Financial Inclusion

RURAL PLANNING &
DEPARTMENT
RESERVE
NEW DELHI
CREDIT
BANK OF INDIA,
PROJECT REPORT
ON FINANCIAL
INCLUSION
SHAHEED SUKHDEV COLLEGE OF BUSINESS

STUDIES
(UNIVERSITY OF DELHI)
VIVEK VIHAR, NEW DELHI-
110095
Financial Inclusion
Page|1
ACKNOWLEDGEMENT
I wish to express my gratitude to Reserve bank of India, New Delhi, for
giving me an opportunity to be a part of it and enhance my knowledge by
granting permission to do my summer project under RBI Young Scholar
Award Scheme.
Im grateful to my Mentor Dr. Dileep Singh (AGM,RPCD),Mr. S.Chaudhri
(GM, RPCD), Mrs. Usha Jain, Mrs. Harmesh Khanna (GM, HRDD), Mr. Rajul
Naithani,Manager (HRDD), Mr. Kulwant Singh (AM,HRDD),& Mr. Sandeep
Kohli(AM, HRDD) for their invaluable guidance and cooperation during the
course of the project. They provided me with their assistance and support
whenever needed that has been instrumental in completion of this project.
The learning during the project was immense & invaluable. My work
includes study of Financial Inclusion, reason behind a large number of
resident has no access to the banking services, and how could we deliver
Financial Services to excluded section of society, various initiatives taken
by Government of India and Reserve Bank Of India, strategical drivers for
enabling financial inclusion viz. Banks, Regional Rural Banks, Urban CoOperative Banks (UCBs), Microfinance Institutions, Design & Delivery
Issues in Microfinance etc., I also conducted survey to assess the impact
of various policy initiative in Hari Nagar(west Delhi).
RAMAN KUMAR
RBI YOUNG SCHOLAR 2009
BFIA,
SHAHEED SUKHDEV COLLEGE OF BUSINESS STUDIES,DU
RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

NEW DELHI
Financial Inclusion
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CONTENT
CHAPT
ER
TIT
LE
PAGE NO.
FINANCIAL EXCLUSION
3-8
I.
INTRODUCTION
II.
DEFINITION
III.
THE INDIAN SCENARIO
FINANCIAL INCLUSION
9-12
CAUSES OF FINANCIAL EXCLUSIO
13-16
I.
DEMAND SIDE BARRIERS
II.
SUPPLY SIDE BARRIERS
CONSEQUENCES OF FINANCIAL EXCLUSION
17-20
POLICY DEVELOPMENTS
21-29
I.
FIRST PHASE DEVELOPMENTS (1969-1981)

SECOND PHASE ANNUAL POLICY (2005II.
2006)
III.
RANGRAJAN COMMITTEE
HOW GOVERNMENT AND RBI CAN BUILD ON
EXISTING BANKING
STRUCTURE TO PROVIDE FINANCIAL SERVICES TO
ALL
30-33
PRESENT STATUS OF FINANCIAL INCLUSION IN THE

COUNTRY
34-36
STUDY RESULT
37
I.
II.
III.
HOUSEHOLD PROFILE
FINANCIAL POSITION
BANKING HABITS
THOSE WHO DO NOT HAVE BANK
IV.
ACCOUNT
V.
CREDIT PATTERN
VI.
SUGGESTIONS
CONCLUSION
54
BIBLIOGRAPH
Y
55
GLOSS
ARY
56
QUESTIONNA
IRE
MASTER
CHART
RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA, NEW

DELHI
Financial Inclusion
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Chapter -1
FINANCIAL EXCLUSION
INTRODUCTION
The World is moving at an amazing pace. Thanks to the advances in
technologies, distances have become meaningless. Globalization has
enabled the rise of global trade leading to wealth generation in developed
as well as developing countries. Wealth can be created in any part of the
world with a single click of the mouse. Developing nations, like India have
immensely benefited from the globalizing economy. Wealth has been
pouring into the country as investments (both direct and institutional).
Indian companies are acquiring companies all over the world, hence
benefitting from expansion. This has directly affected the lives of many
citizens in our country. For many, there has been a dramatic increase in
the disposable income. The savings, consumption and investment
patterns have changed in the past few years. This has meant that there
has been an increase in demand for many financial services from different
financial firms.
The market has responded to this soaring demand with making attractive
offers and services for the customers at affordable rates. The liberalization
of the economy in the 1990s has brought in new players into the field
which has not only brought in some much needed fresh air to the stagnant
financial sector but also competition for the same market space which was
relatively unknown in the financial sector till then. Since then, there have
been progressive reforms in the financial sector allowing for better and
easier facilities and options to the consumer. An increasing financially
aware middle class have realized the importance of financial services.
Banks have streamlined and rationalized themselves to meet with the
changing demands of the people. Banks have become partners in growth
for many offering them a safer and secure future.
However, not all the reforms in the financial services sector have still been
able to bring in the other half of Indias population who are un-banked.
There are many reasons that are obvious for this kind of financial
exclusion. The new surge in the economy has not yet percolated into the
lower strata of the society. It is easy to blame the capitalist growth for this
sort of income disparities. Even after 60 years of Indian independence, 1/3
of our population is still illiterate (let alone financially literate) and at least
26% of the population still lives under the poverty line. There are many
statistics, which goes on to prove that for even a developing nation India
has a long way to go.
Most of the un-banked or financially excluded population of India live in
rural areas; nevertheless, there is also a significant amount of the urban

population of India who face the same situation even with easy access to
banks. Many of the financially excluded in these

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areas are illiterates earning a meagre income just enough to sustain their
daily needs. For such people, banking still remains an unknown
phenomena or an elitist affair. It is easier for them to keep their money at
their house or with some moneylenders and easily make immediate
purchases (which make up most of their expenditure) rather than to follow
the cumbersome process at banks. A lot of the financially excluded
populations are at the mercy of moneylenders or pawn shop owners. They
should be made a part of the formal banking structure so that they could
also have the benefits that the others enjoy. By making them financially
inclusive, we are making their financial position less volatile. At the same
time, we are treating them on an equal par with other members of the
population so that they would not be denied of access to a basic service
such as banking.
FINANCIAL EXCLUSION
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 1990s 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.
DEFINITION
The definition of financial exclusion will range upon several dimensions,
but the most important dimension are the breadth & focus of financial
exclusion and the concept of relativity or degree i.e. Financial
Exclusion is defined in relation to some predefined standard(i.e. inclusion).
Breadth means the scope of definition; the broadest definitions of
financial exclusion recognize that there are many factors interacting
between financial exclusion and social exclusion and disadvantage. The
type of such a broad definition is found in the seminal work of Leyshon
and Thrift, who define financial exclusion as processes that prevent poor
and disadvantaged social groups from gaining access to the financial
system1.
The other end of extreme definitions are narrowed its scope, for example,
while Rogaly has a broad view of social exclusion, his working definition of
financial exclusion is narrow which he stated as
Exclusion from particular sources of credit and other financial services
(including insurance, bill-payment services, and accessible and
appropriate deposit accounts)2
1
2
Leyshon & Thrift 1995

Rogaly 1999

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Extreme definition may be seen as a somewhat sweeping definition, with

its apparent reference to access to the financial system as a whole, rather
than access to specific financial services or products and access to
specific channels of distribution. The other extreme of definitions of
financial exclusion are those that take a very narrow perspective based on
a lack of ownership of, or access to, particular types of financial services
or products, including forms of credit and insurance.
A person transacting regularly with his saving fund bank account and
availing very basic of services i.e. payment and remittances or for saving
some of part of his income to meet future contingencies/future
requirement is said to be financially included despite the fact that he is
not availing all/majority of other financial services such as Insurance,
investment schemes etc.
In other words, an individual having access to mainstream-necessary
financially services is considered to be financially included as opposed to
the first extreme definition stated above.
The focus here refers to the group of people (communities) to household,
a region to the specific type of business; this is more often implicitly
rather than explicitly acknowledged in the literature
Further study of literature suggest that the operational definitions have
also evolved from the underlying public policy concerns that many people,
particularly those living on low income, cannot access mainstream
financial products such as bank accounts and low cost loans, which, in
turn, imposes real costs on them -often the most vulnerable people.3
Operational definitions are context-specific, originating from countryspecific problems of financial exclusion and socio-economic conditions.
Thus, the contexts specific dimensions of financial exclusion assume
importance from the public policy perspective. In recent development
definitions have witnessed a shift in emphasis from the earlier ones, which
defined financial inclusion and exclusion largely in terms of physical
access, to a wider definition covering access to and use and
understanding of products and services. This also underscores the role of
financial institutions or service providers involved in the process
Finally, definitions of financial exclusion vary considerably according to the
dimensions such as the concept of relativity, i.e., financial exclusion
defined relative to some standard (i.e., inclusion). This line of thinking
defines the problem of financial exclusion as that emanating from
increased inclusion, leaving a minority of individuals and households
behind4.
3
4
H.M. Treasury,2004
Kempson et al., 2000

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Figure 1: Anatomy of Various Financial Products or Services and the

Institutional Structure
Thus, there exists duality of hyper inclusion with some having access to a
range of financial products and at the same time a minority lacking even
the basic banking services. This phenomenon is observed mostly in
developed countries with high degree of financial development.
THE INDIAN SCENARIO

In India the focus of the financial inclusion at present is confined to
ensuring a bare minimum access to a savings bank account without frills,
to all. There could be multiple levels of financial inclusion and exclusion.
At one extreme, it is possible to identify the super-included, i.e., those
customers who are actively and persistently courted by the financial
services industry, and who have at their disposal a wide range of financial
services and products. At the other extreme, we may have the financially
excluded, who are denied access to even the most basic of financial
products.
In between are those who use the banking services only for deposits and
withdrawals of money. But these persons may have only restricted access
to the financial system, and may not enjoy the flexibility of access offered
to more affluent customers.
Further, Financial exclusion may not definitely mean a social exclusion in
India as it does in the developed countries, but it is a problem that needs
to be addressed. The large presence of informal credit, could avoid
social exclusion but the legal validity of such financial services pose an
obstacle for creating a modern globalizing economy.

