Journal of Exclusive Management Science October 2016 - Vol 5 Issue 10 ISSN 2277-5684

Initiatives and Impact of Financial Inclusion in India

*Dr V. Basil Hans
*Associate Professor of Economics, St Aloysius Evening College, Mangaluru
Abstract
Financial inclusion is an agenda of planning for development. India accepted this as a way of achieving
most of the Millennium Development Goals (MDGs) and incorporated it in the Approach Paper to the
Twelfth Five Year Plan (2012-2017). Now with NITI Aayog and Sustainable Development Goals (SGDs) in
action, we need tore-look at the philosophy and agenda of inclusive growth. At the same time we need
to take into account the progress in the sphere of financial inclusion, particularly through the
empowering tool of micro-finance. If inclusion means integration of the individual person,
institution with the economy, how far has this been realised? This is the concern of research in this
paper.
Keywords: Banks, financial deepening, financial widening, financial inclusion, India
I. Introduction
The debate is between people who believe in exclusivity and those who believe in inclusion (egalitarian
opportunity as the predominant value). JACK PEARPOINT
It has been more than a decade now since financial inclusion came to be considered as a strong arm for
achieving inclusive growth in India. Every year, however, new initiatives are being taken and both
researchers and policy-makers continue to grapple with the issues related to inclusive growth per se as
well as the initiatives and impact of financial inclusion in India. Some discussions have been regionspecific, some on modes and mechanism involved such as the banks, microfinance institutions etc.,
and very few on mechanism and tools of evaluation. It is essential for any economy to aim at inclusive
growth involving each and every citizen in the economic development progression. In this context that
financial inclusion should be aimed at inclusive growth in the Indian context. For India financial
inclusion is an agenda of planning for development. The country accepted this as a way of achieving
most of the Millennium Development Goals (MDGs) and incorporated it in the Approach Paper to the
Twelfth Five Year Plan (2012-2017). Now the Planning Commission might have been dismantled but
even for transforming India under the new National Commission for Transforming India (NITI) and the
2015-30 global Sustainable Development Goals (SDGs), financial inclusion needs to be present both as
a philosophy and practice. Therefore, it is necessary to have a re-look at the philosophy and agenda of
inclusive growth. At the same time we need to take into account the progress in the sphere of
financial inclusion, particularly through the empowering tool of micro-finance.
Analysing the initiatives and impact of financial inclusion in the Indian context is of great
significance and relevance. The new mantra of inclusive growth has to work for overcoming the pitfalls
that have been created by the neo-liberal development strategy of the 1990s. Inclusion also means
integration of the individual person, institution with the economy. How far has this been realised?
A study on these lines would throw light on future course of action too. This paper looks at some of the
initiatives, guidelines and imperative of financial inclusion as well as their impact on the Indian
economy.
II.

Nature of Financial Inclusion

Financial inclusion is delivery of banking services at an affordable cost ('no frills' accounts,) to the vast
sections of disadvantaged and low income group. As banking services are in the nature of public good,
it is essential that availability of banking and payment services to the entire population without
discrimination is the prime objective of the public policy. Financial Inclusion and Financial Literacy are
twin pillars where financial inclusion acts on the supply side i.e. for creating access and financial
literacy acts from the demand side i.e. creating a demand for the financial products and services.
Financial inclusion is much more than credit and bank accounts. People, especially those
belonging to weaker sections of the society should have easy access to a wide range of financial services,
including saving deposits, insurance, remittance products etc. Institutions must view financial
inclusion as an enabling mechanism, by knowing the customers and reaching them wherever they are
placed, geographically, socially and vocationally. In this sense, microfinance is a multidimensional
phenomenon: credit++. Under the banner of inclusive growth financial inclusion is expected to become
a strong arm of economic transformation of India.

