Index

CONTENTS Page no

1. Acknowledgement 2
2. Executive summary 3
3. Introduction 5
4. Objectives 7
5. Financial exclusion 8
6. The need for financial inclusion 12
7. The benefits of financial inclusion 13
8. The tools of financial inclusion and the methods 14
to achieve them.
9. Cross country experience 17
10. Indian scenario 20
11. The extent of financial inclusion in India 22
12. Survey : financial inclusion – then and now 30
13. The significance of financial inclusion in the 33
current financial crisis
14.Bibliography 35

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 ACKNOWLEDGEMENT

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

Before proceeding further, we would like to express our thanks to all those who have
helped us in one way or any other way for successful completion of this project.

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

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

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

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

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

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 EXECUTIVE SUMMARY

Financial services actively contribute to the humane & economic

development of the society. These lead to social safety net & protect the people
from economic shocks. Hence, each & every individual should be provided with
affordable institutional financial products/services popularly called “Financial
Inclusion”.

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

disheartening to note that nearly half of the rural households even today do not have
any access to any source of funds- institutional or otherwise. Hardly one-fourth of
the rural households are assisted by banks. Hence the major task before banks is to
bring most of those excluded, i.e. 75% of the rural households, under banking fold.

There is a need for the formal financial system to look at increasing financial
literacy and financial counseling to focus on financial inclusion and distress
amongst farmers. Indian banks and financial market players should actively look at
promoting such programs as a part of their corporate social responsibility. Banks
should conduct full day programs for their clientele including farmers for
counseling small borrowers for making aware on the implications of the loan, how
interest is calculated, and so on, so that they are totally aware of its features. There
is a clearly a lot requires to be done in this area.

This enables the customer to remit funds at low cost. The government can utilize
such bank accounts for social security services like health and calamity insurance
under various schemes for disadvantaged. From the bank’s point of view, having
such social security cover makes the financing of such persons less risky. Reduced
risk means more flow of funds at better rates.

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

day management of finances. For example, bills for daily utilities (municipality,
water, electricity, telephone) can be more easily paid by using cheques or through
internet banking, rather than standing in the queue in the offices of the service.

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 A bank account also provides a passport to a range of other financial products
and services such as short term credit facilities, overdraft facilities and credit card.
Further, a number of other financial products, such as insurance and pension
products, necessarily require the access to a bank account.

Employment Guarantee Scheme of the Government which is being rolled out

in 200 districts in the country would bring in large number of people through their
savings accounts into the banking system.

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

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 INTRODUCTION

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

equity” clearly envisages that the growth spree of the globe in the 21st century
has left some people behind the time. Handful of the global populace are still
languishing in the vicious circle of poverty & are cast aside by those who are
economically stronger & swifter in the sway of globalization & liberalization. For
sustenance/better growth of the world, the deprived sections should be dragged into the
mainstream of growth. This is because of the fact that poverty any where is a grave
threat to prosperity everywhere. Financial services actively contribute to the humane &
economic development of the society. These lead to social safety net & protect the
people from economic shocks. Hence, each & every individual should be provided
with affordable institutional financial products/services popularly called “Financial
Inclusion”.
Financial inclusion may be defined as the process of ensuring access to financial
services and timely and adequate credit where needed by vulnerable groups such
as weaker sections and low income groups at an affordable cost. Financial products
& services are identified as basic banking services like deposits accounts, institutional
loans, access to payment, remittance facilities & also life & non life insurance services.
The following are the denotation & connotation of financial inclusion in India.
1. Affordable credit
2. Savings bank account
3. Payments & Remittance
4. Financial advice
5. Credit/debit cards
6. Insurance facility
7. Empowering SHGs(self help groups)

An inclusive financial system facilitates efficient allocation of productive resources

and thus can potentially reduce the cost of capital. An all-inclusive financial system
enhances efficiency and welfare by providing avenues for secure and safe saving
practices and by facilitating a whole range of efficient financial services like easy day-
to-day management of finances, safe money transfer etc. The govt. of India as well as
the banking industry has recognized this imperative and has undergone certain
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fundamental changes over the last two decades. In fact, in order to address the issues of
financial inclusion, the Government of India constituted a “Committee on Financial
Inclusion” under the Chairmanship of Dr. C. Rangarajan. Not only in India, but
financial inclusion has become an issue of worldwide concern, relevant equally in
economies of the underdeveloped, developing and developed nations. Building an
inclusive financial sector has gained growing global recognition bringing to the fore
the need for development strategies that touch all lives instead of a select few.

