Financial Inclusion

Definition of Financial Inclusion:

• According to committee on Financial inclusion
headed by Dr. C. Rangarajan defined financial
inclusion 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 inclusions do not stand for delivery
of financial services for all at all cost. But it
means that the delivery of financial services
and products at affordable costs of excluded
sections of population and low income
groups. It plays a crucial role to remove away
the poverty from the country.
• Financial inclusion is to provide equal
opportunities to vast sections of population to
access mainstream financial services for better
life, living and better income.
• It provides path for inclusive growth.
• Financial inclusion can be described as the
provision of affordable financial services, viz
saving, credit, insurance services, access to
payments and remittance facilities by the formal
financial systems to those who are excluded.
• So, financial inclusion refers to access to vast
range of financial product and services at
affordable cost. It not only includes banking
products but also other financial services such
as loan, equity and insurance products.
• The process of financial inclusion consists of ensuring
bank accounts to each household and offering their
inclusion in the banking system.
• Access to financial services promotes social inclusion,
and builds self-confidence and empowerment.
• In an address Dr. K. C. Chakrabarty, Deputy Governor,
Reserve Bank of India at the National Finance Conclave
2010, has mentioned that financial inclusion is no
longer a policy choice but it is a policy compulsion
today. And banking is a key driver for inclusive growth.
 Financial inclusion in India:

• The Reserve Bank of India setup a commission

(Khan Commission) in 2004 to look into Financial
Inclusion and the recommendations of the
commission were incorporated into the Mid-term
review of the policy (2005-06). In the report of
RBI it is exhorted that the no. of banks with the
view of achieving the financial inclusion to make
available a basic "no-frills" banking account.
• In India, Financial Inclusion first featured in 2005, when
it was introduced, that, too, from a pilot project in UT
of Pondicherry, by Dr. K. C. Chakraborthy, the chairman
of Indian Bank. Mangalam Village became the first
village in India where all households were provided
banking facilities.
• Norms were relaxed for people intending to open
accounts with annual deposits of less than Rs. 50,000.
General credit cards (GCCs) were issued to the poor
and the disadvantaged with a view to help them access
easy credit.
• In January 2006, the Reserve Bank permitted
commercial banks to make use of the services
of non-governmental organizations
(NGOs/SHGs), micro-finance institutions, and
other civil society organizations as
intermediaries for providing financial and
banking services.
• The basic intermediaries were used as
business facilitators by the commercial banks.
The banks asked the various commercial
banks to start financial inclusion campaign as
a 100% in different region of the country. As a
result of the campaign states or U.T.s like
Pondicherry, Himachal Pradesh and Kerala
have announced 100% financial inclusion in all
their districts.
• Reserve Bank of India’s vision for 2020 is to open
nearly 600 million new customers' accounts and
service them through a variety of channels by
leveraging on IT. However, the lack of bank branches in
rural areas, illiteracy rate and low saving of the income
continue to be a road block to financial in
• clusion in many states of the country. Instead from this
there are various types of current models which are
followed by the country at that particular time. The
financial structure is inadequate legal.
 Importance of Financial Inclusion:
• Easy access to financial services will allow the
population leaving in lower strata, to save money
safely and help in preventing concentration of
economic power with a few individuals, thus
mitigating the risks that the poor could face as a
result of economic shocks.
• Therefore, providing access to financial services
is becoming an area of concern for the
policymakers as it has far reaching economic and
social implications.
• The number of commercial Banks in a country
provides an opportunity for the people of that
country to participate in the formal financial
system and to utilize financial services of
formal financial system. Larger the number of
commercial banks, larger the scope for
bringing people in to formal financial system
provided if banks provide suitable financial
products and services.
 The importance of Financial Inclusion
can be given from the following:
• It is a necessary condition for sustaining equitable growth.
• It should provide access to basic financial services like banking etc.
• The usage of financial services should address needs of the poor.
• It provides an avenue for bringing the savings of the poor into the formal
financial intermediation system and channels them into investment.
• To explore the need and significance of financial inclusion for economic
and social development of society.
• To analyse the current status of financial inclusion in Indian economy.
• To study the access of rural people to bank branches and the number of
ATM opened in those areas.
• To study the progress of State Cooperative Banks in financial inclusion
plan.
•
 Objectives of financial inclusion:

1. Economic Objectives: For the equitable growth in all the sections of

the society leading to a reduction of disparities in terms of income
and savings the financial inclusion can serve as a boom for the
underdeveloped and developing nations.
•
• Mobilisation of Savings: If the weaker sections are provided with
the facility of banking services the savings can be mobilised which is
normally piled up at their households can be effectively utilised for
the capital formation and growth of the economy.
•
• Larger Market for the financial system: To serve the requirements
and need of the large section of society there is a surgent need for
the larger market for the financial system which opens up the
avenue for the new players in the financial sector and can lead to
growth of banking sector also.
• 2. Social Objectives: Poverty Eradication is considered
to be the main sole objective of the financial inclusion
scheme since they bridge up the gap between the
weaker section of society and the sources of livelihood
and the means of income which can be generated for
them if they get loans and advances.
• Sustainable Livelihood: Once the weaker section of
society got some money in loan form they can start up
their own business or they can support their education
through which they can sustain their livelihood. Thus
financial inclusion is turn out to be boom for the low
income households.
3. Political Objectives: There are certain other
political objectives which can be achieved
with the wider inclusion of lower strata in the
society and an effective direction can be given
to the government programmes.
Dimensions of Financial Inclusion:
• The level of financial inclusion in India can be measured based on
three tangible and critical dimensions. These dimensions can be
broadly discussed under the following heads:

• Branch Penetration: Penetration of a bank branch is measured as

number of bank branches per one lakh population. This refers to
the penetration of commercial bank branches and ATMs for the
provision of maximum formal financial services to the rural
population.