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Without a formal and a legally recognized financial system in which all

sections of the population are a part of, it would be impossible even for
the most efficient of the governments to reach out to all sections of the
people. A stable and healthy financial service sector creates trust among
the people about the economy and only with this trust (which has legal
validity) could a strong, stable and an inclusive economy be created.
Financial exclusion could be looked at in two ways:
Lack of access to financial services mainly payment system, which

could be due to several reasons such as:
Lack of sources of financial services in our rural areas, which
are popular for the ubiquitous moneylenders but do not have (safe)
saving deposit and insurance services.
1
2
High information barriers and low awareness especially for

women and in rural areas.
Inadequate access to formal financial institutions that exist to

the extent that the banks could not extend their outreach to the
poor due to various reasons like high cost of operations, less volume
and more number of clients, etc. among many others.
Poor functioning and financial history of some beleaguered

financial institutions such as financial cooperatives in many states,
which limit the effectiveness of their outreach figures.
Primary Agricultural Cooperative Societies (PACS), which

number around one lakh are also often exclusionary, as their
membership is restricted to persons with land ownership. Even to
their members, not many PACS offer saving services.
Lack of access to formal financial services in of both rural and urban

areas, but is a larger issue in cities and small towns. The distinction
between access to formal and informal services is crucial to
understand, as informal financial markets suffer from several
imperfections, which the poor pay for in many ways.
Some attributes of informal financial services, due to which there
is exclusion are:
1. High risks to saving: loss of savings is an easily discernible
phenomenon in low-income neighbourhoods in urban areas.
2. High cost of credit and exploitative terms: credit against collateral
such as gold is even more expensive than the effective interest
rates, similarly, rates paid by hawkers and vendors who repay on
daily basis are very high.

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Financial Inclusion
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3. High cost and leakages in money transfers: the delays in sending

money home through all informal channels add to these.
4. Near absence of insurance and pension services: life, asset, and
health insurance needs.
Another key aspect of financial exclusion is the lack of financial education
and advice. In
India, as the basic literacy rate is low supporting basic financial capability
is indeed not just necessary, but also equally difficult.
Financial exclusion is often related to more complex social exclusion
issues, which makes financial literacy and access to basic financial
services even more complex.

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Chapter -2
FINANCIAL INCLUSION
The word Financial Inclusion could be described as being the opposite of
financial exclusion. However, financial inclusion is more of a process
rather than a phenomenon.
It is a process by which financial services are made accessible to all
sections of the population. It is a conscious attempt to bring the unbanked people into banking.
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 Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan,
2008))
Financial Inclusion does not merely mean access to credit for the poor, but
also other financial services such as Insurance. Financial Inclusion allows
the state to have an easier access to its citizens, with an inclusive
population, for e.g.: the government could reduce the transaction cost of
payments like pensions, or unemployment benefits.
It could prove to be a boon in a situation like a natural disaster, a
financially included population means the government will have much less
headaches in ensuring that all the people get the benefits. It allows for
more transparency leading to curtailing corruption and bureaucratic
barriers in reaching out to the poor and weaker sections. An intelligent
banking population could go a long way by effectively securing
themselves a safer future.
The objective of Financial Inclusion
1
The access to various mainstream financial services e.g. saving

bank account, credit, insurance, payments and remittance and
financial and credit advisory services.
The main objective is to provide the benefit of vast formal

financial market,& protect them from exploitation of informal credit
market, so that they can be brought into the mainstream

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WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL

SERVICES NECESSARY FOR FINANCIAL INCLUSION
OF HOUSEHOLD?
Basic saving bank account- an account with all basic feature of
saving account.
1
2
Payment and remittances services
Immediate credit in case of contingencies like accidents, medical

treatment etc, they should be provided immediate credit.
Entrepreneurial credit this means, to run/expand small scale

business/shop or any economic activity, easy credit should be
provided, so that financial dependence can be created amongst
households.
5
Housing finance- funding for purchasing new residential or
reconstruction
4
Insurance life\healthcare- to plan future better
Financial education\credit counselling centres to guide them

which product suits them better, where to go credit needs, what are
various services available to better their personal financial planning.
BASIC SAVING BANK ACCOUNT
IMMEDIATE CREDIT
ENTREPRENEURIAL CREDIT
HOUSING FINANCE
PAYMENT & REMITTANCES SERVICES
INSURANCE LIFE/HEALTHCARE
FINANCIAL EDUCATION/CREDIT
COUNSELING
Figure 2: Mainstream Financial Services

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Financial Inclusion therefore, is delivery of not only banking, but also other
financial services like insurance, pension, remittance, mutual funds, etc.
delivered at affordable, though market driven costs. Opening a no-frills
account is just a beginning to a continuous process of providing banking
and financial services.
Once the first step of safety of savings is achieved, the poor require
access to schemes and products which allow their savings to grow at rates
which provide them growth beyond mere inflation protection.
To understand it better, lets take life of migrant street

vender living in almost every part of Delhi, and his
financial life will look like this-->
WHAT
TYPE
OF
PRODU
CT OR
SERVIC
ES IS
REQUI
RED
FOR
THIS
TYPE
OF
CUSTO
MER5??
POSSIBL
Y
1. A
bank
accou
nt,
wher
e
he/sh
e can
save
small
amou
nts at
regul
ar
interv
als
ideally
with
savings
being
collected at their place of work or
a specified point of transaction
(SPOT) in the locality
2. Micro-Credit for working capital
to increase stock and business.
This credit can be short term and
repayment to be configured at
regular intervals. Savings history
and credibility checks to be used
as a proxy for collateral.
3. Insurance for life
4. Health Insurance for minor
illnesses and hospitalization
5. Investment
plan
for
child's
education
6. Pension for old age
Working or operational
definitions of financial
exclusion generally
focus on ownership or
access to particular
financial products and
services.
The focus
narrows
down
mainly to
the
As
Daily cash
income
To send
mone
y
regula
rly to
his
family
living
in
villag
e
Frequently
purchases
stock,
mainly in
cash
Irregular
income due to
seasonality of
occupation
No income, If he
misses a
day due ill
dis
cus
sed
in
pa
per
titl
ed
Uni
ver
sal
Fin
an
he
alt
h
To make
small,
regular
payment
for fee for
childs
education
cial Inclusion in India: The

Way Forward by S.Ramesh
and Preeti Sahai of BASIX
RURAL PLANNING
AND CREDIT
DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
Financial Inclusion
P a g e | 12
products and services provided by the mainstream financial service

providers (Meadows et al., 2004). Such financial products may include
money transmission, home insurance, short and long-term credit and
savings6. Furthermore, the operational definitions have also evolved from
the underlying public policy concerns that many people, particularly those
living on low income, cannot access mainstream financial products such
as bank accounts and low cost loans, which, in turn, imposes real costs on
them - often the most vulnerable people7
More importantly, Financial Inclusion is imperative for creating an inclusive

economy at all fronts. This attains special importance at this stage of
rising food and oil prices, without an inclusive economy the countrys
development will suffer. In the recently concluded G8 meeting in
Hokkaido, Japan, the World Bank chief Robert Zoellick reiterated the
importance of creating an inclusive economy in an increasingly globalized
World.
6
7
Bridgeman, 1999
H.M. Treasury, 2004

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Chapter -3
CAUSES OF FINANCIAL
EXCLUSION
Financial Exclusion may also have resulted from a variety of structural
factors such as unavailability of products suiting their requirements,
stringent documentation and collateral requirements and increased
competition in financial services. The Causes of financial exclusion can be
identify broadly in two categories, first the demand side and the second
supply side.
A. DEMAND SIDE BARRIERS

The people who have the requirement\need but still not demanding\availing the
financial services\products which can be due to the following reasons:
1.
Low Income: A higher share of population below the poverty line

results in lower
demand for financial services as the poor may not have savings to
place as deposit in savings banks; hence the market lacks incentives in
providing financial service/products.
Most the people belonging to financially excluded group are having
irregular/seasonal income. Hence opening of a bank account and
operating it i.e. deposit and withdrawal in very small denominations
with high frequency will increase the cost of transaction, adding to that
they also anticipate that bank will refuse if they transact with so small
amount.
Further provided that, as they have low earning they cannot maintain
minimum balance requirements of a normal saving bank account which
ranges from Rs. 500 to Rs 5000(Rs. 500 in case of PSB and Rs. 5000 for
Pvt. Sector Banks) and various annual maintenance charges(AMC)
levied by banks.
2.
Transaction cost: Vast number of rural population resides in small

villages which
are often located in remote areas devoid of financial services.
Consequently, the overall transaction cost to the customer in terms of
both time and money proves to be a major deterrent for visiting
financial institutions. The excluded section of the society find informal
sector more reachable due to proximity and ease of transaction.
3.
Financial Services Being Very Complex In Nature:
excluded sections of
the society find dealing with organized financial sector cumbersome.

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Easy access to alternative credit: For a good amount of low

income people,
the alternative credit provided by the money lenders and pawn shop
owners are far more attractive and hassle free compared to getting a
loan from a commercial bank.
Some of the poor that do not have property find it impossible to get
credit without the collateral. The uneducated poor would rather put
their trust in moneylenders who provide easy non-collateral credit than
on the well established commercial banks. There might also be cultural
reasons for trusting a moneylender rather than a bank.
Distance
from
bank
branch,
branch
timings,
cumbersome
documentation/procedures, unsuitable products, language, staff
attitude are common reasons Higher transaction cost
5.
Low literacy level: The lack of financial awareness about the

benefits of the
banking and also illiteracy act as stumbling blocks to financial
inclusion. The lack of financial awareness maybe the single most risk in
financial inclusion as those who are newly included in the financial
sector have to maintained within the formal financial sector.
6.
Legal identity: Lack of legal identities like identity cards, birth

certificates or written
records often exclude women, ethnic minorities, economic and political
refugees and migrant workers from accessing financial services.
7.
Sophisticated Financial Terminologies: Bankers often use

complex financial
terminologies, which the masses are unable to comprehend and
hence do not approach for financial services voluntarily.
8.
Terms and conditions: Terms and conditions attached to

products such as
minimum balance requirements and conditions relating to the use of
accounts as in the case of saving bank account often dissuade people
from using such products/services
Further, term and conditions and its framework is generally so tedious
and detailed that understanding it is not possible for those who cannot
even write their name or are less literate and do not understand
English or Hindi(in case of some regional rural areas).
9.
Psychological and cultural barriers: The feeling that banks

are not interested
to look into their cause has led to self-exclusion for many of the low
income groups. However, cultural and religious barriers to banking
have also been observed in some of the countries.

