocks to financial inclusion. The lack of financial
awareness maybe the single most risk in financial inclusion as those who are newly
included in the financial sector have to maintained within the formal financial sector.

vi. Legal identity: Lack of legal identities like identity cards, birth certificates or written
 records often exclude women, ethnic minorities, economic and political refugees and
migrant workers from accessing financial services.
vii. Sophisticated Financial Terminologies: Bankers often use complex financial
terminologies, which the masses are unable to comprehend and hence do not
approach for financial services voluntarily.

viii. Terms and conditions: Terms and conditions attached to products such as minimum
balance requirements and conditions relating to the use of accounts as in the case of
saving bank account often dissuade people from using such products/services
Further, term and conditions and its framework is generally so tedious and detailed
that understanding it is not possible for those who cannot even write their name or are
less literate and do not understand English or Hindi(in case of some regional rural
areas).

ix. Psychological and cultural barriers: The feeling that banks are not interested to
look into their cause has led to self-exclusion for many of the low income groups.
However, cultural and religious barriers to banking have also been observed in some
of the countries.

x. Disincentives for the consumer: The cost of maintaining an account (non-zero

balance accounts) and procedural problems in accessing formal credit act as
disincentives for consumers with weaker financial background.

The bank would rather give smaller number of large credits to middle and upper class
individuals and institutions, due to the lower cost involved in banking with them. The
banks and other financial service firms have fewer financial products which are
attractive to the poor and the socially disadvantaged. All these act against the interest
of a consumer from a poor background.
viii) CONSEQUENCES OF FINANCIAL EXCLUSION

There are three dimensions of consequences that financial exclusion has on the people
affected:
Firstly, financial exclusion can generate financial consequences by affecting directly or
indirectly the way in which the individuals can raise, allocate, and use their monetary
resources.

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

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

These consequences are affecting individuals’ patterns of consumption, the way they
participate to economic activities or access to social welfare and the distribution of
incomes and wealth. They impact the way in which people behave both in terms of
purchase decisions and the way in which they choose to spend their time, as well as their
overall quality of life.

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

financial exclusion. These are the consequences affecting the various links that are
binding the individuals: link to corresponding to self esteem, links binding to the society
and links binding to community and/or relationships with other individual or groups.

Access to a bank account, credit and insurance are now widely regarded as essential
supports for personal financial management and for undertaking transactions in
modern societies (Speak and Graham, 1999). According to the Treasury Committee,
UK (2006), financial exclusion can impose significant costs on individuals, families
and society as a whole. These include

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

bank account;
II. Opportunities to save and borrow can be difficult to access;
 III. Owning or obtaining assets can be difficult;

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

V. Exclusion from mainstream society.

In terms of cost to the individuals, financial exclusion leads to higher charges for basic
financial transactions like money transfer and expensive credit, besides all round
impediments in basic/ minimum transactions involved in earning livelihood and day to
day living. It could also lead to denial of access to better products or services that may
require a bank account. It exposes the individual to the inherent risk in holding and
storing money – operating solely on a cash basis increases vulnerability to loss or theft.
Individuals/families could get sucked into a cycle of poverty and exclusion and turn to
high cost credit from moneylenders, resulting in greater financial strain and
unmanageable debt.

At the wider level of the society and the nation, financial exclusion leads to social
exclusion, poverty as well as all the other associated economic and social problems. Thus,
financial exclusion is often a symptom as well as a cause of poverty. Financial exclusion
is not evenly distributed throughout society; it is concentrated among the most
disadvantaged groups and communities and, as a result, contributes to a much wider
problem of social exclusion.

A significant portion of demand for credit by rural households arises in order to ease the
financial burden of crop failures, illness or death, and health care. In the case of
microenterprises, credit may be needed to achieve a reasonable and viable scale of
activities. The rising entrepreneurship spanning rural, semi-urban and urban areas,
particularly in the unorganized and informal sectors may give rise to large potential
demand for credit. The evidence on the demand for credit in India suggests that medical
and financial emergencies are the major reasons for household borrowings.

Medical emergencies were particularly high for the lowest income quartile (IIMS, 2007) .
Thus, the difficulty in obtaining finance from formal sources has major social
implications.
 Another cost of financial exclusion is the loss of business opportunity for banks,
particularly in the medium-term. Banks often avoid extending their services to lower
income groups because of initial cost of expanding the coverage may sometimes exceed
the revenue generated from such operations. These business related concerns of banks
were, however, meaningful when technology development was at a nascent stage and
expanding the coverage of financial services required substantial initial investment. The
strides in technology have now reduced the required initial investment in a significant
manner. What is required is to explore the appropriate technology which is suitable to
socio-economic conditions of the region under consideration. Moreover, availability and
usage of financial services by the otherwise excluded population groups would lead to
increase in their income levels and savings. This, in turn, would have the potential to
increase savings deposits as well as credit demand, implying profitable business for banks
in the medium- term.

ix) POLICY DEVELOPMENTS

We have seen in the previous chapter that in our country the financial services has
been\being used by a very limited group of people\individuals. To enlarge the area
and service sector, certain policy measures have been taken by government.

Annual Policy •determining new model for

effective reach
•Nationalisation of banks 2005-2006 •leveraging on technology based solutions
•presecription of priority sector targets
•No Fril bank account •improvements in
•lead bank scheme
•simple KYC norms •Credit absorption capcaility
•NGOs, SHGs, MFIs etc were allowed •exisiting formal credit
•easier credit facilities delivery system

1969-1991 Rangrajan
Committee Report

Policy development in India for financial inclusion can be seen in three stages
FIRST PHASE DEVELOPMENTS (1969-1981)
In 1969, the banks were nationalised in order to spread bank’s branch network in
order to develop strong banking system which can mobilise resources/deposits
and channel them into productive/needy sections of society and also
government wanted to use it as an important agent of change. So, the planning
strategy recognized the critical role of the availability of credit and financial services to
the public at large in the holistic development of the country with the benefits of
economic growth being distributed in a democratic manner. In recognition of this role,
the authorities modified the policy framework from time to time to ensure that the
financial services needs of various segments of the society were met satisfactorily
Before 1990, several initiatives were undertaken for enhancing the use of the banking
system for sustainable and equitable growth. These included

