REGIONAL DISPARITY IN FINANCIAL INCLUSION:THE INDIAN EVIDENCE

DR.RAM PRATAP SINHADR.RAM PRATAP SINHAASSOCIATE PROFESSOR OF ECONOMICSASSOCIATE PROFESSOR OF ECONOMICS

GOVERNMENT COLLEGE OF ENGINEERING AND LEATHER GOVERNMENT COLLEGE OF ENGINEERING AND LEATHER TECHNOLOGYTECHNOLOGY

LB BLOCK, SECTORLB BLOCK, SECTOR--III,SALT LAKE, KOLKATAIII,SALT LAKE, KOLKATA--700098700098E MAILE MAIL: : rampratapsinha39@gmail.comrampratapsinha39@gmail.com

Introduction

• Financial inclusion may be defined as the

process of ensuring access to financial

services(including savings, loans, insurance,

payments, remittance facilities etc.) and thepayments, remittance facilities etc.) and the

provision of adequate credit to the socially

vulnerable groups at affordable rates.

• Financial inclusion can therefore be considered

as an important prerequisite for just and

equitable growth of a modern society

Financial Inclusion in Banking

• In the Indian context, the process of financial inclusion in the bankingsector was initiated by the public sector banks since the end sixtiesthrough the process of branch banking which provided the ruralpeople with the opportunity to have bank accounts in their nameseven with small amounts of deposits.

• The RBI introduced a Self-help Group (SHG)-Bank Linkage Programmein 1992 and formulated the Kisan Credit Card scheme in 2001in 1992 and formulated the Kisan Credit Card scheme in 2001

• In November 2005, commercial banks were advised to make availablea basic banking ‘no-frills’ account with low or nil minimum stipulatedbalances as well as charges to expand the outreach of such accountsto vast sections of the population.

• In January 2006, banks were permitted to utilise the services of non-governmental organisations (NGOs/SHGs), micro-finance institutionsand other civil society organisations as intermediaries in providingfinancial and banking services through the use of business facilitatorand business correspondent models.

Financial Inclusion in Insurance

• The IRDA introduced social and rural sector obligations for the

insurance companies in 2002:

• Rural sector was defined by the IRDA as comprising of (a) a

population <5000,(b) density of population <400 per square kilometer,

and (c) more than twenty five % of the male working population is

engaged in agricultural activity.

• The social sector is defined to comprise of (i)unorganized

sector,(ii)informal sector,(iii) economically vulnerable or backward

classes, and (iv) other categories of persons, both in rural and urban

areas.

The Rural-Urban Gap in the Provision/Access of Banking Services

Particulars Offices(% to total)

No of Deposit

Accounts(% of

Deposits(% to total)

No of Credit Accounts

(% of number of

Credits(% to total)

(% of number of

households)

number of households)

Rural 68 181.8 29.1 32.2 20.8

Urban 32 335.4 70.9 50.2 79,2

Total 100 517.2 100 82.4 100

Index of Financial Inclusion

• Sarma(2008) pointed out that while there is an widespread

recognition of the importance of financial inclusion,one does

not find any comprehensive measure of financial inclusion in

the literature which may be used to measure the extent of

financial inclusion across economies.

• In her paper she presented an approach for the construction of

an index of financial inclusion and used the same to compare

100 countries in respect of financial inclusion.

A Multidimensional Index

• Sarma(2008) proposed a multidimensional approach for the

construction of an index of financial inclusion. The approach

involves the computation of a dimension index for each dimension

of financial inclusion. The dimension index for the ith dimension,

di, is computed by the following formula.

di =(Ai-mi)/(Mi-mi) ----------(1)

where

Ai = Actual value of dimension I, mi = minimum value of dimension i

Mi = maximum value of dimension i

The Index

• Formula (1) ensures that 0 ≤ di ≤ 1. Higher the value of di, higher the

country’s achievement in dimension i. If n dimensions of financial

inclusion are considered, then, a country i will be represented by a

point Di = (d1, d2, d3, ….dn) on the n dimensional Cartesian space.

