project on financial inclusion

8/12/2019 Project on Financial Inclusion

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CHAPTER 1

INTRODUCTION

Financial inclusion is integral to the inclusive growth process and

sustainable development of the country. However, the financial inclusion

growth model which came up with lots of expectations should be replicable

and viable across the country. Though, the banking network has rapidly

expanded over the years, the key challenge would be to extend the banking

coverage to include the large population living in 6 lacs villages in the country.

In the past, Indian banking system has demonstrated resilience in the face of

the recent global financial crisis, nevertheless, these banks should adopt

strong and urgent measures to reach the unbanked segment of society and

unlock their savings and investment potentials. To accomplish this task,

nearly 80 per cent of the public sector banks (PSBs) have already adopted the

Core Banking Solutions (CBS), while just 20 per cent public sector banks are

yet to adopt the core banking solutions. Efforts are on to persuade the private

sector banks to build in the financial inclusion plans in their respective

business strategies. Governments initiative can be understood on the

adoption of new and appropriate technologies for promoting financial

inclusion as the necessary requirements of channeling the wage payments

through the banking system under the Mahatma Gandhi National Rural

Employment Guarantee Act scheme. This has added new meaning to financialinclusion; other banks also need to come up with a definite financial inclusion

plan to tap the fortune at the bottom of the pyramid. This will facilitate the

rural customers to transfer their income electronically between the bank


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branches located in the rural hinterland and conduct financial transaction

impeccably.

The financial services include the entire gamut-savings, loans,

insurance, credit and payments etc. the financial system has to provide its

function of transferring resources from surplus to deficit and surplus units are

those with low incomes, poor background etc. by providing these services, the

aim is to help them come out of poverty. So far, the focus has only been on

delivering credit (it is called as microfinance but is microcredit) and has been

quite successful. Similar success has to be seen in other aspects of finance as

well.

Financial inclusion refers to a process that ensures the ease of access,

availability and usage of the formal financial system for all members of an

economy.

It facilitates efficient allocation of productive resources and thus can

potentially reduce the cost of capital.

An inclusive financial system can help reduce the role of informal sources of

credit (such as money lenders) which are often found to be exploitative.

The importance of an inclusive financial system is widely recognized in the

policy circle and become a policy priority in many countries including India.


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CHAPTER 2

DEFINITION

Leeladhar (2005) Financial inclusion is the delivery of bankingservices atan affordable cost to the vast sections of disadvantaged and

low incomegroups.

UshaThorat (2007) - by financial inclusion we mean the provision ofaffordable financial services, (viz., access to payments and remittance

facilities, savings, loans and insurance services) by the formal financial

systemto those who tend to be excluded.

Rangarajan Committee (Jan 2008) process of ensuring access tofinancial services and timely and adequate credit where needed by

vulnerable groups....at an affordable cost.

Definition: Financial inclusion ensures ease of availability, accessibilityand usage of the formal financial system to all members of the economy.

Financial Inclusion as defined by RBI

Financial Inclusion is the process of ensuring access to appropriate financial

products and services needed by all sections of the society in general andvulnerable groups such as weaker sections and low income groups in

particular at an affordable cost in a fair and transparent manner by

mainstream institutional players


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CHAPTER 3

OBJECTIVEOF FINANCIAL INCLUSION

The word Financial Inclusion could be described as being the opposite

of financial exclusion.However, financial inclusion is more of a process rather

than a phenomenon. It is a process by which financial services are made

accessible to all sections of the population. It is a conscious attempt to bring

the un-banked people into banking.

The process of ensuring access to financial services and timely and

adequate credit where needed by vulnerable groups such as weaker sections

and low income groups at an affordable cost

(The Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan, 2008)

Financial Inclusion does not merely mean access to credit for the poor,

but also other financial services such as Insurance. Financial Inclusion allows

the state to have an easier access to its citizens, with an inclusive population,

for e.g.: the government could reduce the transaction cost of payments like

pensions, or unemployment benefits.