I. Nationalization of private sector banks,

II. Introduction of priority sector lending norms,

III. The Lead Bank Scheme,

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

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

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

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

SOCIAL NETWORKING APPROACH

The announcement of the policy of social control over banks was made in December
1967 with a view to securing a better alignment of the banking system with the needs of
economic policy. The National Credit Council was set up in February 1968 mainly to
assess periodically the demand for bank credit from various sectors of the economy and to
determine the priorities for grant of loans and advances. Social control of banking policy
was soon followed by the nationalisation of major Indian banks in 1969. The immediate
tasks set for the nationalised banks were mobilisation of deposits on a massive scale and
lending of funds for all productive activities. A special emphasis was laid on providing
credit facilities to the weaker sections of the economy.
THE PRIORITY SECTOR APPROACH
The administrative framework for rural lending in India was provided by the Lead Bank
Scheme introduced in 1969, which was an important step towards implementation of the
two-fold objectives of deposit mobilisation on an extensive scale and stepping up of
lending to weaker sections of the economy. Realising that the flow of credit to
employment oriented sectors was inadequate; the priority sector guidelines were issued
to the banks by the Reserve Bank in the late 1960s to step up the flow of bank credit to
agriculture, small- scale industry, self-employed, small business and the weaker sections
within these sectors.

The target for priority sector lending was gradually increased to 40 per cent of advances
in the case of domestic banks (32 per cent, inclusive of export credit, in the case of
foreign banks) for specified priority sectors. Sub targets under the priority sector, along
with other guidelines including those relating to Government sponsored programmes,
were used to encourage the flow of credit to the identified vulnerable sections of the
population such as scheduled castes, religious minorities and scheduled tribes. The
Differential Rate of Interest (DRI) Scheme was instituted in 1972 to provide credit at
concessional rate to low income groups in the country

LEAD BANK SCHEME APPROACH

But all these measure were focused towards inclusion of a sector, regional areas etc.,
there was a very less or no emphasis was on financial inclusion of Individual/household
level. The promotional aspects of banking policy have come into greater prominence.
The major emphasis of the branch licensing policy during the 1970s and the 1980s was on
expansion of commercial bank branches in rural areas, resulting in a significant expansion
of bank branches and decline in population per branch. The branch expansion policy was
designed, inter alia, as a tool for reducing inter-regional disparities in banking
development, deployment of credit and urban-rural pattern of credit distribution. In order
to encourage commercial banks and other institutions to grant loans to various categories
of small borrowers, the Reserve Bank promoted the establishment of the Credit Guarantee
Corporation of India in 1971 for providing guarantees against the risk of default in
repayment. The scheme, however, was subsequently discontinued.
II. SECOND PHASE – ANNUAL POLICY (2005-2006)

As the central bank of the country, the Reserve bank of India has taken steps to ensure
financial inclusion in the country. It has tried to make banking more attractive to citizens
by allowing for easier transactions with banks. In 2004 RBI appointed an internal group
to look into ways to improve Financial Inclusion in the country.

With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its
Annual Policy Statement for the year 2005-06, while recognizing the concerns in regard
to the banking practices that tend to exclude rather than attract vast sections of
population, urged banks to review their existing practices to align them with the objective
of financial inclusion. In the Mid Term Review of the Policy (2005-06),

It is observed that there were legitimate concerns in regard to the banking practices that
tended to exclude rather than attract vast sections of population, in particular
pensioners, self-employed and those employed in the unorganised sector. It also
indicated that the Reserve Bank would
1. Implement policies to encourage banks which provide extensive services, while
dis- incentivising those which were not responsive to the banking needs of the
community, including the underprivileged;
2. The nature, scope and cost of services would be monitored to assess whether
there was any denial, implicit or explicit, of basic banking services to the
common person; and
3. Banks urged to review their existing practices to align them with the objective
of financial inclusion.

RBI exhorted the banks, with a view to achieving greater financial inclusion, to make
available a basic banking ‘no frills’ account either with nil or very minimum balances as
well as charges that would make such accounts accessible to vast sections of the
population. The nature and number of transactions in such accounts would be restricted
and made known to customers in advance in a transparent manner. All banks are urged to
give wide publicity to the facility of such no frills account so as to ensure greater
financial inclusion.
RBI came out with a report in 2005 (Khan Committee) and subsequently RBI issued a
circular in 2006 allowing the use of intermediaries for providing banking and financial
services. Through such policies the RBI has tried to improve Financial Inclusion.
Financial Inclusion offers immense potential not only for banks but for other businesses.
Through an integrated approach the businesses, the NGOs, the government agencies as
well as the banks can be partners in growth. RBI has realized that a push is needed to kick
start the financial inclusion process. Some of the steps taken by RBI include the directive
to banks to offer No-frills account, easier KYC norms, offering GCC cards to the poor,
better customer services, promoting the use of IT and intermediaries, and asking SLBCs
and UTLBCs to start a campaign to promote financial inclusion on a pilot basis.

Brief glimpses of main initiative are followings:-

a) No-Frill Accounts

It is a basic saving fund account having all the features of a normal saving fund account
which it differs in the following aspects

1. The holder is not required to maintain any minimum balance requirement and
also nothing is charged for opening this type of account
2. KYC norms have been simplified so that everyone can have this account

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

4. ATM facility is provided free of cost

5. There is no account maintenance cost

Similar types of accounts, though with different names, have also been extended by
banks in various other countries with a view to make financial services accessible to the
common man either at the behest of banks themselves or the respective Governments

b) Overdraft in Saving Bank Accounts

Bank were advised to give credit in form of overdraft on saving bank account to its
customer so that in case of small credit need like medical bill, any accidental charges etc.
can be met in.
c) KYC norms
The Know Your Customer (KYC) norms were revised in order to make it easy for
people to avail financial services on February 18, 2008. These guidelines include

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

place of residence while opening accounts, banks can obtain an identity document
and a utility bill of the relative with whom the prospective customer is living,
along with a declaration from the relative that the said person (prospective
customer) wanting to open an account is a relative and is staying with him/her.
Banks can also use any supplementary evidence such as a letter received through
post for further verification of the address;
2. banks have been advised to keep in mind the spirit of the instructions and avoid
undue hardships to individuals who are otherwise classified as low risk customers;
3. Banks should review the risk categorization of customers at a periodicity of not
less than once in six months.
4. Further, in order to ensure that persons belonging to low income group both in
urban and rural areas do not face difficulty in opening the bank accounts due to
the procedural hassles, the KYC procedure for opening accounts has been
simplified for those persons who intend to keep balances not exceeding rupees
fifty thousand (Rs. 50,000/-) in all their accounts taken together and the total
credit in all the accounts taken together is not expected to exceed rupees one lakh
(Rs.1,00,000/-) in a year.