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 OBJECTIVES

The research aims to cover the following objectives.

· How financial inclusion is the need of the hour for the sustainability and
maintenance of the growth process.

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

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

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

· The future of financial inclusion process in India

· The extent of financial inclusion India.

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

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 FINANCIAL EXCLUSION

T he concept of financial inclusion and its implementation has come a long way
since the last two decades and the results are also quite fair. There has been
much technological advances that has transformed the banking industry from
traditional brick –and-mortar infrastructure like staffed branches to a system
supplemented by other channels like automated teller machines, debit and credit
cards, internet banking, online money transfer etc. The moot point, however, is that
access to such technology and services are restricted to only certain segments of the
society. There is a growing divide, with an increased range of personal finance
options for a segment of high and upper middle income population and a significantly
large section of the population who lack access to even the most basic banking
services. This is termed as “Financial exclusion”.
Financial exclusion can be geographical exclusion, exclusion on the grounds of
charges, exclusion due to ignorance & also self exclusion. One of the oldest
definitions by Leyshon and Thrift (1995) define financial exclusion as referring to
those processes that serve to prevent certain social groups and individuals from
gaining access to the financial system. According to Sinclair (2001), financial
exclusion means the inability to access necessary financial services in an appropriate
form. Exclusion can come about as a result of problems with access, conditions,
prices, marketing or self-exclusion in response to negative experiences or
perceptions. Carbo et al. (2005) have defined financial exclusion as broadly the
inability (however occasioned) of some societal groups to access the financial
system.

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Causes of Financial exclusion.
Some of the important factors responsible for financial exclusion are given as under
1. Terms & conditions.

Different types of terms & conditions imposed by the bankers often deter
people with low income & rural areas from opening bank account. In Canada,
USA, France & India strict regulation is imposed on Opening balance &
Minimum balance required for an account. This often goes beyond the budget
of the low income people.
Another area of obstacle is the conditions relating to the use of accounts. In
Belgium for instance, accounts have been closed by banks because customers
either use them too little or withdraw money too often.

2. Identity Requirements.

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

Rural people & low income people think transacting through banks is a
cumbersome affair & banks charge highly. Sometimes they think that services
offered by the banks are not meant for them. Such type of “Self exclusion” is
far more important than direct exclusion by banks refusing to opening accounts.
In England the Pakistani & Bangladeshi communities face religious barriers to
banking, because, accounts overdrawn (even if inadvertently) is harmful under
Islamic law.
4. Bankers’ approach.

Bankers’ attitude towards the rural folk & the marginalized mass is also not
conducive. Sometimes these people are distracted by difficult financial terms
used by the bankers & sometime by the apathetic attitude of the bankers.
Absence of banks in the vicinity of rural area is also one of the causes of
exclusion.

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 NO SAVINGS NO ASSETS

NO BANK FINANCIAL EXCLUSION NO ACCESS TO

ACCOUNT MONEY ADVICE

NO INSURANCE NO AFFORDABLE CREDIT

Effects of financial exclusion:

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

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

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 c. Lack of security in holding & storing money.

d. The small business may suffer due to loss of access to middle class and
higher-income consumers, higher cash handling costs and delays in
remittances of money.

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

view.

f. General decline in investments.

g. Increase in unemployment.

Who are the excluded?

