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7/27/2019 Finveda Mudra Financial Inclusion
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Financial Inclusion
Rohan Harsh ([email protected]/ [email protected])
(Goa Institute of Management)
Contact: 7507775139
“What do you call an Indian with a small piece of land, a few pieces of jewellery and a job
that only pays about $80 per month?
While many Westerners would say "poor," Emory University scholar Jagdish Sheth says
"opportunity." According to Dr. Sheth, the problem is not the technology; it's the banks,
which unlike the retail and life insurance industries, have failed to change the way they reach
out to India's rural consumers. An economic "caste system" blinds many to the sleeping giant
that is India's rural population, which could hold more than $2 trillion worth of gold” [7]
Picture: A rural bank
Introduction
The committee on financial inclusion under chairmanship of Dr. C. Rangarajan has defined
financial inclusion “as the process of ensuring access to financial services and timely and
adequate credit as needed by vulnerable groups such as weaker sections and low income
groups at an affordable cost” [2]. The key objectives of financial inclusion are (a) including
the weaker and less privileged sections of society into formal banking domain, (b) limiting
the role of unorganized money lending practices, (c) helping a large section of the society
make formal financial decisions. Achieving equitable growth is one of the major purposes of
financial inclusion. Several countries across the globe now look at financial inclusion as the
means for a more comprehensive growth, wherein, each citizen of the country is able to use
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his/her earnings as a financial resource that they can put to work to improve their future
financial status and simultaneously contribute to the nation‟s progress.
The RBI has operated on product, process, institution and policy level in its endeavour for a
bank – led financial inclusion solution for people, particularly in rural areas [1].
(a) Product-Basic Savings Bank Deposit Accounts, („ No frills account‟ the name now
dropped by RBI for zero savings account on the basis of stigma attached with it),
general credit card, and overdrafts associated with no frills account.
(b) Process-Simplified account opening, electronic credit of wages such as that of
MNREGA.
(c) Institution-Business correspondents, networking of business correspondents
companies and self help groups.
(d) Policy-Relaxing KYC norms for no frill accounts, relaxed branching policy in rural
areas, enhancing the role of regional rural banks.
Establishment of regional rural banks, service area approach, self help group bank linkage
programme are the various path breaking initiatives over the years to increase access to
banking for the poorer sections of the society [2].
Case of Fortune at The Bottom of The Pyramid
By improving commercial Infrastructure at the bottom of the pyramid like improving access
through (a) distribution systems (BC/BF/ATM's), (b) Communications links (Mobile
banking), one can increase buying power of the masses (70% of population lives in rural
India), by providing them access to credit through these medium and opening new avenues
for income generation which will lead to shaping aspirations for purchase of goods and
services.
Financial literacy is about changing consumer behaviour, and this is the right time to sow the
seeds of change. Consumer education is most essential for sustainable development in this
regard. Banking in rural areas can only be promoted if it is tailored for local solutions which
can be obtained by targeted product development and providing bottom-up innovation.
Though over thirty three thousand villages have appeared on the banking map of the country
as a result of the thrust on rural banking, more than five lakh villages are yet to be covered by
banks. Gramin banks are yet to take up the installation of ATMs in rural areas and
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particularly those installed in off site locations [3]. However, the rate of increase in the
penetration of banking services in the rural and semi-urban areas has been much lower than
that in the urban areas. Also only about 57 percent of the population across the country has
bank account (savings). Further, 13 percent of the population has debit cards and 2 percent
has credit cards. India has a significantly low level of financial penetration compared with
OECD countries [4]. The main under banked states in India are Bihar, Chhattisgarh,
Jharkhand, Orissa, Rajasthan, and Uttar Pradesh. [5].
Table 1: Key Statistics on Financial Inclusion in India: A Survey
(Per cent)
Share with anaccount at a formal
financial institution
Adults saving inthe past year
Adultsoriginating a
new loan inthe past year
Adults
withacreditcard
Adultswith an
outstandingmortgage
Adults paying
personally for healthinsurance
Adults
usingmobilemoney inthe
pastyear
Alladults
Poor estincomequintile
Women
Using aformalaccount
Using acommunity-basedmethod
From aformalfinancialinstitution
Fromfamily or friends
1 2 3 4 5 6 7 8 9 10 11 12
India 35 21 26 12 3 8 20 2 2 7 4
Wor ld 50 38 47 22 5 9 23 15 7 17 7
Source: Asli Demirguc - Kunt and Klapper , L. (2012): „Measuring Financial Inclusion‟, Policy
Research Working Paper, 6025, World Bank, April. [1]
The main issue in the case of financial inclusion is that many of the no frills accounts are
dormant with minimal transactions and low average balances, the main purpose of these
accounts being payment of MNREGA wages, that are fully drawn down within days of
government crediting these accounts, thus empty accounts and one way transaction raises a
big question mark over this method of financial inclusion. Therefore the major structural
challenges for the banks are (a) Branch expansion, (b) Human resource, and (c) Cost. The
concept of mobile banking is still in early stages with respect to semi urban and rural areas as
it needs to spread at a faster rate to overcome the brick and mortar banking problem posed in
the Indian context.