d) SHG Model
A Self Help Group (SHG) is a group of about 15 to 20 people from a homogenous class
who join together to address common issues. They involve voluntary thrift activities on a
regular basis, and use of the pooled resource to make interest-bearing loans to the
members of the group. In the course of this process, they imbibe the essentials of
financial intermediation and also the basics of account keeping. The members also learn
to handle resources of size, much beyond their individual capacities. They begin to
appreciate the fact that the resources are limited and have a cost.
Once the group is stabilized, and shows mature financial behavior, which generally takes
up to six months to 1 year, it is considered for linking to banks. Banks are encouraged to
provide loans to SHGs in certain multiples of the accumulated savings of the SHGs. Loans
are given without any collateral and at interest rates as decided by banks. Banks find it
comfortable to lend money to the groups as the members have already achieved some
financial discipline through their thrift and internal lending activities. The groups decide
the terms and conditions of loan to their own members. The peer pressure in the group
ensures timely repayment and becomes social collateral for the bank loans.

Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and
nurture them. These SHPIs include various NGOs, banks, farmers’ clubs, government
agencies, self- employed individuals and federations of SHGs. However, some SHGs
have also been formed without any assistance from such SHPIs. There are three different
models that have emerged under the linkage programme-

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

intervention/ facilitation by any NGO.
II. Model II: This envisages lending by banks directly to SHGs with facilitation
by NGOs and other agencies.
III. Model III: This involves lending, with an NGO acting as a facilitator and
financing agency.

Model II accounted for around 74 per cent of the total linkage at end-March 2007, while
Models I and III accounted for around 20 per cent and 6 per cent, respectively.

e) KCC / GCC Guidelines

A. GCC SCHEME

With a view to providing credit card like facilities in the rural areas, with limited point-of-
sale (POS) and limited ATM facilities, the Reserve Bank advised all scheduled commercial
banks, including RRBs, in December 2005 to introduce a General Credit Card (GCC)
Scheme for issuing GCC to their constituents in rural and semi-urban areas, based on the
assessment of income and cash flow of the household similar to that prevailing under a
normal credit card.

The Reserve Bank also advised banks to classify fifty per cent of the credit outstanding
under loans for general purposes under General Credit Cards (GCC), as indirect finance to
agriculture under priority sector. The Reserve Bank further advised banks in May 2008 to
classify 100 per cent of the credit outstanding under GCCs as indirect finance to agriculture
sector under the priority sector with immediate effect.

B. KCC Scheme

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

 Revolving cash credit facility allowing any number of withdrawals and repayments
within the limit.

 Seasonal sub limits may be fixed at the discretion of banks. Limit of valid for 3 years
subject to annual review.

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

to natural calamities.

 Withdrawals through slips /cheques accompanies by card and passbook.

 Personal Accident Insurance of Rs. 50,000 for death and permanent disability and Rs.
25,000/- for partial disability available to Kishan Credit Card holder at an annual
premia of Rs. 15/- per annum.

f) Financial Literacy Program

Recognizing that lack of awareness is a major factor for financial exclusion, the Reserve
Bank has taken a number of measures towards imparting financial literacy and promotion
of credit counseling services. The Reserve Bank has undertaken a project titled “Project
Financial Literacy”.
The objective of the project is to disseminate information regarding the central bank and
general banking concepts to various target groups, including, school and college going
children, women, rural and urban poor, defense personnel and senior citizens. The
banking information would be disseminated to the target audience with the help of,
among others, banks, local government machinery, schools/colleges using pamphlets,
brochures, films, as also, the Reserve Bank’s website.

Various initiatives taken by the Reserve Bank in order to promulgate Financial Literacy:
 A multilingual website in 13 Indian languages on all matters concerning banking
and the common person has been launched by the Reserve Bank on June 18, 2007.
 Comic type books introducing banking to schoolchildren have already been put on
the website. Similar books will be prepared for different target groups such as
rural households, urban poor, defence personnel, women and small entrepreneurs.

 Financial literacy programs are being launched in each state with the active
involvement of the state government and the SLBC. Each SLBC convener has
been asked to set up a credit counselling centre in one district as a pilot project
and extend it to all other districts in due course.
 The ‘Financial Inclusion and Financial Literacy Cell’ has been established the
college of Agricultural Banking, which would act as a resource centre in this field.

III. THIRD PHASE - RANGRAJAN COMMITEE

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

Financial Inclusion on June 26, 2006 to prepare a strategy of financial inclusion. The
Committee submitted its final Report on January 4, 2008. The Report viewed financial
inclusion as a comprehensive and holistic process of ensuring access to financial services
and timely and adequate credit, particularly by vulnerable groups such as weaker sections
and low-income groups at an affordable cost. Financial inclusion, therefore, according to
the Committee, should include access to mainstream financial products such as bank
accounts, credit, remittances and payment services, financial advisory services and
insurance facilities.

The Report observed that in India 51.4 per cent of farmer households are financially
excluded from both formal/informal sources and 73 per cent of farmer households do not
access formal sources of credit. Exclusion is most acute in Central, Eastern and North-
eastern regions with 64 per cent of all financially excluded farmer households. According
to the Report, the overall strategy for building an inclusive financial sector should be
based on

 Effecting improvements within the existing formal credit delivery mechanism;

 Suggesting measures for improving credit absorption capacity especially amongst
marginal and sub-marginal farmers and poor non-cultivator households;
 Evolving new models for effective outreach; and
 Leveraging on technology-based solutions.

Keeping in view the enormity of the task involved, the Committee recommended the
setting up of a mission mode National Rural Financial Inclusion Plan (NRFIP) with a
target of providing access to comprehensive financial services to at least 50 per cent
(55.77 million) of the excluded rural households by 2012 and the remaining by 2015.
This would require semi-urban and rural branches of commercial banks and RRBs to
cover a minimum of 250 new cultivator and non-cultivator households per branch per
annum. The Report of the Committee on Financial Inclusion Committee has also
recommended that the Government should constitute a National Mission on
Financial Inclusion (NaMFI) comprising representatives of all stakeholders for
suggesting the overall policy changes required, and supporting stakeholders in the domain
of public, private and NGO sectors in undertaking promotional initiatives.

