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FFIINNAANNCCIIAALL IINNCCLLUUSSIIOONN –– AANN OOVVEERRVVIIEEWW 4.1 Introduction 4.2 Concept of Financial inclusion 4.3 Definition 4.4 The objectives of Financial Inclusion 4.5 Financial Inclusion- Global Relevance. 4.6 Barriers to Financial inclusion 4.7 Urban Financial Inclusion. 4.8 Financial Inclusion Lifecycle 4.9 Dimensions of Financial Inclusion 4.10 Facilitating Financial Inclusion- Initiatives 4.11 Financial Inclusion through Micro Finance 4.12 Microfinance in India 4.13 Microfinance in Kerala 4.14 Financial Inclusion (FI)/ Financial Exclusion (FE) - Present Position 4.15 Conclusions

4.1 Introduction

Committee on Financial Inclusion (Rangarajan Committee, 2008)

emphasises that Financial Inclusion needs to be preceded by social inclusion.

Social inclusion is based on the belief that we all fare better, when no one is

left too far behind and the economy works for everyone. Social inclusion is

achieved, when all have the opportunity and resources necessary to participate

fully in economic, social and cultural activities, which are considered the

societal norm. Social inclusion is about reducing inequalities between least

advantaged groups and communities by closing the opportunity gap and

ensuring that support reaches those who need it most. A socially inclusive

society is one, where all people feel valued, their differences are respected and

their basic needs are met so they can live in dignity. Financial Inclusion is an

explicit strategy for accelerated economic growth and is considered to be

critical for achieving inclusive growth in the country.

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4.2 Concept of Financial Inclusion

The word FI could be described as being the opposite of FE. 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 un-banked people into banking. The term

FI is perceived in different ways under different contexts. There is a view that

only access to credit is treated as FI. The other view includes all the services

extended by the financial institutions. Merely having a banking account may not

be a good indicator of FI. FI in the narrow sense may be achieved by offering

any one of the financial services but a comprehensive FI would be to provide a

set of services encompassing all the services.

4.3 Definition

In literature, there are different definitions of FI. Report of the

Committee on FI in India (Rangarajan Committee, 2008) defines FI 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”.

The World Bank (2008) considers FI as access to financial services. It

“implies an absence of obstacles to the use of these services, whether the

obstacles are price or non - price barriers to finance”. FI is “a process that

ensures the ease of access, availability and usage of the formal financial

system for all members of an economy” (Mandira Sarma, 2008).

Financial Inclusion Task Force (H.M. Treasury, 2007), defines FI as “the

access to appropriate financial services for every person for enabling him to

(i) manage his money on day-to-day basis effectively, securely and

confidently;(ii) plan for future and cope with financial pressure in short

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term with the help of long term funds; and (iii) deal effectively with

financial distress like long term sickness, unemployment, or family

breakdown by availing money management advice and insurance”.

Treasury committee (2005) defines FI as “the ability of individuals to

access appropriate financial products and services”.

4.4 Objectives of Financial Inclusion

The major objectives of FI are the following:

1) To provide access to various mainstream financial services such as

savings bank account, credit, insurance, payments and remittance

and financial and credit advisory services.

2) To provide the benefit of vast formal financial market and protect

the excluded from exploitation of informal credit market so that

they can be brought into the mainstream.

4.5 Financial Inclusion - Global Relevance.

There is plenty of interest in the subject of FI not only in India but in

developed countries too. FI has become an issue of worldwide concern

relevant equally in economies of the under - developed, developing and

developed nations. Building an inclusive financial sector has gained growing

global recognition, bringing to the fore the need for development strategies

that touch all lives instead of a select few (Bluebook, 2006).FI has assumed

public policy relevance. Many countries like India, the United Kingdom (UK)

and International organisations like the United Nations (UN), World Bank

(WB) etc. have set up task force/committees to understand FI and to improve

its scope.

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FI is important simply because it is a necessary condition for sustaining

equitable growth (Subbarao, 2009). FI will promote both growth and equity

(Subbarao, 2010). Fl of all individuals and all sections of population is very

vital from the point of view of ensuring inclusive growth of national economy.

Adoption and implementation of inclusive practices by all banks and financial

institutions and also by insurance companies and mutual funds will go a long

way in bringing about FI of all those who presently stand financially excluded

(Sunnykkutty Thomas and Rajesh, 2010).

The essence of FI is to ensure that a range of appropriate financial

services is available to every individual and enabling them to ‘understand’ and

‘access’ those services. FI does not require that everyone who is eligible uses

each of these services but they should be able to choose them if they desire to

use them (Blue Book, 2006). FI rests on three pillars viz. access to financial

services, affordability of such services and actual use of such services. FI can

be achieved only if all the three pillars show affirmative results. The ABC of

FI is Advice, Banking and Credit (Shetty, V.P. 2006).

Providing access to financial services is increasingly becoming an area of

concern for the policymakers for the obvious reason that it has far reaching

economic and social implications. Being able to access and use a wide range of

financial products and services is now necessary to lead a normal social life

(Gloukoviezoff, G.2007). Access to finance will empower the vulnerable groups

by giving them an opportunity to have a bank account, to save and invest, to

insure their homes or to partake of credit, thereby facilitating them to break the

chain of poverty (Subha Rao, 2010). It also helps them to insure themselves

against income shocks and equips them to meet emergencies such as illness, death

in the family or loss of employment. Savings, loans and insurance should be


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convenient and flexible in terms of access and design and reliable in the sense that

savings are safe and that insurance claim will be paid with certainty (Nachiket,

Mor. & Ananth, Bindu. 2007).

Access to finance can help in reducing inequality and poverty through

several channels. Credit, savings and insurance facilities will enable the poor to

take advantage of financial resources beyond their own capabilities. FI protects

the poor from the clutches of the usurious moneylenders (Subharao, 2010).

Access to financial services allows the poor to save money outside the house

safely and prevents concentration of economic power with a few individuals

(ADB, 2000). It facilitates them to build up funds for potentially profitable

investment opportunities, or in smoothening their future consumption (World

Bank, 2008).

FI is not merely providing reliable access. It is also not just

microfinance. People in India believe that FI primarily implies access to a

bank account backed by deposit insurance and access to affordable credit and

the payment system (Usha Thorat, 2006). FI is not a one - off event. It means

that hitherto excluded people - have access to credit on regular basis for as

long as they continue to abide by the terms of such a credit relationship. For FI

to promote growth, it has to move from opening an account in the bank to

regular savings and finally to a relationship which enables the borrower to

access loans on a regular basis (Sameer Kochaar, 2009).

The single gateway of a ‘bank account’ can be used for several purposes.

It can be used for making small value remittances at low cost and making

purchases on credit. It can also be used by the State Governments to provide

social security services like health insurance and calamity insurance under

various schemes for the disadvantaged (Usha Thorat, 2006).Access to

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banking, affordable credit and free market advice are the 3 major tools

deployed abroad in FI (Chakraborthy, K. C.2007).

In order to be able to access and effectively use financial products,

individuals not only need to have a range of skills, information and confidence

but also need to have access to a wide range of ‘appropriate financial products’

in the financial mainstream. Access to a financial product is of little meaning

if people cannot or do not want to make use of it. Hence, access to

‘appropriate’ services is a central element of the definition of FI. Access to

appropriate financial services enable them (i) to manage their money on a day

today basis, effectively, securely and confidently; (ii) to plan for the future and

cope with financial pressure by managing their finances to protect against

short - term variations in income and expenditure and to take advantage of

longer - term opportunities, and (iii) to deal effectively with financial distress,

should unexpected events lead to serious financial difficulty (Satheesh Kumar

and Selvaraj, 2010).

Access essentially refers to the supply of services; whereas, use is

determined by demand as well as supply. Among the non - users of formal

financial services, a clear distinction needs to be made between voluntary and

involuntary exclusion. The problem of FI addresses the involuntarily excluded,

as they are the ones, who, despite demanding financial services, do not have

access to them. While the RBI speaks of FI, its target is essentially the poor

people who have not yet been brought into the mainstream of formal banking

culture (Mathew, P.M. 2007).

The diagram below shows the scale of FI among the unbanked and the

under banked but bankable population - Bottom of the Pyramid (BOP).


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Source: www.ncr.com

Figure 4.1. Unbanked and the under banked but Bankable population Financially Included

There could be multiple levels of FI and FE. At one extreme, it is possible

to identify the ‘super included’ customers who have at their disposal a wide

range of services and products. At the other extreme, we may have the

financially excluded, unbanked people, who are denied access to even the most

basic of financial products. In between are the under banked who use the

banking services only for deposits and withdrawal 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 (Leeladhar, 2006).

