Research Paper on Financial Inclusion

-Atanu Mondal

ABSTRACT Financial inclusion is the delivery of financial services, at affordable costs, to sections of disadvantaged and low income segments of society. There have been many formidable challenges in financial inclusion area such as bringing the gap between the sections of society that are financially excluded within the ambit of the formal financial system, providing financial literacy and strengthening credit delivery mechanisms so as to improvised the financial economic growth. This report highlights the basic features of financial inclusion, and its need for social and economic development of the society. The study focuses on the role of financial inclusion, measures taken by the Government of India and RBI for promoting financial Inclusion. After analyzing the facts and figures it can be concluded that undoubtedly financial inclusion is playing a catalytic role for the economic and social development of society but still there is a long road ahead to achieve the desired outcomes.

INTRODUCTION Financial services actively contribute to the humane & economic development of the society. These lead to social safety net & protect the people from economic shocks. Hence, each & every individual should be provided with affordable institutional financial products/services popularly called Financial Inclusion. Despite witnessing substantial progress in financial sector reforms in India, it is disheartening to note that nearly half of the rural households even today do not have any access to any source of funds- institutional or otherwise. Hardly one-fourth of the rural households are assisted by banks.
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Hence the major task before banks is to bring most of those excluded, i.e. 75% of the rural households, under banking fold. There is a need for the formal financial system to look at increasing financial literacy and financial counseling to focus on financial inclusion and distress amongst farmers. Indian banks and financial market players should actively look at promoting such programs as a part of their corporate social responsibility. Banks should conduct full day programs for their clientele including farmers for counseling small borrowers for making aware on the implications of the loan, how interest is calculated, and so on, so that they are totally aware of its features. There is a clearly a lot requires to be done in this area. This enables the customer to remit funds at low cost. The government can utilize such bank accounts for social security services like health and calamity insurance under various schemes for disadvantaged. From the banks point of view, having such social security cover makes the financing of such persons less risky. Reduced risk means more flow of funds at better rates. Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities (municipality, water, electricity, telephone) can be more easily paid by using cheques or through internet banking, rather than standing in the queue in the offices of the service. A bank account also provides a passport to a range of other financial products and services such as short term credit facilities, overdraft facilities and credit card. Further, a number of other financial products, such as insurance and pension products, necessarily require the access to a bank account.

1. 1.1.

RESEARCH DESIGN Objective of the study:

The ability of banks to offer clients access to several markets for different classes of financial instruments has become a valuable competitive edge. With the increase in the country's population and the increased demand for banking services; speed, service quality and customer satisfaction are going to be key differentiators for each bank's future success. Thus it is important
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for banks to get tap the rural market by including them financially, which in turn will help them take positive steps to maintain a competitive edge. 1.2. To study the customer awareness with respect to banking services. To identify the gaps of financial inclusion and exclusion. Type of research:

As objective of the research was to understand the Financial inclusion, thus the report is the basic research report. 1.3. Data source:

Secondary data from websites and other research report title: An Analytical Study: Relevance of Financial Inclusion for Developing Nations by Dr. Anupama Sharma and Ms. Sumita Kukreja and news paper articles from economic times and business standard. 1.4. Methodology:

The study includes importance of financial inclusion and its effect on banking system & Analysis for the same. 1.5 Literature Review: The Reserve Bank of India has unveiled a new committee of 13 members headed by Nachiket Mor, member on the RBI's Central Board of Directors to frame for Comprehensive Financial Services for Small Businesses and Low-Income Households, said the media report.

The 'Committee on Comprehensive Financial Services for Small Businesses and Low-Income Households' has been tasked to develop a comprehensive monitoring framework to track the progress of financial inclusion and deepening efforts on a nationwide basis, RBI said in media.

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According to research, countries with a high level of human development are also those with a relatively high level of financial inclusion. In fact financial inclusion index and human development index move in pretty much the same direction, which means there is a need to look at the issue of inclusion holistically.

