Financial Inclusion_A Banking Perspective

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FINANCIAL INCLUSION

* M s. Kusum a Konen!

** M r. Vil1ay Chagonii

of the process, factors like geographical

The economic disparity is widening and remoteness, working timings, documentation,

economic condition of the people in rural areas staff attitude, financial discrimination, lack of

is worsening. Gini Index is the evidence. Out of internet access, complicated financial products

a myriad of then), financial exclusion is one and many more contribute to the financial

typical reason for the phenomenon. Though our exclusion. India, still a developing nation, is

country is growing at around 9% every year, facing financial exclusion. The Rangarajan

the growth does not seem to be inclusive. Many Committee Report (2008) marks financial

people still are far from basic services like inclusion as a process of ensuring access to

~iavil~g.a savings account and are left only financial services, timely and adequate credit

lInagmmg about having more sophisticated needed by the weaker sections and low income

services like net banking facilit:ies. Therefore, for groups. The financial inclusion index of the

the past several years, -:-------;,_---------- global economies hadand significantly in the Financial exclusion is one significant ranked India in the 50th

last year, RBI has reason for most rural economy that position according to

pursued financial falls into a debt trap. Reasons for the report. The report

inclusion as one' of its financial exclusion include low also suggested that the

core objectives. RBI income, low savings, financial banks in future should

made the priority clear, illiteracy, social exclusions, focus on the customers

by launching a national unemployment, underemployment, at the bottom of the

pilot project on financial poor financial habits, financia I pyramid. Specifically,

inclusion in Puducherry exploitation by inorganic SOU1'ces, the report iden tifies

in 2005. This project d I1 some essential servicesan actc Ofawarenessmade the bank officials ') to be extended to every

open bank accounts at individual which

the doorsteps of the households ~itJ.inot much include (~) :lo-frills banking account for making

ins!stence on the minimum balance or deposits. an? recelvmg payments, (b) savings product

This paper reviews the literature to explore the SUIted to the pattern of cash flows of a poor

current status offinancial inclusiveness and the household, (c) money transfer facili ties, (d)

various initiatives in vogue for the purpose, small loans and overdrafts productive, personal

frOI~na banking standpoint, generally in the and other purposes, and (e) micro-insurance

Indian context with a specific focus on Andhra (life and non-life). Maplecroft (2009) has

Pradesh, and goes on to provide a critique. analyzed 119 countries on their financialF incl~siveness. It categorized India as facing a

inancial exclusion is one significant medium level of risk in terms of its financialreason for most rural economy that falls into a . I .

dme usiveness, while categorizing USA, Canada,

ebt trap. Reasons for financial exclusion "and Austria as being more inclusive.~n~Iude low income, low savings, financial'illiteracy, social exclusions, unemployment, The challenge of financial inclusion

underemploymen t, pOOl' financial habi ts, cannot be trivialized. An RBI publication reveals

financial exploitation by inorganic sources, and that there is no universally accepted definition

lack of awareness and so on. On the other side ? f financial inclusion, and itis measured broadlyin terms of exclusion from financial system.

In trod uction:

~'A5si5tnn t P ro fe sso r, G IT AM University

** R esearc h Sc holar, G IT AM U niversity

Business Visioll October - December, 2010 87



> ft

Financial exdusion thus needs an exhaustive

definition. While early discussion on financial

exclusion was preceded by social exclusion and

focused predominantly on geographical access

to services, a more appropriate contemporarydefinition of financial exclusion includes all

types of people making little or no use of

financial services.

Review:

Financial inclusion is a critical

determinant of economic health of a nation. On

even a higher pedestal, it is an essential

precondition for the eradication of poverty and

reduction of socio-economic inequalities. With

reference to an RBIpublication, the definitional

emphasis of financial inclusion varies acrosscountries and geographies, depending on the

level of social; economic and financial

development; the structure of stake holding in

the financial sector; socio-economic

characteristics of the financially excluded

segments; and also the extent of the recognition

of the problem by authorities or governments.

