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ISSN 0975-1211

Poverty Alleviation through Financial Inclusion: An Analytical Study with Special Reference to India
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Mr. Krishna Murari Dr. Manish Didwania

Abstract At the beginning of the new millennium, 260 million people in the country did not have incomes to access a consumption basket which defines the poverty line. Of these, 75 per cent were in the rural areas. India is home to 22 per cent of the worlds poor. Such a high incidence of poverty is a matter of concern in view of the fact that poverty alleviation has been one of the major objectives in the 21st century. Financial inclusion can serve the purpose to a greater extent. Increasing access of financial services to deprived section of society is the main motto of Financial Inclusion in India. A major section of Indian rural population is deprived of financial access in the form of bank accounts, financial advice, financial services etc. The main problem in India is the provision of financial services to those living in poverty and excluded from the financial system. These people do not have income nor own a property and therefore, are unable to provide Bank guarantees, as a result of which they are generally forgotten by financial Institutions and Banks. The concept of Financial Inclusion has gained a lot of importance and momentum in this regard in the last decade.

In this paper we have made an attempt to highlight the poverty situation in India in comparison with the rest of the world since its independence. The Indian government has been serious about the poverty alleviation at the Bottom of pyramids (BOP) and continuously designing the strategies and practices for the same. Further, the various attempts made by the government in this regard have been explored and their effectiveness is analyzed. Finally the financial inclusion as the poverty alleviation mechanism to maintain living standards of poor people and providing them entrepreneurial environment for their upliftment and need of financial inclusion has been explored, followed by the analytical study with reference to India, for alleviating the poverty from the grass root level is assessed.
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**

Asst. Professor (Business Administration), MITS University, Laxmangarh, Sikar, Rajasthan. Asst .Professor (ABST,) MITS University, Laxmangarh, Sikar, Rajasthan.

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Keywords- Poverty Line, Poverty Alleviation, Financial Inclusion, Financial Services, Financial System, BOP.

Introduction After the period of economic reforms in India, so many attempts have been made to reduce the poverty, but the outcome was not observed up to the mark. Meaning thereby, rich became richer and the poor became poorer. This post-economic reform period evidenced both setbacks and progress. Rural income poverty increased from 34% in 1989-90 to 43% in 1992 and then fell to 37% in 1993-94. Urban income poverty went up from 33.4% in 1989-90 to 33.7% in 1992 and declined to 32% in 199394 Also, NSS data for 1994-95 to 1998 show little or no poverty reduction, so that the evidence till 1999-2000 was that poverty, particularly rural poverty, had increased post-reform. However, the official estimate of poverty for 1999-2000 was 26.1%, a dramatic decline that led to much debate and analysis. This was because for this year the NSS had adopted a new survey methodology that led to both higher estimated mean consumption and also an estimated distribution that was more equal than in past NSS surveys. The latest NSS survey for 2004-05 is fully comparable to the surveys before 1999-2000 and shows poverty at 28.3% in rural areas, 25.7% in urban areas and 27.5% for the country as a whole, using Uniform Recall Period Consumption. The corresponding figures using the Mixed Recall Period

Consumption method was 21.8%, 21.7% and 21.8% respectively. Thus, poverty has declined after 1998, although it is still being debated whether there was any significant poverty reduction between 1989-90 and 1999-00. The latest NSS survey was so designed as to also give estimates roughly, but not fully, comparable to the 1999-2000 survey. These suggest that most of the decline in rural poverty over the period during 1993-94 to 2004-05 actually occurred after 19992000.Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion.

World Banks New Poverty Estimates and India The World Bank has redefined the poverty line to $1.25 per day from the initial poverty line of $1 per day in view of the fact that the cost of living has gone up in developing countries. This revision has also increased the estimated poverty ratio for India.The World Bank has readjusted the international poverty line from $1 a day 61

to $1.25 a day.

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This estimate of the poverty line is based on the average poverty line of the poorest 1020 countries. The cost of living in the poorest countries has increased resulting in a revision of the international poverty line.