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Journal of Exclusive Management Science October 2016 - Vol 5 Issue 10 ISSN 2277-5684
III. Dimensions and Directions of Financial Inclusion
The dimensions of financial inclusion are penetration, affordability, convenience, and productivity.
Therefore, financial inclusion acts on the supply side i.e. for creating access and financial literacy acts
from the demand side i.e. creating a demand for the financial products and services. Banks are the
principal vehicle for financial inclusion because of the fact that only they can offer the products that
would facilitate meaningful financial inclusion. Banks need support from bank-related as well as nonbanking and grassroots institutions like microfinance institutions, co-operatives, self-help groups
(SHGs), panchayats, NGOs etc. in the mission of inclusive growth. They are formal or informal
organisations to reach and reinforce financial inclusion in India
Financial inclusion has to generate positive externalities: it leads to increase in savings, investment and
thereby, spurs the processes of economic growth. It also provides a platform for inculcating the habit of
saving money, especially amongst the lower income category that has been living under the constant
shadow of financial duress, mainly because of absence of savings. Financial inclusion is also necessary
to plug gaps and leaks in distribution of government benefits and subsidies through direct benefit
transfers to beneficiaries bank accounts rather than through subsidising the products and making
cash payments. This is the leverage effect of financial inclusion.
IV. Avenues and Advantages of Financial Inclusion
The two main planks of financial inclusion are financial widening and financial deepening. Financial
widening refers to financial expansion or growth though institutions and technology. Financial
widening can ensure better resilience and enhanced capacity to cope with shocks distress and crises
and make inclusive growth durable. Simple utility-transfer mechanisms can work wonders. This is
definitely possible with smart and digital technology. Mobiles and Apps can do better trade even without
middlemen. Technology aids the user in two ways: reaching and self-teaching; makes her self-reliant
and avoid undue gains for others. Financial deepening generally means an increased ratio of money
supply to GDP or some price index. It refers to liquid money. The more liquid money is available in an
economy, the more opportunities exist for continued growth including the growth of different financial
products in India. Thereby, a familys inclusive growth plan makes for a robust and effective
macroeconomic policy of growth with stability. Larger, diversified and well planned investments are the
features of financial widening. However, structural rigidities, high cost of transactions, and high degree
of informality can impede financial widening. Deep-rooted maladies like poverty and inequality can be
dealt with effectively through financial deepening activities.
The growth trend of the Indian economy over the last few years appears to indicate the
beginning of a new phase of higher growth. From an average growth rate of around 6.0 per cent for a
quarter of a century, the growth rate has accelerated to 8.1 per cent over the last few years. Along with
declining population growth, this suggests high growth in per capita income in excess of 6 per cent in
recent years, and perhaps approaching 7 per cent, which would lead to doubling of per capita income
every ten years. Most importantly, the current growth process is not a flash in the pan so through the
financial inclusion we will achieve the inclusive growth, and access of credit facility will lead to increase
the entrepreneurial skill of people and overcome the problem of credit crunch among the hitherto
disadvantaged people. The advantages of financial inclusion are that
It is important because recent trends show that financial exclusion results in widespread inequality
in incomes and earning opportunities. On the other hand, regions, populace with lower degrees of
inequality are those with higher levels of financial widening and deepening.
Absence of financial penetration and deepening results in absence of debt leverage to micro
enterprises and they have to either borrow at very high rates of interest or have to be contented with
their own capital. This leads to restricted growth in economic activities.
Financial inclusion benefits users (e.g.freedom from moneylenders, reduced transaction costs;
providers(e.g.better compliance of norms, niche marketing for micro-insurance, micro-pension and
other innovative products); regulators(e.g. better handling of benefits transfers like that of subsidies,
more accountability and transparency paving the way for good financial and economic governance).
The rural-urban dichotomy is also reduced a lot by networks of financial institution and peoples
participation in growth and governance. The whole economy thus, gains; it is a win-win situation.

