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COMPARATIVE ANALYSIS OF FINANCIAL INCLUSION IN RURAL AND URBAN

AREAS OF INDIA

By: Vikas Sharma, Yukti Sharma and Narender Singh Negi

ABSTRACT
Financial Inclusion has become a buzzword internationally even in developed financial
markets there are concerns about those excluded from the banking system. The aim of financial
inclusion is to expand the coverage of the formal financial system in the country, and over the
past decade, this has also become a key objective for emerging economies.
The biggest challenge for next decade or more to banks in India is to capture thebanking business
of over 40% population of this country of over 120 billion people. In India, financial inclusion
first featured in 2005, when it was introduced by K C Chakraborthy, the chairman of Indian
Bank. Mangalam Village became the first village in India where all households were provided
banking facilities.
CRISIL Inclusix (an Index to measure Financial Inclusion) shows India still has a long way to go
to ensure that its 1.2 billion population gets access to banking. The score for India, based on the
three parameters of branch penetration, credit penetration and deposit penetration, stood at
40.1 in 2011 against 37.6 in 2010.The index also shows that though there is an improvement in
branch coverage and in the number of people depositing their money in banks, credit delivery is
still poor. The present study intended to cover the Branch Penetrationparameter to show the
comparison of branches opened in Rural and Urban areas for the period 2008-09 to 201213.Graphical representation, mean, co-variance, and t-test were applied to analyze the collected
data using SPSS software. It is found that banks are more consistent in opening branches in
urban areas than rural areas, thus branch penetration is high in urban areas while the rural areas
are still being ignored.
Key words: Financial Inclusion, Financial Literacy, CRISIL INCLUSIX, Branch
Penetration.

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INTRODUCTION
Financial inclusion is delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low income group. Unrestrained access to public goods and services is the
sine qua non of an open and efficient society. As banking services are in the nature of public
good, it is essential that availability of banking and payment services to the entire population
without discrimination is the prime objective of the public policy."
Dr.Subbarao, former RBI Governor terms Financial Inclusion as the supply side of the equation
and Financial Literacy the demand side. Financial Inclusion and Financial Literacy are two sides
of the equation. Financial Inclusion acts from supply side by providing financial market/services
that people demand whereas Financial Literacy stimulates the demand side by making people
aware of what they can demand. Therefore, access to financial services and Financial Education
must happen simultaneously. It must be continuous, an on-going process and must target all
sections of the population.
India has chosen a bank-led model, primarily due to concerns of- risk mitigation and supervision.
Yet after eight years, it is clear that banks are labouring under the mandate, progress is slow and
the cost of continuing exclusion is growing. 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 but having a current account / savings account on its own, is not regarded as an accurate
indicator of financial inclusion. 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.

REVIEW OF RESEARCH LITERATURE:

Some of the studies on Financial Inclusion are as follows:
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Dr.Anupama Sharma and Ms.SumitaKukreja in their research paper Titled An Analytical

