"REACHING THE UNREACHED: FINANCIAL INCLUSION IN

INDIA- A STUDY"

Dr. Namita Rajput

Associate Prof in commerce
Sri Aurobindo College (M)

Ms Shelly Oberoi
Research Scholar
Annamalai University

Abstract
1) Purpose Financial inclusion is new exemplar of economic growth which plays a
major role in driving away the poverty. The purpose of this paper is to analyze the
current status of financial inclusion in India; to critically analyze the Government,
RBI and banks initiative on Financial inclusion and literacy in India; to analyze the
financial inclusion in India through the lens of Crisil Inclusix Index with respect to
state orientation and to compute a comprehensive measure of financial inclusion for
each state and propose some suggestions to counter the challenges of financial
inclusion in India.
2) Design/methodology/approach The data for the present study has been
collected primarily from secondary sources. The secondary data was acquired from
reports, journals, NABARD auxiliary Statements, State Level Committee Reports of
banks, Census 2011, Economic Surveys and Internet. This study seeks to scrutinize
the achievement of the Indian states regarding the financial inclusion. In this study,
Rotated Principal Component Analysis has been used to compute an inclusive
measure of financial inclusion for each state. To add robustness similar analysis is
done using Crisil Inclusix Index.
3) Findings Ranks of the states in accordance with the Composite score show that
most of the states in southern region have performed better in terms of financial
inclusion. Conversely, the level of financial inclusion of the states in India have a near
to the ground mean and high disparity and the findings are parallel if the factors are
cross checked through the lens of Crisil Inclusix Index.
4) Research limitations It was difficult to collect data as on some parameters it
was very challenging to complete the data for comprehensive analysis.

5) Practical implications The survey results will help the policy makers and
regulators to drift the policies to root out the regional disparities for inclusive growth.

6) Originality/value The paper is based on original analysis of the data available.

7) Keywords: Financial inclusion, sustainable growth, inclusive growth, Inclusix
Index, Challenges

8) Paper type: Analytical Paper

25

SECTION 1: INTRODUCTION
A strong financial system is a pillar of economic growth, development and progress of an
economy. A financial system, which is intrinsically burly, functionally varied and displays
competence and suppleness, is crucial to our national objectives of creating a market-driven,
productive and aggressive economy. Grown-up system supports higher levels of investment
and encourages growth in the economy with its depth and exposure. In the modern-day era of
achieving economic power and self reliance, it is imperative for any rule to create amiable
conditions for persons, households and private institutions. The ease of access of banking
facilities and strong bank branch network are the major facilitators of developmental and
expansionary activities. India has a functioning financial market/system comprising of money
market, Forex market, capital market, debt market to cater to financial needs and wants of
various participants and segments of society. It ensures a downy and proficient flow of
monetary resources, meeting the funding needs required for expansion and affluence. India
has a remarkable and well-structured banking system to cater to the financial needs of
individuals and households' and contribute towards the progress and advancement of the
nation. Towards these needs, necessary reforms, supervision and constant monitoring are
envisaged to ensure a modern and up-to-date banking practices, healthy competition, and
financial inclusion and well calibrated de-regulation. The Indian banking sector comprises of
the Reserve Bank of India (RBI), commercial banks and co-operative banks. Bank
nationalization in India marked a paradigm shift in the focus of banking as it was intended to
shift the focus from class banking to mass banking. The justification for creating Regional
Rural Banks was also to take the banking services to poor people. The banking industry has
shown marvellous growth in volume and intricacy over the last decade or so. Despite making
noteworthy improvements in all the areas relating to financial feasibility, productivity and
competitiveness, still banking services have not reached a measureless section of the
population, particularly the underprivileged sections of the society. Financial inclusion is new
exemplar of economic growth which plays a major role in driving away the poverty. There
are many factors which create an urgent need for financial inclusion like Lack of access to
financial services in most of rural areas due to high informative barriers and low awareness,
poor functioning and financial history of financial institutions, near absence of insurance and
pension service. Indian economy has travelled a long path of economic development but the
aftermaths show that benefits pertaining to this have hardly reached 50% of the Indian
population mainly because of no access to loan and insurance. All these factors necessitate
the urgent need for financial inclusion. Financial inclusion revolves around deposit
mobilization and credit intermediation to a wider section of population and is considered to
be an integral part of inclusive growth process and sustainable development. The process of
financial inclusion plays a major role in driving a way the poverty from the country. Financial
inclusion refers to delivery banking services to masses including privileged and
disadvantaged people at an affordable and inexpensive terms and conditions. It augments
financial intensity of agriculture and also helps in escalating rural nonfarm activities which
direct to development of rural economy and improve economic condition of people. The three
main facets of financial inclusion are (i) financial market accessibility (ii) credit market
accessibility (iii) awareness of financial matters.