The financially excluded sections largely comprise of:

· Marginal farmers
· Landless labourers
· Self employed and unorganized sector enterprises
· Urban slum dwellers
· Migrants
· Ethnic minorities and socially excluded groups
· Senior citizens and women, etc.
· Large pockets of population in North East, Eastern, and central regions
of India.

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 THE NEED FOR FINANCIAL
INCLUSION

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

disheartening to note that nearly half of the rural households even today do not
have any access to any source of funds- institutional or otherwise. Hardly one-fourth
of the rural households are assisted by banks. Hence the major task before banks is
to bring most of those excluded, i.e. 75% of the rural households, under banking
fold. But the task is not so easy since they are illiterate, poor and unorganized. They
are also spread far and wide. What is needed is to improve their living standards by
initiating new/increased economic activities with the help of banks, NGO’s and local
developmental agencies. To start with, it is necessary to develop a fair understanding
of their profile. In addition, their perception about the bank and its services needs to
be understood.
So there is a need for the formal financial system to look at
increasing financial literacy and financial counseling to focus on financial inclusion
and distress amongst farmers. Indian banks and financial market players should
actively look at promoting such programs as a part of their corporate social
responsibility. Banks should conduct full day programs for their clientele including
farmers for counseling small borrowers for making aware on the implications of the
loan, how interest is calculated, and so on, so that they are totally aware of its
features. There is a clearly a lot requires to be done in this area.

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 BENEFITS OF FINANCIAL
INCLUSION.

Financial inclusion has many benefits. Following are some of the benefits
summed up.

· It paves the way for establishment of an account relationship which helps the
poor to avail a variety of savings products and loan products for housing ,
consumption, etc.
· An inclusive financial system facilitates efficient allocation of productive
resources and thus can potentially reduce the cost of capital.
· This also enables the customer to remit funds at low cost. The government can
utilize such bank accounts for social security services like health and calamity
insurance under various schemes for disadvantaged. From the bank’s point of
view, having such social security cover makes the financing of such persons
less risky. Reduced risk means more flow of funds at better rates.
· Access to appropriate financial services can significantly improve the day-to-
day management of finances. For example, bills for daily utilities
(municipality, water, electricity, telephone) can be more easily paid by using
cheques or through internet banking, rather than standing in the queue in the
offices of the service.
· Transfer of money can be done more safely and easily by using the cheque,
demand draft or through internet banking.
· A bank account also provides a passport to a range of other financial products
and services such as short term credit facilities, overdraft facilities and credit
card. Further, a number of other financial products, such as insurance and
pension products, necessarily require the access to a bank account.
· Lastly, the Employment Guarantee Scheme of the Government which is being
rolled out in200 districts in the country would bring in large number of people
through their savings accounts into the banking system.

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 TOOLS OF FINANCIAL INCLUSION AND
THE METHODS TO ACHIEVE THEM

To address the issue of financial exclusion in a holistic manner, it is essential to

ensure that a range of financial services is available to every individual. These
services are: `

(i) a no-frills banking account for making and receiving payments,

(ii) a savings product suited to the pattern of cash flows of a poor household,

(iii) money transfer facilities,

(iv) small loans and overdrafts for productive, personal and other purposes, &

(v) micro-insurance (life and non-life)

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Meeting the needs:
To bring about a highly inclusive financial system, it is highly necessary that the
current financial products are appropriate to the needs of low-income households.
Following are some of the major points that are required to achieve success of the
financial products.
Reducing barriers to access
Widening access requires overcoming the barriers presented by risk assessment as
well as improving physical access. Using intermediaries to deliver financial products
can overcome the problems of physical access. Telephone and computer-based
services, however, are likely to reinforce financial exclusion as many excluded
households lack these facilities.

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

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Delivery systems
People on the margins of financial services want to deal with organizations which
are financially secure, trustworthy and understand their needs. It is not, however,
necessary for the same organization to both provide the product and deliver it to the
customer. Indeed, experience shows that the use of intermediaries offers many
advantages. For example, many local authorities run insure with rent schemes for
tenants wanting home contents policies, which they are able to offer at a substantial
saving on similar policies bought direct or through a broker. The Post Office is also
exploring a similar role as financial service intermediary, as are a small number of
credit unions and housing associations. New technology offers some opportunities
for product delivery at the end of the market. Electronic cards and electronic money
transmissions are likely to be the most acceptable.