• Credit Penetration: Credit Penetration takes the average of the

three measures: number of loan accounts per one lakh population,
number of small borrower loan accounts per one lakh population
and number of agriculture advances per one lakh population.
• Deposit Penetration: Deposit penetration can
be measured as the number of saving deposit
accounts per one lakh population. With the
help of this measure, the extent of the usage
of formal credit system can be analysed.
 Approaches of financial inclusion:

1. Product Based Approach: Reserve bank of

India has been proactive, liberal and
supportive while making policies so as to
enable financial institutions to come up with
innovative products for enabling a common
man to get the benefit of the financial
inclusion plan. Some products developed for
fulfilment of this approach have been
mentioned in this paper.
• No- Frills Account (NFAs):- This concept was introduced
by RBI in November 2005 to provide access to basic
baking services by financially excluded peoples. Under
this approach banks open accounts with zero balance
or very minimum balance requirement for the under-
privileged. In 2012, the banks under RBI guidelines
came-up with a better version of the no-frill accounts
where they would open Basic Savings Bank Deposit
Accounts (BSBDAs) for all individuals with the facility
of debit card, cheque book, internet banking, overdraft
limits at minimal charges. However, the number of
transactions could be restricted so as to prevent
misuse of such accounts.
• Kisan Credit cards (KCCs):- Under this scheme
banks issue smart cards to the farmers for
providing timely and adequate credit support
from single window banking system for their
farming needs. During 2012-13 (up to
December 2012), public and private sector
banks issued 1.2 million smart cards as KCCs.
•
• General Purpose Credit Cards (GCC) :- In 2005 Reserve bank of
India, issue guidelines to banks that to provide General Purpose
Credit Card (GCC) which facilitate credit up to Rs.25000/- without
any collateral requirement for rural and semi urban people based
on assessment of household cash flows. Now as per the revised
guidelines in Dec.‟2013 under this approach bank also fulfill Non-
farm entrepreneurial credit requirement of individuals (e.g. Artisan
Credit card, Laghu Udyami Card, Swarojgar Credit Card, Weaver’s
Card etc) There will be no ceiling on the loan amount as long as the
loan is for the purpose of non-farm entrepreneurial activity and is
otherwise eligible for classifications priority sector. Security norms
will be applicable as per Reserve Bank guidelines on collateral free
lending for micro and small units issued from time to time.
• Saving account with Overdraft facility: - Banks
have been advised to provide overdraft (OD)
facility in saving account and also Small
Overdrafts in No-frills accounts. The setting up
of the limit for the same would be done by
banks considering the transaction in the
account. This would help the customer to get
easy access to the credit at lower rates.
• 2. Bank Led approach:
• i. Self Help Group - Bank Led Initiative (SLBP):- The SLBP or Self
Help Group – Bank Linkage Program has been the major
institutional based innovation in India for enabling access and
covering the gap of reaching financially excluded population of the
country in the last two decades. In this model, the banks involve
themselves with a group of local people with the idea of enabling
them to pool up their savings. The same is deposited with the bank
against which the bank also provides a certain amount of credit
facility. The group takes a decision to whether to lend to any
member of the group. The bank provides the framework,
accounting services and support to the group to manage their
deposits and lending. Thus the model has an approach of savings
first, lending later. The banks do not have a risk in such lending as
the borrower‟s reputation and peer pressure in the group would
reduce the risk of bad loans considerably
• Technology Based approach:
• Branchless Banking: - Some of the leading banks have
come up with this concept where there would be an
online system with chat facility assisting the person to
make use of various electronic machines for depositing
and withdrawing cash and cheques. However this
initiative is in a very initial stage and has a limitation in
terms of initial Cost for banks and literacy / knowledge
for the rural population and hence this concept is
currently limited to urban and semi-urban areas.
• Mobile Banking :- One of the most remarkable developments in terms of
innovation in order to harness the full power of technology, the banks
have tied up with mobile operators to provide financial services like bill
and utility payment, fund transfer, ticket booking, shopping etc. Some
examples of this model are m-Pesa by Vodafone and Airtel Money.
•
• Aadhaar Enabled payment services: - In this system, any Indian citizen
having an Aadhaar number updates his account with the same. All
accounts having aadhaar number updated are to be reported to RBI,
which in turn reports it to various government departments. While making
payments to people for working under initiatives like MGNREGA or various
subsidy schemes, the departments use this information for directly
crediting the money to the beneficiarys account. This not only reduces the
delay in the benefits being received by the end user, but also reduces the
chances of corruption in the distribution of the benefits under schemes.
• Kiosk / ATM based banking: - In some states,