4.6 Barriers to Financial Inclusion

Bringing financial services to rural clients is the biggest challenge in the

quest for broad - based FI. There are barriers to access financial services

emanating from both demand side and supply side factors. From the demand

side, the big barriers are the lack of awareness about financial services and

products, limited literacy and social exclusion. Many of the financial products

are unsuitable for the poor and there is not much effort to design products

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suitable to their needs. The unfriendly and unempathetic attitude of the banks

to the customers also plays an important role in undermining the demand for

financial services. Exorbitant and non-transparent fees combined with

cumbersome terms and conditions attached to the financial products also

dampen the demand. From the supply side, the main barrier is the transaction

costs that the bankers perceive. Because of low volume, they find that

extending financial services is not cost effective. Lack of communication, lack

of infrastructure, language barriers and low literacy levels all raise the cost and

inhibit bankers from taking initiatives from the supply side.

Yet another barrier to FI in rural areas is the great distances that rural

residents must travel to reach a bank branch. Poor infrastructure and

telecommunications and heavy branch regulation also restrict the geographical

expansion of bank branch networks. In many developing countries, there are

fewer bank branches per rural resident than per urban resident. Better

geographic outreach can remove distance as a barrier to financial access for

both lenders and borrowers, perhaps allowing banks to be more responsive and

less intimidating to their customers. Allowing banks to operate through agents

including partnerships with postal networks and retailers reduces the fixed

costs associated with geographical expansion and holds great promise for

improving access to financial services especially in poor and remote areas.

4.7 Urban Financial Inclusion.

There is a general feeling that FI is not necessary in urban and metro

centres. In reality, large number of persons in urban centres does not have

banking facilities and financial exclusion is very common particularly in

respect of migrated labour that have moved into these areas in search of jobs.

These people do not have bank accounts or knowledge of banking facilities.


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Hence, they send money to their family members through informal sources

and through friends, relatives, etc, or carry cash whenever they visit their

native place which carries an element of risk.

FI calls for a holistic approach on the part of the banks in creating

awareness about financial products, education and advice on money

management, debt counseling, savings and affordable credit and as such the

banks need to redesign their business strategies to promote FI, treating it

both as a business opportunity as well as a Corporate Social Responsibility

(Mukhopadhyay, 2010). This understanding of FI implies that responsibility in

bringing FI forward is shared amongst a range of actors: individuals, the state

and the financial institutions as providers of financial products and to better the

circumstances of individuals through social policies. The pressure on banks to

serve low-income customers is growing as FI becomes more important as a

policy objective in developing countries. More than 1 in 10 countries already

require financial institutions to offer basic bank accounts. The scope of FI can

be expanded in two ways – statutory enactments and voluntary efforts made by

the banks to reach the bottom of the pyramid (Leeladhar, 2007).

4.8 Financial Inclusion Lifecycle

The first step of FI is to educate customers and open an account.

However, merely opening a bank account for a poor individual is not FI. This

approach generally results in an inactive account or at best a repository of

Government benefits. A three-step approach is required to bring financially

underserved individuals into a financially inclusive society. After improving

financial literacy and opening an account of some form, it is usage of that

account, linkage with other financial services and access to all the financial

instruments that are required to complete the FI lifecycle.

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Step 1: Financial Literacy

To begin the FI process, one needs to understand financial products,

usage, operation and management of accounts. As defined by the RBI,

financial education is "the process by which financial consumers/

investors improve their understanding of financial products, concepts

and risks and through information, instruction and/or objective

advice, develop the skills and confidence to become more aware of

financial risks and opportunities to make informed choices, to know

where to go for help and to take other effective actions to improve

their financial well-being." Efforts for financial literacy can be driven

through microfinance institutions (MFIs), self-help groups (SHGs),

and co - operative & rural banks.

Step 2: Opening a Bank Account

Opening a bank account is the second step towards FI. It provides

access to financial facilities for the financially underserved through

formal sources of banking.

Step 3: Delivering Financial Services

The cost of delivery of service is considered to be a problem for the

consumers. The favoured delivery channel for microfinance and

microcredit is via the business correspondent (BC) model whereby an

agent (who may or may not be a direct employee of the financial

institution) personally travels within a wide geographical area to enroll

customers, delivers loans, and collects repayments. This ‘doorstep

banking’ model has its own limitations. Agents may abscond with their

clients’ funds or may themselves be the target of thieves.


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Conventional Delivery Model

Technology can improve conventional delivery channels such as the BC

model by adding new levels of security, speeding up enrolment procedures or

ensuring accuracy.

Technology-enabled Delivery Model

Alternatively, technology can actually become the direct delivery

channel. Self service Technology through ATMs, the internet and user-driven

mobile phone banking may be resorted to. With policy support, self-service

technology can provide a feasible platform for the delivery of financial

services to the financially underserved population (www.ncr.com).

4.9 Dimensions of Financial Inclusion

Similarly to social inclusion, FI is a multidimensional concept. Five

dimensions of FI are identified in the literature: (1) Banking inclusion –

allowing access to and being able to make effective use of bank accounts.

(2) Savings inclusion – allowing access to and being able to actively use

savings products. (3) Credit inclusion – allowing access to and being able

to make effective use of (mainstream) credit. (4) Financial Service

Inclusion (including insurance) – allowing access to appropriate insurance

products. (5) Information Inclusion - allowing access to timely and

appropriate information and being able to take informed decisions. The

different dimensions are inter-related and reinforce each other. Within each

dimension of FI different degrees of inclusion are identified. Full FI can only

be achieved if a wide range of financial products exists to suit individuals’

needs and circumstances.

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4.10 Facilitating Financial Inclusion - Initiatives 4.10.1 Global Scene

The importance of FI to national economies is evidenced by the support

of individual Governments as well as international bodies around the world.

Financial sector reforms that promote FI are increasingly at the core of the

international development agenda for policy makers and development

institutions at the global level. The United Nations (UN), declared 2005 as the

Year of Microfinance. The United Nations Capital Development Fund

(UNCDF), which is present in 33 of the identified 50 Least Developed

Countries (LDC), invests in local development and inclusive finance with a

total program portfolio amounting to US$130 million. UNCDF’s vision of

inclusive finance is to offer appropriate financial services to all segments of

the population to be supported by sound government policies, legal and

regulatory frameworks and infrastructure. UNCDF has been instrumental in

taking innovative approaches to build inclusive financial sectors to help them

reduce poverty and achieve inclusive growth.

Similarly, the International Financial Corporation (IFC), a member of

the World Bank, supports numerous causes designed to support the

proliferation of FI. The Pittsburgh and Korea G-20 communiqués increasingly

underscore the importance that this topic has gained in the international arena.

The Nobel Institute awarded the Nobel Peace Prize to the founders of

microfinance Muhammad Yunus and the Grameen Bank in 2006. New

international bodies such as the Alliance for Financial Inclusion (AFI) have

emerged whose primary objective is to advance FI for the world’s poor.

The International Monetary Fund (IMF) and the International Finance

Corporation (IFC) also increasingly pay attention to this debate. The IMF has


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launched a new database on FI and the IFC together with Consultative Group

to Assist the Poor (CGAP) and AFI have been leading the G-20 discussion

around FI for households and Small and Medium Enterprises (SMEs). The Bill

& Melinda Gates Foundation have just pledged $500 million per year over the

next five years to expand access to saving services.

4.10.2 Indian Scene

In India, the use of the term FI is of recent origin but the efforts to bring

the poor under the fold of formal credit system have been going on since

nationalisation or even before. Deliberate policies of the Government of India

and RBI for opening one of the biggest branch networks in rural and semi-

urban areas have been a major step towards FI. Various Poverty Alleviation

Programs with credit support from the banks have contributed substantially in

this direction despite many shortcomings. Large scale expansion of branches

of banks in rural and semi urban areas, establishment of RRBs, coupled with

direction to lend 40 per cent of net bank credit to priority sector of which 18

per cent to agriculture and 5 per cent to weaker sections have been important

proactive measures on the part of the state to promote FI. But the socio-

economic diversities rendered many of such attempts inadequate in extending

banking facilities to a vast section of the population who remained beyond the

reach of the formal financial institutions for long and the bottom of the

pyramid has been expanding faster than the rate of banking growth

(Thingalaya, 2006).

Conceptually, the historical journey of FE and FI in India can be

specified into four phases. These phases are characterised by banking sector’s

concern for and approach towards certain sectors. These phases are:

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1. Unconcerned - For long, there was no meeting point between banks and

the poor, rural, unorganised, farm and other related sectors. Banks remained

unconcerned for they had no knowledge or information about the economy

and financial dimensions of the working and living of the excluded sections.