It could prove to be a boon in a situation like a natural disaster, a

financially included population means the government will have much lessheadaches in ensuring that all the people get the benefits. It allows for more

transparency leading to curtailing corruption and bureaucratic barriers in

reaching out to the poor and weaker sections. An intelligent banking


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population could go a long way by effectively securing themselves a safer

future.

The objective of Financial Inclusion

Access to various mainstream financial services e.g. saving bankaccount, credit, insurance, payments and remittance and financial and

credit advisory services.

The main objective is to provide the benefit of vast formal financialmarket, & protect them from exploitation of informal credit market, so

that they can be brought into the mainstream.

Financial Inclusion therefore, is delivery of not only banking, but also other

financial serviceslike insurance, pension, remittance, mutual funds, etc.

delivered at affordable, though marketdriven costs. Opening a no-frills

account is just a beginning to a continuous process of providingbanking and

financial services. Once the first step of safety of savings is achieved, the

poorrequire access to schemes and products which allow their savings to

grow at rates which providethem growth beyond mere inflation protection.


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CHAPTER 4

THE IMPORTANCE OF FINANCIAL INCLUSION IN THE

DEVELOPING WORLD

Financial inclusion poses policy challenges on a scale and with an

urgency that is unique for developing countries, which house nearly 90% of

the worlds unbanked population.

Developing country policymakers have recognised that complex and

multi-dimensional factors contribute to financial exclusion and therefore

require a comprehensive variety of providers, products and technologies that

work within and are a reflection of the socio-economic, political, cultural and

geographic conditions in their countries.

Nevertheless, a number of common trends and barriers can be

identified.Emerging trends include the recognition of the changing role of

policymakers and the importance of leadership to successful financial

inclusion strategies and response; that microfinance can be used as an entry

point for issues of access; that new technology is a very important but not

the only consideration for developing country policymakers; that savings

are the cornerstone of responses; that banks have an important role to play;

and that financial inclusion policy can and should not only focus on the

supply-side.

Commonly identified barriers include issues of market response; needfor greater stakeholder coordination; lack of reliable data as well as national

identity documents and systems; and the need for greater consumer

understanding, trust and protection.
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Depending on the level of development of financial inclusion policy,

there appears to be three broad groups of countries some early leaders,

others for whom financial inclusion is a priority but much more policy

development is needed, and others for whom chronic structural challenges in

the financial sector mean financial inclusion may not be among the top

priorities at this time.

While there is no standard global solution for rapid replication in most

places, it can be concluded that there is enormous potential to promote tailor-

made solutions based on available good practices.

Adopting country-specific, comprehensive policies at the country level thatrespond to both demand and supply-side barriers will be most effective in

fostering financial inclusion. There is openness and demand for technology-

based solutions and public-private partnerships to foster access, though these

must be gradually introduced within the broad range of evidence-based

effective policy solutions for financial inclusion.

Policymakers expressed a preference and need for two-way knowledge

exchange opportunities with their peers to encourage learning from the

experience of others.

A better and broader understanding of financial instability risk within

financial innovation is a key prerequisite for scaling-up particularly in the

area of technology-enabled financial services. Mobile financial services are

mostly limited to payments and are not connected with financial

intermediation.

However advances from a handful of countries have shown paths to

safely extending beyond payments to banking services such as deposits

through innovative leadership and partnerships with banks or microfinance


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institutions. Systematic global and regional efforts are needed to refine and

spread insight on these areas widely. Mechanisms that help leverage existing

insight need to be strengthened.

The movement towards evidence-based policy through improved data

permits a potential next step for some countries.

Adopting realistic self-set targets when designing financial inclusion policies

against which they can monitor their progress and make necessary policy

adaptations. Quantitative objectives of this kind to be agreed upon by a larger

number of countries could become a major incentive to build global

commitment to effectively overcome financial exclusion.Access to sustainable and secure financial services contributes directly to

increasing income and reducing vulnerability for the poor. Bringing more

people, and therefore more money, into the formal financial system can lead

to overall economic growth and development and increased stability in

developing country economies.