THE NEED FOR FINANCIAL INCLUSION Despite witnessing substantial progress in financial sector reforms in India, it is disheartening to note that nearly half of the rural households even today do not have any access to any source of funds- institutional or otherwise. Hardly one-fourth of the rural households are assisted by banks. Hence the major task before banks is to bring most of those excluded, i.e.75% of the rural households, under banking fold. But the task is not so easy since they are illiterate, poor and unorganized. What is needed is to improve their living standards by initiating new and increased economic activities with the help of banks, NGOs and local developmental agencies. To start with, it is necessary to develop a fair understanding of their profile. In addition, their perception about the bank and its services needs to be understood. So there is a need for the formal financial system to look at increasing financial literacy and financial counselling to focus on financial inclusion and distress amongst farmers. Indian banks and financial market players should actively look at promoting such programs as a part of their corporate social responsibility. Banks should conduct full day programs for their clientele including farmers for counselling small borrowers for making aware on the implications of the loan, how interest is calculated, and so on, so that they are totally aware of its features. There is a clearly a lot requires to be done in this area.

BENEFIT OF FINANCIAL INCLUSION Financial inclusion has many benefits. Following are some of the benefits summed up as:MBFI Page 4

It paves the way for establishment of an account relationship which helps the poor to

avail a variety of savings products and loan products for housing, consumption, etc. An inclusive financial system facilitates efficient allocation of productive resources and

thus can potentially reduce the cost of capital. This also enables the customer to remit funds at low cost. The government can utilize

such bank accounts for social security services like health and calamity insurance under various schemes for disadvantaged. From the banks point of view, having such social security cover makes the financing of such persons less risky. Reduced risk means more flow of funds at better rates. Access to appropriate financial services can significantly improve the day-today

management of finances. For example, bills for daily utilities (municipality, water, electricity, telephone) can be more easily paid by using cheques or through internet banking, rather than standing in the queue in the offices of the service. Transfer of money can be done more safely and easily by using the cheque, demand

draft or through internet banking. A bank account also provides a passport to a range of other financial products and

services such as short term credit facilities, overdraft facilities and credit card. Further, a number of other financial products, such as insurance and pension products, necessarily require the access to a bank account. Lastly, the Employment Guarantee Scheme of the Government which is being rolled out

in200 districts in the country would bring in large number of people through their savings accounts into the banking system.

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TOOLS OF FINANCIAL INCLUSION AND THE METHODS TO ACHIEVE THEM To address the issue of financial exclusion in a holistic manner, it is essential to ensure

that a range of financial services is available to every individual. a) A no-frills banking account for making and receiving payments. b) A savings product suited to the pattern of cash flows of a poor household. c) Money transfer facilities. d) Small loans and overdrafts for productive, personal and other purposes. e) Micro-insurance (life and non-life). Without a formal and a legally recognized financial system in which all sections of the population are a part of, it would be impossible even for the most efficient of the governments to reach out to all sections of the people. A stable and healthy financial service sector creates trust among the people about the economy and only with this trust (which has legal validity) could a strong, stable and an inclusive economy be created. Financial exclusion could be looked at in two ways: Lack of access to financial services mainly payment system, which could be due to

several reasons such as: Lack of sources of financial services in rural areas, which are popular for the ubiquitous

moneylenders but do not have (safe) saving deposit and insurance services. High information barriers and low awareness especially in women and in rural areas. Inadequate access to formal financial institutions that exist to the extent that the banks

could not extend their outreach to the poor due to various reasons like high cost of operations, less volume and more number of clients, etc. among many others. Primary Agricultural Cooperative Societies (PACS), which number around one lakh are

also often exclusionary, as their membership is restricted to persons with land ownership. Even to their members, not many PACS offer saving services.
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Lack of access to formal financial services in of both rural and urban areas, but is a larger

issue in cities and small towns. The distinction between access to formal and informal services is crucial to understand, as informal financial markets suffer from several imperfections, which the poor pay for in many ways. Some attributes of informal financial services, due to which there is exclusion are: High risks to saving: Loss of savings is an easily discernible phenomenon in low-

income neighborhoods in urban areas. High cost of credit and exploitative terms: Credit against collateral such as gold is even

more expensive than the effective interest rates, similarly, rates paid by hawkers and vendors who repay on daily basis are very high. High cost and leakages in money transfers: The delays in sending money home

through all informal channels add to these. Near absence of insurance and pension services: Life, asset, and health insurance

needs another key aspect of financial exclusion is the lack of financial education and advice . In India, as the basic literacy rate is low supporting basic financial capability is indeed not just necessary, but also equally difficult.