The major recommendations relating to commercial banks included target for providing
access to credit to at least 250 excluded rural households per annum in each rural/semi
urban branches; targeted branch expansion in identified districts in the next three years;
provision of customised savings, credit and insurance products; incentivising human
resources for providing inclusive financial services and simplification of procedures for
agricultural loans. The major recommendations relating to RRBs are extending their
services to unbanked areas and increasing their credit-deposit ratios; no further merger of
RRBs; widening of network and expanding coverage in a time bound manner; separate
credit plans for excluded regions to be drawn up by RRBs and strengthening of their
boards.
In the case of co-operative banks, the major recommendations were early implementation
of Vaidyanathan Committee Revival Package; use of PACS and other primary co-
operatives as BCs and co-operatives to adopt group approach for financing excluded
groups. Other important recommendations of the Committee are encouraging SHGs in
excluded regions; legal status for SHGs; measures for urban micro-finance and separate
category of MFIs.

CREATION OF SPECIAL FUNDS

The “Committee on Financial Inclusion” set up by the Government of India (Chairman:
Dr. C. Rangarajan) in its Interim Report recommended the establishment of two Funds,
namely the “Financial Inclusion Promotion and Development Fund” for meeting the cost
of developmental and promotional interventions for ensuring financial inclusion, and the
“Financial Inclusion Technology Fund (FITF)” to meet the cost of technology adoption.

The Union Finance Minister, in his Budget Speech for 2007-08 announced the
constitution of the Financial Inclusion Fund (FIF) and the FITF, with an overall corpus of
Rs.500 crore each at NABARD.

The Government advised that for the year 2007-08 it was decided to initially contribute
Rs.25 Crore each in the two funds by the Central Government, RBI and NABARD in the
ratio 40:40:20. The final report of the Committee has been submitted to the Government in
January 2008.

x) GOVERNMENT AND RBI CAN BUILD ON EXISTING BANKING

STRUCTURE TO PROVIDE FINANCIAL SERVICES TO ALL
Banking system is like a team, which constitutes from various entities which are different
in nature, form, structure and its working but together they makes system in which they
efficiently work for a common motive.
SHG BANK LINKAGE PROGRAM
The SHG-Bank Linkage program can be regarded as the most powerful initiative since
independence for providing financial services to the poor in a sustainable manner. The
program has been growing rapidly YOY basis. Currently, 10 million SHG’s are working
across the country with a credit base of Rs. 100000 Crore. But this is not enough to reach
the entire mass. This number needs to be increased substantially.

However, the spread of the SHG- Bank linkage program in different regions has been
uneven with southern states accounting for the major chunk of credit linkage. Many states
with high incidence of poverty have shown poor performance under the program.
NABARD has identified 13 states with large population of the poor, but exhibiting low
performance in implementation of the programme. The ongoing efforts of NABARD to
upscale the programme need to be given a fresh impetus. NGOs have played a
commendable role in promoting SHGs and linking them with banks.

As of now, SHGs are operating as thrift and credit groups. They may evolve to a higher
level of commercial enterprise in future. Hence, it becomes critical to examine the
prospect of providing a simplified legal status to the SHG

MICRO FINANCE INSTITUTIONS (MFIs)

From the late 1980s, the emergence of the Grameen Bank in Bangladesh drew attention to
the role of micro- credit as a source of finance for micro-entrepreneurs. Lack of access to
credit was seen as a binding constraint on the economic activities of the poor.

Microfinance Institutions (MFIs) are those, which provide thrift, credit, and other
financial services and products of very small amounts mainly to the poor in rural, semi-
urban or urban areas for enabling them to raise their income level and improve living
standards. Lately, the potential of MFIs as promising institutions to meet the demands of
the poor has been realized. The closer proximity with the people at grassroots level and
the mix of offering right products at right price based on the actual needs of the masses
makes their role very important in deepening financial inclusion.
However, there is exigency to upscale their outreach. In India, out of some 400 million
poor workers, less than 20 per cent have been linked with financial services provided by
MFIs.

Steps needed to promote MFIs

 One of the ways of expanding the successful operation of microfinance

institutions in the informal sector is through strengthened linkages with their
formal sector counterparts.
 Efforts are needed to make MFIs an integral part of mainstream banking and to
bring down the rates of interest on microcredit to ensure the micro finance
movement gets further impetus
 A mutual beneficial partnership should be established between MFIs and Banks
contingent on comparative strength of each sector. For example, informal sector
microfinance institutions have comparative advantage in terms of small
transaction cost achieved through adaptability and flexibility of operations.

COOPERATIVE CREDIT INSTITUTIONS

Rural credit cooperatives in India were originally envisaged as a mechanism for pooling
the resources of people with small means and providing them with access to different
financial services. It has served as an effective institution for increasing productivity,
providing food security, generating employment opportunities in rural areas and ensuring
social and economic justice to the poor and vulnerable sections.

Despite the phenomenal outreach and volume of operations, the health of a very large
proportion of these credit cooperatives has deteriorated significantly. Various problems
faced by these institutions are:

 Low resource base

 High dependence on external source of funding
 Excessive government control
 Huge accumulated losses and imbalances
 Poor business diversification
  Low recovery

Taking all these facts in mind, there is an urgent need to address the structural
deficiencies of these institutions in order to make them play an effective role in meeting
the financial inclusion goal.

RRBs
RRBs, post-merger, represent a powerful instrument for financial inclusion. RRBs
account for 37% of total rural offices of all scheduled commercial banks and 91% of their
workforce is posted in rural and semi-urban areas. They account for 31% of deposit
accounts and 37% of loan accounts in rural areas. RRBs have a large presence in regions
marked by financial exclusion of high order.

RRBs are, thus, the best suited vehicles to widen and deepen the process of financial
inclusion. However, they need to be oriented suitably to serve the rural population with a
specific mandate to achieve financial inclusion. It is hoped that recent regulatory changes
and fresh impetus provided by the regulator will help in making RRBs front institution in
achieving the target of reaching out to financially excluded people.

THE BUSINESS CORRESPONDENT MODEL

In January 2006, the Reserve bank permitted banks to utilize the services of non-
government organizations (NGOs/SHGs), micro-finance institutions and other rural
organizations as intermediaries in providing financial and banking services through the
use of business facilitator (BF) and business correspondent models(BC). The BC model
allows banks to do ‘cash in cash out’ transactions at a location much closer to the rural
population, thus addressing the last mile problem.