Policymakers in developing countries have an important role to play in

creating the conditions for improved access, and thereby unlocking the

economic potential of their populations. The potential for economic growth

and poverty alleviation through the development of a more inclusive financial

services sector has been recognised by leaders in developing and developed

countries and is emerging as a priority issue on political agendas.


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BENEFITS OF INCLUSION

For the customer can avail a variety of financial products provided byinstitutions regulated and supervised by credible regulators.

The regulator benefits from the audit trail which is available astransactions are Conducted transparently in supervised environment.

The economy benefits, as greater financial resources becometransparently available for efficient intermediation and allocation, foruses that have the highest returns.

It strengthens the financial deepening and leads to financialdevelopment in a country, Which would in-turn accelerate economic growth

of the country.


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CHAPTER 5

FINANCIAL INCLUSION IN INDIA

TheReserve Bank of India (RBI) set up the Khan Commission in 2004 to

look into financial inclusion and the recommendations of the commission

were incorporated into the mid-term review of the policy (200506). In the

report RBI exhorted the banks with a view to achieving greater financial

inclusion to make available a basic "no-frills" banking account. In India,

financial inclusion first featured in 2005, when it was introduced by K.C.

Chakraborthy, the chairman of Indian Bank.Mangalam became the first village

in India where all households were provided banking facilities. Norms were

relaxed for people intending to open accounts with annual deposits of less

than Rs. 50,000. General credit cards (GCCs) were issued to the poor and the

disadvantaged with a view to help them access easy credit. In January 2006,

the Reserve Bank permitted commercial banks to make use of the services of

non-governmental organizations (NGOs/SHGs), micro-finance institutions,

and other civil society organizations as intermediaries for providing financial

and banking services. These intermediaries could be used as business

facilitators or business correspondents by commercial banks.

The bank asked the commercial banks in different regions to start a

100% financial inclusion campaign on a pilot basis. As a result of the

campaign, states or union territories likePuducherry,HimachalPradesh andKerala announced 100% financial inclusion in all their districts.

Reserve Bank of Indias vision for 2020 is to open nearly 600 million new

customers' accounts and service them through a variety of channels by

leveraging on IT. However, illiteracy and the low income savings and lack of
http://en.wikipedia.org/wiki/Reserve_Bank_of_Indiahttp://en.wikipedia.org/wiki/Mangalamhttp://en.wikipedia.org/wiki/Puducherryhttp://en.wikipedia.org/wiki/Himachal_Pradeshhttp://en.wikipedia.org/wiki/Himachal_Pradeshhttp://en.wikipedia.org/wiki/Keralahttp://en.wikipedia.org/wiki/Keralahttp://en.wikipedia.org/wiki/Himachal_Pradeshhttp://en.wikipedia.org/wiki/Himachal_Pradeshhttp://en.wikipedia.org/wiki/Puducherryhttp://en.wikipedia.org/wiki/Mangalamhttp://en.wikipedia.org/wiki/Reserve_Bank_of_India


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bank branches in rural areas continue to be a roadblock to financial inclusion

in many states and there is inadequate legal and financial structure.

In India, RBI has initiated several measures to achieve greater financial

inclusion,such as facilitating no-frills accounts and GCCs for small deposits

and credit. Some of these steps are:

Opening of no-frills accounts:Basic banking no-frills account is withnil or very low minimum balance as well as charges that make such

accounts accessible to vast sections of the population. Banks have been

advised to provide small overdrafts in such accounts.

Relaxation on know-your-customer (KYC) norms:KYC requirementsfor opening bank accounts were relaxed for small accounts in August

2005, thereby simplifying procedures by stipulating that introduction

by an account holder who has been subjected to the full KYC drill would

suffice for opening such accounts.The banks were also permitted to take

any evidence as to the identity and address of the customer to their

satisfaction. It has now been further relaxed to include the letters issued

by the Unique Identification Authority of India containing details of

name, address and Aadhaar number.

Engaging business correspondents (BCs):In January 2006, RBIpermitted banks to engage business facilitators (BFs) and BCs as

intermediaries for providing financial and banking services. The BC

model allows banks to provide doorstep delivery of services, especially

cash in-cash out transactions, thus addressing the last-mile problem.


