Paper Presentation on Financial Inclusion

Submitted by Catherine.F Poornima. J

Abstract:

Poverty is not merely insufficient income, but rather the absence of wide range of capabilities, including security and ability to participate in economic and political systems. Today the term bottom of the pyramid refers to the global poor most of who live in the developing countries. These large numbers of poor are required to be provided with much needed financial assistance in order to sail them out of their conditions of poverty. This paper is an attempt to comprehend and distinguish the significance of Financial Inclusion in the context of a developing country like India wherein a large population is deprived of the financial services which are very much essential for overall economic growth of a country. Poor people save, borrow, and make payments throughout their lives. But to use these services to their full potential to protect their families and improve their lives they need well-suited products delivered responsibly. Bringing this about requires attention to human and institutional issues, such as quality of access, affordability of products, provider sustainability, and outreach to the most excluded populations. A definition and vision with clear and meaningful objectives in all these areas can inspire leaders to take a comprehensive path towards full financial inclusion. Financial inclusion is intended to connect people to banks with consequential benefits and it is a process of ensuring access to financial services, timely and adequate credit when needed by vulnerable sections of the society such as weaker sections and low income group at affordable costs. Introduction: Despite raid expansion of banking network over the last 4 decades, there is vast majority of people in our Country who do not have access to basic banking services resulting in financial exclusion. A number of measures were taken in the past 40 years, such as Nationalization of Banks and opening branches in remote/far flung areas, introduction of Lead Bank Scheme and Service Area Approach, adoption of villages by the Banks, strengthening the Co-operatives, opening Regional Rural Banks, etc. However, considering large geographical area and vast population, the Banking services could not be made available to a large number of villages as could be seen from the following data given by National Sample Survey Organization.
Out of 6.25 lakh villages, only 30000villages are covered by bank branches.

Out of 203 million Households, 145 million are financially excluded. Out of 89.3 million farmer households, 45.9 million (51.4%) do not have access to credit from institutional /non institutional sources. Rural India houses 72.2% of population and accounts for only 9% of Total deposits, 7% of credit and 10% of life insurance business. Only 59% adults have Bank Accounts. Only 0.6% buy General Insurance Policies, 13% have Debit Cards, 2% carry credit cards The banking industry has shown tremendous growth in volume and complexity during the last few decades. 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 include vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services. And hence the concept of financial inclusion emerged in the recent years.

Financial inclusion or inclusive financing is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society Definition for Financial Inclusion: Rangarajan Committee (Report of the Committee on Financial Inclusion in India (2008)) defines it as: "Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost."
Definition for Financial Exclusion:

According to Mohan (2006) financial exclusion signifies the lack of access by certain segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers. Thus, the definitions on financial inclusion/exclusion provide an indication that financial exclusion occurs mainly to people who are at the margins of the society. The scope of Financial Inclusion The scope of financial inclusion can be expanded in two ways. (a) through state-driven intervention by way of statutory enactments ( for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France). (b) through voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society. When bankers do not give the desired attention to certain areas, the regulators have to step in to remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion. 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. Internationally, the financial exclusion has been viewed in a much wider perspective. 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. Financial Inclusion Plan:

Banks were advised by GOI / RBI that Financial Inclusion Plan (FIP) should be an integral part of their business plans. Further, FIP should have the following components: Types of products and services offered Extent of coverage of villages through Brick and Mortar model as well as BC model. Outline strategies of Bank to cover urban centers.

Steps in Financial Inclusion:

Identifying the villages which are not having banking services and unbanked households

through a survey of villages is the first step in implementation of FI. To begin with, villages having a population of 2000 and above have been identified and allotted to Banks by the SLBC in different States. 100% of the households in these villages are expected to be covered by providing banking services before 31.03.2012. Further, all other villages with population of less than 2000 are to be covered before 31.03.2013. The banking services may be made available either by opening branches or by appointing Business Correspondents / Business Facilitators, so that they aid in opening of No Frill Accounts of all the eligible members of the households and identify their credit needs before the stipulated time.