Study: Relevance of Financial Inclusion For Developing Nations concluded that for standing
out on a global platform India has to look upon the inclusive growth and financial inclusion is
the key for inclusive growth .There is a long way to go for the financial inclusion to reach to the
core poor.
According to K.C.Chakrabarty RBI Deputy Governor Even today the fact remains that nearly
half of the Indian population doesnt have access to formal financial services and are largely
dependent on money lenders. Mere opening of no-frill bank accounts is not the purpose or the
end of financial inclusion while formal financial institutions must gain the trust and goodwill of
the poor through developing strong linkages with community-based financial ventures and
cooperative. Financial Inclusion has not yielded the desired results and there is long road ahead
but no doubt it is playing a significant role and is working on the positive side.
Mr Nitin Kumar in his Research Paper Titled Financial Inclusion and its determinants:
Evidence from state level empirical analysis in India Concluded that the issue of financial
inclusion has acquired a substantial attention in the Indian context since some time now. The
prominent findings include the continuous improvement of credit and deposit penetration in the
current decade (1995 to 2008). At All-India level the credit penetration and deposit penetration
are positively correlated implying that the regions having high credit penetration are also the
regions having high deposit penetration and vice versa.
The results from the empirical analysis indicate a negative influence of population density on
deposit penetration. The finding implies that although deposit accounts have improved over time,
but its growth has not matched with respect to the population increase. But, the relationship is
not as clear in case of credit penetration as the coefficient is insignificant. The average
population per branch is having a negative influence on deposit penetration. It confirms the
beneficial impact of improvement of branch network on financial inclusion drive, which occurs
due to greater accessibility and convenience. The income level is unambiguously having a
positive influence on both penetration proportions. It points to the fact that level of economic
condition is a vital determinant of financial inclusion efforts.
P. Arulmurugan, P. Karthikeyan and N. Devi in their Research Paper titled Financial Inclusion
in India: A Theoretical Assessment Concluded that all services such as savings, insurance and
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remittances are extremely importance for poverty alleviation and development. In order to
achieve the goal of total financial inclusion, policy makers, MFIs, NGOs and regulators have to
work together. The issue of financial inclusion has received large importance in India during the
recent years. India had invested considerable amount of resources in expanding its banking
network with the objective of reaching to the people. During the last 40 years huge infrastructure
has been created in the banking sector. However, this large infrastructure that has penetrated
even remote rural areas has been able to serve only a small part of the potential customers. While
India is on a very high growth path, almost at the two-digit level, majority of the people are out
of the growth process. This is neither desirable nor sustainable for the nation.

OBJECTIVES OF THE STUDY

The objectives of the study are:
1) To understand and analyse the hurdles in financial inclusion,
2) To analyse the comparative penetration of banking facilities in rural and urban areas.
Hypothesis
Null hypothesis(H0): there is no significant difference between number of branches
opened in rural and urban areas
Alternate Hypothesis (H1): there is significant difference between number of branches
opened in rural and urban areas.

RESEARCH METHODOLOGY
For this study secondary data has been collected from RBIs publications and reports,
CRISIL INCLUSIX Index,statistical tables related to banks in India, newspaper, magazines,
journals, data available on internet and other sources also have been studied.
Sample Design
The study has covered Rural, semi-urban, urban and metropolitan areas to study the four
category of banks i.e public sector banks, new private sector banks, old private sector banks
and foreign banks.
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The study covers the period from 2008-09 to 2012-13.

Research Tools
Collected data has been analysed by graphical representation and statistical tools like
measure of central tendency, standard deviation, coefficient of variation and t-test .
Data analysis and interpretation
The banking industry has shown tremendous growth in volume and complexity during the last
few decade Despite making significant improvements in all the areas relating to financial
viability, profitability and competitiveness, there are concerns that banks have not been able to
reach and bring vast segment of the population, especially the underprivileged sections of the
society, into the fold of basic banking services.

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TABLE A: Position of households availing banking services:

As per Census 2001

As per Census 2011

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Number

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Househol

Total

Percent Total

ds

number of of

number of households

household

household

household

availing

s availing

banking

banking

Number

of Percent

services

services
Rural
Urban
Total

138,271,55

167,826,73

91,369,805

54.4

53,692,376 26,590,693 49.5

78,865,937 53,444,983

67.8

191,963,93

246,692,66

41,639,949 30.1

68,230,642 35.5

144,814,788

58.7

As per Census 2011, 58.7%households are availing banking services in the country. Out of
which 54.40 percent are in rural areas and 67.80 percent are in urban areas. There is 80.70
percent increase in the number of household availing banking services in rural areas as compared
to 37 percent increase in the urban areas. This shows RBI and commercial banks have taken
serious steps towards financial inclusion particularly in rural areas.
TABLE: No. of branches of Scheduled Commercial Banks as on 31st March, 2013:
Bank Group-wise Number of branches as on 31.03.2013