1.1 CONCEPTUAL FRAMEWORK OF FINANCIAL INCLUSION

Meaning of financial inclusion
It refers to deliverance of financial services at a reasonable cost in a just and translucent terms
and conditions to enormous sections of drawbacks, weaker and low income groups counting
26

household enterprise, small medium enterprise and merchants. It not only augments financial
intensity of agriculture on the whole but also helps in increasing rural nonfarm activities
which lead to growth of rural economy and perk up Financial Inclusion and Growth of Indian
Banking System economic condition of people. Financial inclusion embrace micro credit,
branchless banking, no frills accounts, saving products, old age pension, microfinance, SHGs,
entrepreneurial credit etc.
Financial Inclusion is:
NFA + Banks+ OFIs+ MFI+ IT = Financial Inclusion
Where, NFA - No frills bank account
OFIs - Other financial Institutions
MFI - Micro financial Institutions
IT Information Technology
Therefore, financial inclusion desirable for equal opportunities to all section of people in
country, inclusive growth, economic development, social development and business
opportunity.
1.2 Need of Financial Inclusion
According to the United Nations the main aim of inclusive finance are as follows:
Access at a rational cost of all households and enterprises to the range of financial
services for which they are bankable, plus savings, short and long-term credit,
leasing and factoring, mortgages, insurance, pensions, payments, local money
transfers and global remittances.
Sound institutions, guided by appropriate internal management systems, industry
performance values, and performance supervising by the market, as well as by
significance prudential principle.
Financial and institutional sustainability as a means of providing right to use financial
services over time.
Multiple providers of monetary services, wherever possible, so as to bring lucrative
and an ample of options to customers.
1.3 Other objectives of Financial Inclusion
There has been numerous objectives related to the call for financial Inclusion such as
1. Economic Objectives: For the impartial growth in all the segments of the society
leading to a diminution of disparities in terms of income and savings the financial
inclusion can serve as a rumble for the underdeveloped and developing nations.
2. Larger Market for the financial system: To serve the requirements and need of the
large section of society there is an insistent need for the larger market for the financial
system which opens up the opportunity for the new players in the financial sector and
can lead to growth of banking sector also.
3. Political Objectives: There are certain other political objectives which can be
achieved with the wider inclusion of lower strata in the society and an effectual
direction can be given to the government programmes.
27