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Disincentives for the consumer: The cost of maintaining an

account (non-zero
balance accounts) and procedural problems in accessing formal credit
act as disincentives for consumers with weaker financial background.
The bank would rather give smaller number of large credits to middle
and upper class individuals and institutions, due to the lower cost
involved in banking with them. The banks and other financial service
firms have fewer financial products which are attractive to the poor and
the socially disadvantaged. All these act against the interest of a
consumer from a poor background.
B. Supply side barriers

Some of the important causes of relatively low extension of institutional
credit in the rural areas are risk perception, cost of its assessment and
management, lack of rural infrastructure, and vast geographical spread of
the rural areas with more than half a million villages, some sparsely
populated
1.
Perception among banks about rural population : Generally,

there exists a
perception among banks that large number of rural population is unbankable as their capacity to save is limited. Therefore, they do not look
favourably at small loans often required by marginalized section. Such
loans are considered to be non-productive.
2.
Miniscule margin in handling small transactions : As the

majority of rural
population resides in small villages that too in remote areas,
banks find small transactions cost ineffective.
3.
KYC
requirements: The KYC requirements of independent
documentary proof of
identity and address can be a very important barrier in having a bank
account especially for migrants and slum dwellers.
4.
Unsuitable products: One of the most important reasons for the

majority of rural
population not approaching the formal sector for financial services is
the unsuitability of products and services being offered to them. For
example, most of their credit needs are in form of small lump sums and
banks are reluctant to give small amounts of loan at frequent intervals.
Consequently, they have to resort to borrowing money from
moneylenders at uxorious rates.
5.
Staff attitude: As public sector banks(PSBs) cater to more than

70% of banked
population and about 90% of rural banked population, a majority of
staffs in these PSBs

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remain insensitive to needs of customer and shirk away from duty. The
situation is even worst in rural branches where they behave with rural
poor in a condescending manner.
6.
Poor market linkage: It is often argued that we may have been

growing second
fastest in the world, but still our 40-55% of people living in rural and
semi-urban areas do not have access to basic necessities of life. 75% of
villages in rural areas have no electricity arrangement, so it can be
imagined that how much penetration market would be having
especially when it comes to providing financial services/products, this
may be that they are reluctant or there is no institutional as well as
physical. Therefore there is no institutional infrastructure available in
the rural area.
Poor market linkage or say penetration of service providers also
constitutes the major factors of financial exclusion.
7.
Lack of interest from Commercial Banks : There is a lot of

criticism on the
commercial banks because of their inherent tendency to think that
poor people are not worthy of being banked on. Banks are in business
to make profit and would like to only indulge in activities that give
them profit. Due to high transaction costs on smaller transactions and
the speculated high risk in lending credit to the lower strata of the
society, they see banking with poor as unviable.
Even if banks are concerned at the poor, they do it in a manner of
corporate social responsibility or social service and treat them
differently instead of trying to bring them into the mainstream. Unless
banks see any incentive in banking with the weaker sections of the
society, they would not be willing to do so.
11.
Poor credit record: Areas with poor credit record, bad past
experience, socially
unstable and poor recovery of previous loan/credit given are observed
to be highly financially excluded, as banks blacklist such areas as the
part of their risk management strategy.

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Chapter -4
CONSEQUENCES OF
FINANCIAL EXCLUSION
There are three dimensions of consequences that financial exclusion has
on the people affected:
Firstly, financial exclusion can generate financial consequences by
affecting directly or indirectly the way in which the individuals can raise,
allocate, and use their monetary resources.
Secondly, a wider dimension of financial exclusion can be identified as
socio-economical consequences i.e. groups which are socially excluded
are mostly also found financially excluded.
These consequences are affecting individuals patterns of consumption,
the way they participate to economic activities or access to social welfare
and the distribution of incomes and wealth. They impact the way in which
people behave both in terms of purchase decisions and the way in which
they choose to spend their time, as well as their overall quality of life.
Finally, a last dimension can be identified as the social consequences
generated by financial exclusion. These are the consequences
affecting the various links that are binding the individuals: link to
corresponding to self esteem, links binding to the society and links binding
to community and/or relationships with other individual or groups.
Access to a bank account, credit and insurance are now widely
regarded as essential supports for personal financial management and
for undertaking transactions in modern societies (Speak and Graham,
1999). According to the Treasury Committee, UK (2006), financial
exclusion can impose significant costs on individuals, families and
society as a whole. These include
9.
Barriers to employment as employers may require wages to be paid

into a bank
account;
35. Opportunities to save and borrow can be

difficult to access; III. Owning or obtaining assets
can be difficult;
IV. Difficulty in smoothening income to cope with shocks; and
22. Exclusion from mainstream society.

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In terms of cost to the individuals, financial exclusion leads to higher

charges for basic financial transactions like money transfer and expensive
credit, besides all round impediments in basic/ minimum transactions
involved in earning livelihood and day to day living. It could also lead to
denial of access to better products or services that may require a bank
account. It exposes the individual to the inherent risk in holding and
storing money operating solely on a cash basis increases vulnerability to
loss or theft. Individuals/families could get sucked into a cycle of poverty
and exclusion and turn to high cost credit from moneylenders, resulting in
greater financial strain and unmanageable debt.
At the wider level of the society and the nation, financial exclusion leads
to social exclusion, poverty as well as all the other associated economic
and social problems. Thus, financial exclusion is often a symptom as well
as a cause of poverty. Financial exclusion is not evenly distributed
throughout society; it is concentrated among the most disadvantaged
groups and communities and, as a result, contributes to a much wider
problem of social exclusion.
A significant portion of demand for credit by rural households arises in
order to ease the financial burden of crop failures, illness or death, and
health care. In the case of microenterprises, credit may be needed to
achieve a reasonable and viable scale of activities. The rising
entrepreneurship spanning rural, semi-urban and urban areas, particularly
in the unorganized and informal sectors may give rise to large potential
demand for credit. The evidence on the demand for credit in India
suggests that medical and financial emergencies are the major reasons for
household borrowings. Medical emergencies were particularly high for the
lowest income quartile (IIMS, 2007) 8 . Thus, the difficulty in obtaining
finance from formal sources has major social implications.
Another cost of financial exclusion is the loss of business opportunity for
banks, particularly in the medium-term. Banks often avoid extending their
services to lower income groups because of initial cost of expanding the
coverage may sometimes exceed the revenue generated from such
operations. These business related concerns of banks were, however,
meaningful when technology development was at a nascent stage and
expanding the coverage of financial services required substantial initial
investment. The strides in technology have now reduced the required
initial investment in a significant manner. What is required is to explore
the appropriate technology which is suitable to socio-economic conditions
of the region under consideration. Moreover, availability and usage of
financial services by the otherwise excluded population groups would lead
to increase in their income levels and savings. This, in turn, would have
the potential to increase savings deposits as well as credit demand,
implying profitable business for banks in the medium-term.
Invest India Incomes and Savings Survey undertaken by Invest India Market Solutions
(IIMS).

NEW DELHI
Financial Inclusion
P a g e | 19
Two other factors have often been cited as the consequences of financial
exclusion. First, it complicates day-to-day cash flow management - being
financially excluded means households, and micro and small enterprises
deal entirely in cash and are susceptible to irregular cash flows. Second,
lack of financial planning and security in the absence of access to bank
accounts and other saving opportunities for people in the unorganized
sector limits their options to make provisions for their old age. From the
macroeconomic standpoint, absence of formal savings can be problematic
in two respects. First, people who save by informal means rarely benefit
from the interest rate and tax advantages that people using formal
methods of savings enjoy. Second, informal saving channels are much less
secure than formal saving facilities. The resultant lack of savings and
saving avenues means recourse to non-formal lenders such as
moneylenders. This, in turn, could lead to two adverse consequences
1. Exposure to higher interest rates charged by informal lenders; and
2. The inability of customers to service the loans or to repay them
As loans from non-formal lenders are often secured against the borrowers
property, this raises the problem of inter-linkage between two apparently
separate markets. Judged in this specific context, financial exclusion is a
serious concern among low-income households, mainly located in rural
areas
To sum up, the nature and forms of exclusion and the factors responsible
for it are varied and, thus, no single factor could explain the phenomenon.
The principal barriers in the expansion of financial services are often
identified as physical access, high charges and penalties, conditions
attached to products which make them inappropriate or complicated and
perceptions of financial service institutions which are thought to be
unwelcoming to low income people.
There has also been particular emphasis on socio-cultural factors that
matter for an individual to access financial services. The most
conspicuous dimension of exclusion is that a majority of the low-income
population do not have access to the very basic financial services. Even
amongst those who have access to finance, most of them are underserved
in terms of quality and quantity of products and services.
The critical dimensions of financial exclusion include access exclusion,
condition exclusion (conditions attached to financial products), price
exclusion, and self exclusion because of the fear of refusal to access by
the service providers. The financial exclusion process becomes selfreinforcing and can often be an important factor in social exclusion,
especially for communities with limited access to financial products,
particularly in rural areas. Apart from the above mentioned supply side
factors, demand side factors may also significantly affect the extent of
financial inclusion. For instance, low level of income and hence low

NEW DELHI
Financial Inclusion
P a g e | 20
savings would result in lower deposits. Similarly, at low level of income,

the ability to borrow is affected because of low repayment capacity and
inability to provide collateral. In the Indian context, both demand and
supply side factors have an important bearing on the usage of
financial/banking services.