CAUSES OF FINANCIAL EXCLUSION:Financial Exclusion may also have resulted from a variety of structural factors such as unavailability of products suiting their requirements, stringent documentation and collateral requirements and increased competition in financial services. The Causes of financial exclusion can be identifying broadly in two categories, first the demand side and the second supply side.

A. DEMAND SIDE BARRIERS:-

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The people who have the requirement\need but still not demanding\availing the financial services\products which can be due to the following reasons:

i. Low Income: A higher share of population below the poverty line results in lower demand for financial services as the poor may not have savings to place as deposit in savings banks. As they have low earning they cannot maintain minimum balance requirements of a normal saving bank account which ranges from Rs. 500 to Rs 5000(Rs. 500 in case of PSB and Rs. 5000 for Pvt. Sector Banks) and various annual maintenance charges (AMC) levied by banks. ii. Transaction cost: The overall transaction cost to the customer in terms of both time and money proves to be a major deterrent for visiting financial institutions. The excluded section of the society find informal sector more reachable due to proximity and ease of transaction. iii. Financial Services Being Very Complex In Nature: Excluded sections of the society find dealing with organized financial sector cumbersome. iv. Easy access to alternative credit: The alternative credit provided by the money lenders and pawn shop owners are far more attractive and hassle free compared to getting a loan from a commercial bank. Some of the poor that do not have property find it impossible to get credit without the collateral. The uneducated poor would rather put their trust in moneylenders who provide easy non-collateral credit than on the well established commercial banks. v. Low literacy level: The lack of financial awareness about the benefits of the banking and also illiteracy act as stumbling blocks to financial inclusion. The lack of financial awareness maybe the single most risk in financial inclusion as those who are newly included in the financial sector have to maintained within the formal financial sector. vi. Legal identity: Lack of legal identities like identity cards, birth certificates or written records often exclude women, ethnic minorities, economic and political refugees and migrant workers from accessing financial services.

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vii. Sophisticated Financial Terminologies:

Bankers often use complex financial

terminologies, which the masses are unable to comprehend and hence do not approach for financial services voluntarily. viii. Terms and conditions: Terms and conditions attached to products such as minimum balance requirements and conditions relating to the use of accounts as in the case of saving bank account often dissuade people from using such products/services. Further, term and conditions and its framework is generally so lengthy and detailed that understanding it is not possible for those who cannot even write their name or are less literate and do not understand English or Hindi. ix. Psychological and cultural barriers: The feeling that banks are not interested to look into their cause has led to self-exclusion for many of the low income groups. However, cultural and religious barriers to banking have also been observed in some of the countries. x. Disincentives for the consumer: The cost of maintaining an account (non-zero balance accounts) and procedural problems in accessing formal credit act as disincentives for consumers with weaker financial background xi. KYC requirements: The KYC requirements of independent documentary proof of identity and address can be a very important barrier in having a bank account especially for migrants and slum dwellers. xii. Unsuitable products: One of the most important reasons for the majority of rural population not approaching the formal sector for financial services is the unsuitability of products and services being offered to them. For example, most of their credit needs are in form of small lump sums and banks are reluctant to give small amounts of loan at frequent intervals. Consequently, they have to resort to borrowing money from moneylenders at uxorious rates. xiii. Poor market linkage: It is often argued that we may have been growing second fastest in the world, but still our 40-55% of people living in rural and semi-urban areas do not have access to basic necessities of life. 75% of villages in rural areas have no electricity arrangement, so it can be imagined that how much penetration market would be having especially when it comes to providing financial services/products, this may be that they are reluctant or there is no
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institutional as well as physical. Therefore there is no institutional infrastructure available in the rural area,

