Financial Inclusion for Rural Growth with special reference to

Changes in Indian Banking Sector

Authors:

Siby Joseph K
Assistant Professor, MBA Department
St. Berchmans College, Changanassery
E-mail: sibyjoseph_k@yahoo.co.in
Mobile: +91 9447249214

Deepu T Mathew & Anukutty Jacob

Final Year Students, MBA Department,
S.B. College, Changanassery.

Financial inclusion is one of the key issues by which the Government of India is focusing for
an overall social development at par with the GDP growth. To sustain and accelerate the
growth momentum, the country has to ensure increased participation of the economically
weak segments of the population in the process of economic growth. Limited access to
affordable financial services such as savings, loan, remittance and insurance services by the
vast majority of the population in the rural areas is believed to be the constraint for the
empowerment of the weaker section. Hence, financial inclusion is concluded to be the critical
factor for inclusive growth and ultimately ensuring sustainable overall growth in the country.
This paper is an attempt to look into the attainment of growth and financial inclusion of rural
areas by means of banking and financial services. The study intends to understand the
activities which are done by Public Sector banks towards financial inclusion and how
effectively the banks are implementing the different policies adopted by the government of
India to attain financial inclusion.

Key words: Financial Inclusion, Banking and financial services, Rural empowerment,
Advanced technology, Policy changes.

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Introduction

Majority of people in the developing world do not have access to formal financial services.
Very few get benefited from savings accounts, loans, or convenient way to transfer money.
Those who do manage to open a bank account, are often faced with sub-optimal services.

Financial services for the poor, often referred to as microfinance, cannot solve all the
problems caused by poverty; but they can help to put resources and power into the hands of
poor and low income people themselves, letting them make those everyday decisions and
chart their own paths out of poverty. The potential is enormous, and so is the challenge. In
other words, this vision is about inclusive financial systems, which are the only way to reach
to the large number of poor and low-income people.

Households need access to finance for several purposes, the most important being for
contingency planning and risk mitigation. Households build buffer savings, to meet
contingencies. They need access to credit for livelihood creation as well as consumption and
emergencies. Finally, wealth creation is another area where financial services are required.
Households require a range of savings and investment products for the purpose of wealth
creation depending on their level of financial literacy as well as their risk perception.

The banks are playing a major role in building a strong financial infrastructure by
maintaining monetary and financial stability leading to economic growth. However, being a
developing and emerging economy, India expects her banks to shoulder the additional
responsibility of promoting growth and development through a proactive role. Despite
making significant improvements in all the areas in relation to financial viability, profitability
and competitiveness, there are concerns that the banks have failed to include the vast segment
of population, especially the underprivileged section of society, into the fold of basic banking
services.

The strategies to ensure financial inclusion can truly lift the living standards of the deprived
class and provide them an opportunity to make their life worthwhile. Financial Inclusion
basically means delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low income groups. An unrestrained access to goods and services is a
prerequisite of an open and efficient society. Between bank nationalization in 1969 and the
onset of financial liberalization in 1990, government regulation of the banking sector in India
sought to affect bank location and lending practices so as to favor the poor.

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As banking services are in the nature of public good, it is necessary that the entire population
without discrimination of any kind should be facilitated with banking and payment services.
This could be achieved either by state intervention through law enactments i.e. by making it a
statutory right to have a bank account or through initiative of the banking community itself to
figure out various plans and programme for admitting people from all layers of society within
ambits of banking sector.

In this context, the paper examines the extent of financial inclusion in India with reference to
role of scheduled commercial banks. The financial inclusion performance is evaluated with
respect to outreach of banking services in rural and semi urban areas.

Financial Inclusion - Concept and Literature

The Rangarajan Committee Report-2008 on Financial Inclusion says that “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.”
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.
• To provide the benefit of vast formal financial market and protect the weaker section
from exploitation of informal credit market, so that they can be brought into the mainstream.
The concept of financial inclusion is generally measured in terms of exclusion from the
financial system. Financial Exclusion is the process by which a certain section of the
population or a certain group of individuals is denied the access to basic financial services.
The term came to prominence in the early 1990’s in Europe where the geographers found that
a certain pockets or regions of a particular country were behind the others in utilizing
financial services. It was also found that these pockets or regions were poorer compared to
regions which utilized more of financial services.

The concept of financial exclusion in literature varies depending on the dimensions such as
‘breadth’, ‘focus’, and ‘degree’ of exclusion. The ‘breadth’ dimension is the broadest of all
definitions linking financial exclusion to social exclusion which defines as the process that
prevent the poor and the disadvantaged social groups from gaining access to financial system
( Leyshon and Thrift,1995). The ‘focus ‘dimension defines financial exclusion as the
potential difficulties faced by some segments of population in accessing mainstream financial

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services such as bank account (Meadow,2004) The’ degree’ dimension defines financial
exclusion as exclusion from particular sources of credit and other services including
insurance , bill payment services and accessible and appropriate deposit account. (Regaly,
1999).