Bank Group

Rural

Semi-urban

Urban

Metropolitan

Total

Public Sector Banks

23286

18854

14649

13632

70421

Private Sector Banks

1937

5128

3722

3797

14584

Foreign Banks

65

249

331

Regional Rural Banks

12722

3228

891

166

17007

Total

37953

27219

19327

17844

102343

As per Census 2011, There are 102,343 branches of Scheduled Commercial Banks (SCBs) in the
country, out of which 37,953 (37%) bank branches are in the rural areas and 27,219 (26%) in
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semi-urban areas, constituting 63 per cent of the total numbers of branches in semi-urban and
rural areas of the country. However, a significant proportion of the households, especially in
rural areas, are still outside the formal fold of the banking system. Due to the vastness of the
rural areas and lack of financial literacy of people in these areas, banks are able to cover only
54% of the total population in the rural areas.
TABLE3: Number of branches of Scheduled Commercial Banks opened during five years:
Years

Rural

Semi-urban

Urban

Metropolitan

Total

2008-09

706

1290

1046

953

3995

2009-10

1021

1729

1417

1139

5306

2010-11

1422

2258

919

981

5580

2011-12

2453

2686

1186

982

7307

2012-13*

1598

1422

546

451

4017

*provisional

3000

Number of Branches opened

2500
2000
Rural

1500

Semi-urban
Urban

1000

Metropolitan
500
0
2008-09

2009-10

2010-11

2011-12

2012-13*

Year

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From the above graph we can analyse that number of branches opened in the rural areas and semi
urban areas are increasing constantly. From 2008-09 to 2011-12 there is 247% and 108%
increase in the number of branches opened in the rural areas and semi-urban areas respectively.
Whereas in urban areas and metropolitan areas this increase is just 13% and 3% respectively.
Lets have a close look with the following statistical analysis:Table 4. Statistical Analysis of number of branches opened during five years
Banks

Mean

S.D.

Coeff. Of Var.

RURAL

1440

664.41

0.46

SEMI-URBAN

1877

585.90

0.31

URBAN

1023

324.30

0.32

METROPOLITAN

901

262.11

0.29

From the above table it is evident that average number of branches opened is highest in semiurban areas and cov. is also low, which is followed by branches in rural areas. If we take average
as the measure of performance then semi-urban areas has the highest average. Banks are more
consistent in opening branches in metropolitan areas with s.d of 262.11 and coeff, of var. of 0.29.
Banks in semi-urban and urban areas are more or less at the same level of consistency in branch
expansion. Due to the vastness of rural areas, it has highest standard deviation and coefficient of
variation.
Now let us compare the performance of rural areas (including semi-urban areas) vis--vis urban
areas(including metropolitan areas)

TABLE 5
Banks
RURAL & SEMI-URBAN
URBAN
METROPOLITAN

Mean

S.D.

S.Error

Coeff.Var.

3317

1183.87

529.44

0.35

575.43

257.34

0.30

& 1924

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From the above table we can conclude that average numbers of branches open in the rural areas
are more than branched opened in the urban areas but variability in opening of branches as
measured by coefficient of variation is higher in rural areas.
Table 6
Descriptive Statistics
Mean

Standard Deviation

Group A

3317

1183.87

Group B

1924

575.43

Independent Samples t-Test

t-Statistic

2.3663

Result

Degrees of Freedom

Reject the null hypothesis.

P value

0.0455

Conclusion

[35.5216 - 2750.4784]

Group A is significantly different from

Group B, t(8) = 2.3663, p < .05.

95%
Interval

Confidence

For testing our hypothesis we used students t test and the value of p arrived at was 0.0455 which
is less than 0.05 thus we have sufficient evidence to reject null hypothesis. That implies there is
significant difference between opening of branch in rural areas and urban areas.