Prominent government initiatives like

establishing the S B r in 1955, nationalization of

commercial banks in1969and 1980,establishing

RRBs in 1975, establishing urban cooperative

banks, primary agricultural credit societies,

introducing Self-Help Groups (SHGs) - Bank

Linkage Program in 1992, and the Kisan Credit

Scheme in 2001; all of them implicitly and

inherently have one common goal - Financial

Inclusion. Some of the other more explicit

measures taken at a macro-economic policy

level, to make financial inclusion as a part of

the fundamental economic structure, of the

nation included (a) creation ofno-frills accounts

by relaxing the KYCstandards, (b) sanctioning

the issue of general credit cards with a credit

limit of R s. 25000, (c) permitting the banks to

take assistance from NGOs, SHGs, Micro-

financing Institutions, (d) bringing in the rural

employment g-uarantee scheme, (e) launching

a website in thirteen languages for credit

counseling and financial education, and (f)

setting up of innovative insurance schemes,

public grievance redressal cell and customer

service centers. Many other initiatives which

aim at creating a structure for financial

inclusion, especially at the local government

level, have been quantitatively impressive but

qualitatively weak (launder. 2010). Also,

beginning in the late 1960s, Indian has beenhome to one of the largest state interventions in

rural credit. This is an indication of the policy

approach and its preference for credit driven

exercises (could be by definition), which may

or may not be in line with the fundamental

tenets of financial inclusion.

A sneak peak-into the RBI publication,

earlier referred, gives us various view pain tson

the definitional aspects of financial inclusion

and the indicators for the corresponding

definition [Table 1].Backin 2000, the indicators

of financial inclusion included the number of

deposits, loans, payment services, money

transfer andr insurance. And the World Bank

standpoint suggests that financial inclusion

would deal with providing access to financial

services such as credit, payments and insurance.

There is not much change in the indicators in a

decade time. However, the debate has been in

terms of what kind of conceptual framework

would really bring in the excluded individuals

to participate in the nation's financial systems.

Such conceptual framework should encompass

various challenges presented at different levels

in the system. A macro economic level, it

becomes an imperati ve to bring in policy driven

initiatives that provide an attractive business

option for the corporate banking entities to

venture beyond these barriers. Also from the

other side, it again becomes the burden of the s:

government to make the individuals think

beyond third party money lenders, provide

them with financial literacy and identity, and

opening gateways for them to enter the larger

financial system. It is an exercise larger than

what imaginations could afford, given the sheer

size of the Indian nation and the complex

structure around which it is built.

The eleventh term plan of the nation

embedded financial inclusion as a part of its

objectives, and initiatives for the purpose have

been in vogue for long. Newer initiatives are

coming up, yet leaving the status of financial r

Business ViSl'OIl October - December, 2010 88

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inclusion uncertain and undecided. This problem would continue to exist so long as there is no

,precise definition, a measuring mechanism, and a long term focused leadership which can address

financial inclusion as its top priority.

Table 1:Definitional aspects of Financial Inclusion/Exclusion

I n s t i t u t i o n J A l l t h o r D e r m it io n I n d i c a t o r s

2 3

'A D B ( 2 0 .D O ) P ro v i s i o n o f a b r o a d r a n g e o f f i n a n c i a l s e r v ic e s s u c h a s

d e po s f t s , lo a n s ~ y m e n t s e rv ic e s , m o n e y t r a n s f e rs a n d

. . i n s u r a n c e t o pool' a n d 1 0 V l . j n c o m e h o u se ho ld s a n d t h e i r

m i c r o - e n t e r p r i s e s . .

D e p os i t s , lo an s , p ay m e n t s e r v i c e s , m o n ey

t r a n s f e r a n d i n s u r a n c e .

S t e p h e n P . S i n c l a r ( 2 0 0 1 ) F m a n c ia J e x c lu s io n m e a n s t h e i n a b il i l y 1 0 a c c e s s n e c e s s a r y

f i n a n c i a l s e rv ic e s I n a n ~ p p ro p r i a le f O (m . E x c l u s io n c a n

c om e B lx lu t a s a r e su lt ~ p ro b l e m s w it h a c c es s , c on d i t i o n s ,. p r ic e s , m a rk e t i n g o r s e l f - e x c lu s io n i n r e sp o n s e t o n e g a t i v e

e x p e ri e n c e s o r p e rc e p ti o n s.

B a s t e b a n k in g s e r v i c e s f o r m o n e y

t r an s m is s i o n ,. ~ r e d i~ . in s u r an c e , d e b t a n d d e b l

a s s is ta n c e , l o n g -t e rm s a v in g s a n d f in a n c ia l

I ~ e r a c y .