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Financial Inclusion
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Chapter - 5
Policy Developments
We have seen in the previous chapter that in our country the financial services
has been\being used by a very limited group of people\individuals. 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
Annua
l
Nationalisation of banks
Policy
presecription of priority sector targets
2
lead bank scheme
0
0
5
1969-1991
2
0
0
6
No Fril
bank
account
simple
KYC
norms
NGOs,
SHGs,
MFIs
etc
were
allowed
easier
credit
facilities
de
ter
mi
nin
g
ne
w
mo
del
for
eff
ect
ive
rea
ch
l
e
v
e
r
a
g
i
n
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o
n
t
e
c
h
n
o
l
o
g
y
b
a
s
e
d
s
o
l
u
ti
o
n
s
impro
vements in
Credit
absorptio
n
capcaility
e
xi
sit
in
g
fo
r
m
al
cr
e
di
t
d
eli
v
er
y
sy
st
e
m
R
a
n
g
r
a
j
a
n
Commit
tee
Report
initi
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es
wer
e
und
ert
ake
n
9. FIRST PHASEfor
DEVELOPMEN enh
TS
(1969-anc
ing
1981)
the
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In 1969, the banks wereof
the
nationalised in order toban
CR
ED
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SE
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IN
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spread banks branchkin

network in order tog
develop strong bankingsys
tem
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sus
resources/deposits andtain
channel
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e
productive/needy
and
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also government wanteditab
to use it as an importantle
agent of change. So, thegro
planning
strategywth
.
recognized the criticalThe
role of the availability ofse
credit
and
financialincl
services to the public atude
large in the holisticd
development
of
the
country
with
the
R
benefits of economic
U
growth being distributed
R
A
in a democratic manner.
L
In recognition of this
P
role,
the
authorities
L
modified
the
policy
A
N
framework from time to
N
time to ensure that the
I
financial services needs
N
of various segments of
G
the society were met
A
satisfactorily
W
DE
LHI
Before
1990,
several
N
D
Financial Inclusion
9.
P a g e | 22
Nationalization of private sector banks,
35. Introduction
of
priority
sector
lending norms, III. The Lead Bank
Scheme,
IV. Branch licensing norms with focus on rural/semi-urban branches,
22. Interest rate ceilings for credit to the weaker sections and
VI.
Creation of specialised financial institutions to cater to the

requirement of the agriculture and the rural sectors having bulk of
the poor population.
SOCIAL NETWORKING APPROACH

The announcement of the policy of social control over banks was made in
December 1967 with a view to securing a better alignment of the banking
system with the needs of economic policy. The National Credit Council was
set up in February 1968 mainly to assess periodically the demand for bank
credit from various sectors of the economy and to determine the priorities
for grant of loans and advances. Social control of banking policy was soon
followed by the nationalisation of major Indian banks in 1969. The
immediate tasks set for the nationalised banks were mobilisation of
deposits on a massive scale and lending of funds for all productive
activities. A special emphasis was laid on providing credit facilities to the
weaker sections of the economy.
THE PRIORITY SECTOR APPROACH
The administrative framework for rural lending in India was provided by
the Lead Bank Scheme introduced in 1969, which was an important step
towards implementation of the two-fold objectives of deposit mobilisation
on an extensive scale and stepping up of lending to weaker sections of the
economy. Realising that the flow of credit to employment oriented sectors
was inadequate; the priority sector guidelines were issued to the banks by
the Reserve Bank in the late 1960s to step up the flow of bank credit to
agriculture, small-scale industry, self-employed, small business and the
weaker sections within these sectors.
The target for priority sector lending was gradually increased to 40 per
cent of advances in the case of domestic banks (32 per cent, inclusive of
export credit, in the case of foreign banks) for specified priority sectors.
Sub targets under the priority sector, along with other guidelines including
those relating to Government sponsored programmes, were used to
encourage the flow of credit to the identified vulnerable sections of the
population such as scheduled castes, religious minorities and scheduled
tribes. The Differential Rate of Interest (DRI) Scheme was instituted in
1972 to provide credit at concessional rate to low income groups in the
country
LEAD BANK SCHEME APPROACH
But all these measure were focused towards inclusion of a sector, regional
areas etc., there was a very less or no emphasis was on financial inclusion
of Individual/household level. The

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Financial Inclusion
P a g e | 23
promotional aspects of banking policy have come into greater

prominence. The major emphasis of the branch licensing policy during the
1970s and the 1980s was on expansion of commercial bank branches in
rural areas, resulting in a significant expansion of bank branches and
decline in population per branch. The branch expansion policy was
designed, inter alia, as a tool for reducing inter-regional disparities in
banking development, deployment of credit and urban-rural pattern of
credit distribution. In order to encourage commercial banks and other
institutions to grant loans to various categories of small borrowers, the
Reserve Bank promoted the establishment of the Credit Guarantee
Corporation of India in 1971 for providing guarantees against the risk of
default in repayment. The scheme, however, was subsequently
discontinued.
35.
SECOND PHASE ANNUAL POLICY (2005-2006)
As the central bank of the country, the Reserve bank of India has taken
steps to ensure financial inclusion in the country. It has tried to make
banking more attractive to citizens by allowing for easier transactions with
banks. In 2004 RBI appointed an internal group to look into ways to
improve Financial Inclusion in the country.
With a view to enhancing the financial inclusion, as a proactive measure,
the RBI in its Annual Policy Statement for the year 2005-06, while
recognizing the concerns in regard to the banking practices that tend to
exclude rather than attract vast sections of population, urged banks to
review their existing practices to align them with the objective of financial
inclusion. In the Mid Term Review of the Policy (2005-06),
It is observed that there were legitimate concerns in regard to the
banking practices that tended to exclude rather than attract vast
sections of population, in particular pensioners, self-employed and those
employed in the unorganised sector. It also indicated that the Reserve
Bank would
1. Implement policies to encourage banks which provide extensive
services, while dis-incentivising those which were not responsive
to the banking needs of the community, including the
underprivileged;
2. The nature, scope and cost of services would be monitored to
assess whether there was any denial, implicit or explicit, of basic
banking services to the common person; and
3. Banks urged to review their existing practices to align them with
the objective of financial inclusion.
RBI exhorted the banks, with a view to achieving greater financial
inclusion, to make available a basic banking no frills account either with
nil or very minimum balances as well as charges that would make such
accounts accessible to vast sections of the population. The nature and

number of transactions in such accounts would be restricted and made
known

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Financial Inclusion
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to customers in advance in a transparent manner. All banks are urged to

give wide publicity to the facility of such no frills account so as to ensure
greater financial inclusion.
RBI came out with a report in 2005 (Khan Committee) and subsequently
RBI issued a circular in 2006 allowing the use of intermediaries for
providing banking and financial services. Through such policies the RBI
has tried to improve Financial Inclusion. Financial Inclusion offers immense
potential not only for banks but for other businesses. Through an
integrated approach the businesses, the NGOs, the government agencies
as well as the banks can be partners in growth. RBI has realized that a
push is needed to kick start the financial inclusion process. Some of the
steps taken by RBI include the directive to banks to offer No-frills account,
easier KYC norms, offering GCC cards to the poor, better customer
services, promoting the use of IT and intermediaries, and asking SLBCs
and UTLBCs to start a campaign to promote financial inclusion on a pilot
basis.
Brief glimpses of main initiative are followings:a) No-Frill Accounts

It is a basic saving fund account having all the features of a normal
saving fund account which it differs in the following aspects
1. The holder is not required to maintain any minimum balance
requirement and also nothing is charged for opening this type of
account
2. KYC norms have been simplified so that everyone can have this
account
3. Transaction are limited to 5-10 free transactions per month
4. ATM facility is provided free of cost
5. There is no account maintenance cost
Similar types of accounts, though with different names, have also been
extended by banks in various other countries with a view to make
financial services accessible to the common man either at the behest of
banks themselves or the respective Governments
b) Overdraft in Saving Bank Accounts

Bank were advised to give credit in form of overdraft on saving bank
account to its customer so that in case of small credit need like medical
bill, any accidental charges etc. can be met in.

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Financial Inclusion
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c) KYC norms
The Know Your Customer (KYC) norms were revised in order to make it
easy for people to avail financial services on February 18, 2008. These
guidelines include
1. In case of close relatives who find it difficult to furnish documents
relating to place of residence while opening accounts, banks can
obtain an identity document and a utility bill of the relative with
whom the prospective customer is living, along with a declaration
from the relative that the said person (prospective customer)
wanting to open an account is a relative and is staying with him/her.
Banks can also use any supplementary evidence such as a letter
received through post for further verification of the address;
2. banks have been advised to keep in mind the spirit of the
instructions and avoid undue hardships to individuals who are
otherwise classified as low risk customers;
3. Banks should review the risk categorization of customers at a
periodicity of not less than once in six months.
4. Further, in order to ensure that persons belonging to low income
group both in urban and rural areas do not face difficulty in opening
the bank accounts due to the procedural hassles, the KYC procedure
for opening accounts has been simplified for those persons who
intend to keep balances not exceeding rupees fifty thousand (Rs.
50,000/-) in all their accounts taken together and the total credit in
all the accounts taken together is not expected to exceed rupees
one lakh (Rs.1,00,000/-) in a year.
d) SHG Model
A Self Help Group (SHG) is a group of about 15 to 20 people from a
homogenous class who join together to address common issues. They
involve voluntary thrift activities on a regular basis, and use of the pooled
resource to make interest-bearing loans to the members of the group. In
the course of this process, they imbibe the essentials of financial
intermediation and also the basics of account keeping. The members also
learn to handle resources of size, much beyond their individual capacities.
They begin to appreciate the fact that the resources are limited and have
a cost.
Once the group is stabilized, and shows mature financial behavior, which
generally takes up to six months to 1 year, it is considered for linking to
banks. Banks are encouraged to provide loans to SHGs in certain multiples
of the accumulated savings of the SHGs. Loans are given without any
collateral and at interest rates as decided by banks. Banks find it
comfortable to lend money to the groups as the members have already
achieved some financial discipline through their thrift and internal lending
activities. The groups decide the terms and conditions of loan to their own
members. The peer pressure in the group ensures timely repayment and
becomes social collateral for the bank loans.