CONCLUSION

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Financial inclusion, which advances universal access to and use of financial services, is crucial to
inclusive growth and to poverty reduction.Financial inclusion is an important driver of economic
growth and policy alleviation. Access to finance can boost job creation, raise income, reduce
vulnerability and increase investments in human capital. In 6,00,000 villages in India average
population per branch as on 31.03.2013 is 12,100.Though the number of scheduled commercial
bank branches have increased from 8,826 in 31st Dec 1969 to 1,02,343 in 31st Mar 2013 still
asignificant proportion of the households, especially in rural areas, are still outside the formal
fold of the banking system. There are many barriers to financial inclusion. Some of them are:
(a) Low density areas and low income populations are not attractive for the provision of financial
services and are not financially sustainable under traditional banking business models;
(b) Regulation (frameworks are not always adapted to local contexts),
(c) Business models (mostly with high fixed costs); Service Providers (limited number and types
of financial service providers)
(d) Financial service providers usually target the middle of the economically active population,
often overlooking the design of appropriate products for older or younger potential customers.
There are hardly any policies or schemes for the younger lot or the old people who have retired,
as the banks do not see any business from them;
To extend the reach of banking to those outside the formal banking system, Government and
Reserve Bank of India (RBI) are taking various initiatives from time to time some of which
includesa) advising banks to open branches in all habitations of 5,000 or more population in
under-banked districts and 10,000 or more population in other districts. (b) Each household to
have atleast one bank account(c) Business Correspondent Model(d) Setting up of Ultra Small
Branches (USBs)(e) USSD Based Mobile Banking.
To cover the vast population is a challenge for the banks. They have to come up with new and
innovative idea like Tab banking of ICICI Bank, SBI Tiny Scheme etc.
Following measure should be taken to cover the Indias vast Population:
First, it is essential to focus more on rural area and treat rural areas as profitable avenues rather
than mere a financial obligation.

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Second, it is essential that the policy for achieving total financial inclusion keeps changing to
adapt to the needs of the environment. This poses challenges for measurement of various
financial inclusion initiatives as also their aggregation across activities, institutions, regions and
so on. Statistical analysis of performance of financial inclusion initiatives and development of
benchmarking standards can be quite complex.
Third, while existing initiatives in measuring financial inclusion are commendable, there is a
need for greater focus on the micro and distributional dimensions.
Fourth, there should be focus on Financial Literacy. Financial Literacy programs should be
organised by banks and RBI on regular basis.
The issue of expanding the geographical and demographic reach poses challenges from the
viability perspectives. Appropriate business models are still evolving and various delivery
mechanisms are being experimented with. Financial literacy and level of awareness continue to
remain an issue and the ICT Based BC Model is also taking time to stabilize. It calls for
coordination of all the stakeholders like sectoral regulators, banks, governments, civil societies,
NGOs, etc. to achieve the objective of financial inclusion. Challenges of financial exclusion are
faced by most countries globally and each country has to develop its own customized solutions
drawing upon its own experiences and those of its peers across the globe.

REFERENCES

1. Report of Committee on Financial Inclusion , Report submitted by Committee headed

by C. Rangarajan
2. Dr. Chakrabarty KC, DG, RBI. Keynote address on Furthering Financial Inclusion
through Financial Literacy and Credit Counseling.
3. Chakrabarty, K.C. (2011), Financial Inclusion - A Road India Needs to Travel, Article
published in www.livemint.com on October 22, 2011.

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4. Mohan, R., (2006), 'Economic Growth, Financial Deepening and Financial Inclusion',
Reserve Bank of India Bulletin.

5. Report of the Committee on Financial Inclusion, Chaired by Dr. C. Rangarajan, January

2008, Retrieved from: http://www.nabard.org/report_comfinancial.asp
6. Dev, Mahendra S (2006). Financial Inclusion: Issues and Challenges. Economic and
Political Weekly. October 14, 2006. pp. 4310 4313.
7. Reserve Bank of India (2006a), Financial Inclusion and Millennium Development
Goals, Address by UshaThorat, Deputy Governor of the Reserve Bank of India, January
16, available at http://www.rbi.org.in
8. BASAVARAJA P.M., Financial Inclusion An Evaluation of Initiatives and Impact (A
study on select districts in Karnataka State), Siddaganga Institute of Technology, Tumkur

9. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=749

10. http://www.igidr.ac.in/conf/money1/Financial%20Inclusion%20and%20Its%20Determin
ants_Nitin.pdf

11. http://financialservices.gov.in/banking/financialinclusion.asp

18. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=749

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