Banks are also entering into agreement with Indian Postal Authority for using the
enormous network of post offices as business correspondents for increasing their outreach
and leveraging the postman’s intimate knowledge of the local population and trust
reposed in him. The intention behind the model is to promote the business of banking
with low capital cost by enabling outsourcing of rural business to agents on a commission
basis.
Recent guidelines issued by RBI to ensure adequate supervision over operations of BCs:
 Every BC to be attached to a certain bank to be designated as the base branch
The distance between the area of operation of a BC and the base branch should not
exceed 30 km in rural, semi-urban and urban areas.

Initiatives needed to be undertaken to promote BC model

 Allow more entry to private well governed small finance banks. The intent is to
bring local knowledge to financial products that are needed locally.
 Facilitate the use of existing networks like cell phone kiosks or kirana shops as
business correspondents to deliver products of large financial institutions.
 Liberalize the business correspondent regulation so that a wide range of local
agents can serve to extend financial services.

ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION

According to recent Boston Consulting Group report, with cost of funds today at 9%,
provision for bad debts at 10% and cost of operation and transaction at 13% for poor
customers in far flung areas, banking for the poor by formal sector becomes unviable.
The key role the technology is expected to play is to reduce the last two components
drastically. Unfortunately, public sector banks (PSBs), which account for 70% of assets,
have been slow in making use of modern technology to bring down transaction costs.

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

 In rural areas, different villages are separated by large distances and poor
connectivity. Consequently, communication technology could play an important
role in bridging the last miles between the customer and the provider thus
facilitating faster transactions.
 The telecom network in India is expanding rapidly as more and more private
operators are entering in the telecom sector. Banks could leverage the network for
expanding operations, reducing costs and increase reliability of their operations.
 As more than one million new mobile users are being added every month in India,
Mobile Banking can become the most promising front end technology for
 facilitating financial inclusion in India. As mobile phones have reached out to
segments and geographies but not yet penetrated by banking sector, this may be
one of the most preferred choices for banks for spreading their network in
unbanked areas.

However, banks need to consider certain facts before leveraging technology to bring more
and more population under the net of financial inclusion

 Cost effectiveness of technology

 Security of accounts
 Financial viability of technology in rural areas
 Ability of potential beneficiaries to use the technology
 CHAPTER-2
REVIEW OF LITERATURE

Prashanta Athma (2000), in his Ph D research submitted at Usmania University

Hyderabad, “Performance of Public Sector Banks – A Case Study of State Bank of
Hyderabad, made an attempt to evaluate the performance of Public Sector Commercial
Banks with special emphasis on State Bank of Hyderabad. The period of the study for
evaluation of performance is from 1980 to 1993-94, a little more than a decade.

Zacharias Thomas(1997)Ph D Thesis, ‘Performance effectiveness of Nationalised

Bank- A Case Study of Syndicate Bank’, submitted to Kochin University (1997),
Thesis studied the performance effectiveness of Nationalized Bank by taking
Syndicate Bank as case study in his Ph.D thesis. Thomas has examined various aspects
like growth and development of banking industry, achievements of Syndicate Bank in
relation to capital adequacy, quality of assets, Profitability, Social Banking, Growth,
Productivity, Customer Service and also made a comparative analysis of 'the
performance effectiveness of Syndicate Bank in relation to Nationalized bank.

Singh R (2003), in his paper Profitability management in banks under deregulate

environment, IBA bulletin, No25, has analyzed profitability management of banks
under the deregulated environment with some financial parameters of the major four
bank groups i.e. public sector banks, old private sector banks, new private sector banks
and foreign banks, profitability has declined in the deregulated environment. He
emphasized to make the banking sector competitive in the deregulated environment.
They should prefer non- interest income sources.

Singla HK (2008), in his paper,’ financial performance of banks in India,’ in

ICFAI Journal of Bank Management No 7, has examined that how financial
management plays a crucial role in the growth of banking. It is concerned with
examining the profitability position of the selected sixteen banks of banker index for a
period of six years (2001-06). The study reveals that the profitability position was
reasonable during the period of study when compared with the previous years. Strong
capital position and balance sheet place, Banks in better position to deal with and
absorb the economic constant over a period of time.

The focal point of the study made by Das and Udaykumar Lal (2002), in his book
Banking Reforms in Lead Bank Scheme, (Deep and Deep Publication, new Delhi)
was the critical evaluation of the lead bank scheme in the light of banking sector
reforms. Das in this book observed that high level of NPAs, large number of un-
remunerative branches, low productivity, overstaff and archaic methods of operations
have affected the profitability of public sector banks. Das sincerely felt that the whole
banking sector in India is to be revolutionized to cope with the changing dimensions of
the satellite one world.

Subramanian and Swami (1994) in their paper, Comparative performance of publc

sector banks in india” Prjanan, Vol. XXII, have analyzed and compared the
efficiency in six public sector banks, four private sector and three foreign banks for the
year 1996-97. Operational efficiency is calculatedin terms of total business and salary
expenditure per employee. The analysis revealed that higher per employee salary level
need not result in poor efficiency and business per employee efficiency co-efficient
was also calculated.

SBI Research Department in 2000, through its paper “Performance analysis of 27

Public sector banks” published in SBI monthly review performance, Vol XXXIX,
was prepared by Economic Research Department of State Bank of India, is to
analyze the Performance of the 27 Public Sector Banks for the year 1999-2000 vis-a-
vis the preceding year. Selecting four different categories of indicators-Business
Performance, Efficiency, Vulnerability and labor productivity indicators, carried out
the analysis. Altogether, 39 indicators were selected for this purpose.

In a paper published in the Financial Express in 2004, titled “India’s Best Banks”
has been doing for several years through its annual exercise to evaluate and rate Indian
banks. They claim that this survey is a comprehensive one, which evaluates the
performance of private, public, Indian, and foreign Banks operating in India. With the
objective of making the comparison more meaningful, Banks were categorized into
Public Sector Banks, New Private Sector Banks and Foreign Banks. Financial
information for the year ending March 31st, 2002 and March 31, 2003 relating to each
of the banks falling into the aforesaid categories was collected from the data available
from RBI.

With an intention to honor excellence, Outlook Money (2004), titled “ The best in
the business cover story”, (March 2004), has announcing annual awards for the best
performers in the personal finance universe. In the best bank award category, the
magazine selected Corporation Bank among public sector banks and HDFC Bank
among private sector banks and presented outlook money award 2004 to these two
banks. A rigorous selection process was devised in consultation with Earnest and
Young. The short listed contenders were mailed questionnaires seeking information on
operational aspects like Number of Branches, Number of ATMs, Deposits, NPAs,
CAR, Return on Assets. They have taken two categories of Banks Public and Private
Sector.