Selection of a suitable technology and engaging Technology Service Providers (TSPs) for increasing the scope and reach of financial services.

Promoting financial literacy and financial awareness.

Models Available For Implementing Financial Inclusion: RBI has advised Banks to follow any of the following models: Brick & Mortar Branch Model. Engaging Business Correspondents

The Bank may adopt suitable Technology for implementation of FI from among the available alternatives such as mobile technology, conventional cards, smart cards, common service centers, low cost ATMs, handheld devices etc. No uniform or unique model is ideally suited to the whole country. Therefore, Bank has to choose from a range of available models and adapt any of them depending upon the requirement. Even though advanced technology is available, there still exists the problem of last mile. Of course, there are alternatives to overcome the last mile problem.

Issues and Challenges Even after the intervention by the government and the concerted efforts of Reserve Bank of India and the public sector banks there has been a significant increase in the number of bank offices in the rural areas; but it is not in tune with the large population living in the rural areas. For a population of 70% only 45% of bank offices provide the financial services. There has been uneven distribution of the banking services in terms of population coverage per bank office in the six regions viz; Northern, North-eastern, Eastern, Central, Western and Southern regions of the country. Bank Branches are required to be increased as it has a direct impact on the progress of financial inclusion. It is clearly established that as the bank branches increase number of bank accounts also increase significantly Poverty levels are having direct relationship with the progress of financial inclusion. Because as the poverty levels decrease financial inclusion also increase. As such, there should be multi fold strategic approach in such poverty dominated areas for financial inclusion. Even though no banker openly expresses his aversion for the financial inclusion process, overtly it can be noticed that they are averse to it in view of the cost aspects involved in opening of no frill accounts.

Recommendations and policy choices:

Keeping in view the dynamics of the changing economy, there is a strong need to

restructure the financial system particularly the rural financial system. The present system which was enshrined in the late 70s greatly needs a rigorous relook.
Involving educational institutions, particularly college students for financial inclusion drive

would not only be cost effective but also would create wide public awareness.
Financial Inclusion drive should not be short-lived; instead a systematic effort should be

structured by establishing FCCs (Financial Counseling Centres)

Partnering with NGOs and MFIs will definitely accelerate the process of financial

inclusion especially in the rural areas. Specific financial as well as non-financial incentives have to be designed for the spirited involvement of such organizations
Financial Inclusion should be imbibed into the course curriculum in high schools so that

the students would understand the importance of financial inclusion for inclusive growth in

the economy which in turn would motivate them to automatically participate in the financial system
One of the often stated reasons for slow pace of financial inclusion has been the hassles

involved in opening of bank accounts and availing of loans from financial institutions due to the long process of documentation. To overcome this, there is a need to digitize the public records for dual purpose of easy accessibility and storage.
Post Offices in rural areas can be asked to provide their services in accelerating the

financial inclusion activity. In view of the postmans intimate knowledge of the local population and the enormous trust reposed in him post offices can be good use in the process of financial inclusion
The use of IT enables banks to handle the enormous increase in the volume of transactions

for millions of households for processing, credit scoring, credit record and follow up. The use of IT solutions for providing banking facilities at doorstep holds the potential for scalability of the Financial Inclusion initiatives.
It should be the endeavor of all the financial institutions to adopt financial inclusion as a

corporate social responsibility and chalk out strategies in tune with the national policy on financial inclusion Conclusion Importance of financial inclusion arises from the problem of financial exclusion of nearly 3 billion people from the formal financial services across the world. With only 34% of population engaged in formal banking, India has, 135 million financially excluded households, the second highest number after China. Further, the real rate of financial inclusion in India is also very low and about 40% of the bank account holders use their accounts not even once a month. Financial Inclusion has far reaching consequences, which can help many people come out of abject poverty conditions. Financial inclusion provides formal identity, access to payments system & deposit insurance. The objective of financial inclusion is to extend the scope of activities of the organized financial system to include within its ambit people with low incomes. Through graduated credit, the attempt must be to lift the poor from one level to another so that they come out of poverty. There is a need for coordinated action between the banks, the Government and others to facilitate access to bank accounts amongst the financially excluded.