• Then the Index of Financial Inclusion (IFI) for entity i is computed as:

IFIi =1-√[(1-d1)2+(1-d2)

2+-----+(1-dn)2]/√n

Studies Based on the Multidimensional Index

• Sarma(2008) made use of the Index of Financial Inclusion to make a cross-country

comparison of financial inclusion for the year 2004 using three dimensions of

financial inclusion:

• (a)banking penetration (BP) as measured by bank accounts/population,

(b)availability of the banking services (BS) as measured by the number of bank

branches per 1000 population andbranches per 1000 population and

(c) usage of the banking system (BU) as measured by the volume of deposit and

credit to GDP.

• Goyal(2009) used the multidimensional index of financial inclusion to compare

the state of financial inclusion of the north eastern states for the year 2005

using the same dimensions used by Sarma.However, the index computed by

Goyal included per capita credit and deposit instead of the volume of credit

and deposit as proportion of the Country’s GDP used by Sarma.

Objective of the Present Paper

• Given the backdrop outlined previously, the objective of the present

paper is twofold:

• To suggest how alternative indices could be constructed using

mathematical programming.

• To provide an inter- state and inter-regional study in the Indian context

on financial inclusion using both the multidimensional index and the

mathematical programming approach.

Construction of a new Index of Financial Inclusion

• In the present context, we propose to develop an index based on data

envelopment analysis. However, one can make use of other methods

like the Free Disposal Hull (FDH) Approach as well.

• We have a total of 35 states and union territories to compare. We

assume that for each state the provision of financial services is

dependent on population. We choose Deposit collected by commercial

banks, credit disbursed and insurance premia mobilised as the threee

indicators of financial inclusion.

Northern Region(Model I)

State/UT BCC Approach

Super Radial Approach

Sarma’sApproach

Chandigarh 1 1.4952 0.512

Delhi 1 3.0786 0.448

Haryana 0.3393 0.3393 0.0652Haryana 0.3393 0.3393 0.0652

Himachal

Pradesh

0.5019 0.5019 0.0632

Jammu &

Kashmir

0.2173 0.2173 0.0455

Punjab 0.5857 0.5857 0.0921

Rajasthan 0.407 0.407 0.0206

Mean 0.578743 0.946429 0.178086

Western Region (Model I)

State/UT BCC Approach

Super Radial

Approach

Sarma’s Approach

Dadra & Nagar Haveli

0.3416 0.3417 0.079

Nagar Haveli

Daman & Diu 0.3094 0.3094 0.0734

Goa 0.6527 0.6527 0.2472

Gujarat 0.561 0.561 0.058

Maharastra 1 2.7381 0.2042

Mean 0.57294 0.92058 0.13236

Southern Region (Model I)

State/UT BCC Approach

Super Radial

Approach

Sarma’s Approach

Andhra Pradesh

0.5948 0.5948 0.0512Pradesh

Karnataka 0.6324 0.6324 0.0886

Kerala 1 1.1668 0.0868

Pondicherry 0.1772 0.1772 0.0857

Tamilnadu 0.9729 0.9729 0.0931

Lakshadweep 1 1 0.2171

Mean 0.7296 0.7574 0.1038

Eastern Region(Model I)

State/UT BCC Approach Super Radial Approach

Sarma’s Approach

Bihar 0.2203 0.2203 0.0003

Jharkhand 0.2253 0.2253 0.0192

Orissa 0.2849 0.2849 0.0192

West Bengal 0.5366 0.5366 0.0418

Sikkim 0.1445 0.1445 0.065

Andaman & Nicobar

0.1386 0.1386 0.0499

Mean 0.2584 0.2584 0.0326

Central Region (Model I)