2. Concerned but not involved - The excluded sector subjected to natural

and man-made miseries for long. The stories about their sufferings made

the banking people felt moved and started feeling concerned. But they did

not know as to how the banks could support these left-behind. The world of

banking and the backward poor were far apart and unconnected due to

geographic, cultural, mental and professional differences coupled with lack

of correspondence and communication. Hence, bankers even when

concerned of these people could not help them through banking services.

3. Concerned, Involved but without a definite approach -The process of

involving the banking sector in the working and financing of the hitherto

neglected sections was unprecedented and revealed some voluntary/

compulsory steps. The banks voluntarily involved in financing the rural and

farm sector, particularly in the green revolution era. Banks, following

‘social control’, assumed social responsibility and opened access to the

excluded sectors to their credit services. With nationalisation and priority

sector financing policy, the commercial banks had to compulsorily involve

in the banking to the poor sections. All these efforts could make banking

sector accessible to a large number of hitherto-excluded people. Some

structural and procedural changes were introduced under the continuous

pressure from the Government but the entire initiative lacked a definite

approach. The lack of professionalism took its toll. As a result, the NPAs

piled up and this situation warranted the need for a review of the policy

procedure and perceptions.


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4. Concerned and involved with a definite approach - The real

beginning of this phase was reflected in two inter-linked land marks, viz;

the flexibility given to the bankers and the focus laid on micro-finance.

4.10.2.1 Policy Developments

In India, the financial services have been used by a very limited group

of people. To enlarge the area and service sector, certain policy measures have

been taken by the Governments. Policy development in India for FI can be

seen in three stages.

First Phase Developments (1969-1981)

Before 1990, several initiatives were undertaken for enhancing the use

of the banking system for sustainable and equitable growth. These included:

a). Nationalisation of private sector banks,

b). Introduction of priority sector lending norms,

c). The Lead Bank Scheme,

d). Branch licensing norms with focus on rural/semi-urban branches,

e). Interest rate ceilings for credit to the weaker sections and

f). Creation of specialised financial institutions to cater to the

requirement of the agriculture and the rural sectors having bulk of

the poor population.

Second Phase – Annual Policy (2005-2006)

As the central bank of the country, the RBI has taken steps to ensure FI

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 FI in the country. With a view to

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enhancing the FI as a proactive measure, the RBI in its Annual Policy

Statement for the year 2005-06, while recognising 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 FI. In the Mid Term Review of the Policy (2005-06), RBI

came out with a report in 2005 (Khan Committee) and subsequently 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 FI.

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 FI on a pilot basis.

Brief Glimpses of Main Initiatives

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. (i). The holder is

not required to maintain any minimum balance requirement and also

nothing is charged for opening this type of account (ii). KYC norms have

been simplified so that everyone can have this account (iii). Transactions

are limited to 5-10 free transactions per month (iv). ATM facility is

provided free of cost (v). There is no account maintenance cost.

b) Overdraft in Saving Bank Accounts

Banks were advised to give credit in the form of overdraft on saving

bank account to its customers, so that in case of small credit need like

medical bill, any accidental charges etc. can be met in.


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c) KYC Norms

The ‘Know Your Customer’ (KYC) norms were revised on 18 February

2008, in order to make it easy for people to avail financial services.

These guidelines include:

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.

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 (` 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 (`1,00,000/-) in a

year. In 2010-11, KYC norms have been further relaxed vide circular

dated 27 January 2011, to include job cards issued by/under National

Rural Employment Guarantee Act (NREGA) (duly signed by an officer

of the State Government) or the letters issued by the Unique

Identification Authority of India containing details of name, address and

Aadhaar number can also be taken as the basis for opening small bank

accounts. It was further relaxed vide circular dated 28 September 2011,

making it applicable to all accounts.

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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.

e) GCC / KCC 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, RBI 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. RBI 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.


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B. KCC Scheme: Eligible farmer will be provided a Kissan 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. Personal Accident Insurance of ` 50,000 for death

and permanent disability and ` 25,000/- for partial disability

available to Kissan Credit Card holder at an annual premium of `

15/- per annum.

f) Financial Literacy Program

Recognising 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 Bank’s website.

Third Phase - Rangarajan Committee

RBI setup a commission (Khan Commission) in 2004 to look into FI and

the recommendations of the commission were incorporated into the Mid-term

review of the policy (2005-06).The Government of India constituted the

Committee on Financial Inclusion under the chairmanship of Dr. Rangarajan

on 26 June 2006, to prepare a strategy of FI. The Committee submitted its

final Report on January 4, 2008. The Report viewed FI as a comprehensive and

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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. FI 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. 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. Table 4.1 exhibits the percentage of FE prevailing in different Indian

states, as revealed by the committee.

Table 4.1. The Percentage of Financial Exclusion prevailing in Different Indian States

Percentage of financial exclusion

States

More than 75 percentage Meghalaya, Mizoram, Jharkhand, Utharakhand, Arunachal Pradesh, Assam and Manipur

51- 75 per cent Bihar, Orissa, Chhattisgarh, Himachal Pradesh, J&K, UP, Nagaland, Tripura, and Sikkim

25- 50 per cent Karnataka, Kerala, MP, Maharashtra, Punjab, TN, West Bengal, and Rajasthan

Less than 25 per cent AP, Delhi, Goa, and Pondicherry. Source: Committee on Financial Inclusion, GoI

In keeping with these objectives, the RBI has formulated its broad

approach to FI aimed at:

Connecting people with the banking system and not just credit

dispensation.

Giving people access to the payment system.


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Using multiple channels such as Civil Service Organisations, Non-

Governmental Organisations (NGOs), Post Offices (POs), Farmers

clubs, Panchayats, MFIs, etc: as Business Facilitators (BFs) to

expand the outreach of banks.

Adopting a decentralised approach which is state and region

specific and has close involvement and co-operation between the

respective state Governments and banks.

Making use of Information and Computer Technology (ICT),

using bio-metric smart cards and mobile hand hold electronic

devices for receipts and disbursements of cash by agents of banks

such as Business Facilitators/Correspondents (BFs/BCs).

Continuous evaluation, sharing of experiences, feedback and

improvement.

In consonance with the broad approach, the RBI has undertaken a

number of measures for attracting the financially excluded population into the

structured financial system.

Adoption of Districts for 100 per cent Financial Inclusion

A decentralised strategy has been adopted for ensuring FI. The State Level

Bankers Committee (SLBC) identified one district for 100 per cent FI. Surveys

are then conducted using various data bases such as electoral rolls, public

distribution system or other house hold data to identify households without bank

accounts. Responsibility is given to the banks in the area for ensuring that all

those who wanted to have bank account are provided with one by allocating the

villages among the different banks. Bank staff or their agents who are usually

local NGOs or village volunteers contact the households at their door steps.

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Recognising the need for providing social security to vulnerable groups,

in some cases, banks have provided in association with insurance companies,

innovative insurance policies at affordable cost covering life, disability and

health cover. SHGs and MFIs are also being used extensively for FI on the

credit side.

Use of Intermediaries as Agents in Micro Finance

In January 2006, the RBI permitted banks to utilise the services of Non

Governmental Organisations (NGOs/SHGs), Micro Finance Institutions (other

than Non-Banking Financial Companies), and other civil society organisations

(CSOs), as intermediaries in providing financial and banking services through

the use of Business Facilitators (BFs) and Business Correspondents (BCs)

model. 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.

The banks are also entering into agreements with Indian Postal

Authorities for using the enormous network of post offices as business

correspondents thereby increasing their outreach and leveraging on the

postman’s intimate knowledge of the local population and trust reposed in

him. During 2010-11, in order to harness the large and widespread retail

network of corporate for providing financial and banking services, ‘for profit’

companies were also allowed to be engaged as intermediaries to work as BCs

for banks in addition to entities permitted earlier.

Use of ICT Solutions for Enhancing Outreach of Banks

The RBI has been encouraging the use of Information and Communication

Technology (ICT) solutions by banks for enhancing their outreach with the help

of their Business Correspondents (BCs).The BCs carry hand held devices


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which are essentially smart card readers. The information captured is

transmitted to a central server where the accounts are maintained. These

devices are used for making payments to rural customers and receiving cash

from them at their door steps. Mobile phones have also been developed to

serve as card readers. Account holders are issued smart cards which have their

photographs and finger impressions. Certain banks have also been using this

technology in Andhra Pradesh, Karnataka, and Maharashtra.

In the budget speech in 2007 (February), the Finance Minister

announced setting up of two funds of `500 million each, viz: Financial

Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF). The

objective of the FIF is, to support ‘developmental and promotional activities’,

with a view of securing greater FI, particularly among weaker sections, low-

income groups and in under developed regions and hitherto unbanked areas.