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The list of eligible individuals and entities that can be engaged as BCs is

being widened from time to time. With effect from September 2010, for-

profit companies have also been allowed to be engaged as BCs. India

map of Financial Inclusion by MIX provides more insights on this.

Use of technology: Recognizing that technology has the potential toaddress the issues of outreach and credit delivery in rural and remote

areas in a viable manner,banks have been advised to make effective use

of information and communications technology (ICT), to provide

doorstep banking services through the BC model where the accountscan be operated by even illiterate customers by using biometrics, thus

ensuring the security of transactions and enhancing confidence in the

banking system.

Adoption of EBT:Banks have been advised to implement EBT byleveraging ICT-based banking through BCs to transfer social benefits

electronically to the bank account of the beneficiary and deliver

government benefits to the doorstep of the beneficiary, thus reducing

dependence on cash and lowering transaction costs.

GCC:With a view to helping the poor and the disadvantaged with accessto easy credit, banks have been asked to consider introduction of a

general purpose credit card facility up to `25,000 at their rural and

semi-urban branches. The objective of the scheme is to provide hassle-

free credit to banks customers based on the assessment of cash flow

without insistence on security, purpose or end use of the credit. This is


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in the nature of revolving credit entitling the holder to withdraw up to

the limit sanctioned.

Simplified branch authorization: To address the issue of unevenspread of bank branches, in December 2009, domestic scheduled

commercial banks were permitted to freely open branches in tier III to

tier VI centres with a population of less than 50,000 under general

permission, subject to reporting. In the north-eastern states and Sikkim,

domestic scheduled commercial banks can now open branches in

rural,semi-urban and urban centres without the need to takepermission from RBI in each case, subject to reporting.

Opening of branches in unbanked rural centres: To further step upthe opening of branches in rural areas so as to improve banking

penetration and financial inclusion rapidly, the need for the opening of

more bricks and mortar branches, besides the use of BCs, was felt.

Accordingly, banks have been mandated in the April monetary policy

statement to allocate at least 25% of the total number of branches to be

opened during a year to unbanked rural centres.


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CHAPTER 6

FINANCIAL INCLUSION IN INDIA: IMPORTANT

The policy makers have been focusing on financial inclusion of Indian

rural and semi-rural areas primarily for three most important pressing needs:

1. Creating a platform for inculcating the habit to save moneyThe lower

income category has been living under the constant shadow of financial

duress mainly because of the absence of savings. The absence of savings

makes them a vulnerable lot. Presence of banking services and products aims

to provide a critical tool to inculcate the habit to save. Capital formation in the

country is also expected to be boosted once financial inclusion measures

materialize, as people move away from traditional modes of parking their

savings in land, buildings, bullion, etc.

2. Providing formal credit avenues So far the unbanked population has

been vulnerably dependent of informal channels of credit like family, friends

and moneylenders. Availability of adequate and transparent credit from

formal banking channels shall allow the entrepreneurial spirit of the masses

to increase outputs and prosperity in the countryside. A classic example of

what easy and affordable availability of credit can do for the poor is the micro-

finance sector.

3. Plug gaps and leaks in public subsidies and welfare programmes A

considerable sum of money that is meant for the poorest of poor does not

actually reach them. While this money meanders through large system of


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government bureaucracy much of it is widely believed to leak and is unable to

reach the intended parties. Government is therefore, pushing for direct cash

transfers to beneficiaries through their bank accounts rather than subsidizing

products and making cash payments. This laudable effort is expected to

reduce governments subsidy bill (as itshall save that part of the subsidy that

is leaked) and provide relief only to the real beneficiaries. All these efforts

require an efficient and affordable banking system that can reach out to all.

Therefore, there has been a push for financial inclusion.


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CHAPTER 7

FACTORS ASSOCIATED WITH FINANCIAL INCLUSION

Socio-economic factors

income, employment, inequality, literacy

Infrastructure related factors

road network, telephone and television network,access to information

through newspapers, radio,cable TV, computer and internet

Banking sector factors

indicators of the health of the banking system,

ownership pattern and interest rate.