~.,

C h a n t L i n k a n d A s s o c i a te s , A u s t r a f l 8 ( 2 0 0 4 ) F in a n c i a l e x ~ u s i o n i s l a c k o f a c c e s s b y c e rt a in c o n l t lm e rs D e p o s t t a c c o u n ts , d l r e c l l n v e s t m e n t s , h o m e

. 1 0 a p p r o p r i a t e lo w c os ~ [ a ir a n d s a .f a f i n a n c ia l p r od u c l~ ~ n d . l o a n s , c re d n c a r d s , p e t s on a l lo a n s , b u i l o il l g

'~ rv i c e s f r o m m a in s t r e am p ro v l d e i 's v F Il8 n c ia ! e x c lu s l o o i n s u ra n c e a n d h om e io o o ra n c e .

~ c o m e s a c o n c e r n i n t h e c o m m un i t y Y t ' l l e n i t a p p -l i e s t o

. . l o w e r I n t O m e c o n s u m e r s a n d / o r ! h o s e in f i n a n c ia l h a r d s h ip .

T r e a ~ u r y C Q ! ll I \ l i t I e 8 , H o o se o f C o m m o n s ,

U K ( 2 0 0 4 ) .

A b i l i t f . o r i n d iv id u a ls t o a c c es s a p p ro p r i e te f i n a n c i a l P ro d U c t s M O l d a b le c re d i t a n d s o v i n g s f o r a ll a n d a e c e s s

a n a s e r v i c e s : t o f in a n c ia l a d v i c e .

S c o l l i s h . G o v e r n m e n t .( 2 0 0 5 )

A c ce s s f o r i n d M c lu a ls t o a p » f o p ri a le t i n a ilc ia l p ro d u c ts a n d A o ce s s .1 0 p ro d u c t s a ~ d s e r v ic e s , ! l n d fo r

~C$. - y m , i I ' l c k K l e s h a v i n g th e c a p a c it Y . s k i l l s , k n ow l e d g e c a p a c it y , s k i : ~ s , k o o N !e d g e a n d u n d e r s t a n d i n g .

a n d u n d e r s t a n d i n g to m a k e th e b e s t u s e o f t h o s e p to d ~ c t s".

a n d s e r v i c e s : f i n a n c i a l e xc lu s i o n b y c o n t r a s ~ is . t h e

c o n v e r s e o r - ,h i $ .

U n R e d N a ti o n s ( 2 j ) 0 6 b ) A f i n a n o i a l s e c t o r t h a t p ro v id e s ' a c c e s s ' t o c r e d H f o r a ll A c c e s s t o c r e d it , i n s u r a n c e , s a v in g s p a y m e n t

' b a n k a b l e ' p e o P l e a n d f i n n sl' o i n s U f 8 l1 ce f o r a n i n s u r a b l e s e r v i c e s .

. . . . p e o p le a n d f i r m s a n d . t o s a v i n g s a n d p a y r r ie n t s s e f \ ' i c e s .

' , - f o r e ve ry o n e . I n c lu s i v e f i n a n ce d o e s n o t r e q u i r e t h a t

. . e v ~ w h o is e li g ib le u s e .e a c h a fln e s e r v ic e s , b u t t h e Y

s h o u l d b e a b le t o c h o o s e 1 0 u s e ! ! le m if d e s i r e d .

R e p q r t , o f th e C o m m it t e e o n F in a n c i a l

I n c lu s i o n i n l ! } d i a ( C h a m a n : C . R a n g a r a j a n )

(2008)

T h e p ro ce ss o f e n s u 'r t n g a c c e ss t o f in a n c i a l s e rv i c e s a n d

t im e ly a n d a d e q u a t e c r e d i l w h e re n e e d e d ~yv u l n e r a b l e

g ro u p s s U c h a s w e ak e r s e c ti o n s a r i d l o w i n co m e g r o u ps a t

a n a ff o rd a l i e c os t

A c c e s s t o f in a n c i a l' s e r v ic e s a n d t i m e l y a n d

a d e q u a fe · c r ed it .

B r q a < i a c c e s s t o f in a n c i a l s e rv ic .e s im p f ie s a n a b $ e n c e o f A cc e s s to f m a n d a l s e r v ic es & J c h a s d ~ t t ,

. p ri c e a n d n O n - p ri c e b a r n e r s 'n t h e ~ o f f in a n c i a l s e r v ic es ; c re d i t , p a y m en ts , i n sU ra n c e .

ij is d if f lc u H t o d e fn e · a n d m e a s u r e b e c a u s e a c c e s s h a s

m a n y C I lm e n s io n s .:

': .