Encouraging take-up
Knowledge of and about financial products is remarkably low among households
that are without them. This is compounded by marketing policies which reinforce
the belief that financial services are 'not for the poor'. Measures to encourage take-up
must, therefore, tackle the widespread mistrust which such households have of many
financial providers, particularly those which are geographically remote. Use of
trusted intermediaries could overcome these barriers. Targeted marketing and
delivery of new products as they become available would also increase take-up.
Equally, the language and cultural barriers faced by some potential users need to be
taken into account.
There is also a need for an independent information and advice service. Lack of
knowledge and experience of financial products renders some households especially
vulnerable to mis-selling, as well as deterring them from taking up financial
services.

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 CROSS COUNTRY EXPERIENCE

I t has been estimated by Consultative Group to Assist the Poor (CGAP) that about
2.5 to 3billion people around the world are still excluded from basic financial
services. The situation is particularly dire in the Least Developed countries. In most
of the developing countries like India & China the extent of exclusion is in the range
of 25%-65%. So, taking into cognizance the importance of financial inclusion, the
international community has taken a number of measures to mitigate the hiatus
between the financially excluded & non- excluded. The following analysis describes
the extent & measures taken by different countries to mitigate financial exclusion.

USA
In USA 10%-15% of total households & 22% of the low income households go
without bank accounts. Community Reinvestment act & Home Mortgage Disclosure
act binds the banks there to provide banking services to all the needy. Some states
like New York made it mandatory for the banks to provide accounts to all citizens.

U.K.
Nearly 12 percent of England’s households are unbanked. Free face to face money
advice to targeted groups in the areas of high exclusion is in vogue. The govt has set
up a Financial Inclusion fund of 120 mn pounds to support initiatives to tackle
financial exclusion. . An enhanced legislative environment for credit unions has
been established, accompanied by tighter regulations to ensure greater protection for
investors. A Post Office Card Account (POCA) has been created for those who are
unable or unwilling to access a basic bank account. The concept of a Savings
Gateway has been piloted. This offers those on low-income employments £1 from
the state for every £1 they invest, up to a maximum of £25 per month. In addition
the Community Finance Learning Initiatives (CFLIs) were also introduced with a
view to promoting basic financial literacy among housing association tenants.

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Australia
Only 3% of adults lacked bank account in Australia till 2002-03. This has been the
result of continuous joint efforts by government & the banks in educating the people
about the benefits of financial products.

France
In 1984 the bank of France through “Banking Act” made access to bank accounts a
legal right in France. In 1992 the banking industry in France signed a charter to
provide bank account to all.

Bangladesh.
Grameen bank of Bangladesh under the stalwartship of Md. Yunus has
revolutionized the movement of financial inclusion. It targeted low income people
especially the women (97% of total borrowers) who were denied credit by other
com. Banks. It has successfully posted a recovery rate of 98.85%. It has also recently
included the beggars within its credit network under a special program i.e.
Struggling Members programmed. Approximately 81000 beggars have already been
benefited by the programme.

South Africa.
More than half of the population here are below poverty line. Only 4% of total
populace has bank accounts & 1% only avail credit from formal sources. To deal
with the situation Dakar Conference ha been organized under the banner of U.N. In
2004, UNDP & UNCDF jointly lunched a program called Building Financial
Security in Africa.
IMF, U.N. & World Bank have extended very good support for building an inclusive
society in the world. U.N. has framed ‘Blue Book’ in consultation with the
developed & underdeveloped countries as a tool & guide for policy makers who
seek to build inclusive financial growth.
In the first-ever Index of Financial Inclusion (IFI) prepared by a New Delhi-based
organization, ICRIER (Indian Council for Research on International Economic
Relations), to find out the extent of the reach of banking services in 100 countries
worldwide pointed out that Spain has occupied the top position in IFI, which is