Socio-economic factors and financial Inclusion

Higher the income level, both at the individual level and for a country,

higher is the financial inclusion.

Beyond income level, income inequality is negatively associated with

financial inclusion.

Adult literacy is positively and significantly associated with financial

inclusion implying that higher the adult literacy, higher will be the financial

inclusion.

Proportion of rural population is found to be negatively associated with

financial inclusion.


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This cross country findings are in line with the earlier findings based

onsurveys within a country/region.

Infrastructure and financial Inclusion

Physical infrastructure like network of paved roads is highly

positivelysignificant in enhancing financial inclusion.

Telephone and internet subscription are also found to be positive

andsignificant. This is in line with Beck et al (2007) who found that

telephonenetwork to be positively associated with banking outreach.

Road network, telephone and internet usage being positively associatedwith

the level of financial inclusion indicate that connectivity andinformation play

an important role in financial inclusion.

Our results also indicate strong links between infrastructuredevelopmentand the development of financial sector.

Banking Sector and financial Inclusion

NPA in an economy is found to be significantly and negatively

associatedwith financial inclusion.

Contradicts the view for high NPA of a banking system is that NPAs are

aresult of providing credit to the low income groups (who are more likely to

default), sometimes to comply with the directed lending programmes suchas

the priority sector lending in India.


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Our results show the opposite, they indicate higher level of NPA to

beassociated with lower level of financial inclusion. Thus, efforts to

includemore people into the financial system is not the significant cause for

theNPA, on the contrary, the cause for NPAs lies elsewhere (Reddy 2002).

Capital Asset Ratio (CAR) is found to have a negative coefficient that is

significant at 0.05 level. Thus, highly capitalized banking systems seem to be

less inclusive. This is not surprising, as banking systems having high CARtend

to be more cautious in lending, thus negatively affecting financialinclusion.

High share of foreign ownership in the banking system is found to be

negativelyassociated with financial inclusion. This is in line with cream

skimming theory offoreign banks. (Detragiache et al, 2006; Gormley, 2007;

Beck et al, 2007)

Advocates of banking sector liberalization have argued that entry of foreign

banks willincrease the supply of credit and improve efficiency by increasing

competition (WTO2005).

Several studies have shown that this argument may not always be true. For

example,an IMF study by Detragiache et al (2006) found that in poor

countries, a strongerforeign bank presence is robustly associated with less

credit to the private sector. Inaddition, they found that in countries with more

foreign bank penetration, creditgrowth is slower and there is less access to

credit.


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Gormley (2007) found that in case of India, the entry of foreign banks is

associatedwith an overall decrease in credit availability for firms.

Using cross country data, Beck et al (2007) have also found a significantly

negativeassociation between share of foreign banks assets and number of

accounts (credit aswell as deposit) per capita in a country.

Share of government ownership in the banking system, our resultsshow,

does not have a significant association with financial inclusion.

This can be interpreted as the inefficacy of state owned banks inbringing

about financial inclusion.

Real interest rate does not show any significant relationship withfinancial

inclusion.


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CHAPTER 8

FINANCIAL INCLUSION INITIATIVES

Encouraged Electronic Benefit Transfer for routingsocial security payments through the banking channel.

Separate program for Urban Financial Inclusioninitiated

Roadmap for providing banking services A structuredway of covering villages. In the first phase villages with

population above 2000 was targeted. The focus has now

shifted to villages with population less than 2000.

Financial Inclusion Plan for Banks - All domesticcommercial banks - public and private sector havedrawn a Board approved 3 year Financial Inclusion Plan

(FIP) starting April 2010.

Self-set targets - FIPs to be integrated with Businessplan of the banks

Banks advised to finalise their next 3 year FIP for theperiod 2013-16


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CHAPTER 9

WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL SERVICES

NECESSARY FOR FINANCIAL INCLUSION OF HOUSEHOLD?

Basic saving bank account- an account with all basic feature of saving

account.

Payment and remittances services

Immediate credit in case of contingencies like accidents, medical treatment

etc, they should be provided immediate credit.