Table 1 Poverty reduction in India as per World Bank


GAINS IN POVERTY REDUCTION (Figures in %) 1990 1993 1996 1999 2002 2005

BELOW $1 A DAY India World 33.3 29.9 31.1 26.9 28.6 23.5 27.0 22.8 26.3 20.8 24.3 16.1

BELOW $1.25 A DAY India World 51. 3 41. 7 82.6 63. 1 49.4 39 46.6 34.7 44.8 33.7 43.9 31.1 41.6 25.7

BELOW $2 A DAY 81.7 61.4 79.8 58.3 78.4 57.0 77.5 53.6 75.6 47.6

India World

As is seen from the above table, for the world, the proportion of people who live below $1 per day was 16.1% in 2005, while that for India was 24.3%. However, if we consider $1.25 as the poverty line then it is seen that for 2005, the poverty ratio for the world is 25.7%, while that of India is 41.6%. In case of $1 as the poverty line, the poverty ratio for the world declined from 20.8% in 2002 to 16.1% in 2005, while it declined from 31.1% to 25.7% between these two years, if $1.25 is considered as the poverty line. For India, the poverty ratio declined from 26.3% to 24.3% between 2002 and 2005 if $1 is considered as the poverty line, while it declined from 43.9% to 41.6% in the same period if $1.25 is considered the poverty line. Poverty Alleviation through Financial Inclusion Providing access to finance is a form of empowerment of the vulnerable groups. Financial inclusion denotes delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. The various financial services include credit, savings, insurance and payments and remittance facilities. The objective of financial inclusion is to extend the scope of activities of the organized financial system to the needy people of low incomes. 63

Chart 1- Dimensions of financial inclusion


Savings

Financial advice Financial Inclusion

Insurance

Affordable credit Bank Accounts

Repayments and Remittances

Financial Inclusion is the delivery of services at affordable cost to the vast section of disadvantaged and low-income groups. Access to financial services such as loans, savings, deposits, health insurance etc. by the population living in the rural and deeprural segments has been limited and been the major deterrent of growth in these segments. Access to such services will help in improving the standard of living, health and hygiene through empowering the under privileged, thereby helping in social, political and economic stability. Delivering banking services in an affordable manner to the rural areas requires a secure transaction processing platform that can be deployed cost-effectively. Financial inclusion is aimed at providing banking / financial services to all people in a fair, transparent and equitable manner at affordable cost.

Households with low income often lack access to bank account and have to spend time and money for multiple visits to avail the banking services, be it opening a savings bank account or availing a loan. These families find it more difficult to save and to plan financially for the future. Thus, the unbanked public is largely cut off from the Banking products/services.

Level of Non-Indebtedness: Across Regions The farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91%, 81.26% and 77.59% in the North Eastern, Eastern and Central Regions respectively. In terms of absolute numbers these regions taken together account for 64% of farm households not accessing credit from formal sources as detailed below: 64

Table 2- Level of Non-Indebtedness: Across Regions


No. of Farmer Households (HH) in Lakh Region Total HHs Indebted HHs % to total HHs Non indebted HHs % to total HHs Indebted to formal sources Northern 109.46 56.26 51.40 53.2 48.60 27.423 25.05 % to total HHs Excluded by formal sauces 82.04 74.95 % to total HHs

North Eastern Eastern

35.40

7.04

19.90

28.36

80.10 1.448

4.09

33.95

95.91

210.6 1

84.22

40.00

126.39

60.00

39.467

18.74

171.14

81.26

Central

271.33 113.04

41.60

158.29

58.40

60.814

22.41

210.52

77.59

Western

103.66 55.74

53.70

47.92

46.30

45.586

43.98

58.07

56.02

Southern

161.5 117.45 6 893.50 434.24

72.70

44.11

27.30

69.072

42.75

92.49

57.25

All India

48.60

459.26

51.40

243.96

27.30

649.54

72.70

Share to all India (%)

57.90

47.05

68.16

41.70

63.99

Source: Report of RBI on financial inclusion, Jan 2008 The Southern Region, on the other end, exhibits relatively better levels of access to formal / non-formal sources (72.7%) mainly on account of spread of banking habits and a more robust infrastructure.