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

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 INDIAN SCENARIO

Indian banking system has exhibited tremendous growth in extending its reach,
coverage & delivery of financial products to the mass ever since 1881. The All
India Rural Survey committee in 1954 recommended the creation of a state
sponsored bank to promote rural penetration. Accordingly, SBI was established in
1955. Another step in this direction was taken in 1969 when 14 major commercial
banks were nationalized followed by six more in 1980. This strengthened the
concept of socialistic & welfare state stature of the country. Lead bank scheme was
launched in 1970 to increase banking penetration with special focus on the districts.
The emergence of RRBs in 1976 blended the skills of commercial banks with the
grass root presence of the co-operative banks helped the mass to access to
institutional credit. NABARD established in 1982 regulated institutional credit for
agriculture & rural development. Talwar committee & Goiporia committee in the
early eighties have made many recommendations to improve the customer services
in India. Following are some of the steps undertaken by RBI:

The RRBs have been advised to allow limited overdraft facilities in no-frill accounts
without any collateral. The idea was that provision of such overdraft facilities
provides a ready source of funding to the account holders who are thereby inducted
to open such accounts.

Banks also have been advised to provide a General Purpose Credit Card (GCC) at
their rural & semi urban branches. From this revolving card system the customer can
withdraw money to a limited amount from the concerned branch.
Bhumuheen’ credit card facility has been arranged apart from Kisan credit cards for
the rural & semi urban tenant farmers, landless labourers whereby they can be
allowed hassle free credit limit up to 0.25 lac per person.
Special Agricultural branches have been opened by the PSBs to meet the financial
needs fore agricultural & allied activities.
On the behest of the RBI, SHG & bank linkage programme has been initiated which
has been a major micro finance programme in the country.

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The micro finance and self help groups are also playing great role in proving
financial services to a large mass of people in the rural and semi urban areas.
Looking at the profitability side of providing newer financial products the private
sector organization is also entering into the market. Reliance Capital, the financial
services arm of Anil Dhirubhai Ambani Group, has funded two microfinance

institutions in Gujarat - MAS Financial Services and Vardan Trust. The Soros
Economic Development Fund (SEDF), Omidyar Network, and Google.org hosts a
‘Small to Medium Enterprise Investment Company’ with an initial corpus of $17
million targeted at “Missing Middle” between microfinance and commercial capital
markets in India. Hyderabad-based SKS Microfinance has attracted investors like
Vinod Khosla, Sequoia Capital India, SIDBI and Units, among others .

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 THE EXTENT OF FINANCIAL
INCLUSION IN INDIA

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

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

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

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

Region No. of Acounts Population No. of Accounts
per
(current+saving) (in ’000)
100 population
(in ’000)

2001 2005 2001 2005 2001 2005

Northern 50944 58777 132679 141599 38 42

N.Eastern 7536 7729 34495 411083 20 19

Eastern 47838 51888 227617 242920 21 21

Central 63498 69424 255714 272906 25 25

Western 48120 55178 149073 159095 32 35

Southern 79531 94725 223437 238459 36 40

All India 297467 337721 1027015 1096063 29 31

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 N.Easter
SOUTHE NORTHE n, 19
RN, 36 RN, 38 Southern
, 40
Eastern,
21
N.EASTE
WESTER RN, 20
N, 32
Central,
EASTER Western,
25
CENTRA N, 21 35
L, 25

2001 2005

Pie chart representation of the data in the table

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

Table—2
Number of Savings Accounts to Adult Population-2005
Region Percentage of savings account
Northern 80
N.Eastern 37
Eastern 34
Central 52
Western 60
Southern 66

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 80
80
66
70 60
60 52
50
37 34
40
30
20
10
0
Northern N.Eastern Eastern Central Western Southern

precentage of savings account

Percentage of savings account

Southern
Northern
20%
24%

Western N.Eastern
18% 11%

Eastern
Central 11%
16%

Pie chart representation of the percentage of savings account.