Source: RBI Publication on Financial Inclusion

Business Vision October - December, 2010 89





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evidence to substantiate. Simultaneously, the there can be a debate on various issues which

factors set by Beck et al,.like penetration and could have impacted these factors, numbers do

use of banking services within the nation need indicate progress. In that sense.India as anation

to be looked at carefully. In case of Andhra and Andhra Pradesh in specific also have seen.

Pradesh, the demographic penetration remains only partial development in terms of financial

the same, while the geographic penetration is inclusivity and that suggests that there is still a

reduced. Pel"capita deposits, per capita credits, long way to go before the economic disparities

deposit-income ratio, and credit-income ration are plugged, and before the economy can

are also reduced inthe considered period. While experience a collective growth.

Appendix 1: Attribute-wise breakdown of the Inclusivity index

-1

,,_

India

State

-. Individual contrtbutien:

Delhi 0 .127. 126

0 . 145

0 . 148

0 . 128

0.1-4

0 . 139

0 . 117

0 . 1220 . 119

0 . 126

0.138

0 . 1 14

0 . 144

0 . 116

0 . 117

0.134

0 . 109 ,

0.116

0 . 116

0 . 114

0.105

0 . 098

0 . 083 '

0.091

0 . 124

1586_.49

14708 .52

7970.989

11775.53

.6631.403

7874.346

10158 . 82

7618.4325990.748

11113.84

6844.516

8787.784

50_5 .9

5147.006

3567.506

4388.313

7 l 06~_28

8389 .359

6366.285

6759.822

. 5 57 4.2 0 1

8312 . 859

.7024.257

540 4.675 .

7371.746

0.138 0 .149 0 .1~7 0.14

Goa 0 . 104.1 6 0 .0 8 1 0 .15 .7 0 .L7

Kerala 0 . 129 0 .0 8 2 0 .12 1 0 .0 97 0 . 096

Punjab 0.132 0 .0 71 0 .132 0 . 104 0.097

0 . 103amataka'I

•III

0 .12 9 0 .0 61 0 .12 1 0 .0 97

T am il N adu 0.107. 122 0 .0 67 0 .1 18 0 . 095

Maharashtra 0 .1 19 0 .0 58 0 .116 0 . 108 0 . 109

O . lH imach al P rad eshW e st B eng al

0 .1420.114

0 .0 53 0 .12 10 . 0730 . 111

0.0990 . 107

0 . 0 89

0 . 092aryana 0 . 121 0 .0 64 0 .115 0 . 085 ·

Andh ra P rad esh 0.096.118 0 .0 56 0 .10 6 0 .0 8 8

Gujarat 0 .097.123 0 .0 57 0 .11 0.096

Tripura 0 .1 15 0 .0 56 0 .0 98 0 .0 8 3 0 .0 8 5

0 .OS7ttarPradesll 0 .113 0 .0 65 0 .10 4 . 0.093

Bihar 0 . 0 8 4.1 11 0 .0 64 0 .0 93 0 . 095

Orissa 0 . 0 8 8.116 0 .0 53 0 .0 9 0 . 0 83

Meghalaya 0.125 0 .0 45 0 .10 5 0.094 0.075

Sikk im 0 . 0 81.118 0 . 039 0 . 096 0.096

.r:M a d h y a P r a d e s h

- ( Business Vision October - December, 2010

0.116 0.049 0 .0 98 0 .0 8 1 0 . 0 85

Raiasthan 0 . 0 83. 118 , 0 . 048 0 .0 97 0 .0 8 1

Assam,__ 0.11 , 0 .0 55 0 .0 94 0.079: 0 . 0 85

Nagaland

0 . 0 85l n l n a c h a l P r a d e S h

0 . 112

0 . 121

0 :0 39 0 .0 97 0 . 085

0 . 0 8 8

0 . 081

0.096

'"I Manipur 0 ..1 0 4 .

0.11 ,8 '

0 .0 2 4 0 .104

0 . 08 0.066

0 . 109

'0 .075.038

0 . 058 ' 0 . 109

·91



Appendix 2:Attribute-wise breakdown of the Inclusivity index

State

Indtvidual contribution:

.2

-!l

I ....

•-: Q)

V Eo 000

I:.J c:0.......