Ram Mohan TT(2003) , in his paper ‘Long run performance of public and private
sector bank stocks” Vol 37, has made an attempt to compare the three categories of
banks-Public, Private and Foreign-using Physical quantities of inputs and outputs, and
comparing the revenue maximization efficiency of banks during 1992-2000. The
findings show that PSBs performed significantly better than private sector banks but
not differently from foreign banks. The conclusion points to a convergence in
performance between public and private sector banks in the post-reform era, using
financial measures of performance.

Das, Abhiman (1999), Profitability in public sector banks – A Decomposition

model, have tried to make all attempt to compare the inter- bank performance of public
sector banks during the reforms:, period. This study was carried out for a period of
three years, i.e. 1992, 1995 and 1998. Das in his paper found a certain convergence-
taking place in the performance of the public sector banks during the years of study.
He further found that there is growing emphasis on other income and a peculiar
tendency to go for risk-free rather than risky loans.

The objective of Sheeba Kapil’s(2007) paper is to review and analyze the current
financial health of the Indian Public Sector Commercial Banks in the light of banking
reforms and predict the future and scope of the same. The viability of the 27 public
sector banks has been analyzed on the basis of off- site supervisory exam model i.e.,
CAMEL Model (C for capital adequacy, A for Asset quality, E for Earnings and L for
Liquidity). These four components of each bank have been analyzed and rated on a
scale to judge the composite rating of the same. The paper finds that the off-site
supervisory exam model (CAMEL) has' rated majority of PSBs as non-viable and they
require immediate attention and government support.

Singh (2003) analyzed profitability management of banks under the deregulated

environment with some financial parameters of the major four bank groups i.e. public
sector banks, old private sector banks, new private sector banks and foreign banks,
profitability has declined in the deregulated environment. He emphasized to make the
banking sector competitive in the deregulated environment. They should prefer non-
interest income sources.
Singla (2008) examines that how financial management plays a crucial role
industrialists growth of banking. It is concerned with examining the profitability
position of the selected sixteen banks of banker index for a period of six years (2001-
06). The study reveals that the profitability position was reasonable during the period
of study when compared with the previous years. Strong capital position and balance
sheet place. Banks are in better position to deal with and absorb the economic
constant over a period of time.
Wahab (2001) has analyzed the performance of the commercial banks under
reforms. He also highlighted the major issues need to be considered for further
improvement. He concluded that reforms have produced favorable effects on
performance of commercial banks in general but still there are some distortions like
low priority sector advances, low profitability etc. that needs to be reformed again.
 CHAPTER-3
OBJECTIVES OF THE STUDY

The objective of Financial Inclusion

 The access to various mainstream financial services e.g. saving bank

account, credit, insurance, payments and remittance and financial and credit

advisory services.

 The main objective is to provide the benefit of vast formal financial

market,& protect them from exploitation of informal credit market, so that

they can be brought into the mainstream

 CHAPTER-4

RESEARCH METHODOLOGY

Population of Ludhiana consist a big group of migrants, labour coming from other part of
country in search of employment, education and other purposes. This groups being financially
weak due to low literacy, low income; generally do not have access to financial services.

In order to assess the level of financial inclusion in Ludhiana, a survey was conducted in
area of Ferozegandhi Market (Ludhiana) through a questionnaire.

Target group were labourers, small shopkeepers migrant, i.e. people employed in unorganized
sector who are unbanked

Objective:

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

Survey brief:

Survey Sample size: 40 Households

Area: Aggar Nagar, B.R.S Nagar, Rajuru Nagar (Ludhiana)

Methodology:

40 household were randomly surveyed regarding financial inclusion/financial literacy through

a well constructed questionnaire (annexure I) in surrounding area of B.R.S. Nagar in Ludhiana.

Of the total sample, 34 were males and 6 were females (the low numbers of females was due
to reluctance in answering questions).
 CHAPTER-5
STAUS OF FINANCIAL INCLUSION AND REGULATION IN INDIA.

PART-I
HOUSEHOLD PROFILE
1. Size

Q.1 When asked about their how many members they have in their family?

FZ=7 FZ=3
10% 7%

FZ=6
18% FZ=3
FZ=4 FZ=5

FZ=6
FZ=4 FZ=7
42%

FZ=5
23%

Figure 1: Family Size of Sample surveyed

The Response Was As Follows

Majority of them were having family size of 4 were 17(42%) and family size of 3 was
the lowest 3(7%)
Family size of 5,6 and 7 were 9(23%),7(18%) ,4(10%) respectively
Q.2 How many of them are earning?

Earning members Nos. %age

Families having 1 Earning members 30 75%

Families having 2 Earning members 7 17%

Families having 3 Earning members 3 8%

8%
17%

75%

Earning members 1Earning members=2

Earning members=3

Figure 2: Earning members in the Family

Interpretation:

The above pie chart shows that 30 (75%) families were having Sole earning member, family having 2
earning member were 7(17%) and only 3 families (8%) were having earning members more than 2
earning members (as shown in the figure).
Q.3 Literacy level

Of the total sample, Majority were school dropout (20 i.e. 50%), High school (5 i.e.
12.5%) and Sr. Secondary (8 i.e. 20%) (As Shown In Figure 3) which implies that their
literacy level was not enough to understand a financial product, or the complications
attached with opening a saving bank account or operating it conveniently.

It also means that as they are not very educated they won’t be having fixed income as
most of them are working daily wages and are underpaid, hence they cannot afford high
charges and penalties.
Figure 3: Literacy level

25

20

15

10

0
School DropoutHigh SchoolSr. Secondary Graduate PG or Above NA

Interpretation:
Graduates consisted 6(15%) People who were the main constituents of Cat II and Cat. IV of
earning group (Figure 5), & 1 respondent didn’t answer this question.
Q.4 Employment

Particulars No. of respondents %age

Organized Sector 2 7%
Unorganized 38 90%
NA 1 3%

1(3%)
2(7%)

Organised Sector
Un-organised NA

38(90%)

Figure 4: Employment

Interpretation:

Of the total 40 people surveyed 2 were found working in organized sector and 38 were found
working in unorganized sector (Figure 4).
 16
16
14
12 10
10
8
6
6
4
3 3
2
0

Self Labour Service Student NA

Employed

Interpretation:

To understand the financial position of household they were further asked further about their
employability or the nature of employment, out of the 40 respondent 16 were labourers working
in Factories in nearby areas; 10 were self employed i.e. shopkeepers and running small scale
business activities; 6 were engaged in service in unorganized sector(as depicted in Figure 5)
 PART II - FINANCIAL POSITION

I. Earnings

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

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

The observation indicates that Cat. I consist mainly the labors and household working
on daily wages (32.5%), and Cat. II & Cat III (42.5% &12.5% respectively) consist
mainly those who are self employed i.e. shopkeepers, Students (3) etc.