Entrepreneurial credit this means, to run/expand small scale

business/shop or any economic activity, easy credit should be provided, so

that financial dependence can be

created amongst households.

Housing finance- funding for purchasing new residential or reconstruction

Insurance life\healthcare- to plan future better

Financial education\credit counseling centers to guide them which product

suits them better, where to go credit needs, what are various services

available to better their personal financial planning.


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CHAPTER 10

PRESENT STATUS OF FINANCIAL INCLUSION IN THE

COUNTRY

Axis Bank to cover 12,000 villages under new financial inclusion plan.Axis Bank, Indias third-largest private bank has begun implementing its rural

expansion plans and intends to cover 5,500 villages for financial inclusion by

March 2011 and scale it up to 12,000 villages in five years time.

Speaking to media, Mr. SK Chakrabarti, executive director Axis banks

retail banking division said that the bank is looking at several low cost

delivery models such as the use of smart card, mobile banking and point of

transaction devices. Axis Bank has also set up separate financial inclusion

team to implement its financial inclusion roadmap.

It may be recalled that Reserve Bank of India had asked all private and

public sector banks to chart a road map on financial inclusion. The plan was

expected to cover issues like the number of branches that banks would plan to

open in rural India, the number of no-frill accounts they plan and the number

of business correspondents they would appoint to achieve their financial

inclusion target.


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SBI plans financial inclusion of 50,000 villages this fiscal. The bank

under financial inclusion initiative has planned to cover 50,000 unbanked

villages during 2010-11 which will take total reach to 1, 50,000 villages," a

senior official of SBI said.

SBI to set up 600 financial inclusion centers. The move to set up FICs is

aimed at powering the bank's drive to reach basic and affordable banking

services to 12,421 out of the 72,315 unbanked villages (identified according to

2001 census) having a population of over 2,000 by March-end 2012. Under

the financial inclusion plan, our bank is currently providing basic banking

services in 1,300 villages. This number will jump to 5,300 by Marchend 2011.

We will complete the target of providing banking outreach in 12,421 villages b

March-end 2012, said Mr. M.I. Dholakia, Deputy General Manager, SBI.


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CHAPTER 11

CONCLUSION

Financial inclusion should be measured not only by the number of bank

accounts held by the weaker sections, but also by the amounts borrowed by

them, which so far shows dismal picture. Financial inclusion could no doubt

be inhibited by the higher transaction costs of dealing with large number of

small accounts rather than a small number of large accounts.

The experience with the linkages of banks with micro finance

institutions (MFIs) and Self-Help Groups (SHGs) clearly demonstrates that the

poor are bankable; even the margins are low; high volumes can make the

business profitable. Therefore, there is an urgent need to corroborate

Financial inclusion programmes as an integral part of the poverty alleviation

programmes. The unbridled growth in population may even thwart the entire

endeavor made to reach high growth trajectory.

Our empirical analysis confirms that income as measured by percapita GDP

is an important factor in explaining the level offinancial inclusion in a country.

Going beyond per capita GDP, we find that income inequality,adult

literacy and urbanisationare also important factors.

Further, physical and electronic connectivity and informationavailability,

indicated by road network, telephone and internetusage, also play positive

role in enhancing financial inclusion.


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These findings strengthen the assertion that financial exclusion isindeed a

reflection of social exclusion, as countries having lowGDP per capita, relatively

higher levels of income inequality, lowrates of literacy, low urbanisation and

poor connectivity seem to beless financially inclusive.

From among the banking sector variables, we find that theproportion non-

performing assets is inversely associated withfinancial inclusion, indicating

that attempts by different countrytowards greater financial inclusion have not

contributed in anyway to the non-performing assets of the banking system.

The capital asset ratio (CAR) is seen to be negatively associatedwith

financial inclusion. In other words, when the CAR of acountry is high, thebanking system tends to be more cautious inopening its doors to the financial

excluded.

Foreign ownership in the banking sector is seen to benegatively affecting

financial inclusion, while governmentownership does not have a significant

effect.

CHAPTER 12


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