The objectives of FITF are to enhance investment in Information and

Communications Technology (ICT), aimed at stimulating research and

technology innovation in the area of FI, increase the adoption of technology

among financial services providers and users and encourage an environment

of innovation and co-operation among stakeholders. In the Union Budget for

2011-12, the corpus of these funds was enhanced by 100 crores each. In the

2009 (October) Policy Review, RBI took a further big step by freeing branch

opening in towns and villages with population below 50,000 and to ensure

that at least 1/3 of such branch expansion happens in the under banked

districts of under banked states.

Since inception in November 2005, 50.6 million ‘no-frills’ accounts

have been opened by banks by March 2010, with outstanding balance of 5,386

crores. In 2009-10, banks were advised to provide small overdrafts in such

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accounts. By March 2010, banks have provided 0.18 million overdrafts

amounting to 28 crores. General purpose Credit Card (GCC), offered by banks

at their rural and semi-urban branches are in the nature of revolving credit

entitling the holder to withdraw up to the limit sanctioned (` 25,000/). By

March 2010, banks had provided credit aggregating 635 crores in 3.5 million

GCC accounts (Economic Review, 2010-11).

4.11 Financial Inclusion through Micro Finance

In many developing economies, a majority of the adult population,

especially those at the bottom of the economic pyramid, those living in the

rural areas and women remain without access to financial services.

Microfinance has emerged as a potent tool to address this issue and its ability

to do so has grown in recent years with the adoption of new technologies and

financial innovations and policy reforms.

In the literature, the terms ‘microcredit’ and ‘microfinance’ are often

used interchangeably. In fact, microcredit is a part of microfinance.

Microfinance encompasses credit, savings, insurance and other basic financial

services like fund transfer. The terms - microfinance and microcredit - have

been used interchangeably in the thesis. Microcredit has been defined by the

RBI as the provision of thrift, credit and other financial services to the poor in

rural and semi-urban areas to enable them to raise their standard of living.

NABARD has defined Microfinance as “Provision of thrift, credit and other

financial services and products of very small amount to the poor in rural, semi

urban and urban areas for enabling them to raise their income levels and to

improve their living standards”. Microcredit as defined by the Grameen Bank

(Bangladesh), symbolises small loans extended to the poor for undertaking the


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self employment projects that would generate income and enable them to

provide employment for themselves and their families.

In 1997, the then United Nations (UN) Secretary General Kofi Annan

declared that “Microcredit is a critical anti-poverty tool - a wise investment in

human capital. When, the poorest especially women receive credit, they

become economic actors with power. Power to improve not only their own

lives but in a widening circle of impact the lives of their families, their

communities and their nations” (http://nobelprize.org).

It may be helpful to enumerate some of the characteristics associated

with what is perceived to be ‘microfinance.’ There are at least seven

traditional features of microfinance (www.financialaccess).

1) Small transactions (whether loans, savings or insurance).

2) Loans for entrepreneurial activity.

3) Collateral-free loans.

4) Group lending.

5) Focus on poor clients.

6) Focus on female clients.

7) Market-level interest rates.

4.11.1 Evolution of Micro Finance

The concept of microfinance is not new. Small informal savings and

credit groups have operated for centuries across the world, from Ghana to

Mexico to India and beyond. In Europe, as early as the 15th century, the

Catholic Church founded pawnshops as an alternative to usurious

moneylenders. The Irish Loan Fund System, started in the early 1700s, is an

early example of this kind. In the 1800s, Europe saw the emergence of larger

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and more formal savings and credit institutions that focused on the rural and

urban poor. The financial co-operative was developed in Germany. The

movement emerged in France in 1865 and Quebec in 1900. Many of today’s

financial co-operatives in Africa, Latin America and Asia find their roots in

this European movement ((Sumanjeet and Vikas Batra, 2010).

Internationally, the terminology ‘micro-credit’ has been in use for the

last 35 years or so became a fashion about 10 years ago when it was renamed

‘micro finance’ and has almost became a fad for the last 5 years or so, when it

got rechristened as FI (Prakash Bakshi, 2009). 1970s saw the birth of

microcredit. Bangladesh, Brazil and few other countries began lending to poor

women entrepreneurs. Early pioneers include Grameen Bank (GB) in

Bangladesh, ACCION International in Latin America and then spread to USA,

Africa and to the Self Employed Women’s Association (SEWA) Bank in India.

In 1980s, microcredit programs throughout the world improved on the original

methodologies. 1990s saw growing enthusiasm among international development

agencies and networks for promoting microfinance as a strategy to alleviate

poverty. In the early 1990s, the term began to be used rapidly, evolved and

expanded from the narrow field of microcredit to the more comprehensive

concept -‘micro finance’ embracing a range of financial services.

Towards the closing years of the 20th century, efforts were made on a

global basis seeking to promote approaches that focus on reducing human

poverty emphasising the importance of equity, social inclusion, women’s

empowerment and human rights for poverty reduction. A key priority in this

endeavour is in reducing extreme poverty and hunger by half within 2015, the

most critical Millennium Development Goal. This paradigm of ‘Micro

Finance’ received increased attention in the mid 1990s, after the World


129

Summit for Social Development held at Copenhagen in March 1995.The

summit urged the Governments of the nations to revise their legal, regulatory

and institutional frameworks that restrict poor people’s access to credit,

follow realistic targets for credit provisions, offer incentives to organised

credit delivery systems that work with poor clients and build up and expand

the existing financial networks to include poor households.

The UN declared the year 1996, as the International Year of Eradication

of Poverty and the periods 1997- 2006, as the first International Decade for the

Eradication of Poverty. Consequently, the World Micro Credit Summit at

Washington DC, in 1997, announced, a global target of ensuring delivery of

credit to 100 million of the world’s poorest families by 2005. Resorting to

these resolutions, many developing nations have included microfinance in

their development paradigms (http://www.soc-info.soc_itec.ac.jpl).

Microfinance emerged as a ground breaking and radical alternative in

international development by offering a bottom-up approach of giving small

loans directly to the poorest of the poor, predominantly women.

Microfinance signaled a departure from the traditional development

initiatives, by the idea that the poor were not only bankable but capable of

becoming economically self-sufficient. Microfinance was quickly hailed as a

success, sparking a revolution in participatory development and the global

women’s movement. One reason that microfinance has received such

widespread attention as a development tool lies in its exceptional ability to

provide an opportunity for women to become empowered in the process. The

approach not only provides economic benefit to the participants but also

addresses more complex dimensions of poverty, isolation, a sense of

inferiority and powerlessness.

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Since the advent of microfinance’s first recognised success - the

Grameen Bank in Bangladesh - many countries particularly neighboring India

with nearly a third of the poorest population in the world have witnessed a

veritable explosion in microfinance institutions (MFIs). Microfinance has for

all intents and purposes become a ‘macro’ phenomenon. MFIs now come in 31

flavours and range in form from non-governmental organisations (NGOs), to

credit unions, non-banking financial intermediaries, self help groups (SHGs) or

‘thrifts’ (sometimes locally referred to as ‘bachat ghats’) and even commercial

banks. Within these various manifestations, it is the SHG that has come to

receive the most replication throughout India primarily because they can be

easily be linked to other NGO’s, state banks or financial intermediaries

(Radha, G. Friedman., 2005)

4.12 Microfinance in India

Microfinance as small loans to the poor is of ancient origin in India. The

informal financing system can be traced to the era of ‘Koutilya’ in the 4th

century BC. The first effort in institutionalising rural credit was made by the

Government of India (GoI) with the passing of the Co- operatives Act in 1904.

1950s saw the creation of a nationwide network of rural co-operatives. In

1967, Social Control was introduced by GoI, followed by nationalisation of

major commercial banks in 1969. In 1975, GoI introduced RRBs with the

objective of accelerating rural economic development.

Even though, some informal self help groups (SHGs), started

functioning, in India, first micro finance institution (MFI), ‘Shri Mahila

SEWA Sahkari Bank’ was formed in 1974. NABARD came into being in

1981 and in 1982, RBI transformed its Agricultural Credit Department into the

NABARD. In the early 1980s the GoI, launched the IRDP, a large poverty


131

alleviation credit program. In 1991, Government reforms allowed for an

increase in commercial banking in India. The bank linkage program (BLP) was

started in the year 1992. In 1993, SHGs, registered or not, were allowed by the

RBI to open savings account with banks. In 1994, Small Industries

Development Bank of India (SIDBI) started operations in the field of

microfinance. In 1999, RBI constituted a microcredit special cell in banks to

suggest measures for mainstreaming microcredit and accelerating flow of credit

from MFIs. In 1999, GoI launched a new program called ‘Swarnajayanthi Gram

Swarazagar Yojana’ (SGSY). In 2005, GoI introduced significant measures in the

annual budget affecting MFIs, following the recommendations of Khan

Committee (2005). In 2005-06, a pilot project for ‘Promotion of Microenterprises’

was launched and in 2006, NABARD launched the Micro Enterprise

Development Program (MEDP) for skill development.