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Generally, the SHGs need self-help promoting institutions (SHPIs) to

promote and nurture them. These SHPIs include various NGOs, banks,
farmers clubs, government agencies, self-employed individuals and
federations of SHGs. However, some SHGs have also been formed without
any assistance from such SHPIs. There are three different models that
have emerged under the linkage programme9.
Model I: This involves lending by banks directly to SHGs

without
intervention/facilitation by any NGO.
35.
Model II: This envisages lending by banks directly to SHGs with

facilitation by NGOs and other agencies.
61.
Model III: This involves lending, with an NGO acting as a

facilitator and financing agency.
Model II accounted for around 74 per cent of the total linkage at endMarch 2007, while Models I and III accounted for around 20 per cent and 6
per cent, respectively.
e) KCC / GCC Guidelines

A. GCC SCHEME
With a view to providing credit card like facilities in the rural areas, with
limited point-of-sale (POS) and limited ATM facilities, the Reserve Bank
advised all scheduled commercial banks, including RRBs, in December
2005 to introduce a General Credit Card (GCC) Scheme for issuing GCC to
their constituents in rural and semi-urban areas, based on the assessment
of income and cash flow of the household similar to that prevailing under
a normal credit card.
The Reserve Bank also advised banks to classify fifty per cent of the credit
outstanding under loans for general purposes under General Credit Cards
(GCC), as indirect finance to agriculture under priority sector. The Reserve
Bank further advised banks in May 2008 to classify 100 per cent of the
credit outstanding under GCCs as indirect finance to agriculture sector
under the priority sector with immediate effect.
B. KCC Scheme
Eligible farmer will be provided a Kishan Credit Card and a Pass Book
or a Card-cum-Passbook.
Revolving cash credit facility allowing any number of withdrawals

and repayments within the limit.

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Financial Inclusion
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Entire production credit needs for full year plus ancillary activities
related to crop production to be considered while fixing limit. In due
course, allied activities and non- farm short term credit needs may
also be covered.
Limit to be fixed on the basis of operational land holding, cropping
pattern and scales of finance.
Seasonal sub limits may be fixed at the
discretion of banks. Limit of valid for 3 years
subject to annual review.
Conversion /re-schedulement of loans also permissible in case of

damage to crops due to natural calamities.
As incentive for good performance, credit limits could be enhanced
to take cares of increase in costs, changing in cropping pattern etc.
Security, margin and rate of interest as per RBI norms.
Operations may be through issuing branch / PACS or through other
designated branches at the discretion of bank.
Withdrawals through slips /cheques accompanies by card and
passbook.
Personal Accident Insurance of Rs. 50,000 for death and permanent
disability and Rs. 25,000/- for partial disability available to Kishan
Credit Card holder at an annual premia of Rs. 15/- per annum.
f) Financial Literacy Program

Recognizing that lack of awareness is a major factor for financial
exclusion, the Reserve Bank has taken a number of measures towards
imparting financial literacy and promotion of credit counseling services.
The Reserve Bank has undertaken a project titled Project Financial
Literacy.
The objective of the project is to disseminate information regarding the
central bank and general banking concepts to various target groups,
including, school and college going children, women, rural and urban poor,
defense personnel and senior citizens. The banking information would be

disseminated to the target audience with the help of, among others,
banks, local government machinery, schools/colleges using pamphlets,
brochures, films, as also, the Reserve Banks website.
Various initiatives taken by the Reserve Bank in order to promulgate
Financial Literacy:
1
A multilingual website in 13 Indian languages on all matters

concerning banking and the common person has been launched by the
Reserve Bank on June 18, 2007.
Comic type books introducing banking to schoolchildren have

already been put on the website. Similar books will be prepared for
different target groups such as rural households, urban poor,
defence personnel, women and small entrepreneurs.

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Financial Inclusion
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Financial literacy programs are being launched in each state

with the active involvement of the state government and the SLBC.
Each SLBC convener has been asked to set up a credit counselling
centre in one district as a pilot project and extend it to all other
districts in due course.
The Financial Inclusion and Financial Literacy Cell has been

established the college of Agricultural Banking, which would act as a
resource centre in this field.
THIRD PHASE - RANGRAJAN COMMITEE
61.
The Government of India (Chairman Dr. C. Rangarajan) constituted the

Committee on Financial Inclusion on June 26, 2006 to prepare a strategy
of financial inclusion. The Committee submitted its final Report on January
4, 2008. The Report viewed financial inclusion as a comprehensive and
holistic process of ensuring access to financial services and timely and
adequate credit, particularly by vulnerable groups such as weaker
sections and low-income groups at an affordable cost 9. Financial inclusion,
therefore, according to the Committee, should include access to
mainstream financial products such as bank accounts, credit, remittances
and payment services, financial advisory services and insurance facilities.
The Report observed that in India 51.4 per cent of farmer households are
financially excluded from both formal/informal sources and 73 per cent of
farmer households do not access formal sources of credit. Exclusion is
most acute in Central, Eastern and North-eastern regions with 64 per cent
of all financially excluded farmer households. According to the Report, the
overall strategy for building an inclusive financial sector should be based
on
1
Effecting improvements within the existing formal credit
delivery mechanism;
2
Suggesting measures for improving credit absorption capacity

especially amongst marginal and sub-marginal farmers and poor noncultivator households;
3
Evolving new models for effective outreach; and
Leveraging on technology-based solutions.
Keeping in view the enormity of the task involved, the Committee

recommended the setting up of a mission mode National Rural Financial
Inclusion Plan (NRFIP) with a target of providing access to comprehensive
financial services to at least 50 per cent (55.77 million) of the excluded
rural households by 2012 and the remaining by 2015. This would require
semi-urban and rural branches of commercial banks and RRBs to cover a
minimum of 250 new cultivator and non-cultivator households per branch
per annum. The Report of the Committee on Financial Inclusion Committee
has also recommended that the Government should constitute a National
Mission on Financial Inclusion (NaMFI) comprising
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

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Financial Inclusion
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representatives of all stakeholders for suggesting the overall policy

changes required, and supporting stakeholders in the domain of public,
private and NGO sectors in undertaking promotional initiatives.
The major recommendations relating to commercial banks included target
for providing access to credit to at least 250 excluded rural households
per annum in each rural/semi urban branches; targeted branch expansion
in identified districts in the next three years; provision of customised
savings, credit and insurance products; incentivising human resources for
providing inclusive financial services and simplification of procedures for
agricultural loans. The major recommendations relating to RRBs are
extending their services to unbanked areas and increasing their creditdeposit ratios; no further merger of RRBs; widening of network and
expanding coverage in a time bound manner; separate credit plans for
excluded regions to be drawn up by RRBs and strengthening of their
boards.
In the case of co-operative banks, the major recommendations were early
implementation of Vaidyanathan Committee Revival Package; use of PACS
and other primary co-operatives as BCs and co-operatives to adopt group
approach
for
financing
excluded
groups.
Other
important
recommendations of the Committee are encouraging SHGs in excluded
regions; legal status for SHGs; measures for urban micro-finance and
separate category of MFIs.
CREATION OF SPECIAL FUNDS
The Committee on Financial Inclusion set up by the Government of India
(Chairman: Dr. C. Rangarajan) in its Interim Report recommended the
establishment of two Funds, namely the
Financial Inclusion Promotion and Development Fund for meeting the
cost of developmental and promotional interventions for ensuring financial
inclusion, and the
Financial Inclusion Technology Fund (FITF) to meet the cost of
technology adoption.
The Union Finance Minister, in his Budget Speech for 2007-08 announced
the constitution of the Financial Inclusion Fund (FIF) and the FITF, with an
overall corpus of Rs.500 crore each at NABARD.
The Government advised that for the year 2007-08 it was decided to
initially contribute Rs.25 Crore each in the two funds by the Central
Government, RBI and NABARD in the ratio 40:40:20. The final report of the
Committee has been submitted to the Government in January 2008.

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Chapter - 6
HOW GOVERNMENT AND RBI

CAN BUILD ON EXISTING
BANKING STRUCTURE TO
PROVIDE FINANCIAL
SERVICES TO ALL
Banking system is like a team, which constitutes from various entities
which are different in nature, form, structure and its working but together
they makes system in which they efficiently work for a common motive.
SHG BANK LINKAGE PROGRAM

The SHG-Bank Linkage program can be regarded as the most powerful
initiative since independence for providing financial services to the poor in
a sustainable manner. The program has been growing rapidly YOY basis.
Currently, 10 million SHGs are working across the country with a credit
base of Rs. 100000 Crore. But this is not enough to reach the entire mass.
This number needs to be increased substantially.
However, the spread of the SHG- Bank linkage program in different
regions has been uneven with southern states accounting for the major
chunk of credit linkage. Many states with high incidence of poverty have
shown poor performance under the program. NABARD has identified 13
states with large population of the poor, but exhibiting low performance in
implementation of the programme. The ongoing efforts of NABARD to
upscale the programme need to be given a fresh impetus. NGOs have
played a commendable role in promoting SHGs and linking them with
banks.
As of now, SHGs are operating as thrift and credit groups. They may
evolve to a higher level of commercial enterprise in future. Hence, it
becomes critical to examine the prospect of providing a simplified legal
status to the SHG
MICRO FINANCE INSTITUTIONS (MFIs)

From the late 1980s, the emergence of the Grameen Bank in Bangladesh
drew attention to the role of microcredit as a source of finance for microentrepreneurs. Lack of access to credit was seen as a binding constraint
on the economic activities of the poor.