Cat. IV and Cat. V people engaged in organized sector and those who are having
business which is stable in nature.

20
Earnings(in thousands

15

10

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

Figure 3: Earnings

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

Particulars No. of respondents %age

Daily 22 22

Weekly 0 0

Monthly 68 68

N.A 10 10

10%
22%

Daily
Weekly
Monthly
N.A

68%

Figure 7: Earning Pattern

Interpretation:

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

Q. Do you save?

Particulars No. of respondents %age

Yes 20 50

No 18 45

NA 2 5

NA
5%

Yes
No 50%
45%

Figure 8: Saving

Interpretation:

50 %( 20) of respondent said that they are saving some part of their income, 45 %( 18) of
respondent are not saving anything and 5% (2) didn’t responded to this question. It was
interesting to see that all those who were earning on daily basis were saving on regular basis
 16
14
14

12

10

4 3
2
2 1
0
0
Weekly Monthly Quarterly Semi-annually NA

Figure 9: Saving Frequency

Out of the 20 respondent who have saving habit, 14 were saving on monthly basis, this can
be contributed to the fact that 70% of them were earning on monthly basis; 3 respondent are
saving weekly and there was no one saving on quarterly basis, 2 didn’t replied to this.
Q. How much do you save?

Particulars No. of respondents %age

0-5% 12 60

5-10% 1 5

10-15% 3 15

15% and above 4 20

20%

0-5%
5-10%
10-15%
15% 15% and above
60%

5%

Figure 10: How much?

Interpretation:
Out of 20 respondent 12(60%) said that they save 0-5% of their income which means they
generally have very small amount of savings which implies that they will be transacting on
regular basis but with very little amount which Commercial banks generally found to be
reluctant. 3(15%) and 4(20%) were saving 10-15% and 15% and above respectively of
their earnings.
Q. Where do you keep your savings?

WHERE DO YOU KEEP YOUR SAVING

Insurance SchemeIn cash at HomePO/NSC/FD
Bank

5%

45%

45%

5%

Figure 14: Distance of Bank Branch

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

Q. Do you have bank account?

Particulars No. of respondents %age

Yes 19 47
No 21 53

47% Yes
53% No

Figure 12: Do you have bank Account

Interpretation:
Of the 40 respondent, 19(47%) are having saving bank account and 21(53%) are not having
bank account.
Q. Did you face any problem while opening account?

Particulars No. of respondents %age

Yes 2 89
No 17 11

11%

Yes
No

89%

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

Interpretation:

Out of the 19 respondent, who have bank account 74% of the respondent didn’t faced any
problem while opening bank account, while 26% said they faced.
Q. How far is the bank branch from your residence?

Particulars No. of respondents %age

0-2 km 79

2-5 km 14

10-12 km 7

14% 7%

0-2 km
2-5 km
10-12 km

79%

Interpretation:

The majority of respondents have no problem of distance of bank branch from their residence as 79%
respondent have bank branch within range of 0-5 Km and 14% within 2-5 Km.
Q. What are the services\product you avail along with your bank account?

15

10

2
1 1 1

Payment & Mobile ATM/DEBIT Loan & Credit CardNet banking

remittances banking CARD Advances

Figure 15: Product and Services Availed

INTERPRETATION:

19(47%) respondent were having bank account (figure 12), among them 5 respondent
were using 1 service/product, 11 respondent were using 2 services, 1 respondent were
using 3 services\product on his two bank accounts and 2 respondent skipped this question.
Q. For what purposes you use your account?

Depositing and withdrawing money so that cash flow is managed accumulating funds/interest earning for future requirement making
to become eligible for other services

5%
19%

57%
19%

Figure 16: Usage of bank account

INTERPRETATION:

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

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

o And rest 5% uses bank account as means of becoming eligible for other financial
services.
 PART IV -THOSE WHO DO NOT HAVE BANK ACCOUNT
(21 RESPONDENT, 52.5%)

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

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

REASONS FOR NOT HAVING BANK ACCOUNT

tried but refused 6%
not aware of
benefits a bank account
29%

cannot meet
MBR* and service charges 26%

tedious
procedure/paper
work 7% lack of
low level of awareness and guidance
literacy 19%
13%
Q. Perception towards banking

Figure 18: Perception towards banking

time and cost PERCEPTION TOWARDS BANKING

constraint
6%

only for HNI* and trust

priveledged group 27% 35%

need
32%

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

Those who were not having bank account were further asked whether they are know
anything about “No Frills Account” or “zero balance bank account” 6 respondent said
yes, They know about this sort of bank account offered by banks as they came to know
about it from newspapers, bank officials, friends & relatives; but majority of the
respondent (29) were not aware about this kind of bank account.
 PART V - CREDIT PATTERN

This part of questionnaire was to evaluate the credit and advance pattern of the sample,
people were not willing to reveal their information regarding how much debt they have,
what the last occasion they borrowed, and other questions related to their indebtness and
credit as they consider it personal and many of them were afraid that this can be used to
evaluate their creditworthiness when they visit banks for loan and advance.

The first question was the last three occasions they borrowed but no one replied to this
question. On further asking about the purpose of borrowing and other related things, the
responded were conservative.

Q. Purpose of borrowing

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

Food and clothing 12%

Celebrations or social obligations 12%

Day to day living expenses or bills 18%

To repay older debts 23%

for funding
business 6%
PURPOSE OF BORROWING

residential house
purchase 12%

Personal
65%
Education of
children 17%
Q. Source of borrowing

Majority of respondent, borrowed from their friends and relatives and whereas only 36%
borrowed from bank and moneylender in both categories.

12

10

6
No. of

0
moneylenders NGOs Friends/relatives Bank

Figure 4: Source of Borrowings

If they borrowed from money lender then further they were asked why they preferred
moneylender over banks for credit needs, response was that from money lender they get
instant cash without any mortgage.
Q. Do you know about banking credit?