State/UT BCC Approach

Super Radial

Approach

Sarma’s Approach

Uttar

Pradesh

0.6088 0.6088 0.0129

Pradesh

Madhya

Pradesh

0.3025 0.3025 0.0175

Chattisgarh 0.1473 0.1473 0.0171

Uttarakhand 0.2706 0.2706 0.0581

Mean 0.3323 0.3323 0.0264

North Eastern Region (Model I)

State/UT BCC Approach

Super Radial Approach

Sarma’s Approach

Arunachal Pradesh

0.1518 0.1518 0.0522

Assam 0.2022 0.2022 0.01

Manipur 0.0877 0.0877 0.0048

Meghalaya 0.077 0.077 0.0262

Mizoram 0.0679 0.0679 0.0229

Nagaland 0.0561 0.0561 0.01

Tripura 0.1467 0.1467 0.0171

Mean 0.1128 0.1128 0.0205

Regional Variation in Financial Inclusion (Model I)

Region BCC Approach

Super Radial

Approach

Sarma’sApproach

(IFI)Northern 0.5787 0.9464 0.1781Western 0.5729 0.9206 0.1324Western 0.5729 0.9206 0.1324Southern 0.7296 0.7574 0.1038Central 0.3323 0.3323 0.0264Eastern 0.2584 0.2584 0.0326North-

Eastern 0.1128 0.1128 0.0205All

States/UT 0.4275 0.5555 0.0850

Northern Region (Model II)

State BCC Approach ( Model II)

Super Radial Approach( Model II)

Chandigarh 1 3.8509

Delhi 1 3.0786

Haryana 0.3425 0.3425Haryana 0.3425 0.3425

Himachal Pradesh

0.6163 0.6163

Jammu & Kashmir

0.4353 0.4353

Punjab 0.5956 0.5956

Rajasthan 0.5479 0.5479

Mean 0.6482 1.3524

Western Region (Model II)

State BCC Approach (Model II)

Super Radial

Approach (Model II)(Model II)

Goa 0.6628 0.6628Gujarat 0.572 0.572

Maharastra 1 2.7381Mean 0.7449 1.3243

Southern Region (Model II)

State BCC Approach Super Radial Approach

Andhra Pradesh 0.6842 0.6842

Karnataka 0.7063 0.7063Karnataka 0.7063 0.7063Kerala 1 1.3861

Pondicherry 0.3058 0.3058Tamilnadu 1 1.0186

Mean 0.7393 0.8202

Eastern Region (Model II)

State BCC Approach Super Radial Approach

Bihar 0.5604 0.5604Jharkhand 0.4700 0.4700

Orissa 0.4739 0.4739Orissa 0.4739 0.4739West Bengal 0.6444 0.6444

Sikkim 1 2.214

Andaman & Nicobar

1 1

Mean 0.6915 0.8938

Central Region (Model II)

State BCC Approach Super Radial Approach

Uttar Pradesh 0.7672 0.7672Madhya Pradesh 0.4642 0.4642Pradesh 0.4642 0.4642

Chattisgarh 0.2843 0.2843Uttarakhand 0.4851 0.4851

Mean 0.5002 0.5002

North Eastern Region (Model II)

State BCC Approach Super Radial Approach

Arunachal Pradesh 0.3766 0.3766Assam 0.366 0.366Assam 0.366 0.366

Manipur 0.2754 0.2754Meghalaya 0.2691 0.2691Mizoram 0.3663 0.3663Nagaland 0.1746 0.1746

Tripura 0.2517 0.2517Mean 0.2971 0.2971

Regional Variation in Financial

Inclusion(Model II)

Region BCC Approach

Super Radial Approach

Northern 0.6482 1.3524Western 0.7449 1.3243Western 0.7449 1.3243Southern 0.7393 0.8202Central 0.5002 0.5002Eastern 0.6915 0.8938North-

Eastern0.2971 0.2971

All States 0.5843 0.8433