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Microfinance Institutions (MFIs) are those, which provide thrift, credit, and
other financial services and products of very small amounts mainly to the
poor in rural, semi-urban or urban areas for enabling them to raise their
income level and improve living standards. Lately, the potential of MFIs as
promising institutions to meet the demands of the poor has been realized.
The closer proximity with the people at grassroots level and the mix of
offering right products at right price based on the actual needs of the
masses makes their role very important in deepening financial inclusion.
However, there is exigency to upscale their outreach. In India, out of some
400 million poor workers, less than 20 per cent have been linked with
financial services provided by MFIs.
Steps needed to promote MFIs
One of the ways of expanding the successful operation of
microfinance institutions in the informal sector is through
strengthened linkages with their formal sector counterparts.
2
Efforts are needed to make MFIs an integral part of
mainstream banking and to bring down the rates of interest on
microcredit to ensure the micro finance movement gets further
impetus
3
A mutual beneficial partnership should be established
between MFIs and Banks contingent on comparative strength of
each sector. For example, informal sector microfinance institutions
have comparative advantage in terms of small transaction cost
achieved through adaptability and flexibility of operations.
1
COOPERATIVE CREDIT INSTITUTIONS

Rural credit cooperatives in India were originally envisaged as a
mechanism for pooling the resources of people with small means and
providing them with access to different financial services. It has served as
an effective institution for increasing productivity, providing food security,
generating employment opportunities in rural areas and ensuring social
and economic justice to the poor and vulnerable sections.
Despite the phenomenal outreach and volume of operations, the health of
a very large proportion of these credit cooperatives has deteriorated
significantly. Various problems faced by these institutions are:
1
Low resource base
2
3
4
5
6
High dependence on external source of funding

Excessive government control
Huge accumulated losses and imbalances
Poor business diversification
Low recovery

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P a g e | 32
Taking all these facts in mind, there is an urgent need to address the
structural deficiencies of these institutions in order to make them play an
effective role in meeting the financial inclusion goal.
RRBs
RRBs, post-merger, represent a powerful instrument for financial inclusion.
RRBs account for 37% of total rural offices of all scheduled commercial
banks and 91% of their workforce is posted in rural and semi-urban areas.
They account for 31% of deposit accounts and 37% of loan accounts in
rural areas. RRBs have a large presence in regions marked by financial
exclusion of high order.
RRBs are, thus, the best suited vehicles to widen and deepen the process
of financial inclusion. However, they need to be oriented suitably to serve
the rural population with a specific mandate to achieve financial inclusion.
It is hoped that recent regulatory changes and fresh impetus provided by
the regulator will help in making RRBs front institution in achieving the
target of reaching out to financially excluded people.
THE BUSINESS CORRESPONDENT MODEL

In January 2006, the Reserve bank permitted banks to utilize the services
of non-government organizations (NGOs/SHGs), micro-finance institutions
and other rural organizations as intermediaries in providing financial and
banking services through the use of business facilitator (BF) and business
correspondent models(BC). The BC model allows banks to do cash in cash
out transactions at a location much closer to the rural population, thus
addressing the last mile problem.
Banks are also entering into agreement with Indian Postal Authority for
using the enormous network of post offices as business correspondents
for increasing their outreach and leveraging the postmans intimate
knowledge of the local population and trust reposed in him. The intention
behind the model is to promote the business of banking with low capital
cost by enabling outsourcing of rural business to agents on a commission
basis.
Recent guidelines issued by RBI to ensure adequate supervision over
operations of BCs:
Every BC to be attached to a certain bank to be designated as
the base branch
1
2
The distance between the area of operation of a BC and the base

branch should not exceed 30 km in rural, semi-urban and urban areas.

NEW DELHI
Financial Inclusion
P a g e | 33
Initiatives needed to be undertaken to promote BC model

1
Allow more entry to private well governed small finance banks.

The intent is to bring local knowledge to financial products that are
needed locally.
2
Facilitate the use of existing networks like cell phone kiosks or
kirana shops as business correspondents to deliver products of large
financial institutions.
3
Liberalize the business correspondent regulation so that a wide
range of local agents can serve to extend financial services .
ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION

According to recent Boston Consulting Group report, with cost of funds
today at 9%, provision for bad debts at 10% and cost of operation and
transaction at 13% for poor customers in far flung areas, banking for the
poor by formal sector becomes unviable. The key role the technology is
expected to play is to reduce the last two components drastically.
Unfortunately, public sector banks (PSBs), which account for 70% of
assets, have been slow in making use of modern technology to bring down
transaction costs.
How technology can lower operating costs as well as lending
rates?
1
In rural areas, different villages are separated by large
distances and poor
connectivity. Consequently, communication technology could play
an important role in bridging the last miles between the customer
and the provider thus facilitating faster transactions.
The telecom network in India is expanding rapidly as more and
more private operators are entering in the telecom sector. Banks
could leverage the network for expanding operations, reducing costs
and increase reliability of their operations.
2
As more than one million new mobile users are being added
every month in India, Mobile Banking can become the most
promising front end technology for facilitating financial inclusion in
India. As mobile phones have reached out to segments and
geographies but not yet penetrated by banking sector, this may be
one of the most preferred choices for banks for spreading their
network in unbanked areas.
1
However, banks need to consider certain facts before leveraging

technology to bring more and more population under the net of
financial inclusion
1
Cost effectiveness of technology
2
3
4
Security of accounts
Financial viability of technology in rural areas
Ability of potential beneficiaries to use the technology

NEW DELHI
Financial Inclusion
P a g e | 34
Chapter- 7
PRESENT STATUS OF
FINANCIAL INCLUSION IN
THE COUNTRY
A GLIMPSE OF EXTENT OF FINANCIAL INCLUSION IN THE
COUNTRY
Number of No-Frill Accounts 28.23 million (as on Dec. 31, 2008)
1
2
Number of rural bank branches 31,727 constituting 39.7% of total

bank branches (as of June. 31, 2009)
3 Number of ATMs 44,857 (as on May 31, 2009)
4
5
6
7
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 phones403 million (as on Apr.30, 2009) out of which

187 million (46%) do not have a bank account (Source: Cellular
Operators Association of India)
Measure of access to banking services in India
PRESENT LEVEL OF ACCESS TO VARIOUS

FIANANCIAL
SERVICE
S
50.00
%
40.00%
40.00
%
30.00
%
20.00
%
13.00%
10.00%
10.00
%
0.60%
2.00%
0.00%
Check
in
account
s
Life
Insurance
Non-Life
Insurance
Credit Card
Debit
ATM +
Card
SOURCE: PRESENT STATUS OF VARIOUS FINANCIAL SERVICES AS

DISCUSSED BY DR. K.C.CHAKRABARTY, DY GOVERNOR, RBI AT 20TH
SKOCH SUMMIT 2009, MUMBAI ON JULY 17, 2009

NEW DELHI
Financial Inclusion
P a g e | 35
POPULATION PER BANK BRANCH (SCHEDULED

COMMERCIAL BANKS)
P
O
P
U
L
A
T
I
O
N
(
I
N
T
H
O
U
S
A
N
D
)
9
0
8
0
7
0
6
0
5
0
Ru
ral
Ur
ba
n
To
tal
4
0
3
0
2
0
1
0
0
1969
198
1
199
1
YE
AR
S
(E
ND
IN200
1
G
MA
RC
H)
End March
Rural
1969
82
1981
20
1991
14
2001
16
2007
17
Note: figures are in

thousands
OBSERVATIONS
1 Less penetration of
banks in rural areas is
resulted in very high
population per branch.
2
Even though it has

come
down
significantly
but
population per bank
branch is still very
high especially in
rural areas.
RURA
L
PLAN
NING
AND
CRED
IT
DEPA
RTME
NT,
RESE
RVE
BANK
OF
INDIA
, NEW
DELHI
200
7
Financial Inclusion
P a g e | 36
NUMBER OF SAVINGS
ACCOUNTS
INSTITUTION
SCBs
RRBs
PACS
UCBs
Post Offices
Total
Total A/C per 100 persons
199
3
200
2
246.0
0
30.50
89.00
41.60
47.50
454.6
0
51.00
N
o
.
o
f
s
a
v
i
n
g
A
c
c
o
u
n
t
(
i
n
m
i
l
l
i
o
n
s
200
7
246.50
36.70
102.10
42.00
60.20
320.90
52.70
125.80
50.00
60.80
454.60
46.00
610.30
54.00
700.
00
600.
00
500.
00
Total
Account
SCBs
400.
00
RRBs
PACs
300.
00
UCBs
200.
00
100.
00
Post
offices
Per 100
persons
0.0
0
1993
2002
Years
Growth in bank
accounts
State wise growth in
bank accounts suggests
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%
RURAL PLANNING
AND CREDIT
DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
2007
Financial Inclusion
P a g e | 37
Chapter 8
Study result
Population of Delhi consist a big group of migrants, labour coming from
other part of country in search of employment, education and other
purposes. This groups being financially weak due to low literacy, low
income; generally do not have access to financial services.
In order to assess the level of financial inclusion in New Delhi, a survey
was conducted in area of Hari Nagar (West Delhi) through a questionnaire.
Target group were labourers, small shopkeepers migrant, i.e. people
employed in unorganized sector who are unbanked
Objective
To assess the impact of policy initiatives on financial inclusion in Delhi
Survey brief
Survey Sample size: 40 Households
Area: MS Block, Mayapuri Phase-II, Hari Nagar B Block (west Delhi)
Methodology
40
household
were
randomly
surveyed
regarding
financial
inclusion/financial literacy through a well constructed questionnaire
(annexure I) in surrounding area of Hari Nagar (Slums nearby MS Block, BBlock & Mayapuri Phase-II) in West Delhi.
Of the total sample, 34 were males and 6 were females (the low numbers
of females was due to reluctance in answering questions).
NEW DELHI
Financial Inclusion
P a g e | 38
PART I - HOUSEHOLD PROFILE

I.
Size
FZ=7
10%
When
asked
about their how
many members
they have in
their family?
FZ=3
7%
FZ
=6
The Response Was

As Follows
18
%
FZ=4
FZ=5
FZ=4
42%
FZ=5
23%
Figure 1: Family Size of Sample

surveyed
FZ=6
FZ=7
Majority of
them were
having family
size of 4 were
17(42%) and
family size of
3 was the
lowest 3(7%)
Family size of
5,6 and 7
were
9(23%),7(18
%) ,4(10%)
respectively
were
having
Sole
35. How many of earning
them
are member,
family
earning?
having 2
earning
Earning members
member
were
Families having 1 Earning
7(17%)
members
and only
3
families
members
(8%)
were
having
members
earning
member
s more
30 (75%) families
Figure 2: Earning
members in the
Family
RURAL PLANNING
AND CREDIT
DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
tha
n2
ear
nin
g
me
mb
ers
(as
sho
wn
in
the
fig
ure
)
Earning
membe
rs=3
8%
17%
75%
Earning
members
1
Earning
members=
2
Financial Inclusion
61.
P a g e | 39
Literacy level
Of the total sample, Majority were school dropout (20 i.e. 50%), High
school (5 i.e. 12.5%) and Sr. Secondary (8 i.e. 20%) (As Shown In Figure 3)
which implies that their literacy level was not enough to understand a
financial product, or the complications attached with opening a saving
bank account or operating it conveniently.
It also means that as they are not very educated they wont be having
fixed income as most of them are working daily wages and are underpaid,
hence they cannot afford high charges and penalties.
25
20
15
10
0
School Dropout High School
Sr. Secondary
Graduate
PG or Above
Figure 3: Literacy level
Graduates consisted 6(15%) People who were the main constituents of

Cat II and Cat. IV of earning group (Figure 5), & 1 respondent didnt
answer this question.