Going by the available data on the number of savings bank accounts and assuming
that one person has only one account, (which assumption may not be correct as
many persons could have more than one bank account) we find that on an all India
basis 59 per cent of adult population in the country have bank accounts – in other

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words 41 per cent of the population is unbanked. In rural areas the coverage is 39per
cent against 60 per cent in urban areas. The unbanked population is higher in the
North Eastern and Eastern regions.
Table –3 - Number of Loan Accounts to Adult Population 2005
Region Percentage of loan accounts
Northern 12
N.Eastern 7
Eastern 8
Central 9
Western 13
Southern 25
India 14

25
25

20
12 13
15
8 9
10 7

0
Northern N.Eastern Eastern Central Western Southern

Percentage of loan accounts

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 Percentage of loan accounts

Northern
16%
Southern N.Eastern
34% 9%

Eastern
11%
Western Central
18% 12%

Pie chart representation of the percentage of loan accounts.

The extent of exclusion from credit markets is much more, as number of loan
accounts constituted only14 per cent of adult population (table-3) In rural areas, the
coverage is 9.5 per cent against 14 per cenin urban areas. Regional differences are
significant with the credit coverage at 25 per cent for the Southern Region and as
low as 7, 8 and 9 per cent respectively in North Eastern, Eastern and Central
Regions.

**The extent of exclusion from credit markets can be observed from a different view
point also. Out of 203 million households in the country, 147 million are in rural
areas – 89 million are farmer households. 51.4per cent of farm households have no
access to formal or informal sources of credit while 73 per cent have no access to
formal sources of credit. Similar data are not available for non farm and urban
households. Looking at the different sources of credit, it is observed that the share
of non institutional sources reduced from 70.8% in 1971 to 42.9% in 2002.
However after 1991, the share of non institutional sources has increased;
specifically, the share of moneylenders in the debt of rural households increased
from 17.5 % in 1991 to 29.6% in 2002. In urban areas the share of non institutional
sources has come down significantly from 40% in 1981 to around 25 % in 2002.

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 a) No. of Banks’ branches in population groups

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

Banks No No. of Branches
of As on June 30, 2004 As on June 30, 2005
Ba Rural Semi Urban Metro Total Rural Semi Urban Metr Total
nk Urban Urba o
s n
SBI 1 4068 2462 1499 1010 8989 4068 2475 1470 1023 9036
(45%) (27%) (16%) (11%) (100%) (45%) (27% (16%) (11 (100%
) %) )
Associates 7 1409 1588 849 732 4578 1412 1605 864 744 4625
Of SBI (30%) (35%) (19%) (16%) (100%) (31%) (35% (19%) (16) (100%
) )
Nationalized 19 13582 7190 6801 5668 33241 13587 7291 6935 5812 33625
(41%) (22%) (21%) (17%) (100%) (40%) (22% (21%) (17 (100%
) %) )
Other PSUs 1 NA NA NA NA NA 5 26 68 60 159
(3%) (16% (43%) (38 (100%
) %) )
PSBs 28 19059 11240 9099 7410 46808 19072 1139 9337 7639 47445
(41%) (24%) (19%) (16%) (100%) (40%) 7 (20%) (16 (100%
(24% %) )
)
Pvt. Sector 29 1106 1768 1537 1383 5794 1097 1831 1714 1479
6121
(19%) (31%) (27%) (24%) (100%) (18%) (30% (28%) (24(100%
) %) )
Foreign Banks 31 Nil Nil 31 188 219 Nil 1 42 206249
(14%) (86%) (100%) (0%) (17%) (83(100%
%) )
RRBs 196 11922 2134 396 20 14472 11922 2158 401 20 14501
(82%) (15%) (3%) (0%) (100%) (82%) (15% (3%) (0%)
(100%
) )
Scheduled 284 32087 15142 11063 9001 67293 32091 1538 11494 9344 68316
Co m. Banks (48%) (23%) (16%) (13%) (100%) (47%) 7 (17%) (14 (100%
(23% %) )
)
4 4 9 7 Nil 20 4 9 10 Nil23
Non-scheduled (20%) (45%) (35%) (100%) (17%) (39% (44%) (100%
Banks
) )
Total 288 32091 15151 11070 9001 67313 32095 1539 11504 9344 68339
(48%) (23%) (16%) (13%) (100%) (47%) 6 (17%) (14 (100%
(23% %) )
)