Important Milestones on Road to Financial Inclusion in India: 1904 1969 1975 1990s 2005 2006 2010 Setting up of Rural Cooperatives Nationalization of 14 major Commercial Banks Setting up of Regional Rural Banks Self Help Group RBI advised banks to open no frill accounts RBI allowed BC/BF to act as agents of banks RBI allowed for - profit companies (excluding NBFC) to act as Business Correspondent 2011 National Payment Corporation of India (NPCI) launched Interbank Mobile Payment System (IMPS)

CONSEQUENCES OF FINANCIAL EXCLUSION:There are three dimensions of consequences that financial exclusion has on the people affected: Financial exclusion can generate financial consequences by affecting directly or indirectly the way in which the individuals can raise, allocate, and use their monetary resources. A wider dimension of financial exclusion can be identified as socio-economical consequences i.e. groups which are socially excluded are mostly also found financially excluded.
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A last dimension can be identified as the social consequences generated by financial exclusion. These are the consequences affecting the various links that are binding the individuals: link to corresponding to self esteem, links binding to the society and links binding to community and/or relationships with other individual or groups.

Access to a bank account, credit and insurance are now widely regarded as essential supports for personal financial management and for undertaking transactions in modern societies (Speak and Graham, 1999). According to the Treasury Committee, UK (2006), financial exclusion can impose significant costs on individuals, families and society as a whole. These include: Barriers to employment as employers may require wages to be paid into a bank account. Opportunities to save and borrow can be difficult to access. Owning or obtaining assets can be difficult. Difficulty in smoothening income to cope with shocks.

POLICY DEVELOPMENT I. FIRST PHASE DEVELOPMENTS (1969-1981)

In 1969, the banks were nationalized in order to spread banks branch network in order to develop strong banking system which can mobilize resources/deposits and channel them into productive/needy sections of society and also government wanted to use it as an important agent of change. So, the planning strategy recognized the critical role of the availability of credit and financial services to the public at large in the holistic development of the country with the benefits of economic growth being distributed in a democratic manner. In recognition of this role, the authorities modified the policy framework from time to time to ensure that the financial services needs of various segments of the society were met satisfactorily. Before1990,

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several initiatives were undertaken for enhancing the use of the banking system for sustainable and equitable growth. These included; Nationalization of private sector banks. Introduction of priority sector lending. The Lead Bank Scheme. Branch licensing norms with focus on rural/semi-urban branches, Interest rate ceilings for credit to the weaker sections. Creation of specialized financial institutions to cater to the requirement of the agriculture and the rural sectors having bulk of the poor population.

SOCIAL NETWORKING APPROACH The announcement of the policy of social control over banks was made in December 1967 with a view to securing a better alignment of the banking system with the needs of economic policy. The National Credit Council was set up in February 1968 mainly to assess periodically the demand for bank credit from various sectors of the economy and to determine the priorities for grant of loans and advances. Social control of banking policy was soon followed by the nationalization of major Indian banks in 1969. The immediate tasks set for the nationalized banks were mobilization of deposits on a massive scale and lending of funds for all productive activities. A special emphasis was laid on providing credit facilities to the weaker sections of the economy.

THE PRIORITY SECTOR APPROACH The administrative framework for rural lending in India was provided by the Lead Bank Scheme introduced in 1969, which was an important step towards implementation of the two- fold objectives of deposit mobilization on an extensive scale and stepping up of lending to weaker sections of the economy. Realizing that the flow of credit to employment oriented sectors was
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inadequate; the priority sector guidelines were issued to the banks by the Reserve Bank in the late 1960s to step up the flow of bank credit to agriculture, small-scale industry, self-employed, small business and the weaker sections within these sectors.