Although the outreach of microfinance in India has increased from a

modest 33 thousand SHGs in 1992 to 2.9 million SHGs by 2007, the biggest

driver of this expansion – the commercial model (based on profits) received

some setbacks in March 2006 (Shylendra, H.S.(2006). The borrowers in the

state of Andhra Pradesh (with the highest microfinance density in India)

started showing considerable hostility to these entities on the ground that they

behave like loan sharks (Ghate, 2007). The union budget of 2008-09

announced that banks would be encouraged to embrace the concept of ‘total

financial inclusion’.

Indian Microfinance sector comprises formal and informal components.

The formal structure which is legal and regulated provides bulk credit and

allied services to the informal sector. This informal sector consists of NGOs,

SHGs and SHPIs. As this structure is outside the legal framework, they operate at

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the grass root level. The regulatory body of the Indian MF sector is the RBI.

NABARD is both a regulatory structure and credit provider. Other suppliers of

credit consist of SIDBI, HUDCO, HDFC, Rashtirya Mahila Kosh (RMK),

Rashtriya Gram Viksa Nidhi (RGVN) etc. The intermediary agencies comprise

Scheduled banks, RRBs, Co-operative banks, Micro credit Institutions and

NGOs.

Though, there are different models for purveying micro finance, the Self

Help Group - Bank Linkage Programme (SBLP) has emerged as the major

microfinance programme in the country. It is being implemented by

commercial banks, regional rural banks (RRBs) and co-operative banks. The

SBLP of NABARD accelerated the growth of the microfinance movement in

India in the latter half of the nineties. Now the SHG-Bank Linkage Programme

is one of the largest microfinance programmes in the world (Acharya, 2008).

SHGs combine another two features not necessarily present in all microfinance

models but which help to explain their success. They function as savings co-

operatives as well as means to credit.

Under the SHG-Bank Linkage Programme, as on 31 March 2012,

79.60 lakh SHGs held saving bank accounts with total savings of 6551.41 crore

as against 74.62 lakh SHGs with savings of 7016.30 crore as on 31 March

2011. Thus, about 103 million families are associated with banking agencies

under the Programme. As on 31 March 2012, the commercial banks had the

maximum share of SHGs savings with 46, 18, 086 SHGs (58 per cent) with

savings amount of ` 4153 crores (63 per cent), followed by RRBs with saving

bank accounts of 21, 27,368 SHGs (27 per cent) and savings amount of ` 1300

crores (20 per cent) and DCBs having savings bank account of 12, 14,895 SHGs

(15 per cent) with saving amount of ` 1098 crores (17 per cent).


133

As on 31 March 2012, the share of women SHGs in total SHGs with

savings bank accounts was 62.99 lakh, i.e.79.1 per cent as compared to last

year’s share of 81.7 per cent. As on 31 March 2012, 43.54 lakh SHGs had

outstanding bank loans of ` 36340 crore as against 47.87 lakh SHGs with bank

loans of ` 31221 crore as on 31 March 2011 registering a growth of 16 per

cent in the number of SHGs while the number of SHGs with outstanding bank

loan declined by 9 per cent. While commercial banks accounted for 71 per

cent of the loans outstanding against SHGs, DCBs accounted for 5.27 per cent

of the loans outstanding against the SHGs during the year 2011-12. Similarly,

RRBs accounted for 23.7 per cent of the loans outstanding

4.13 Microfinance in Kerala

Banking is a key driver for financial inclusion/inclusive growth.

Compared to other states in India, Kerala has had a higher percentage of

people with bank accounts. According to a survey, 81.36 per cent of the

population already had access to banking facilities, meaning that around 18.64

per cent of the population did not have access to financial services. The high

level of banking among the population is the result of the highest literacy rate

prevailing in the state showing that banking increases with literacy and

education (http://www.scribd.com/harikul).

According to 2011 census, out of 77, 16,370 households in Kerala, 57,

28,876 households are availing banking services (www.censusindia.gov.in). It

suggests that 74 per cent of the total households in Kerala are availing banking

services. Kerala has the rare advantages in its FI programme being a State

with one of the largest Government-run women empowerment programmes in

the country, called ‘Kudumbashree' with 37 lakh members and covering more

than 50 per cent of households in Kerala having linkages with banks.

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All Kudumbashree NHGs (neighbourhood groups) have bank accounts

through which members of NHGs have access to savings and credit services of

banks. For pooling funds, 1, 29,041 NHGs had been connected to banks on

August 2011. Moreover, over 24 lakh families have registered under the

Mahatma Gandhi National Rural Employment Guarantee Scheme

(MGNREGS) and have their wages paid through over 35 lakh bank accounts.

Kerala also has the largest number of social security pensioners in India, over

15 lakh people whose pension is paid only through bank accounts. A recent

trend has been a flood of new accounts being opened by another vulnerable

section living in Kerala, the lot of migrant labourers (about 10 to 30 lakh of

them ) flocking to the State from all parts of the country (Krishnakumar,

2012).

Earlier, Palakkad in north Kerala had become the first district in the

country to achieve total FI in 2007. Subsequently, 127 villages were identified

with no banking channels and a bank branch. Mobile bank or banking

counselor started functioning there under a special FI initiative by lead banks

in each district. Since then, several banks have launched financial literacy and

credit counseling centres, facilities for opening no-frills accounts and issued

smart cards as part of the initiative. In December 2007, Kerala made a

landmark achievement: its banking sector could achieve 100 per cent FI,

guaranteeing at least one bank account in each household and banking facility

within reach of all the people in the 14 districts of the State.

One of the earliest and serious efforts at enabling greater inclusion to the

financial sector of Kerala has been through linking informal groups of SHGs

with formal banks in the organised sector. Kerala state has seen a massive

expansion of the SHG-Bank Linkage Programme under the stewardship of the


135

Government initiative called ‘Kudumbashree’. Neighbor Hood Group (NHG)

– Bank linkage scheme is a Flagship Programmes of Kudumbasree Mission.

National Bank for Agricultural and Rural Development (NABARD)

Bank linkage grading procedures are applied while selecting eligible NHGs

for availing loan. Banks will provide loans to those NHGs who acquire 80 per

cent marks in grading. The cumulative amount that has been lent to NHGs

through linkage banking is 1380 crore as on 30th September 2012. The number

of NHGs availed bank linkage was 97993. In Kerala More than 4 lakh Self

Help Groups (SHG) maintaining their savings bank accounts with 625.49 crore

in various banks as on March 2012.These figures suggest a very impressive

coverage of the poor households under the microfinance programme by

NABARD and its partners.

Besides the SHG and micro finance related initiatives, efforts have been

made by the state to ensure greater FI by banks. This inter alia comprised

opening numerous ‘no frills accounts’ i.e., savings accounts without any

prescribed minimum balances and conditionality’s or offering multi-purpose

General Credit Cards (GCC) to poor with the objective to provide hassle-free

credit based on the assessment of cash flow and without insistence on security,

specified purpose or any end-use stipulations. Further, to enhance the physical

outreach of the formal banking system and to enable inclusion, banks have

been permitted to use the services of Non-Governmental Organisations / Self

Help Groups (NGOs/ SHGs), Micro Finance Institutions (MFIs) and other

bodies to serve as intermediaries in providing financial and banking services

through the use of Business Facilitator and Correspondent models.

Despite an array of initiatives by the Government and the range of

financial products in the bank's shelf, many poor continue to be excluded by

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136

banks. This is particularly paradoxical for a state like Kerala which has a

highly literate population intensively banked rural neighbourhoods with limited

geographically secluded areas as also a good lateral spread of SHG programme

in the state. These persisting complexities bring greater interest to the subject

of FI in a state that houses largely urbane population.

Even in places like Kerala, carpet coverage of communities by the

formal institutions or a cent per cent FI initiative through Government support

still remains a far cry. There is a need for more research into the financial lives

of the vulnerable poor to appreciate the reasons for their continued link with

moneylenders (Suran and Narayana, 2009).

4.14 Financial Inclusion (FI)/ Financial Exclusion (FE) - Present Position

4.14.1 India

The World Bank has released a research study in April 2012, known as

the Global Financial Inclusion database (Global Findex). The survey

conducted in 2011 covered at least 1,000 adults each in 148 economies using

randomly selected, nationally representative samples. The focus of the Global

Findex Database encompasses a set of indicators that measure how adults

save, borrow, make payments, and manage risk, stressing thereby on how a

well-functioning financial system serves the vital purpose of offering savings,

credit, payment, and risk management products to people with a wide range of

needs. A snapshot of the data on some indicators for select countries is given

in Table 4.2 below.


