Financial Inclusion-case study

Financial Inclusion is a need which has been capturing the attention of the governments and
policy makers all over the world. It is a process by which banking services as well as other
financial services can be extended to the poorest of the poor in a country. There can be multiple
levels of financial inclusion. Banks have at one end the high end customers for whom they are
offering wide range of products & services. At the other end there are customers having only the
savings bank accounts & withdrawal facilities.
Governments have followed different approaches to achieve financial inclusion .The US
government expanded the scope of financial inclusion through statutory enactments. e.g.
Community Reinvestment Act. In France, it is a statutory right of every individual to have a bank
account. Internationally Financial Inclusion has a wider perspective, a mere current & saving
account holdings cannot be an accurate indicator for the financial inclusion.
A financial inclusion taskforce in UK identified three priority areas namely
1) Access to banking
2) Access to affordable credit
3) Access to advisory services.
UK has established a financial inclusion fund for removing financial exclusion. A post office
card account has been created for people who are unable to access basic bank account.
Community Advance Finance initiative was introduced to promote financial literacy among
people. Housing Reimbursement Act in US prohibits discrimination by banks against low &
moderate income households. Financial Inclusion leads to an increase in opportunities for
employment by availing bank finances and other services and generates higher income. On the
other hand, studies conducted revealed that financial exclusion can lead to income inequalities
& consequent social unrest. Financial Exclusion is also believed to be resulting in higher
incidence of crime & increased unemployment.
Where does India stand in this regard? The index of Financial Inclusions puts India at the 50
th

rank in the world. According to NSSO only 34% of the population has an easy and complete
access to financial services & banking facilities.The present system of bank lending in India
depends mostly on collaterals submitted by borrowers. A poor person with a low income has no
scope of providing collateral. Further, the banks have to meet the financial targets, therefore they
focus on larger accounts. Small businessmen in many villages and the general public there do not
have easy access to basic facility of remittances of money. This results in higher handling cost
and need for cash transactions.
The concept of Financial Inclusion started as early as 1969 when Government of India
nationalized major private sector banks. The branch expansion policy of the Reserve bank of
India helped the cause of social banking & mass banking. For the first time, deviation was made
from class banking to mass banking. Banks were also required to lend 40% of their advances to
priority sector consisting of small scale industries, ST, SC persons, women entrepreneurs, small
transport operators, village artisans & craftsman etc. Out of this 40%, 18% is meant for
agriculture related financing to poor farmers directly and indirectly. Even foreign banks
operating in India are required to finance 32% of their advances to priority sector and export
Later , RBI announced that housing loans up to 20 lakhs to borrowers would also be included as
forming part of priority sector advances.. The shortfall in this amount, if any has to be deposited
with NABARD towards Rural Infrastructure Development Fund(RIDF). As NABARD pays very
low interest for such deposits banks necessarily have to take efforts to fulfill their priority sector
lending targets. These measures have helped Financial Inclusion of the poor people to a great
extent.
The Regional Rural Bank Act came into force in 1975. As per this Act, a number of Grameen
Banks were established for making use of the commercial banking expertise for rural
development Sponsoring bank usually a public sector bank contributed 50% of the paid up
capital.Government of India contributed 35% while the State Government in which the Grameen
banks were established contributed 15% of the paid up Capital. The sponsoring banks were
mostly nationalized banks & SBI Group banks Even though most of the Regional Rural Banks
are in loss their ability to reach to poor people in rural areas cannot be under estimated.
Therefore, the recommendation of the committee on financial inclusion appointed by
Government for merger of the Regional rural banks has to be viewed in the right perspective..
Surely, that is the way to reach out to more poor people by offering banking services.
NABARD has also been contributing to the task of financial inclusion by helping the
Microfinance Institutions through their special fund. The Business correspondent model is
helping commercial banks & Regional Rural Banks to extend banking services to a large number
of villagers. The NGOs and SHGs play an important role in this model.

In order to promote financial inclusion faster ,commercial banks were advised by the RBI to
open No Frills accounts. with minimum KYC norms to poor people Even though banks
opened these accounts ,there is no perceptible improvement in banking operations .Many no
frills accounts are remaining dormant .As such Government & the RBI felt the necessity for
Financial Inclusion as major criteria for consideration while issuing licenses to the new
commercial banks..Further, Government of India appointed a committee under Dr. C
Rangarajan former Governor of RBI to make suitable recommendations for the promotion of
financial inclusion. The committee has recommended a target oriented approach to reach out to
the poor people. The committee also pointed out that 16 crore people use India Post with
savings account which gives India Post a great opportunity to offer banking services to the rural
population. The 13
th
Finance Commission under the Chairmanship of Shri. Vijay Kelkar has
proposed a budget of Rs.3,000 crore for providing incentives to people enrolling for the UID
project promoted by Government of India. The UID project will be useful to the banking sector
as well to extend their financial benefits to the rural masses under the Direct Cash Benefit
Transfer Schemes. Cash incentives may be provided by the government through the smart card
issued by banks under the UID schemes to enable the farmers to obtain financial facilities
directly. It will prevent the misuse of funds by the middlemen & reduce corruption in the system
The core banking solutions offered by the banks helps the urban customers to operate their
accounts from any of their networked branches. Banks can now explore Cloud computing
facilities to reduce the cost of extending Core banking to rural areas..
Despite all these efforts there is a wide gap between what is done and what needs to be done
According to NSSO out of the 90 lacs households in India only 45 lakhs have an access to the
banking services at present. Even among the different states, there is a wide disparity in the
coverage of financial services.The northern region consisting of Haryana, Chandigarh have a
high average of 84% while Bihar has a low coverage of 33% and Nagaland a meager 21%.So
any attempt at Financial Inclusion will have to take into account the removal of such wide
disparities. Financial inclusion and aggressive bank marketing will have to go hand in hand.
Marketing strategies have to be evolved afresh by banks. There is a great potential for capturing
new customers which requires an innovative approach in the delivery mechanism. Banks have
got to combine insurance facilities, remittances facilities, lending facilities under one umbrella to
enlist more depositors in rural areas. Village Community Centers may also be involved by the
banks in spreading financial literacy amongst the villagers which should include basic
information about banks, cheques, ATMs, Credit Cards etc. Banks may like to enlist voluntary
support from Civil Society organizations, SHGs,NGOs,MFIs , state & central governments
departments of Social welfare for achieving the target for Financial Inclusion. RBI may play a
proactive role in the process.
Questions:-
.1. Why Financial Inclusion is necessary? How is it achieved by UK&USA?
2. What are the efforts made by Reserve Bank of India in this regard so far?
3. Do you think committee approach will help?
4. What are your suggestions for improving Financial Inclusion through innovations?