Goa 0.114

Delhi 30168.95 0 .135 0.167. 0.147 0 .148 0.167 0.167

29523.58 0.167 . 0 .0 8 8 0 .167 0 .142 0.146

K erala 14749.2 5 0 .133 0.088 0.13 0 .15 0 .119 0.116 .

Maharashtra 18007- .070 0.\15 0.061 0 .117 0 .146 0 .139 0 :151

T am il N adu

0.127

16260.760 0 .122 {).0 70 0 .1 2 1 0.167 0 .111 . 0.128

Kamataka 13449.55 0.127 0 .0 64 0 .1 2 2 0 .147 0 .1 2 4

Punjab 17438 .2 0 0 0 .133 0 .0 77 0 .130 0 .1 2 6 0 .118 0.117

- - U t ta ra nc ha l0 .103

11710.860 0 .130 0 :0 57 0 .1 2 0 0 .1 2 3 0 .130 0 .1 0 3H im ac hal P ra desh 150 92 .4 8 0 .139 0.055 0.124 0 .1 2 3 0 .115

0 .103

A n dh ra P ra de sh 13908,34 0 .117 0 .0 59 ,5 . 0.116 0 .1,45 ·0 .105 0..113

Sikkim 0.110

Haryaua 2 0 593 .7 0 .1 2 2 0 .0 7 1 ·....0 .1 1 8 0.119 0 .106

14589.510 0.130 0 .0470 .105 0.122 0 .117

W est Bengal 11178 .360 0 .110 0 .0 76 ' 0 .110 0 .111 ·0 .112 0.111

Gujarat 16663.4 0 .119 0.059 0.119 0 .116 0.108 - 0 .1 07

0.101

Orissa 8203.013 0 .113 0 .0 55 0 .1 0 1 0.125· 0 .1 0 6 0 .1 0 6

U ttar P radesh - Ne1 .... 6533.344 0 .1 0 6 " 0.068 0.107 0.110 0 .112

Tripura

0 .106ajasthan'

10454 .950 .

·9686.328

0 :109

0 .112

. 0 .0 57 ,0.103

0.050 0.102

0 .126

0 .114

0 .101

0.099

_0 .087

Ma dh ya P radesh - N ew 0.11 0 .051 0.101 0.109 0 .1 0 5 0 .1 0 3

- - lh ark b an d 0 .0 8 9 _

Megb.alaya" 11663 .830 0 .119 0.047 0 .098 · 0.112 0.r07 0 .092

,10066 ,74 0.109 0 .0 )8 0 . . 1 . 0 4 0 .109 0.106

Bihar- N ew 432 4 .712 0 .10 1 '0.07 0 :0 92 0 .1 0 4 0 .11 0.092

Assam 7358.659 0 .10 2 0 .0 56 0.098 0 .105 0 .103 0.093

- - Chh at tisg ar h

'0 .085 .

948 9.50 0 . 0 .10 5 . -0.047 0.094 0.105 0.102 0 .096

Arunachal P radesh 11369.62 -0.112 0 .0 2 4 0 .1 0 .10 5 0.106

Nagaland 12 30 0 .160 0 .0 95 0 .0 40 '0.079 0 .1 0 0 0 .0 93 0 .0 77

M anipur 10 50 3 .670 0 .0 92 0 .0 37 0 .077 0 .098 0.081 0.081

India 14430 .910 0.115

Conclusions and Suggestions:

While there is evidence which can bepresented for financial inclusion happening,

there is more evidence that can convey

meanings otherwise. We suggest a review of

specific initiatives taken across the globe, their

progress, their criticalsuccess factors, and the

feasibility of amore aggressive economic policy

to perhaps bri.ng in change more quickly a n deffectively, For sure, developing nations are in

the race to improve their growth and grow

consistently.

0.060 0.112 0 .1 2 9 0 .113 0 .117

References:

1. Ahluwalia, M. S. (2000). Economicperformance states in post-reforms period, Economicand Political Weekly 35(19),1637-1648.

2. Anamika, S. (2009). Challenges for building

Financially InclusiveIndia, Accepted Paper Series,SS~. I

3: .Beck, T, A. Dernirguc Kunt, and" R' Levine.

(2004). Finance, inequality and poverty, World'Bank

Policy Research Working Paper 3338.4. [atinder, H. -(2010).Financial Inclusion in India:

Integration o f Technology, Policy and l.1al'kets at the

bottom of the pyramid, Working Paper Series, SSRN.

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Financial Inclusion_A Banking Perspective

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