4. Social Objectives Poverty Eradication is considered to be the major solitary objective

of the financial inclusion scheme since they viaduct up the gap between the weaker
sections of society and the sources of livelihood and the means of income which can
be generated for them if they get loans and advances.
5. Sustainable Livelihood Once the weaker section of society got some money in loan
form they can start up their own business or they can support their education through
which they can sustain their livelihood. Thus financial inclusion is turn out to be bang
for the low income households.
6. Mobilization of Savings If the weaker sections are provided with the facility of
banking services the savings can be mobilized which is usually piled up at their
households can be efficiently used for the capital formation and growth of the nation.
In this backdrop, the main objectives of the study are:
1) To analyze the current status of financial inclusion in India
2) To critically analyze the Government, RBI and banks initiative on financial inclusion
and literacy in India.
3) To analyze the financial inclusion in India through the lens of Crisil Inclusix Index
with respect to state orientation.
4) To compute a comprehensive measure of financial inclusion for each state.
The paper is divided into following sections. Section 1 i.e. the present section gives the
overview of Financial Inclusion in India followed by the Review of Literature contained in
Section 2. Section 3 gives the description of data and methodology used to conclude and
achieve the objectives of the study. Section 4 gives Analysis and Interpretations of results.
Summary and conclusion is entailed in Section 5. Section 6 gives details about the references
used in the study.
SECTION 2.REVIEW OF LITERATURE
The following section gives the brief review of literature in the area of financial inclusion.
Levine (1997) empirically tested the neo-classical view and locate that countries with larger
banks and more vigorous stock markets nurture faster over consequent decades even after
controlling for many other factors underlying economic growth. Likewise imperative is
access to finance by all sections of the society (Levine 1997, Pande and Burgess 2003).
Finance can also play an affirmative role in poverty diminution. A well developed financial
system available to all diminishes information and transaction costs, sway saving rates,
investment assessments, technological innovation, and long-run development rates (Beck et
al. 2009). Binswanger and Khandker (1995) and Pande and Burgess (2003) propose that
Indian rural branch expansion program appreciably lowered rural poverty, and enlarged nonagricultural employment. A key objective in development economics is to work out ways to
lift people out of poverty. Admittance to finance has been seen as a significant factor in
enabling people to convert their production and employment activities and to egress poverty
(Aghion 1997; Banerjee 2001; Banerjee & Newman 1993, Pande & Burgess 2003, Yunus
1999). Financial inclusion has assumed public policy relevance in recent years. Many
countries like India (Government of India 2008) and the United Kingdom (UK) (2006) and
International organizations like the United Nations (2006), World Bank (2008, 2009) have set
up committees to comprehend financial inclusion. Honohan (2007) projected the fraction of
the adult population using official financial intermediaries using the information on number
of banking and MFI accounts for more than 160 countries, and then correlated with inequality
and poverty. Sarma (2008) constructed an Index for financial inclusion using cumulative
28

banking variables like total number of accounts, figure of bank branches and sum of credit
and deposit as percentage of GDP for 55 countries. Mehrotra et al. (2009) also developed an
index for financial inclusion using related kind of cumulative indicators like number of rural
offices, figure of rural deposit accounts, amount of rural deposit and credit for 16 major
Indian states. In addition, World Bank (2008) provides a compound measure of access to
financial services i.e. the percentage of adult population that has an account with a financial
intermediary for 51 countries.
World Bank (2009) examined the alliance between access to banking services, as measured
by the number of bank accounts per thousand adults in every country, and a number of other
factors like transactions offered at banks and regulations espoused by country authorities that
may influence banking access for 45 countries. Beck et al. (2009) confer about the
accessibility of abundant data on many aspects of the financial system, although systematic
indicators of inclusiveness of financial sector are missing. Sadhan Kumar Chattopadhyay in a
working paper for RBI on Financial Inclusion in India: A case-study of West Bengal (2011),
According to the study there has been an enhancement in outreach activity in the banking
sector, but the success is not noteworthy. An index of financial inclusion (IFI) was also
constructed in the study using data on three magnitudes of financial inclusion such asbanking penetration (BP), accessibility of the banking services (BS) and usage of the banking
system (BU). The paper presents a analogous picture between different states on the basis of
IFI rankings.

SECTION 3: DATA AND METHODOLOGY

This study tries to embrace most of the indicators found in literature for evaluating the
performance of the states in financial inclusion. The indicators taken in this study are Number
of bank branches per lakh population, Number of banks per thousand square kilometer,
Number of Self-Help Groups per hundred poor populations, Number of deposit accounts per
hundred populations, Number of credit accounts per hundred populations, Percentage of
savings to net state domestic product, Percentage of credit outstanding to net state domestic
product, Per capita Domestic Savings, Per capita Loan Outstanding, Credit deposit ratio. This
study seeks to examine the success of the Indian states regarding the financial inclusion.
Rotated Principal Component Analysis has been used to calculate a comprehensive measure
of financial inclusion for each state. Primarily, Principal Components have been extracted by
Kaiser Criteria which consider only the components having Eigen value greater than one.
Though, in case of Principal Component Analysis with no rotation, the eigenvectors may not
align close to the data clusters and thus may not focus the actual states as well. The rotated
PCA methods rotate the PCA eigenvectors so that they align closer to the cluster of data. This
study has used Varimax rotation strategy which maximizes the variance of the rotated
squared PCs. PCA, has been rotated specifying the preset number of components. Relevant
rotated component scores have been acquired by regression method. Lastly, the Composite
Index of Financial Inclusion, CIFI has been computed using the weighted sum of component
scores. The weight of a particular PC is the percentage of variations in the data set is
enlightened by the particular PC after rotation. To add robustness similar analysis is done
using Crisil Inclusix Index. The data for the current study has been collected mostly from
secondary sources such as reports, journals, NABARD ancillary Statements, State Level
Committee Reports of banks, Census 2011, Economic Surveys and Internet.