Fig: Anatomy of Various Financial Products or Services and the Institutional Structure

Strategy for Building an Inclusive Financial Sector

Overall strategy for building an inclusive financial sector may 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.

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Financial Inclusion Lifecycle

A three-step approach is required to bring financially underserved individuals into a

financially inclusive society. After improving financial literacy and opening an account of
some form, it is usage of that account, linkage with other financial services and access to all
the financial instruments that are required to complete the financial inclusion lifecycle.
Optimum utilisation of an account should be another target for banking service providers.

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Step 1: Financial Literacy

As defined by the Reserve Bank of India (RBI), financial education is "the process by which
financial consumers/investors improve their understanding of financial products, concepts
and risks and, through information, instruction and/or objective advice, develop the skills and
confidence to become more aware of financial risks and opportunities, to make informed
choices, to know where to go for help, and to take other effective actions to improve their
financial well-being."
Efforts for financial literacy can be driven through microfinance institutions (MFIs), self-help
groups (SHGs), cooperative and rural banks and collaboration between these parties would
accelerate results.

Step 2: Opening a Bank Account

Opening a bank account is the second step towards financial inclusion. It provides access to
financial facilities for the financially underserved through formal sources of banking.
Financial services providers, technology service providers and regulators are the functioning
participants in the system.

Step 3: Delivering Financial services

Currently, the favored delivery channel for microfinance and microcredit is via the business
correspondent (BC) model, whereby an agent (who may or may not be a direct employee of
the financial institution) personally travels within a wide geographical area to enroll
customers, delivers loans, and collects repayments. The ‘doorstep banking’ model has
obvious restrictions of scale as well as security.
Conventional delivery model: Technology can improve conventional delivery channels
such as the BC model by adding new levels of security, speeding up enrolment procedures or
ensuring accuracy. Used in this way, technology offers conventional models the chance to
increase scale, though to a limited degree. A conventional BC model will always be restricted
by the amount of ground the agent can physically cover.
Technology-enabled delivery model: Alternatively, technology can actually become the
direct delivery channel. Self service technology, in particular, has already achieved this in the
broader financial industry, through ATMs, the internet and user-driven mobile phone
banking.

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With policy support, self-service technology can provide a feasible platform for the delivery
of financial services to the financially underserved population. As well as technology
providers, the other participants in this third step are the financial services providers.

Rural India

About 70 percent of the population (770 million people) lives in villages, a fraction lower as
compared to the post independence (in 1947) figure of 75 percent. The vast majority of this
group, 65 percent of the population is employed in agriculture. For financial inclusion policy
makers, this fact emphasizes the importance of financial facilities being made available to the
unorganised primary sector, particularly agriculture and agro-based industries. Small
investments such as seeds, fertilizers, pesticides create demand for microcredit for small and
medium sized farmer households.
Non-farming household’s dependent on unskilled activities, including landless labour,
construction workers and farm product processing workers, are also underserved by formal
sources of finance due to low income. “The Report of the Committee on Financial Inclusion”
(January 2008) stated that 72.7 percent of India’s 89.3 million farmer households are
excluded from formal sources of finance. Some other relevant data will help us to understand
the criticality of the issue. Only 5.2% of India’s 650,000 villages have bank branches even
though 39.7% of the overall branch network of Indian banks, or 31,727, are in rural India.
The first decade of the current century has witnessed leaps and bounds in economic growth as
evidenced the rate of GDP growth around 8.5% to 9% from 2001-2008 (Arunachalam,2008)
But, 30 to 35% of Indian population still lives below the poverty line. Even within these poor
are the poorest who live on less than $0.050 a day. (Thorat, 2007). Overall, the population
covered by each branch has come down from 63,000 in 1969 to 16,000 in 2007 and the total
number of check-in accounts held at commercial banks, regional rural banks, primary
agricultural credit societies, urban cooperative banks and post offices during this period has
risen from 454.6 million to 610.3 million. Still, very few people in the low-income bracket
have access to formal banking channels. Only 34% of people with annual earnings less than
Rs 50,000 in urban India had a bank account in 2007. The comparative figure in rural India is
even lower, 26.8%.

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Policy Developments by the Government
In our country the financial services has being used by a very limited group of people. To
enlarge the area and service sector, certain policy measures have been taken by government.
Policy development in India for financial inclusion can be seen in three stages:

Financial Inclusion: Measure of Access to Banking Services in India

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Population per Bank Branch (Scheduled Commercial Banks)

Major observation from the above charts is that less penetration of banks in rural areas is
resulted in very high population per branch and even though penetration has come down
significantly but population per bank branch is still very high especially in rural areas.