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

Summary of the financial inclusion statistics in India(2005)

(a) General :
51.4% of farmer households are financially excluded from both formal / informal
sources.Of the total farmer households, only 27% access formal sources of credit;
one third of this group also borrow from non-formal sources.
Overall, 73% of farmer households have no access to formal sources of credit.
(b) Region-wise :
Exclusion is most acute in Central, Eastern and North-Eastern regions - having a
concentration of 64% of all financially excluded farmer households in the country.
Overall indebtedness to formal sources of finance alone is only 19.66% in these
three regions.
(c) Occupational Groups:
Marginal farmer households constitute 66% of total farm households. Only 45% of
these households are indebted to either formal or non formal sources of finance.
About 20% of indebted marginal farmer households have access to formal sources of
credit. Among non-cultivator households nearly 80% do not access credit from any
source.

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(d) Social Groups :
Only 36% of ST farmer households are indebted (SCs and Other Backward Classes -
OBC - 51%) mostly to informal sources.
Analysis of the data provided by RBI thru' its Basic Statistical Returns reveal that
critical exclusion (in terms of credit) is manifest in 256 districts, spread across 17
States and 1 UT, with a credit gap of 95% and above. This is in respect of
commercial banks and RRBs.
As per CMIE (March 2006), there are 11.56 crore land holdings. 5.91 crore KCCs
have been issued as at the end of March 2006, which translated into a credit
coverage of more than 51% of land holdings by formal sources. Further data with
NABARD on the doubling of agricultural credit indicates that agricultural loan
disbursements during 2006-07 covered 3.97 crore accounts. Thus, there are different
estimates of the extent of inclusion thru' formal sources, as the reference period of
the data is not uniform.
Consequently, this has had an impact on quantifying the extent of levels of
exclusion.

REFERENCES FOR THIS SECTION

1. Central Statistical Organisation

National Accounts Statistics, Ministry of Statistics and Programme
Implementation, Government of India, New Delhi,.
2. National Sample Survey Organisation (NSSO),, “Informal Sector in India, -
Salient Features”, NSSO, Ministry of Statistics and Programme
Implementation, Government of India, New Delhi,.

3. National Statistical Commission

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

29 | P a g e
 SURVEY : FINANCIAL INCLUSION –
THEN AND NOW

T o understand the extent of financial inclusion in a general context and the

perception of people regarding financial inclusion a survey was conducted.
The details of the survey are as follows.

Place of survey: Sukhjora, a rural village in Jharkhand.

No of people surveyed: 50

Age group of people surveyed: Above 65.(this age group was chosen so as to know
the condition of financial inclusion 40 years back)

The survey was conducted through a questionnaire containing five questions. There
were no fixed answers to the questions, rather we made it a point to note down their
answers. The questions are as follows.

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

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

3. Where do keep or invest your money now?

4. How do you avail credit now?

5. How do you rate the financial inclusion services now?

The answers to the questions received and the percentage of people that answered
the various answers are as follows:

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

ANS TO Q –2 PERCENTAGE OF PEOPLE

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

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

ANS TO Q –3 PERCENTAGE OF PEOPLE

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

31 | P a g e
 ANS TO Q –4 PERCENTAGE OF PEOPLE
1. From banks (PSBs) 63%
2. From relatives and friends 22%
3. From money lenders 12%
4. From private sector banks 10%
5. By selling land or gold 21%
6. From self saved money 37%

ANS TO Q –5 PERCENTAGE OF PEOPLE

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

From the answers of Q—3&4 it is clear that financial inclusion services are in
services now. We see people have bank accounts now. Though the spread of the
public sector banks are more but the spread of private sector banks are also
happening. On surveying the area , it is found that what was a nil bank area has now
five banks and in each of the banks the no. of customers have exceeded their limits.
In case of credit taking banks have become the priority.