Business correspondents find viability doubtful; they are not willing to pay security deposit,
finding trustworthy locals for setting up customer service points pose another challenge.
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Social challenges include lack of active campaign, illiteracy and fear of approaching bank
branches.
Regulatory challenges include customer identification, customer confidentiality, distance
criteria, bank‟s responsibility for agents etc.
The main objective should be financial inclusion rather than banking inclusion. The access to
financial services must bring a difference to the life of the user, savings must not be the sole
aim but access to credit in a hassle free manner should also be promoted. Government bank
co-ordination in this regard is of utmost importance, proper selection of financially excluded
section should also be done judiciously, agent driven financial inclusion should be promoted
with proper allotment of villages, and participation of self help group should be promoted.
Financial inclusion it must be reiterated is not the end in itself; it is one of the means for
enabling specially the rural poor to improve their economic conditions. Banking schemes
have to be suitably modified to match their requirements [3]. The two major problems are (a)
the market not supplying products to appropriate consumer needs, (b) the market not making
appropriate products easily accessible.[8]
Financial exclusion may lead to increased travel requirements, higher incidence of crime,
general decline in investment, difficulty in gaining access to credit, increased unemployment
and so on [5].
Crisil‟s Inclusix on Financial Inclusion:
CRISIL Inclusix is a comprehensive index for measuring the progress of financial inclusion
in the country, down to the district-level. CRISIL Inclusix will be a key enabler in taking
financial services to the bottom of the pyramid. It measures financial inclusion on the three
critical parameters of basic banking services - branch penetration, deposit penetration, and
credit penetration. The index uses parameters that focus only on the 'number of people' whose
lives have been touched by various financial services, rather than on the 'amounts' deposited
or loaned. [9]
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Figure 1: (Source: Crisil)
The major findings of the report are: (1) One out of every two Indians has a savings account,
but only one in seven has access to bank loan, (2) India‟s six largest cities have 11 per cent of
the country‟s bank branches while four distr icts have only one branch each with bottom 50
districts have just 2 per cent of the country‟s bank branches, (3) Region wise the southern
region leads in financial inclusion with a Crisil Inclusix score of 62.2.The western region
stands second with an score of 38.2, followed by the northern region (37.1), eastern region
(28.6), and north-eastern Region (28.5). (Report released on June 25, 2013)
New Bank Licenses and Financial Inclusion:
The RBI has announced that for obtaining new bank license the banks need to open one out
of four of its branch in the unbanked area, which is a positive step for financial inclusionconsidering the RBI‟s move to go for bank led financial inclusion rather than one based on
non banking financial services. Also twenty six applicants have applied for banking license
which include big corporate names as Tata, Birla and Ambani. They can bring much needed
funds for these new banks and provide competition for customers much alike the telecom
firms which have penetrated deep inside India‟s rural market. The big surprise is the request
for banking license from India post. In banking an extensive branch network is always
desired and India Post is unbeatable in this with over 1.55 lakh post offices across the
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country, 90 per cent of them in rural areas which if gets the license puts the mission fully on
track.
Conclusion
This is just the beginning of accessing the surface of what is the biggest potential market
opportunity in the history of commerce. Managers in the private sector who commit their
companies to a more inclusive capitalism have the opportunity to prosper and share their
prosperity with those who are less fortunate. 41 million Kisan Credit cards have been issued
in rural areas as against 22 million credit cum debit cards in urban areas is just indicative of
the future of the market. The aim of inclusion should be to expand the coverage of the formal
financial system in the country so as to become a key objective for the emerging economy. In
a very real sense, the fortune at the bottom of the pyramid will be one of the most successful
goals targeted till now by the means of financial illusion.
REFERENCES
1. Financial Inclusion framework is it inclusive? (N.Srinivasan: Bank Quest „Financial
inclusion‟ April-June 2012).
2.
Financial inclusion: Road Ahead (D. Rama Krishna Reddy: Bank Quest „Financialinclusion‟ April-June 2012)
3. Role of rural banks in achieving financial inclusion (Dr. N.K. Thingalaya: Bank Quest
„Financial inclusion‟ April-June 2012)
4. Financial Inclusion in India Emerging Profitable Models by Dr Debesh Roy Assistant
General Manager NABARD.
5. Towards Financial inclusion in India Karmakar, Banerjee, Mohapatra SAGE South
Asia.
6. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=749
7. http://www.globalatlanta.com/article/26110/banks-must-rethink-the-poor-indian-
consumer/#largeBanner
8. http://facultylive.iimcal.ac.in/sites/facultylive.iimcal.ac.in/files/WPS-630_1.pdf
9. http://crisil.com/about-crisil/crisil-inclusix.html#open
REFERNCE FOR TABLE
1. http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1041
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REFERENCE FOR FIGURE
1. http://crisil.com/about-crisil/crisil-inclusix.html#open
ABBREVATIONS
1. MNREGA: Mahatma Gandhi national rural employment guarantee act.
2. RBI: Reserve Bank of India.
3. OECD: Organization for economic co-operation and development.
4. BC: Business Correspondent.