NEW DELHI
NA
Financial Inclusion
IV.
P a g e | 40
Employment
2(7%)
1(3%)
Organised
Sector
Un-organised
NA
38(90%)
Figure 4: Employment
Of the total 40
people surveyed
2
were
found
working
in
organized sector
and
38
were
found working in
unorganized
sector (Figure 4).
To understand the
financial position
of household they
were
further
asked
further
about
their
employability or
the
nature
of
employment, out
of
the
40
respondent
16
were
labourers
working
in
Factories
in
nearby areas; 10
were
self
employed
i.e.
shopkeepers and
running
small
scale
business
activities; 6 were
engaged
in
service
in
unorganized
sector(as
depicted in Figure
5)
16
14
12
10
8
6
4
10
2
0
Unorganized Sector
R
U
R
A
L
P
L
A
N
N
I
N
G
A
N
D
C
R
E
D
I
T
D
E
P
A
R
T
M
E
N
T
,
R
E
S
E
R
V
E
B
A
NK OF
INDIA,
NEW
DELHI
Financial Inclusion
P a g e | 41
PART II - FINANCIAL POSITION

9.
Earnings
In figure 6, Cat. I consist of respondent whose earning is in the range of

Rs 0-4000, similarly Cat. II=Rs. 4000-8000, Cat III = Rs. 8000-12000, Cat
IV =Rs. 12000-16000 & Cat V = Rs. 16000 & above
The observation indicates that Cat. I consist mainly the labors and
household working on daily wages (32.5%), and Cat. II & Cat III (42.5%
&12.5% respectively) consist mainly those who are self employed i.e.
shopkeepers, Students (3) etc.
Cat. IV and Cat. V people engaged in organized sector and those who
are having business which is stable in nature.
i
n
t
h
o
u
s
a
n
d
s
)
20
E
a
r
n
i
n
g
s
(
Figure 3: Earnings
It may be seen from the

above that nearly 75%
(cat. I & cat. II) of the
respondent pertains to
low income group.
15
10
5
0
Cat.I
Cat.II Cat. III Cat.IV Cat. V
whereas 22%
had earning on dailyDaily
basisWeekly
and 10Monthly
i.e. 4
NA
respondent
did not answered on this.
Figure 7: Earni
pattern
RURAL PLANNING AND

CREDIT DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
Financial Inclusion
61.
P a g e | 42
they
are
saving
some part
of
their
income, 45
%( 18) of
respondent
are
not
saving
anything
and 5% (2)
didnt
responded
to
this
question
Saving
Q.
Do
you save?
NA
5%
50 %( 20) of
respondent
Yes
said
that
No 50% 45%
Figure 8: Saving
It
was
interestin
g to see
that
all
those
who were
earning
on
daily
basis
were
saving on
regular
basis
to
this.
Weekly
Monthly
6
Figure 9: Saving Frequency
Out
of
the
20
respondent who have
saving habit, 14 were
saving on monthly
basis, this can be
contributed to the
fact that 70% of them
were
earning
on
monthly
basis;
3
respondent
are
saving weekly and
there was no one
saving on quarterly
basis, 2 didnt replied
16
14
12
10
RURAL PLANNING
AND CREDIT
DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
Qu
Financial Inclusion
Q.
P a g e | 43
Figure 10: How
much?
How much?
Out
of
20
respondent
12(60%) said
that
they
save 0-5% of
their income
which means
they
generally
have
very
small
amount
of
savings
which
implies that
they will be
transacting
on
regular
basis
but
with
very
little amount
which
Commercial
banks
generally
found to be
reluctant.
20%
15%
3(15%)
and
4(20%) were
saving
1015% and 15%
and
above
respectively
of
their
earnings.
60%
5%
0-5%
5-10%
10-15%
15% & Above
HERE DO
YOU KEEP
YOUR
SAVING
Q.
Where do you
keep your savings?
5%
45%
45%
Figure 11: Where do you
keep your saving?
Majority of the
respondent were either
5%
keeping their saving in alternativ

saving bank account or es.
cash at home (45%
each) and only 5% were
putting it in investment
RUR
NG AND CREDIT
AL
PLA
NNI
DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
Financial Inclusion
P a g e | 44
PART III - BANKING HABITS
Q.
Do you have bank account?

bank account.
DO YOU HAVE BANK ACCOUNT?
Of the 40
respondent
, 19(47%)
are having
saving
bank
account
and
21(53%)
are
not
having
47%
53%
Account
Q. Did
you
face
Figure 12: Do you have bank
Yes 26%
Out of 19
respondent,
11(74%) were
having only 1
bank account &
2(11%) were
having 2 and 4
bank account.
Provided
further, Out of
19 respondent,
17 were having
saving bank
account and 2
among them
also having
fixed deposit
account, 1
recurring
deposit
account.
any problem
while opening
account?
Figure
13: Did
you face
any
problem
while
opening
bank
account
Out
of
the
19
res
pon
den
t,
who
hav
e
ban
k
acc
oun
t
74%
of
the
respondent
didnt
faced any problem
while opening bank
account, while 26%
said they faced.
The general problems
faced were
Not finding an
introductory to
RU
o
p
e
n
a
n
or
m
al
s
a
vi
count
Not
having
documen
t
regarding
proof of
address
those
who were
b
a
n
k
a
c
RAL G AND
RESE
PLA CREDIT
RVE
NNIN DEPARTMENT, BANK
p
u
t
ti
n
g
u
p
o
n
r
O DIA, NEW
F DELHI
IN
e
nt
.
Financial Inclusion
P a g e | 45
Q. How far is the bank branch from your residence?
25KM
02KM
1012K
M
The majority of respondents

have no
problem of distance of bank
branch
from their residence as 79%
7%
respondent have bank

branch within
range of 0-5 Km and 14%
within 2-5
Km.
14%
79%
Figure 14: Distance of Bank Branch
Q.
What are the services\product you avail along with your

bank account?
15
10
Payment &
remittances
Mobile
banking
ATM/DEBIT
CARD
Loan &
Advances
1
Credit
Card
1
Net
banking
Figure 15: Product and Services Availed
19(47%) respondent were having bank account (figure 12), among them 5
respondent were using 1 service/product, 11 respondent were using 2
services, 1 respondent were using 3 services\product on his two bank
accounts and 2 respondent skipped this question.

NEW DELHI
Financial Inclusion
P a g e | 46
Q. For what purposes you use your account
Depositing and withdrawing money so that cash flow is managed

accumulating funds/interest earning for future requirement
making and receiving payment
to become eligible for other services
19%
19%
5%
57%
Figure 16: Usage of bank account
The majority of sample population,57% uses bank account for
managing their cash flow as they get their salary or earning in

beginning of month but expenditure is over the month,
19% uses bank account for accumulating funds and interest thereon
for meeting future contingencies, and other 19% uses bank account
for making and receiving payment
And rest 5% uses bank account as means of becoming eligible for
other financial services.

NEW DELHI
Financial Inclusion
P a g e | 47
PART IV -THOSE WHO DO NOT HAVE BANK

ACCOUNT
(21 RESPONDENT, 52.5%)
There was no respondent having anticipated rejection from bank or those
who have voluntarily excluded himself from banking system.
Further when asked about whether they have been approached by anyone
to open a saving bank account, 7(33.33%) said yes they have been
approached by various people like friends, family and specifically by their
employer; 16(76.19%) respondent said that they have never been
approached by anyone to open saving bank account in Hari Nagar area.
REASONS FOR NOT HAVING BANK

ACCOUNT
tried but refused
6%
not aware of
benefits a
bank
accou
nt
29%
cannot
meet
MBR*
and
service
charges
26%
tedious
procedure/pap
er
work
7%
lack of
low level
of
literacy
13%
awareness
and
guidance
19%
Figure17: Reasons for not having bank account

DELHI
Financial Inclusion
P a g e | 48
Q. Perception towards banking

time and cost
contraint
6%
PERCEPTION TOWARDS BANKING

tr
u
st
3
5
%
only for HNI*

and
priveledged
group
27%
need
32%
Figure 18: Perception towards banking
35% of the respondent felt that banking means trust, 32% felt that the
banking is their need whereas on the contrary 27% said that banking is
only meant for High Net worth Individuals (HNI) and privileged group of
society, 6% said they are connected to banking system due to time and
cost constraints (figure 18).
Those who were not having bank account were further asked whether
they are know anything about No Frills Account or zero balance bank
account 6 respondent said yes,
They know about this sort of bank account offered by banks as they came
to know about it from newspapers, bank officials, friends & relatives; but
majority of the respondent (29) were not aware about this kind of bank
account.