the state government has taken initiatives for
providing kiosk based model for access to
financial services. Also banks have used the
technology to enable their ATMs to virtually
act like a 24x7 branches.
• RBI Branch authorization policies: - General
permission has been given or granted by RBI to
the domestic Scheduled commercial banks and
others regional rural banks to open branches and
administrative office throughout the country in
order to extend and spread the banking network
in the various unbiased area. RBI has also advised
the banks that at the time of preparing Annual
Branch Expansion Plan the banks should allocate
25% of the total no. branches during the year.
•
• Expansion of BCA network: - Banks have also been
suggested and advised by DFS to expend the various
banking services throughout the geographical region of
the entire country. It is based on the concept of sub
service area which consists of 1000-1500 households.
In case of larger and biggest Gram Panchayats more
than one BCA could be appointed. In case of smaller
Gram Panchayats more than one contiguous Gram
Panchayat, could be appointed in the geographical
area, could be assigned to each BCA.
• Swabhimaan Scheme: Under Swabhimaan scheme, the
Banks were advised to provide appropriate banking
facilities to habitations if the population is more than
2000 (as per 2001 census) by March 2012. The banks
identified approximately 74000 habitations throughout
the country having a population more than 2000 for
providing banking facilities. There are 74351 villages the
population of which is more than 2000 have been covered
with banking facilities either by branches; Business
Correspondents, mobile banking etc. by March 31, 2012.
•
•
• Direct Benefit Transfer (DBT) and Direct Benefit Transfer for LPG
(DBTL): The objective of DBT Scheme is to ensure that money
reaches to beneficiary directly under development plan scheme
without any delay. Banks play a key, significant and important role
in implementation of DBT/DBTL and this involves four important
steps, which are given as below:
• Opening of accounts of all beneficiaries;
• Seeding of bank accounts with Aadhaar numbers and
uploading on the NPCI mapper;
• Undertaking funds transfer using the National Automated Clearing
House Aadhaar Payment Bridge System (NACH-APBS).
• Strengthening of banking infrastructure to enable beneficiary to
withdraw money.
• (i) Direct Benefit Transfer (DBT): The scheme
was launched in the country from January,
2013. 25 schemes are also started along with
this scheme. In starting this scheme covers 43
district but this scheme is also expanded in 78
districts. Additional three schemes are also
introduce in 1st July 2013. Presently 35 direct
benefit transfer schemes have been expanded
and spread across the entire country.
• (ii) Direct Benefit Transfer for LPG (DBTL) : The Direct Benefit
Transfer for LPG (DBTL) scheme was introduce and launched in 291
districts in the country from 1st June 2013 in six important phases.
The primary objectives of this scheme is to curbing leakages in the
distribution system, the speed at which it was rolled out and
introduce and inclusion of low Aadhaar districts gave rise to
consumer grievances in a significant way. This scheme is constituted
a Committee on 7th March, 2014 under the chairmanship of Dr. S.G.
Dhande, Former Director, IIT, and Kanpur to review the scheme and
submit its report to the Government of India after consultation with
the stakeholders. Union Cabinet in its meeting held on 18.10.2014
decided to re-launch of Modified Direct Benefit Transfer for LPG
Consumers (DBTL) PAHAL Scheme from 15.11.2014 in 54 districts
and in the entire country from 1.1.2015.
• RuPay Card: RuPay, a new card payment scheme has been imagined
by NPCI to offer a domestic, open-loop, multilateral card payment
system which will allow all Indian banks and financial Institutions in India
to make some participation in the electronic payments. The card has
been dedicated by the President of India to the nation on May 08, 2014.
• RuPay card system helps in improving the capabilities of banking industry
in India to build a card payment network / system in a better way at much
lower and affordable costs to the Indian banks so that dependency on
international card scheme is reduced and minimized. This is in line with
many of the large emerging nations like China which have their own
domestic card payment system. Banks has directed by the govt. of India to
issue Debit cards to all KCC and DBT beneficiaries and that every new
account holder should be issued a debit card. RuPay will help in achieving
this objective by providing the low cost option and it significantly help in
fulfilling and achieving the objective and target of financial inclusion. The
RuPay Card works on ATM, Point of Sale terminals, & online purchases
etc.
• Pradhan Mantri Jan-Dhan Yojana (PMJDY): Pradhan Mantri
Jan-Dhan Yojana (PMJDY) was formally introduced on 28th
August, 2014. In order to universal access to banking
facilities with at least one basic banking account for
every household, financial literacy, access to credit,
insurance and pension is provided to old age person
according to this scheme. The beneficiaries would get a
RuPay Debit Card having inbuilt accident insurance
cover of Rs.1.00 lakh. In addition there is a life
insurance cover of Rs.30000/- to those people who
opened their bank accounts for the first time between
15.08.2014 to 26.01.2015 and meet other eligibility
conditions of the Yojana.
• Thanks