Level of Non-indebtedness: Across Social Groups


The highest levels of non-indebtedness to both formal and non-formal sources is observed among Scheduled Tribes (ST) with 63.7%, followed by Scheduled Castes (SC) with 49.8% as detailed below :

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Table 3- Level of Non-Indebtedness: Across Social Groups

Households

Scheduled Tribes

Scheduled Other Castes Back ward Classes


155.93 370.43

Others

All

Total no. of farmer HHs (lakh) Non-indebted farmer HHs (lakh) Proportion of non-indebted Farmer HHs (%)

119.24

247.90

893.50

75.94

77.60

125.76

125.76

459.26

63.69

49.77

48.58

50.73

51.40

Source: Report of RBI on financial inclusion, Jan 2008

The Changing Environment for Poverty Alleviation and Financial Inclusion Policies and Practice in India What is required now is not creating new institutions for extending their outreach but finding ways and means to effect improvements within the existing formal credit delivery mechanism and evolve new models for extending out-reach. In a broad sense, we need to address issues on the supply side as well as demand side. The formal banking system, the rural cooperatives and non-governmental organizations must be strengthened organizationally to extend their out-reach. The financially excluded sections require products which are customized to meet their needs. Financial exclusion is also caused by demand side issues. Unless steps are taken on the demand side that is in the real sectors mere supply side solutions from the financial sector will not work. Credit is necessary for this, but not sufficient. Credit has to be an integral part of an overall programme aimed at improving the productivity and income of small farmers and other poor households. Putting in place an appropriate credit delivery system to meet the needs of marginal and sub-marginal farmers must go hand in hand with efforts to improve the productivity of such farm households.

Role of Government in Poverty Alleviation


Post-independent India aimed at establishing a socialist pattern of society. Socialist goal of a society was advanced through various measures in different stages. After 1970s the

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Indian government focused on providing government subsidy and preferential credit to the poor to enable them to increase their income. Since 1970 various programmes were in operation in our country following such strategy of poverty alleviation. The Small Farmers Development Agency (SFDA) programme (1971-79), the Integrated Rural Development Programme (IRDP) (1979-99), the Swarnjayanti Gram Swarozgar Yojana (SGSY) (1999 to present and continuing), the Sampoorna Grameen Rozgar Yojna (SGRY) (2001to present and continuing), the National Rural Employment Guarantee Act 2005 (NREGA) are examples of such strategy. In this section I shall briefly review the experience of the programmes which were initiated by Indian

government as a strategy for poverty alleviation.

The Small Farmers Development Agency (SFDA) Programme


The SFDA programme was in operation during 1970s. Under this programme attempts were made to assist small farmers, marginal farmers and agricultural labourers to increase their income. An administrative mechanism was devised so that these vulnerable groups, who failed to benefit from the process of development, get benefited. The main cause of poverty among the small and marginal farmers was that they were unable to use modern technology due to resource constrains. Thus, the major challenge before the SFDA was to enable small and marginal farmers to use modern technology. In its effort to enable small farmers and marginal farmers to use modern technology, it was realized that the scale of available modern agricultural technology was such that it was not possible for farmers with small and fragmented holdings to use modern technology fruitfully in their individual capacity.

The Integrated Rural Development Programme (IRDP)


The SFDA programme was in operation during 1970s in some selected districts throughout the country as a pilot project. It was felt that such programme should be expanded also to
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cover non-agricultural poor like rural artisans, fishermen and others. Thus, on 2 October 1979 the SFDA was merged with the IRDP. As the conceived programme was extended to cover non-agricultural poor also, poverty line, instead of landholding (as was done under the SFDA) became the criterion for identifying the target group of the programme and was conceived as a programme covering the entire population living below poverty line. The programme was extended to all the blocks of the country. Due to the failure of group centered approach under the SFDA, the IRDP emphasized more on individual beneficiary

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based schemes. It did not confine its focus only on agriculture and emphasized on nonagricultural income generating activities as a measure for poverty alleviation.