YesNo

46%
54%

Figure 5: Awareness of banking credit

Interpretation:
54% of the respondents do not know what is banking credit, whereas
46% knows what is banking credit.
 CHAPTER-6
FINDINGS

 17(42%) and family size of 3 was the lowest 3(7%) Family size of 5,6 and 7 were
9(23%),7(18%) ,4(10%) respectively
 30 (75%) families were having Sole earning member, family having 2 earning member
were 7(17%) and only 3 families (8%) were having earning members more than 2 earning
members
 6(15%) People who were the main constituents of Cat II and Cat. IV of earning group
 40 people surveyed 2 were found working in organized sector and 38 were found working
in unorganized sector
 40 respondent 16 were labourers working in Factories in nearby areas; 10 were self
employed i.e. shopkeepers and running small scale business activities; 6 were engaged in
service in unorganized sector
 Nearly 75% (cat. I & cat. II) of the respondent pertains to low income group.
 68% of the respondent were earning monthly whereas 22% had earning on daily basis and
10 i.e. 4 respondent did not answered on this.
 50 %( 20) of respondent said that they are saving some part of their income, 45 %( 18) of
respondent are not saving anything and 5% (2) didn’t responded to this question. It was
interesting to see that all those who were earning on daily basis were saving on regular
basis.
 12(60%) said that they save 0-5% of their income which means they generally have very
small amount of savings which implies that they will be transacting on regular basis but
with very little amount which Commercial banks generally found to be reluctant. 3(15%)
and 4(20%) were saving 10-15% and 15% and above respectively of their earnings.
 19(47%) are having saving bank account and 21(53%) are not having bank account.
 74% of the respondent didn’t faced any problem while opening bank account, while 26%
said they faced.
 79% respondent have bank branch within range of 0-5 Km and 14% within 2-5 Km.
 5 respondent were using 1 service/product, 11 respondent were using 2 services, 1
respondent were using 3 services\product on his two bank accounts and 2 respondent
skipped this question.
 54% of the respondents do not know what is banking credit, whereas 46% knows what is
banking credit.
 CHAPTER-7
CONCLUSION AND SUGGESTION

Steps taken towards bringing lower income groups to the banking system has been
successful to a significant extent, as the main causes observed earlier like distance of bank
branch, unawareness about banking services has improved.

While doing survey it was found that people are not voluntarily excluding themselves
from banking system, most of them have faith in banking and feels that they need banking
services. The need varies from managing cash flow as they earn on daily basis or irregular
basis.

The reasons behind not approaching banks are mainly the minimum balance requirements
which have been taken care by No Frills Bank Account but most of the respondent was
not aware about this type of account. Hence it needs to be advertised; literacy level and
awareness about various other products/services.

It was also found that people prefer to borrow from personal/informal sources when the
purpose is personal or consumption. Where the amount to be borrowed is generally small,
the people found to be reluctant to approach banks, whereas for other productive purposes
they borrow from banks.

In other words, it may be said as per the study conducted in Hari Nagar Area. Despite the
thrust given to financial inclusion, the desired results have not come up.
 SUGGESTIONS

Every bank should be forced to establish a customer care /May I help you Counter
at every branch so that new customer should be guided and relevant information is
provided.

To increase the awareness, there is a good scope of having financial literacy cell
or credit counselling centres in each district so that it can take care of
uneducated/illiterate individuals.

Every bank should be made to offer No frill saving account with basic services
without terms & conditions which are class/group specific but are applicable to all.

Private sector should be involved in process of financial inclusion and they should
be made realise that it is not only a business opportunity for them but corporate
social responsibility too.
 BIBLIOGRAPHY

Annual Policy report 2005-2006

Report on currency and Finance 2006-08

Ranjrajan Committee report on Financial Inclusion(2008)

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

Preeti Sahai

The need for financial inclusion with an Indian perspective by

Amol Aggarwal, IDBI

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

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

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

Manager, NABARD

Working paper on social, economical and financial Consequences of

financial exclusion by Bernard Bayot

Internet

o www.wikipedia.com

o www.rbi.org.in

o http://aryavart-rrb.com/

o www.grameen-info.org

o http://cab.org.in
 QUESTIONNAIRE

Q.1 When asked about their how many members they have in their family?
a) FZ=3 b) FZ=4
c) FZ=5 d) FZ=6

Q.2 How many of them are earning?

a) Families having 1 Earning members
b) Families having 2 Earning members
c) Families having 3 Earning members

Q.3 What is literacy Level?

a) School dropout b) High School
c) Sr. Secondary d) Graduate
e) Post Graduate f) PG or above
g) NA

Q.4 Employment?
a) Organized Sector b) Unorganized
c) NA

Q.5 How much do you earn?

a) Cat. I (Rs.0-4000) b) Cat. II (Rs.4000-8000)
c) Cat.III (Rs.8000-12000) d) Cat.IV (Rs.12000-16000)
e) Cat.V (Rs.16000 and above)

Q.6 What is your earning Pattern?

a) Daily b) Weekly
c) Monthly d) N.A.
Q.7 Do you save?
a) Yes b) No
c) N.A.
Q.8 How much do you save?
a) 0-5% b) 5-10%
c) 10-15% d) 15% and above

Q.9 Where do you keep your savings?

a) Bank b) Insurance Scheme
c) In cash at home d) PO/NSC/FD

Q.10 Do you have bank account?

a) Yes b) No

Q.11 Did you face any problem while opening account?

a) Yes b) No

Q.12 How far is the bank branch from your residence?

a) 0-2 km b) 2-5 km
c) 5-10 km d) 10 and above

Q.13 What are the services\product you avail along with your bank account?
a) Payment & remittances b) Mobile Banking
c) ATM/ Debit Card d) Loan and Advances
e) Credit Card e) Net banking

Q.14 For what purposes you use your account?

a) Depositing and withdrawing money so that cash flow is managed
b) Accumulating funds/interest earning for future requirement
c) Making and receiving payment
d) To become eligible for other services

Q.15 If you don’t have a bank account?

Reason …………………………………………….
Q.16 Perception towards banking?
Reason __________________________

Q.17 What is the purpose of borrowing?

a) Food and clothing
b) Celebrations or social obligations
c) Day to day living expenses or bills
d) To repay older debts

Q.18 What is the source of your borrowing?

a) Moneylenders b) NGOs
c) Friends/ relatives d) Bank

Q.19 Do you know banking credit?

a) Yes b) No