NEW DELHI
Financial Inclusion
P a g e | 49
PART V - CREDIT PATTERN

This part of questionnaire was to evaluate the credit and advance pattern
of the sample, people were not willing to reveal their information
regarding how much debt they have, what the last occasion they
borrowed, and other questions related to their indebtness and credit as
they consider it personal and many of them were afraid that this can be
used to evaluate their creditworthiness when they visit banks for loan and
advance.
The first question was the last three occasions they borrowed but no one
replied to this question. On further asking about the purpose of borrowing
and other related things, the responded were conservative.
Q. Purpose of borrowing
Total of 17 who responded to this question 65% said that they have borrowed
money for personal purpose, 17% said they have borrowed money for
education of children, 12% for residential house purchase, 6% for funding
business.
ON ASKING FURTHER IF PERSONAL, THEN
Food and clothing
12
%
Celebrations or social obligations
12
%
Day to day living expenses or bills
18
%
To repay older debts
23
%
for funding
PURPOSE OF
BORROWING business
residential house
6%
purchase
12%
Person
al
65%
Education
of
children
17%
Figure 19: Purpose of borrowings

DELHI
Financial Inclusion
P a g e | 50
Q. Source of borrowing
Majority of respondent, borrowed from their friends and relatives and
whereas only 36% borrowed from bank and moneylender in both
categories.
k
1
2
1
0
N
o
.
o
f
r
e
s
p
o
n
d
e
n
t
4
2
0
mon
eyle
nder
s
NGO
s
Frie
nds/
rela
tive
s
Ban
w money lender they

a get instant cash
Figure 4: Source of Borrowings
s without
any
t mortgage.
h
a
If they borrowed fromt
money
lender
then
further they were askedf
why
they
preferredr
moneylender over bankso
for credit needs, responsem
RURAL PLANNING AND

CREDIT DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
Financial Inclusion
Q.
P a g e | 51
Total amount outstanding
14 respondent who filled this question, the average debt was Rs. 37571 with
avg. rate of interest of 10.05%,the debt was ranging from Rs. 6000 to the
highest 0f Rs. 300000, interest rate ranged from lowest of 8.00% to 20.00%.
TOTAL AMOUNT OUTSTANDING & RATE OF INTEREST

ch
ar
ge
s
ou
tst
an
di
ng
\In
ter
es
t
3500
00
3000
00
2500
00
2000
00
1500
00
1000
00
8.5
0%
20
%
8.00%
8.0
0%
14%
5000
0
10.50%
A
m
ou
nt
11.5
0%
0
1
10
%
10%
5
0
10
No. of respondent
0
1
1
1
2
0
13
14
AWARENESS ASPECT
Q.
Do you know about banking credit?

54% of the respondents do
not
Yes
No
know what is banking

credit, whereas 46%
knows what is banking
credit.
46%
54%
Figure 5: Awareness of banking credit

DELHI
Financial Inclusion
Q.
P a g e | 52
Have you ever approached any bank for credit need?
Yes
5%
No
95
%
Figure 6: Approached for banking credit needs
It is revealed from the above that only 5% of the respondents have

approached banks for credit needs.
Q.Have you purchased any insurance scheme?

Out of 37, only 3 people have purchased some insurance scheme, where 34
people have not purchased any insurance scheme as they are not aware about
what is insurance.
.Over the past couple of years, have you been

anywhere for advice about money matters?
Majority with 33 respondent said no they never been to anyone for financial
advice, whereas 3 responded that they have been to financial advisor for their
credit guidance and financial planning.
Further they were asked, is there any credit counselling centre in their area? Only
one respondent said yes and rest 30 said no.

NEW DELHI
Financial Inclusion
P a g e | 53
PART VI - SUGGESTIONS
Q. Do you think that every bank should have the
following things in place to enable financial inclusion?

Customer care/reception/may I help you counter
Credit counseling centers
Compulsory No Frill Account offering from every bank
Any suggestion
(specify)__________________________________________________
__
Majority with 53% of respondent felt that establishing customer care

counter/may I help you counter should be made compulsory, When told
about what is no frills account, 24% felt that every bank should be made
to offer No Frill account and 23% said there should be atleast one credit
counselling centre/financial education centre in their area.
compulsory no frill account offering from

every bank 24%
S
u
g
g
e
st
io
n
s
compulsory customer
care counter 53%
cred
i
t
c
o
u
n
s
e
l
i
n
g
c
e
n
t
e
r
2
3
%
Figure 7: suggestions
RURAL PLANNING AND

CREDIT DEPARTMENT,
RESERVE BANK OF
INDIA, NEW DELHI
Financial Inclusion
P a g e | 54
Chapter - 9
Conclusion
Steps taken towards bringing lower income groups to the banking system
has been successful to a significant extent, as the main causes observed
earlier like distance of bank branch, unawareness about banking services
has improved.
While doing survey it was found that people are not voluntarily excluding
themselves from banking system, most of them have faith in banking and
feels that they need banking services. The need varies from managing
cash flow as they earn on daily basis or irregular basis.
The reasons behind not approaching banks are mainly the minimum
balance requirements which have been taken care by No Frills Bank
Account but most of the respondent was not aware about this type of
account. Hence it needs to be advertised; literacy level and awareness
about various other products/services.
It was also found that people prefer to borrow from personal/informal
sources when the purpose is personal or consumption. Where the amount
to be borrowed is generally small, the people found to be reluctant to
approach banks, whereas for other productive purposes they borrow from
banks.
In other words, it may be said as per the study conducted in Hari Nagar
Area. Despite the thrust given to financial inclusion, the desired results
have not come up.
Suggestions
Every bank should be forced to establish a customer care /May I

help you Counter at every branch so that new customer should be
guided and relevant information is provided.
To increase the awareness, there is a good scope of having financial
literacy cell or credit counselling centres in each district so that it
can take care of uneducated/illiterate individuals.
Every bank should be made to offer No frill saving account with
basic services without terms & conditions which are class/group
specific but are applicable to all. Private sector should be involved in
process of financial inclusion and they should be made realise that it
is not only a business opportunity for them but corporate social

responsibility too.

NEW DELHI
Financial Inclusion
P a g e | 55
BIBLIOGRAPHY
Annual Policy report 2005-2006
Report on currency and Finance 2006-08
Ranjrajan Committee report on Financial Inclusion(2008)
Universal Financial Inclusion in India: The Way Forward by

S.Ramesh and Preeti Sahai
The need for financial inclusion with an Indian

perspective by Amol Aggarwal, IDBI
Pushing Financial Inclusion Issues, Challenges and

Way Forward - A Presentation by Dr. K.C.Chakrabarty
Deputy Governor, RBI
Presentation on Financial Inclusion & Banking System by

S K Kale, General Manager, NABARD
Working paper on social, economical and financial

Consequences of financial exclusion by Bernard Bayot
Internet
o
www.wikipedia.co
m o
www.rbi.org.in
o http://aryavartrrb.com/ o
www.grameen-info.org
o http://cab.org.in

NEW DELHI
Financial Inclusion
P a g e | 56
GLOSSARY
MBR-
Minimum
balance
requirement AMC Annual

maintenances charges HNI
High Net worth Individuals
KYC norms- Know Your Customer
Norms SLBC State levels
banker committee GCC- General
credit card
KCC-Kisan Credit
Card SHGs Self
Help groups
SHPIs Self help Promoting
Institutions POS Point of sale
RRBs Regional Rural Banks
UCBs Urban Cooperative
banks MFIs Micro-finance
Institutions
PACS Primary Agricultural Cooperative Societies
No Frill Bank Account- a zero balance saving bank account with no annual
maintenance charges

NEW DELHI

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RURAL PLANNING &

SHAHEED SUKHDEV COLLEGE OF BUSINESS

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

CAUSES OF FINANCIAL EXCLUSIO

FIRST PHASE DEVELOPMENTS (1969-1981)

PRESENT STATUS OF FINANCIAL INCLUSION IN THE

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA, NEW

rural areas; nevertheless, there is also a significant amount of the urban

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Leyshon & Thrift 1995

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Extreme definition may be seen as a somewhat sweeping definition, with

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Figure 1: Anatomy of Various Financial Products or Services and the

THE INDIAN SCENARIO

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Without a formal and a legally recognized financial system in which all

Lack of access to financial services mainly payment system, which

High information barriers and low awareness especially for

Inadequate access to formal financial institutions that exist to

Poor functioning and financial history of some beleaguered

Primary Agricultural Cooperative Societies (PACS), which

Lack of access to formal financial services in of both rural and urban

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

3. High cost and leakages in money transfers: the delays in sending

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

The access to various mainstream financial services e.g. saving

The main objective is to provide the benefit of vast formal

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL

Payment and remittances services

Immediate credit in case of contingencies like accidents, medical

Entrepreneurial credit this means, to run/expand small scale

Insurance life\healthcare- to plan future better

Financial education\credit counselling centres to guide them

BASIC SAVING BANK ACCOUNT

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

To understand it better, lets take life of migrant street

cial Inclusion in India: The

products and services provided by the mainstream financial service

More importantly, Financial Inclusion is imperative for creating an inclusive

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

A. DEMAND SIDE BARRIERS

Low Income: A higher share of population below the poverty line

Transaction cost: Vast number of rural population resides in small

Financial Services Being Very Complex In Nature:

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Easy access to alternative credit: For a good amount of low

Low literacy level: The lack of financial awareness about the

Legal identity: Lack of legal identities like identity cards, birth

Sophisticated Financial Terminologies: Bankers often use

Terms and conditions: Terms and conditions attached to

Psychological and cultural barriers: The feeling that banks

have also been observed in some of the countries.

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Disincentives for the consumer: The cost of maintaining an

B. Supply side barriers

Perception among banks about rural population : Generally,

Miniscule margin in handling small transactions : As the

requirements: The KYC requirements of independent

Unsuitable products: One of the most important reasons for the

Staff attitude: As public sector banks(PSBs) cater to more than

RURAL PLANNING AND CREDIT DEPARTMENT, RESERVE BANK OF INDIA,

Poor market linkage: It is often argued that we may have been