Apart from the problem of misappropriation of assistance by the non-poor, the main problem faced by the IRDP was that even when it was possible to deliver assistance to the poor, its scope of work ended there. The IRDP operated mainly up to the point of providing assistance to the poor. After that, the assisted household was expected to utilize the assistance to increase its income by operating in the market. Not every assisted household could be expected to have the required entrepreneurial competencies, and the market generally favoured those who were more resourceful (Mandal, 2004). Thus the IRDP assistance failed to benefit the poor who were needier.

The Swarna Jayanti Grameen Swarojgar Yojona (SGSY)


The IRDP was in operation till 1999. In the new millennium it was replaced by the SGSY. It was observed that under the IRDP the poor people often were not able to succeed in income position. Thus, generating activities because of their week socio-economic

to overcome this problem again going back to group approach was

resorted to. It was thought that if poor people form group to undertake income generating activities, they may be able to overcome the disadvantages they face in undertaking income generating activities. The Grameen Bank experience of Bangladesh, several

similar experiments in our country and the success of micro-finance approach world over, prompted policy makers to emphasize on group approach under SGSY.

The most important aspect of the SGSY programme is that it emphasizes on a group centered approach. Under the SGSY, Self Help Groups are formed for mobilizing assisted poor families (Swarojgaries) for poverty alleviation. These Self Help Groups go through stages of evolution such group formation, group stabilization followed by micro enterprise development

Sampoorna Grameen Rozgar Yojna (SGRY) In the beginning of 21st century, the need was felt that the different programmes for wage-employment in the rural areas be merged and one ambitious programme be introduced which would take care of food security, additional wage employment and village infrastructure at the same time. With this noble idea, a new WageEmployment Programme namely the Sampoorna Grameen Rozgar Yojana (SGRY) was announced 68

by the Honorable Prime Minister on 15th August 2001. The new programme was launched on 25th September 2001 with an annual out lay of Rs.10, 000 crores. Under the Scheme, 50 lakh tonnes of food grains amounting to Rs.5, 000 crores (at economic cost) will be provided every year free of cost to the State Governments and Union Territory Administrations. The remaining funds will be utilized to

meet the cash component of wages and the material cost. Under the Scheme, about 100 crores man days of wage-employment are envisaged to be generated every year.

National Rural Employment Guarantee Act 2005(NREGA) Another important step taken by Indian government towards the reduction of poverty was the proposition of NREG scheme. Later on it was implemented as National Rural Employment Guarantee Act 2005(NREGA). The motto of this act was to provide for the enhancement of livelihood security of the households in rural areas of the country by providing at least one hundred days of guaranteed wage employment in every financial year to every household whose adult members volunteer to do unskilled manual work. As per the latest data released by Indian government, it can be seen that employment has been provided to the all castes, keeping in view the overall social empowerment as shown in the table below: Table 4-Employment provided to households Person days [in Crore] Total SCs STs Women Others Total works taken up Works completed Works in progress Source: http://nrega.nic.in/netnrega/home.aspx 2009) 3.88 175.24 53.6 [30.59%] 37.26 [21.26%] 86.8 [49.53%] 84.38 [48.15%] 30.56 Lakhs. 11.16 Lakhs. 19.4 Lakhs. (Dec 12,