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Journal of Exclusive Management Science October 2016 - Vol 5 Issue 10 ISSN 2277-5684
V. Initiatives and Steps
One of the earliest initiatives in financial inclusion in India is the SHG-Bank Linkage Programme
started as a pilot programme by the RBI through the National bank for agriculture and Rural
Development (NABARD) in 1992. This is referred to as Bank-led Growth model. This paved the way for
certain other approaches like the microfinance delivery through microfinance institutions (MFIs).
Further other institutions like cooperatives, SIDBI, NGOs etc. took up their roles and duties
accordingly. In India microfinance through SHGs formed by NGOs is very popular. The bank-led model
was meant to remove hassles and hurdles, especially regulatory bottlenecks in the delivery of financial
products and services to the people. Conducive regulatory environment and a strong institutional
support for banks and SHGs were created. A welcome trend is that software companies, mobile
companies, retail houses also joined the bandwagon. Without doing any credit function they became
partners in the microfinance revolution. They became a viable mode of transaction and communication
for financial inclusion by customer financial literacy and protection. Mention must also me made here
about the role of academia. Professors and research scholars took up projects and studies to evaluate
the fabric and functioning of financial inclusion in India, in terms of products, location, organisation,
benefits etc.
Some of the important steps taken during the process were: (a) Basic Saving Bank Deposit
(BSBD) scheme with e-banking facilities by all banks (e.g. GSM based Mobile phones), (b) Simplified
KYC norms now Aadhar Cards can be used as proof of customer identity and access, (c) Simplified
Bank Authorisation Policy with emphasis on NE region of India, (d) Better decision-making and
forward planning with compliance banks to have Financial Inclusion Plan (FIP), (e) More emphasis on
Banking Correspondent (BC) model such as through the Swabhimaan Campaign, 2011, (f) Increased
distribution of cards to farmers (KISAN), (g) Spread of SHG movement through the Rashtriya Mahaila
Kosh (RMK) and Womens Development Corporations providing social intermediation, (h) Financial
literacy through camps, choupals, seminars and lectures etc., (i) In 2014the programme, Pradhan
Mantri Jan Dhan Yojana (PMJDY) got further impetus with the aims of removing financial
untouchability, and the financing of landless farmers under the Bhoomi Heen Kisan scheme, and (j)
Jnana Jyoti: - Jnana Jyoti is a Trust formed jointly by Syndicate Bank and Vijaya Bank for financial
literacy and credit counselling. It is an attempt at productive borrowing debt planning and
restructuring with focus on happy repaying.
VI.

Impact of Financial Inclusion

Slowly but steadily, financial inclusion and human development is improving in India. SHGs have
disproved that women cannot save and are not bankable. Long journey starts from a small, single step.
So was the journey of the SHG- Bank Linkage Programme from linking a pilot of 500 SHGs of rural
poor two decades ago, it now boasts of the worlds largest microfinance initiatives with over 7.4 million
SHGs representing 97 million rural households directly are part of this great movement. Geographically
its tentacles have now spread to every nook and corner of India from the desert sands of Rajasthan to
the forest villages of Arunachal Pradesh and from the inaccessible terrain of Jammu and Kashmir to the
serene coastal villages of Lakshadweep Islands. Besides Financial Access and Financial Literacy, there
is also a new financial intermediation BCs for instance wider reach, customer doorstep banking,
paper less banking. There is a good progress in availing banking services (see Table 1 and Table 2).
Apart for physical and regional initiatives on FI, some special focus on technology-based
schemes and approaches has also become part of the FI practice. They include Mobile banking,
Common Service Centres, Financial Literacy &Counselling, Capacity Building & Business Facilitation.

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Journal of Exclusive Management Science October 2016 - Vol 5 Issue 10 ISSN 2277-5684
Table 1: Progress in Banking for financial inclusion
Census 2001
Households

No of Hh

No of Hh
availing
banking
services

Per
cent

Rural

138,271,559

41,639,949

Urban

53,692,376
191,963,935

Total

Total

Census 2011
Total

Percent

No of Hh

No of Hh
availing
banking
services

30.1

167,826,730

91,369,805

54.4

26,590,693

49.5

78,865,937

53,444,983

67.8

68,230,642

35.5

246,692,667

144,814,788

58.7

Source: Status of Micro Finance in India 2009-2010 & 2012-13, NABARD; and Handbook of Statistics
India Economy, RBI.
Table 2: Microfinance by SHGs
(Rs. In Crores)
Year

Micro Loans Distributed to SHGs

GDP at Factor Cost

Amount (in Crores)

Number of SHGs (In

Lakhs)

2007-2008

3896636

8849.26

12.27

2008-2009

4158676

12253.51

16.10

2009-2010

4516071

14453.30

15.87

2010-2011

4918533

14547.73

11.96

2011-2012

5247530

16534.77

11.48

2012-2013

5482111

20585.36

12.20

4703259.5

14537.32

Average
Source: Same as Table 1.