137

Table 4.2. World Bank's FINDEX - Select Indicators on Financial Inclusion - 2011 (Proportion of Population of Age 15+)

Indicator Name USA UK Germany Russia Brazil China India

CREDIT:

Loan from a financial institution in the past year

20.1 11.8 12.5 7.7 6.3 7.3 7.7

Loan from a financial institution in the past year, income, bottom 40%

17.6 11.1 12.3 6.3 3.5 7.7 7.9

Loan from a financial institution in the past year, income, top 60% 22.3 13.2 13.7 8.7 8.2 7.0 7.5

Loan in the past year 44.6 28.8 25.3 31.9 23.8 29.4 30.6

Loan in the past year, income, bottom 40% 45.1 28.1 25.4 32.1 19.7 32.4 35.7

Loan in the past year, income, top 60% 44.2 30.2 24.6 31.7 26.6 27.3 24.9

INSURANCE:

Personally paid for health insurance NA NA NA 6.7 7.6 47.2 6.8

Purchased agriculture insurance (% working in agriculture, age 15+) NA NA NA 3.7 11.2 7.2 6.6

PAYMENTS:

Checks used to make payments 65.5 50.1 7.2 5.2 6.7 1.8 6.7

Electronic payments used to make payments 64.3 65.3 64.2 7.7 16.6 6.9 2.0

Mobile phone used to pay bills NA NA NA 1.7 1.3 1.3 2.2

SAVINGS:

Saved at a financial institution in the past year

50.4 43.8 55.9 10.9 10.3 32.1 11.6

Saved at a financial institution in the past year, income, bottom 40% 32.1 43.5 55.1 8.8 5.8 18.3 10.4

Saved at a financial institution in the past year, income, top 60% 66.5 44.3 60.0 12.4 13.3 41.7 12.9

Saved any money in the past year 66.8 56.7 67.3 22.7 21.1 38.4 22.4

Saved any money in the past year, income, bottom 40%

51.5 56.2 67.1 18.9 12.1 23.3 19.4

Saved any money in the past year, income, top 60% 80.2 57.7 68.1 25.4 27.1 48.9 25.8

NA: Not Available Source: Source: Asli Demirguc - Kunt and Klapper, L. (2012): ‘Measuring Financial

Inclusion’, Policy Research Working Paper, 6025, World Bank, April www.cgap.org/blog/measuring-financial-exclusion

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138

From the above Table, the key statistics on FI/FE in India can be

identified and explained as shown below.

Table 4.3. Status of Financial Inclusion in India (Per- cent)

Share with an

account at a formal financial institution

Adults saving in the past year

Adults originating a

new loan in the past year

Adul

ts w

ith a

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Adul

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age

Adul

ts p

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ally

for h

ealth

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e

Adul

ts u

sing

mob

ile m

oney

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ear

All a

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Poor

est i

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From

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tion

From

fam

ily o

r frie

nds

1 2 3 4 5 6 7 8 9 10 11 12

India 35 21 26 12 3 8 20 2 2 7 4

World 50 38 47 22 5 9 23 15 7 17 7

Source: World Bank's FINDEX 2011

Figure 4.2 provided below shows the percentage of account penetration

in high income economies and developing economies of the world.

Source: Demirguc-Kunt and Klapper 2012

Figure 4.2 Account Penetration


139

From the figure it can be observed that the global account penetration

rate is 50 per cent, while it is 33 per cent for South Asia which India belongs

to. For high income economies of the world it is 89 per cent.

The World Bank study reveals that 50 per cent of adult population

worldwide report owning an account with a formal financial institution, but

actual operation and use of these accounts for transactions varies widely across

regions and economies. Financially excluded populace is predominant in

developing countries, where only 41 per cent adults have a formal account,

with only 37 per cent of women having formal account against 46 per cent of

men; the gender gap widens further because of varying degrees of income

inequalities observed among the developing countries. The cross country

comparison would reveal that bank account penetration, measured as a per

cent of adult population, varies widely across the countries. In high-income

economies, account based financial inclusiveness is much higher with 89 per

cent adults having accounts with formal financial entities.

The results of the survey suggest that India lags behind developing

countries in opening bank accounts, but is much closer to the global average when

it comes to borrowing from formal institutions. In 2011, in India, 35 per cent of

people had formal accounts versus the global average of 50 per cent and the

average of 41 per cent in developing economies. For India, account penetration is

reported to be 35 per cent (43.7 per cent for men and 26.5 per cent for women)

while China scored better at 63.8 per cent (67.6 per cent for men and 60 per cent

for women). South Korea reported high account penetration at 93 per cent, on

account of universality of education and particularly the spread of financial

literacy. The survey also points to the ‘slow growth of mobile money in India,

where only 4 per cent of adults in the Global Findex sample report having used a

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mobile phone in the past 12 months to pay bills or send or receive money’.

Similarly the per cent use of debit card and credit card is 8 and 2 respectively.

4.14.2 Progress by the Commercial Banks in India

The progress by commercial banks since the launch of FIPs clearly indicate

that banks are progressing in areas like deploying BCs, opening of banking outlets,

opening of no-frills accounts, grant of credit through KCCs and GCCs. The

penetration of banks in rural areas has increased sharply in two years of the FIP

implementation. With a view to encouraging transactions in no-frill accounts, banks

were advised to provide small overdrafts (ODs) in such accounts, which helped in a

strong growth of such accounts. The impact of Information and Communication

Technology (ICT) based BC model in facilitating door step delivery of services can

be seen from the ascending trends of transactions. Table below portrays the

progress of commercial banks in India for the period 2008 to 2012.

Table 4.4 Statistics relating to Progress of Commercial Banks in India at a Glance

Indicators March 2008

March 2009

March 2010

March 2011

March 2012

(1) No. of bank offices in India (Total)

78787 82897 88203 94019 101261

(a) Rural 30927 31598 32529 33868 36130 (b) Semi-urban 18027 19337 21022 23299 25931 (c) Urban 15566 16726 18288 19046 20321 (d) Metropolitan 14267 15236 16364 17806 18879

(2) Aggregate Deposits(` Billion) 31969.4 38341.1 44928.26 54285.10 61741.47 (3) Bank Credit (` Billion) 23619.13 27755.49 32447.88 40768.68 48215.27 (4) Advance to priority sectors

(` Billion) 7814.76 9089.29 10915.10 13158.59 14713.30

(5) Share of priority sector advance to total advance (per cent)

31.6 30.3 31.2 30.6 29

(6) CD Ratio (per cent) 74.6 73.8 73.7 76.5 78.6 Source: RBI, Statistical Tables-2012


141

At the national level, number of bank branches of all scheduled

commercial banks grew from 94019 at the end of March 2011, to 101261 at

the end of March 2012, with an increase of 7242 branches within one year. Of

the total bank branches, 36130 are in rural areas, 25931 are in semi urban

areas, 20321 are in urban areas and metropolitan cities having 18879 branches.

7282 new branches were opened during the year ended on 31st March 2012. Of

the new branches opened by SCBs during the year, 2264 (31 per cent) were in

rural areas, 2635 (36 per cent) were in semi-urban areas, 1294 (18 per cent)

were in urban areas and 1089 (15 per cent) were in metros.

Table 4.5. Progresses of Banks in Financial Inclusion Plan in India

Sl.No Particulars Year ended Mar2010

Year ended Mar 2011

Year ended

Mar2012

Progress April 11-March 12

1 Banking outlets in Villages with population >2000

37791 66447 112130 45683

2 Banking outlets in Villages with population <2000

29903 49761 69623 19862

3 Banking Outlets through Brick & Mortar Branches 33378 34811 37471 2660

4 Banking Outlets through BCs

34174 80802 141136 60334

5 Banking Outlets through Other Modes

142 595 3146 2551

6 Total Banking Outlets 67694 116208 181753 65545

7 Urban Locations covered through BCs 447 3771 5891 2120

8 No Frill A/Cs (No. in millions)

73.45 104.76 138.50 33.74

9 Amount in No Frill A/Cs (Amt in billions)

55.02 76.12 120.41 44.29

Source: RBI, Various statistical returns 2011-12

Chapter 4

142

From the above table, it can be seen that the total number of villages

covered by at least one banking outlet grew at 56 per cent in 2011-12 over the

previous year. 62 per cent of the total villages covered under FIPs were

villages with population less than 2,000. Almost 78 per cent of the total

villages covered were through BCs. Banks have, up to March 2012, opened

banking outlets in 181753 villages up from 116208 as on March 2011. Out of

these, 37471 villages have been covered through brick-&-mortar branches,

141136 through BC outlets and 3146 through other modes like mobile vans,

etc.