Poverty Woes in Indian Scenario: Remaining Concerns Poverty in India is reducing but it is still a major issue. Rural Indians depend on unpredictable agriculture incomes, while urban Indians rely on jobs that are, at best, scarce. Since its independence, the issue of poverty within India has remained a prevalent concern. According to the common definition of poverty, when a person finds it difficult to meet the minimum requirement of acceptable living standards, he or she is 69

considered poor. Millions of people in India are unable to meet these basic standards, and according to government estimates, in 2007 there were nearly 220.1 million people living below the poverty line. Nearly 21.1% of the entire rural population and 15% of the urban population of India exists in this difficult physical and financial predicament. The following chart presents the poverty situation in India:

Chart 2: Poverty Situation in India

The division of resources, as well as wealth, is very uneven in India this disparity creates different poverty ratios for different states. For instance, states such as Delhi and Punjab have very low poverty ratios. On the other hand, 40-50% of the populations in Bihar and Orissa live below the poverty line. The poverty ratios illustrated here are divided in two types: urban and rural. Specific reasons for poverty vary in the urban and rural settings. A number of factors are responsible for poverty in the rural areas of India. Rural populations primarily depend on agriculture, which is highly dependant on rain patterns and the monsoon season. Inadequate rain and improper irrigation facilities can obviously cause low, or in some cases, no production of crops. Conclusion There are over 24 crore people below the poverty line in our country. Now days, creating self employment opportunities is one way of attacking poverty and solving the problems of unemployment .It is becoming increasingly important that financial inclusion requires a lot of attention of the financial system for creating awareness about financial products, education, and advice on money management, debt counseling,

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savings and affordable credit among rural people. The Scheme of financial inclusion along with Micro-finance has been found as an effective instrument for lifting the poor above the level of poverty by providing them increased self-employment opportunities and making them credit worthy. The programmes and strategies adopted by Indian government after 1970s have been effective in reduction of poverty to a great extent, but still it is a big concern. There is a need of Designing financially sustainable models and increase outreach and scale up operations for poor in India. People belong to villages are still unaware about banking policies and credit system.

Finally, the Indian financial system has to redesign their business strategies to incorporate specific plans to promote financial inclusion of low income group treating it both a business opportunity as well as a corporate social responsibility. They have to make use of all available resources including technology and expertise available with them as well as the MFIs and NGOs. It may appear in the first instance that taking banking to the sections constituting the bottom of the pyramid, may not be profitable but it should always be remembered that even the relatively low margins on high volumes can be a very profitable proposition. Financial inclusion can emerge as commercial profitable business. Only the banks should be prepared to think outside the box.

Notes* see for further details Cost of Living Higher in Developing World than is Perceived: WB, The Financial Express, 27 August 2008). ** Dr.K.G.Karmakar, Director, 2008. NABARD, Poverty Alleviation or Financial Inclusion? Managing 16 July

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Purchasing Power Parities. Key indicators for Asia and the Pacific, Manila 2. Brainard, Lael and LaFleur (2006) The Private Sector in the Fight against Global Poverty, in Laet Brainard (ed.) Transforming the Development Landscape: The Role of the Private Sector, Washington, D.C: Brookings Institution Press.
3. Financial inclusion: reaching the unreached, Business Line (As on August 10, 2007)

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4. http://nrega.nic.in/netnrega/home.aspx

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5. http://rural.nic.in/anual0203/chap-2.pdf 6. Microfinance: an investment opportunity, Research Report of Deustche bank Dec 19, 2007 7. Purushothan, P. (2006) National Study on SGSY: A Process Study, Hyderabad: National Institute of Rural Development
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R Srinivasan and M S Sriram Microfinance: An Introduction IIMB Management Review, June 2003

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Rajesh Chakrabarti, The Indian Microfinance Experience Accomplishments and Challenges

10. Report on financial inclusion 2008, RBI 11. Report on scaling up financial inclusion by debt on our door step 12. Shubhanil Chowdury, India has Fewer Poor People: World Bank, Business Standard, 27 August 2008. 13. Special issue of Yojna on microfinance, Jan 2008 14. Tapan S. Parikh, Rural Microfinance Service Delivery: Gaps, Inefficiencies and Emerging Solutions Washington. 15. www.rbi.gov.in

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