On the impact side however, not everything is rosy. Despite PMJDY not many families have gone
up in the ladder of prosperity the ladder socially or out of the BPL line. Thousands of accounts have
been opened but not kept operative. Data from the Reserve Bank of India shows that the spread of rural
banks has fallen by seven per cent between 2006 in 2013. SBI has opened 3.6 crore accounts and the
balance in them is Rs. 1,400 crore. So, it's an average of Rs. 400 per account. The bank on Rs. 400 a
year will make Rs. 12. Where is the money? What has happened to productivity? Some blame on
monsoon havoc, climate change, crop failure. Another area of concern is the rising controversies
regarding interest rates, credit polices etc. Financial inclusion in India is often closely connected to the
aggressive micro-credit policies that were introduced without the appropriate regulations oversight or
consumer education policies.
VII.

Challenges and Suggestions

While there is no denying the fact that financial inclusion is important for economic welfare, there are
many who argue that there are certain gaps in this reach-out programme: (i) In 2014 only 35 per cent of
people in India had formal accounts as against 62 per cent global average. (ii) India rates poorly on
credit cards, micro-insurance, business correspondence, mobile banking etc. even in this New Age
Banking. (iii) There is much to be desired in terms of social intermediation. Banks still seem to consider
financial inclusion as a short-term measure (or pressure?) rather than a medium-term commercial
viability and long-term growth possibility. (iv)Banks interest in rolling out new financial products is not
akin to their interest in delivery them to the lower segments of the society.(v)Customer attention/
customer counselling is a weak link in the chain.(vi)Distance, density and reach (especially in northeast
region) are still obstacles.(vii)Man and machine fine-tuning the relationship is another challenge. (viii)

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Journal of Exclusive Management Science October 2016 - Vol 5 Issue 10 ISSN 2277-5684
Awareness, protection and enforcement of IPRs in India is a limited factor. (ix)The ecosystem for
commercialisation of science, entrepreneurship and technology are quite poor.
People of small means cannot weather todays technological challenges with ease and so there is
the danger of perpetual financial exclusion of them. The challenges, however, are formidable. The
following suggestions may therefore, merit the attention of all concerned: (1) Meaningful and productive
banking not just keen to open an account but also to operate it as frequently as possible and required
are required for a responsible and responsive financial inclusion. (2) When government and banks fail
to deliver then viable alternatives must be encouraged. Nearly 70 per cent of Indian villagers do not
have a bank account, and tapping them would require multiple banking channels. This is where
local/private consultants play a pivotal role. (3) Encourage IT providers is the need of the hour. In fact,
a series of such models can be modified on a continual basis to tweak peculiar topographical or socioeconomic constraints. (4) Banking reforms and technological changes should neither be peripheral not
far-fetched. They must be systemic and transformational for very customer, every need, every single
transaction or function Banks FI Plans need to be synchronised with customer financial plans. (6)
Develop new approaches to financial inclusion and through it to social inclusion taking better care of
money, jobs and homes and health of the people (e.g. risk management). Group working for bonding
and bridging capital and for empowerment should be encouraged. (7) If banks feel the burden of the
task of FI is too much, take alternative avenues or market niche space of other forms of member-based
deposit taking institutions like the co-operatives. (8) Take steps to bridge knowledge gaps that still
exist. Let software designers and executives work transparently with customers (i.e. fostering interface
mechanisms and schedules).
VIII.

Conclusion

Today with smart technology and fast services there is a better environment for financial inclusion in
India. Financial literacy has a major role to play for economic empowerment of the masses. Banking
penetration needs to be stepped up as it would make financial innovation widespread. In the words of
Ritesh Dhawan an Analyst of Financial Services, As the worlds largest democracy and second mostpopulous nation, India has a certain responsibility to think more creatively and implement more
effectively for full financial inclusion. If and when it does, the rewards will also be that much more
noteworthy and gratifying for all involved.
The country can draw positives from the initiatives and impact of financial inclusion, thus far.
India needs to strengthen the microfinance revolution through social intermediation in order to improve
financial literacy, to bring a new identity to establish social rights and to promote financial
sustainability of the masses.
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