But the rating of financial services by the people are still average. One of the prime
causes of this reason is that people have become educated about the financial
services in the urban areas. Thus, they feel that less development has taken place in
their area.

(For question no. 1,2,3&4 the total of the percentage of people giving the answers
is not 100 because more than one option of answer has been given as a response )

32 | P a g e
 THE SIGNIFICANCE OF FINANCIAL
INCLUSION IN THE CURRENT
FINANCIAL CRISIS

T he current ‘tsunami’ in the financial sector triggered by the subprime crisis has
had a telling impact on the global economy from which it will take some time to
recover. The role of the banking sector will be vital for India if it were to stay as one
of the fastest growing economies. The multilayered Indian banking system—
compromising 82 scheduled commercial banks (SCBs) , 92 regional rural banks
(RRBs), four local area banks (LABs), 1813 urban cooperative banks (UCBs) and
109497 rural co-operative credit institutions has the ability to convert what was
largely perceived as a social responsibility into a viable growth : providing access to
finance to all , irrespective of geography , income or education.
According to a study ‘Banking in 2050’ shows that the structure of global ranking
will undergo a complete realignment with the E7 (Brazil, Russia India, China,
Indonesia, Mexico and Turkey ) driving growth.

· Over the next 25 years, banking sectors will grow much faster than the GDP
of these countries.
· Total domestic product in the E7 will exceed those of G7 countries in the next
40 years.
· India is likely to emerge as the third-largest domestic banking market by
2040, and could even grow faster than China.

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

As per the Planning Commission’s India ‘Vision 2020’ document, the growth of
banking is likely to be more qualitative than quantitative. While reliance on
borrowed funds has increased for many of the global banks, the pace of deposit

33 | P a g e
growth among local banks over the last couple of years has been encouraging. But it
needs to be sustained with constant monitoring of quality of the deposit base.
The present trend shows a strong shift among younger consumers from traditional
branch-banking to alternate channels. Electronic delivery channels, such as the
internet, ATMs and phones, have emerged as effective channels for distribution of
products and services. Branches though will continue to be used more for cross-
selling products and managing client relationship. The business challenge would be
to ensure continuous compliance with cyber laws and other regulatory directives.

Thus, it can be summed up that financial inclusion is one of the

viable routes through which banks can maintain their development and also survive
the current financial crisis. But in order to do that there should be extensive efforts
both from the government’s side as well as the banks themselves. According to the
Boston Consulting Group’s 2007 report, The Next Billion Banking Customers — the
most effective marketing campaigns will have to include equal parts of education
and sales pitch. To include their next customers, bank will have to access them, and
be accessible.

(The entire information on this particular section has been extracted from
Businessworld Issue 18-24 Nov 2008)

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 BIBLIOGRAPHY

WEBSITES

1. www.npi.org.uk
2. www.nationalcentrefordiversity.com
3. www.bbcnews.com
4. www.nssoresults .co in
5. www.nabard.org
6. www.indian-bank.com
7. www.rbi.org.in
8. www.innoviti.com
9. www.egovonline.net

NEWSPAPERS

1. The Economic Times

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

SPEECHES AND REPORTS

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

2. Report of the committee on informal financial sector statistics,

Dr. C Rangarajan, chairman of the National Statistical Commission

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

Consulting group.

35 | P a g e
4. Treating bank customers fairly, speech by Usha Throat, governer, RBI
organized by the Financial Standards Planning Board , India.

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

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

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

Research on International Economic Relations

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

Govt. of India ,Friday 14th November.2008

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