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Growth in Bank Accounts

State wise growth in bank accounts shows that during post reform period, Andhra Pradesh
achieved the highest growth rate of 5.69% in rural areas, followed by Kerala and Gujarat,
constituting top three states in India. States where negative growth in bank accounts is
observed are Chandigarh (-.96%), Delhi (-.94%), Andaman and Nicobar island (-.69%) and
West Bengal (-.01%).

The growth in bank outreach in urban areas in various states during the post reform period is
much better as compared to rural areas. The highest growth is observed in Jammu and
Kashmir (6.61%), followed by Pondicherry (6.07%) and Andhra Pradesh (5.93%). Among all
urban areas, only West Bengal witnessed a negative growth rate in bank accounts of -0.01%.
The extent of financial inclusion in India can be well studied from the analysis of the
following points.

SHG – Bank Linkage Scheme

The SHG - Bank Linkage Programme can be regarded as the most potent initiative since
Independence for delivering financial services to the poor in a sustainable manner. The
programme has been growing rapidly and the number of SHGs financed increased to 29.25
lakhs on 31 March 2007.

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Present Status of Financial Inclusion

 Number of No-Frill Accounts –28.23 million (as on Dec. 31, 2008)

 Number of rural bank branches –31,727 constituting 39.7% of total bank branches (as
of June. 31, 2009)
 Number of ATMs –44,857 (as on May 31, 2009)
 Number of POS –4,70,237 (as on May 31, 2009)
 Number of Cards –167.09 million (as on May 31, 2009)
 Number of Kisan Credit cards –76 million (Source: CMIE publication 2007-08)
 Number of Mobile phones–403 million (as on Apr.30, 2009) out of which 187
million (46%) do not have a bank account (Source: Cellular Operators Association of
India)

Conclusion

Indian economic policy emphasises achieving high growth rates coupled with ensuring that
the poor are able to participate in the market economy. This inclusion agenda has many
implications for the field of finance. It involves creating a business environment through
which the poor across the country have easy, secure and affordable access to critical risk
management products. The complex financial needs and risks faced by the poor require
sophisticated financial solutions and risk management tools. These cannot be scaled down
versions of existing products for the rich.
Microfinance institutions (MFIs) in India have shown how credit products can be restructured
to meet the needs of the poor, so that loans can be made at lower interest rates while still
being profitable.
Access to the formal financial system starts with a bank account, and the ability to make
secure payments through that account. Once the ability to make payments is available
ubiquitously, other financial products such as credit, insurance, pensions and mutual funds
can be delivered using this infrastructure. From the year 1990s onwards, policy makers have
attempted a variety of initiatives in order to achieve financial inclusion.

Commercial banks are leading the charge for financial inclusion today. They are opening no
frills accounts for poor customers. Central, state and local governments increasingly prefer

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government benefits payments to be routed through banks. Banks are increasingly offering
remittance products to their customers and Installing ATMs in rural areas. In a world that is
fast becoming electronic and connected, banks needs to innovate and change with the times.
It must offer customers products that can be used effortlessly and instantaneously through the
use of technology and by playing a dominant role in financial inclusion whereby banks
increase its relevance and improve its profits.
The commercial banks has a critical role in providing more banking services to socially
marginalized sections and regions and the policy makers has to frame and monitor the
measures for the sectoral outreach of banking towards achieving the Financial Inclusion goal.

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BIBLIOGRAPHY

Arunachalam, Ramesh S(2008), Scoping paper on Financial Inclusion :Consideration

and Recommendation for UNDP

Kempson E,C Whyleg (2000) In or Out ? Financial Exclusion: A Literature and

Research Review , Financial Services Authority, London

Leyshon A, N.Thrift (1995), Geographies of Financial Exclusion : Financial

Abandonment in Britain and US, New Service Publication.

Meadow , Ormerod (2004), A report on Financial Exclusion in Australia, Research

Centre, Australia.

Thorat, Usha (2007), Financial Inclusion- The Indian Experience, Financial Inclusion
Conference, White Hall Palace, London, UK.

Websites :

http://indiamicrofinance.com/financial-inclusion-in-india-some-key-statistics.html

http://www.rbi.org.in/scripts/AnnualPublications.aspx?head=Branch%20Banking
%20Statistics

http://www.rbi.org.in/scripts/QuarterlyPublications.aspx?head=Quarterly%20Statistics%20on
%20Deposits%20and%20Credit%20of%20Scheduled%20Commercial%20Banks

http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx/home.aspx

http://www.rbi.org.in/scripts/BS_ViewBulletin.aspx/BS_ViewBulletin.aspx?Id=11700

http://ruralbank.com.au/

http://www.ausaid.gov.au/keyaid/growth_microfinance.cfm

http://www.banknetindia.com/banklinks.htm

http://rbidocs.rbi.org.in/rdocs/Content/PDFs/82245.pdf

http://www.atmbankindia.com/

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