LEAD BANK SCHEME APPROACH But all these measure were focused towards inclusion of a sector, regional areas etc., there was a very less or no emphasis was on financial inclusion of Individual/household level. The promotional aspects of banking policy have come into greater prominence. The major emphasis of the branch licensing policy during the 1970s and the 1980s was on expansion of commercial bank branches in rural areas, resulting in a significant expansion of bank branches and decline in population per branch. The branch expansion policy was designed, inter alia, as a tool for reducing inter-regional disparities in banking development, deployment of credit and urban-rural pattern of credit distribution.

II.

SECOND PHASE ANNUAL POLICY (2005-2006)

As the central bank of the country, the Reserve bank of India has taken steps to ensure financial inclusion 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 Financial Inclusion in the country. With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its Annual Policy Statement for the year 2005-06, while recognizing 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 financial inclusion. In the Mid Term Review of the Policy (2005-06),

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It is observed that there were legitimate concerns in regard to the banking practices that tended to exclude rather than attract vast sections of population, in particular pensioners, self- employed and those employed in the unorganized sector. It also indicated that the Reserve Bank would 1. Implement policies to encourage banks which provide extensive services, while disincentivizing those which were not responsive to the banking needs of the community, including the underprivileged; 2. The nature, scope and cost of services would be monitored to assess whether there was any denial, implicit or explicit, of basic banking services to the common person; and 3. Banks urged to review their existing practices to align them with the objective of financial inclusion. RBI exhorted the banks, with a view to achieving greater financial inclusion, to make available a basic banking no frills account either with nil or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts would be restricted and made known to customers in advance in a transparent manner. All banks are urged to give wide publicity to the facility of such no frills account so as to ensure greater financial inclusion. RBI came out with a report in 2005 (Khan Committee) and subsequently RBI 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 Financial Inclusion. Financial Inclusion offers immense potential not only for banks but for other businesses. Through an integrated approach the businesses, the NGOs, the government agencies as well as the banks can be partners in growth.

Brief glimpses of main initiative are followings: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. The holder is not required to maintain any minimum balance
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requirement and also nothing is charged for opening this type of account, KYC norms have been simplified, 5-10 free transactions per month, ATM facility is provided free of cost, no account maintenance cost. b) Overdraft in Saving Bank Accounts: Bank were advised to give credit in form of overdraft on saving bank account to its customer so that in case of small credit need like medical bill, any accidental charges etc. can be met in. c) KYC norms: The Know Your Customer (KYC) norms were revised in order to make it easy for people to avail financial services. The KYC procedure for opening accounts has been simplified for those persons who intend to keep balances not exceeding rupees fifty thousand (Rs. 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 (Rs.1,00,000/-) in a year. 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.

III

THIRD PHASE - RANGRAJAN COMMITEE

The Government of India (Chairman Dr. C. Rangarajan) constituted the Committee on Financial Inclusion on June 26, 2006 to prepare a strategy of financial inclusion. The Committee submitted its final report on January 4, 2008. According to the Report, the overall strategy for building an inclusive financial sector should be based on
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Effecting improvements within the existing formal credit delivery mechanism; Suggesting measures for improving credit absorption capacity especially amongst marginal and sub-marginal farmers and poor non-cultivator households; Evolving new models for effective outreach; and
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Leveraging on technology-based solutions.

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.

FINDINGS AND CONCLUSION

For standing out on a global platform India has to look upon the inclusive growth and financial inclusion is the key for inclusive growth .There is a long way to go for the financial inclusion to reach to the core poor according to RBI Deputy Governor, Even today the fact remains that nearly half of the Indian population doesnt have access to formal financial services and are largely dependent on money lenders. Mere opening of no-frill bank accounts is not the purpose or the end of financial inclusion while formal financial institutions must gain the trust and goodwill of the poor through developing strong linkages with community-based financial ventures and cooperative. Financial Inclusion has not yielded the desired results and there is long road ahead but no doubt it is playing a significant role and is working on the positive side.

REFERENCES http://timesofindia.indiatimes.com/topic/Financial-inclusion/news/ http://www.moneycontrol.com/news-topic/financial-inclusion/ http://www.firstpost.com/tag/financial-inclusion http://www.goodreturns.in/news/2013/09/24/rbi-forms-aid-financial-media-report-210659210673.html

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