Table 4.6. Progress of Financial Inclusion in India

Sl. No Indicator 2010-11 March

2011-12 March

1 2 4

1 Credit-Deposit ratio 76.5 78.6

2 Population per bank branch(No.) 13382 12577

3 Per capita deposit (Rs) 45505 51106

4 Deposit per office (million) 609 643

5 Per capita credit (Rs) 34187 39909

6 Credit per office (million) 458 502

7 No. of ATMs 74505 95686

8 No. of credit cards (million) 18.04 17.65

9 No. of debit cards (million) 228 278

10 No. of new branches opened 5314 6918

11 Banking outlets opened in villages under FIP 116208 181753

12 Share of advances to priority sectors to total advance 30.6 29 Source: RBI, various statistical returns 2011-12.

The Credit Deposit (CD) Ratio of all Scheduled Commercial Banks in

India by the end of March 2012 was 78.6 per cent, which was 76.5 per cent


143

during the last year. At national level, population per office of scheduled

commercial banks at the end of March 2012 was 12577 as against 13382 in

2011 (Table 4.6). Per capita deposit for 2012 was ` 51106 as against ` 45505

in 2011. Similarly per capita credit in 2012 was ` 39909 as against ` 34187 for

2011.

Basic banking ‘no-frills’ account with ‘nil’ or very low minimum

balance requirement as well as no charges for not maintaining such minimum

balance make such accounts accessible to vast sections of the population and

were introduced as per the Reserve Bank directive in 2005. The number of

‘no-frills’ accounts recorded a growth of 32.21 per cent in 2011-12 over the

previous year (Table 4.5). As on March 2012, 138.50 million ‘No-frills’

accounts have been opened by banks with outstanding balance of 120.41

billion. These figures respectively were 104.76 million and 76.12 billion in

March 2011.Banks have been advised to provide small over drafts (ODs) in

such accounts. Up to March 2012, banks had provided 2.71 million ODs

amounting to 1.08 billion. The figures respectively were 0.61 million and 0.26

billion, in March 2011.

The number of Kisan Credit Cards (KCCs) and General Credit Cards

(GCCs) witnessed growth of 12 per cent and 24 per cent, respectively in 2012

over the previous year. As on March 2012, banks had provided credit

aggregating 41.84 billion in 2.11 million GCC accounts. Kisan Credit Cards to

small farmers have been issued by banks. As on March, 31 2012 the total

number of KCCs issued has been reported as 30.23 million (Table 4.5).

The total advances financed by Scheduled Commercial Banks as at the

end of March 2012 at all India level grew by 7446.59 billion to reach at

48215.27 billion as against 40768.68 crore during the corresponding period of

Chapter 4

144

2011 resulting in an increase of 18 per cent. The priority Sector advances

disbursed by commercial banks in 2011-12 was 14713.3 billion as against

13158.59 billion in the previous year resulting in an increase of 11.8 per cent

over the previous period.

The total deposits of all scheduled Commercial banks at all India level at

the end of March 2012, was 61741.47 billion, as against 54285.10 billion

during 2011, registering a growth rate of 14 per cent over the last year.

Table 4.7. Population Group-wise Distribution of Deposits and Credit of SCBs 2008 to 2012

(Amount in Billion) March 2008 March 2009 March 2010 March 2011 March 2012

Depo

sit

Cred

it

Depo

sit

Cred

it

Depo

sit

Cred

it

Depo

sit

Cred

it

Depo

sit

Cred

it

Rural 3030

(9.4)

1831

(7.6)

3655

(9.3)

2087

(7.3)

4235

(9.2)

2498

(7.5)

4969

(9.2)

2941

(7.2)

5782

(9.4)

4182

(8.7)

Semi urban

4294

(13.3)

2306

(9.6)

5319

(13.5)

2667

(9.3)

6182

(13.4)

3204

(9.6)

7212

(13.3)

3831

(9.4)

8484

(13.7)

4569

(9.5)

Urban 6576

(20.4)

3836

(16.0)

8245

(20.9)

4619

(16.2)

9511

(20.7)

5593

(16.7)

11164

(20.6)

6850

(16.8)

12809

(20.7)

7809

(16.2)

Metro 18388

(56.9)

15973

(66.7)

22154

(56.3)

19202

(67.2)

26091

(56.7)

22161

(66.2)

30921

(57)

27147

(66.6)

34666

(56.1)

31654

(65.7)

All-India Total

32288

(100)

23946

(100)

39373

(100)

28575

(100)

46019

(100)

33456

(100)

54285

(100)

40769

(100)

61741

(100)

48215

(100)

Source: RBI Statistical tables 2012 Note: Figures in brackets indicate percent share in All-India total

Table 4.7 illustrates the population group - wise distribution of deposits

and credits of scheduled commercial banks in India for the period from 2008

to 2012. It can be observed from the table that during the period of five years,

the share of credit is less than the share of deposits for all the groups except


145

metro where, the share of credit exceeds the share of deposits for all the five

years from 2008 to 2012. As on 31st March, 2012 the metro’s share of credit

was 66 per cent against the deposit share of 56 per cent to total. However,

there is a slight decline in the share of credit to metros over the period from

67.2 per cent in 2009 to 65.7 per cent in 2012. Similarly, over the period, the

share of credit to rural areas shows an increase of 1.1 per cent in 2012 as

against the share of 2008.Similarly, there is an increase in the share of credit to

rural areas. In 2012, the share was 8.7 per cent as against 7.2 per cent in 2011.

SHG-Bank Linkage Programme has completed two decades of existence

since the early days of the pilot in 1992. In 2011-12, 1.15 million new SHGs

were credit linked with banks and bank loans of 16,535 crore (including repeat

loan) was disbursed to these SHGs. Further, at end-March 2012, 7.96 million

SHGs maintained savings accounts with a membership of over 103 million

households in India. The balance in the savings accounts with the banks as at

the end of March, 2012 stands at ` 6551.41 crores. Further, over 4.35 million

SHGs have now access to direct credit facilities from banks and the total bank

loans outstanding against these groups is over ` 36340 crores as on 31-03-

2012.ie an average of ` 83500 per group. About 1.15 million SHGs were

extended fresh loans to the extent of ` 16534 crores during 2011-12 by all the

banks averaging `1.44 lakh per group. Fresh lending to SHGs during the year

shows an increase of 13.7 per cent over the previous year. The number of

SHGs having loans outstanding against them from banks declined by 9 per

cent during the year to 43.54 lakh as against 47.87 lakh last year, although the

quantum of loans outstanding increased to ` 36340 crores (16.4 per cent

increase over the last year). There is a strong belief that the SHG movement

has the potential to satisfy the financial service needs of India’s unbanked

people in a sustainable way.

Chapter 4

146

4.14.3 Kerala’s Position

Availability of adequate and affordable finance is a key determinant for

the performance of an economy. Despite being a small state, Kerala has an

extensive bank network and accounts for 4.2 per cent of the total Scheduled

Commercial Banks operating in the country on par with larger states like Bihar

and Punjab. At the end of March 2012, Kerala had 4783 branches and there

was an increase of 256 branches compared to March 2011. Kerala has

3.1 per cent of the total advances financed by Scheduled Commercial Banks,

on par with Haryana and much higher than states like Assam, Punjab,

Rajasthan and Bihar. All leading commercial banks have their presence in

Kerala, with State Bank of India and State Bank of Travancore being the most

dominant players.

Source: SLBC: 2012

Figure 4.3. District -wise Distribution of Number of SCB Branches in Kerala

In Kerala, total number of Scheduled Commercial bank branches as on

March 2012 was 4783, which shows that there is an increase of 256 bank

0100200300400500600700800

Thiruvannthapu

ram

Kollam

Pathanam

thitta

Alappu

zha

Kottayam

Idukki

Ernakulam

Thrissur

Palakkad

Malapuram

Kozhikod

e

Wayanad

Kann

ur

Kasaragod

535

284

312

297 378

131

765

543

323

347

331

97

241

139


147

branches within one year. Of this, 345 are rural branches, 3253 are semi urban

branches and 1185 are urban branches. The District-wise details of banking

statistics in Kerala reveals that Ernakulam district with 765 branches holds the

largest number followed by Thrissur with 543 branches and Thiruvananthapuram

535 branches.

Advances disbursed by scheduled Commercial Banks from 2001 to 2012

in Kerala as well as in India with percentage of annual growth and incremental

advance are furnished in Table 4.4. Kerala availed an amount of 1, 51,525

crore at the end of March 2012 against 122823 crore during the corresponding

period in the previous year and the increase in actual terms is 28,702 crore.

Table 4.8. Advances by Scheduled Commercial Banks in Kerala and India (Amount in Crores)

Sl. No

Year

Advance in Kerala Incremental advance in

Kerala

Advance in India

Amount % of growth

Amount % of growth

1 2 3 4 5 6 7

1 2001 19180 20.3 3239 511434 17.30

2 2002 22062 15.0 2882 589723 15.30

3 2003 27007 22.4 4945 759210 28.70

4 2004 31548 16.8 4541 890866 17.30

5 2005 39351 23.5 7803 1157807 30.00

6 2006 49153 24.91 9802 1517497 31.10

7 2007 60615 23.32 11462 1949567 28.50

8 2008 71226 17.51 10611 2394566 22.83

9 2009 81612 14.58 10386 2857525 19.33

10 2010 95785 17.37 14173 3345619 17.10

11 2011 122823 28.23 27038 4076868 21.90

12 2012 151525 23.37 28702 4821527 18.27

Source: Economic Review 2012, State Planning Board, Thiruvananthapuram, Kerala.

Chapter 4

148

Above table shows that over a period of 11 years, the advances by

Commercial Banks in Kerala exceeded the all India growth rate during

2001, 2011 and 2012. During these years the percentage growth in

advances by Commercial Banks in Kerala was 20.3 per cent, 28.23 per cent

and 23.37 per cent respectively against the national growth of 17.3 per cent,

21.9 per cent and 18.27 per cent. Total advances by co-operative banks at the

end of March 2012 were ` 23312.9 crores as against ` 4914.62 crores in

2011(SLBC-2012).

Table 4.9. Growth of Bank Deposits in Kerala (Amount in Crores)

Year

Total Deposits Domestic Deposits NRE Deposits

Amount Annual

Growth % Amount

Annual Growth %

Amount Annual

Growth % 1 2 3 4 5 6 7

2001 44850 16.1 23419 17.7 21431 14.5

2002 51656 15.2 27122 15.8 24534 14.5

2003 59399 15.0 30703 13.3 28696 17.0

2004 65961 9.95 35861 16.8 30100 4.89

2005 69396 5.21 40276 12.3 29121 -3.25

2006 77677 11.93 47006 16.7 30671 5.06

2007 94510 21.07 58393 24.22 33304 8.58

2008 105488 11.62 75599 29.47 29889 -10.25

2009 130350 23.57 93331 23.46 37019 23.85

2010 143404 10.01 106518 14.13 36886 -0.36

2011 161562 12.66 123872 16.29 37690 2.18

2012 197557 22.27 149103 20.23 48454 28.55 Source: Economic Review 2012, State Planning Board, Thiruvananthapuram, Kerala

Table 4.5 illustrates the growth of bank deposits over a period from 2001

to 2012. In March 2012, deposits in Kerala banks accounted for 3.3 per cent of

the total deposits in Scheduled Commercial Banks in the country. Total deposits


149

in Kerala grew by 22 per cent in 2012 over the previous year, with NRE

deposits growing at nearly 29 per cent and domestic deposits growing by 20 per

cent. A unique feature of Kerala is the large proportion of NRE deposits, which

was over 34 per cent of the total deposits in private sector banks in March 2012.

NRE deposits accounted for around 25 per cent of the total bank deposits in

Kerala. Total deposits mobilised by the co-operatives were ` 28136.01 crores as

against ` 5205.45 crores at the end of March 2011(SLBC-2012).

In public sector banks, Kerala has a relatively low credit deposit ratio

compared to neighboring states of Tamil Nadu and Andhra Pradesh. It

however, has a higher credit deposit ratio than Karnataka and the All India

average, showing that credit growth is increasing at a higher rate than deposit

growth. The CD ratio of Commercial Banks in Kerala has increased to 77 per

cent in March 2012 from 76 per cent in March 2011. However, as long as the

ratio is less than one, banks are likely to have idle funds, which need to be

productively tapped. The disbursement of credit against deposit in

Pathanamthitta district was very low with the C.D ratio of 30.6 per cent in

2012 as against 31.6 per cent in 2011. In Ernakulam, Wayanad and Idukki

districts, the credit intake exceeded considerably against the deposits. The CD

ratio of co-operatives for 2012 was 82.86 as against 94.41 for 2011.

Microfinance provides high quality financial services to the poor, either

individual or as part of a group, with the aim of helping them out of poverty. It

includes microcredit (also known as microloans), which is the provision of

credit in small amounts to those who could previously not afford them due to

the high cost of such services. It is a boon for those who do not have access to

regular banking services.

Chapter 4

150

In Kerala, as on 31st March 2012, the number of savings linked SHGs

stands at 6, 15,714 with a balance of ` 413.71 crores in the savings accounts

with the banks. Further, 1,59, 843 SHGs have now access to direct credit

facilities from banks and the total bank loans outstanding against these groups

is ` 1779.23 crores as on 31-03-2012.ie an average of ` 1,11, 310 per group

against the national average of ` 83,500. During 2011-12, 55,242 SHGs were

extended fresh loans to the extent of ` 854.15 crores by all the banks,

averaging ` 1.55 lakh per group against national average of 1.44 lakhs per

group. The cumulative amount that has been lent to NHGs through linkage

banking is 1380 crore as on 30th September 2012. The number of NHGs

availed bank linkage was 97993.

In the light of intervention of the State and Central Governments, banks

in Kerala have slightly modified their lending policy. All major banks in

Kerala now sanction education loan to deserving students as per the direction

of the Ministry of Finance, Govt. of India. There was substantial increase in

the disbursement of educational loans in Kerala during 2011-12. It is observed

that, at the end of March 2012, ` 7210.63 crore was sanctioned to 3, 59,013

students against ` 5551.72 crores at the end of March 2011 and the percentage

increase of education loan and beneficiaries during March 2012 was nearly 30

and 20 per cent respectively over the last year.

During 2011-12, an amount of ` 29658.12 crore has been disbursed to

35, 90,688 beneficiaries of weaker sections in the state. Corresponding figures

in 2010-11 was ` 23186.37 crore to 3841112 beneficiaries indicating nearly 28

per cent of growth in the amount sanctioned. During 2011-12 the advances to

SC/STs was ` 3672.87 crore to 311892 beneficiaries against ` 3654.72 crore

to 329107 beneficiaries in the previous year. According to the SLBC report,


151

State Bank Group is in the forefront in issuing advances to the SC/ST

compared to other Nationalised and Private Sector Banks in Kerala. .

MGNREGP provides 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 with the

auxiliary objective being generating productive assets and protecting

environment to achieve long term livelihood sustainability. In terms of

auxiliary objectives, the programme is not a complete success in Kerala since

we fail to attract the male work force with the meagre per day wages of ` 164

which is not sufficient to attract labour in Kerala. Hence we are unable to reap

the benefits of the scheme in terms of productivity and maintenance of assets.

The average financial achievement of the programme during XIth Plan was

86 per cent, the financial release being ̀2945.5 crore. The financial achievement

under MGNREGP during 2010-11 was 81.9 per cent where as that of 2011-12 was

95 per cent. The total employment in terms of man-days generated under MNREGP

during the XIth plan was 16.8 crore. The employment generation during 2011-12

was 6.3crore man-days, 1.8 crore in excess of that in 2010-11.

4.15 Conclusion

In India, the failure of the formal credit institutions in meeting the credit

needs of the rural poor has been the major reason for the innovation in the micro

financing. In order to improve the standard of living of the poor and the

downtrodden, the concept of microfinance has been initiated. The microcredit

especially to women is a notion that mixes ‘ethics’ with ‘economics’ and is a

socially conscious program. Microcredit became the means for women’s

empowerment aimed at reducing poverty, promoting self employment and

Chapter 4

152

development-based activities. Indian model of microfinance offers greater

promise and potential to address poverty as it is focused on building social

capital through providing access to financial services through linking with the

mainstream.

India has been experimenting with microfinance strategy in the form of

SHGs as a part of formal credit delivery system since, 1960s. The concept of

SHG was the essence of Gandhian Sarvodaya which aims at ‘Gram Swaraj’

which means ‘of the people by the people and for the people’. It is the essence

of the Co-operative Movement under the broad principle, ‘all for all’.

Microfinance through SHGs is a novel way of reaching the rural people.

Empowerment through SHG would lead to benefits not only to the individual

woman but also to the family and community as a whole through collective

action and transformation into development. It is not just for meeting their

economic needs but to create more holistic social development.

Microfinance has many supporters but also many critics and opponents.

Critics of microfinance have suggested that micro-lending is not a powerful tool

in increasing the speed of economic development. Even if studies give mixed

results, microfinance is still considered by international agencies as an efficient

tool against poverty and for FI. Though MF is not a panacea for the poor, it has

developed into an important delivery mechanisms for reaching the poor and

achieving FI by creating productive employment, reducing gender and geographic

differences, which leads to the expansion and growth of economy.


153

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