29

SECTION 4: ANALYSIS AND INTERPRETATION

4.1 To analyze the current status of financial inclusion in India
Financial inclusion was first featured in 2005 in India; it was introduced by K C Chakraborty,
the chairman of Indian Bank. Mangalam Village was the foremost village in India where all
households were provided banking facilities. Rules were relaxed for people intended to open
accounts, and General credit cards (GCCs) were issued to the poor. In 2006, the Reserve
Bank allowed commercial banks to utilize the services of non-governmental organizations,
micro-finance institutions, and further civil society organizations as mediators for providing
monetary and banking services. These mediators could be used as business facilitators or
business correspondents by commercial banks. Reserve Bank of Indias vision for 2020 is to
open almost 600 million new customers' accounts and service them through a multiplicity of
channels through IT. Conversely, illiteracy and the small income savings and short of bank
branches in rural areas persist to be a barricade to financial inclusion in many states and there
is derisory authorized and monetary arrangement. The process of financial inclusion in India
generally entails three phases, (See Figure 1).

Figure 1: Process of financial inclusion in India

First Phase (1960-1990)
Channeling credit to
weaker sections of the
society

Second Phase (19902005)

Third Phase (2005

onwards)

Strengthening the
financial institutions
as part of financial
sector reforms

Financial Inclusion

The Report Committee headed by Dr.C.Rangarajan (2008) on Financial Inclusion has

examined that financial inclusion must be taken up as a mission and recommended a National
Mission on Financial Inclusion (NMFI) suggesting the essential policy changes and
sustaining stakeholders in public domain, private sector and NGOs in undertaking
promotional initiatives. The Eleventh Five Year Plan (2007-12) foresees inclusive growth as
its key objective. Inclusive growth in India is the biggest defy as it is very complicated to
bring 600 million people living in rural India into the mainstream. One of the best ways to
attain inclusive growth is through financial inclusion.RBI and Government both is taking
initiatives to achieve inclusive growth through Financial Inclusion. The following tables, i.e.
table 1 and 2 gives the snapshot of current status of financial inclusion in India.

30

Table 1: Population wise and bank wise deposits and credits of scheduled commercial
banks in India as on March, 2013
Population group

Rural
Semi-urban
Urban
Metropolitan
All India

Population group

SBI and its associates

Total deposits

No of offices

No of
accounts
61254
81886
46706
38100
227946

6499
5672
3956
3446
19573

Amount
1478183.1
2995548.6
3413005.9
5311952.8
13198690.5

Nationalized banks
Total deposits

No of offices

Rural
Semi-urban
Urban
Metropolitan
All India

15597
12246
11483
11128
50454

Population group

No of offices

No of
Amount
accounts
129188
2862909.1
110359
3795446.1
99979
6623453.1
111060
18800191
450585
32081999.3
Foreign banks
Total deposits
No of
accounts
2
4
373
3544
3923

Rural
7
Semi-urban
8
Urban
62
Metropolitan
247
All India
324
Source: RBI bulletins and publication

Amount
1912
1947.1
88432.7
2615362.1
2707653.9

Total credits
No of
accounts
8092
10704
4176
2147
25119

Amount
outstanding
1048032.5
1676393.5
2021662.1
5719796.4
10465884.4

Total credits
No of
accounts
16951
12098
7164
5581
41794

Amount
outstanding
1861636
2052771.7
4100663.1
17136839.4
25151710.2

Total credits
No of
accounts
6
187
9218
9411

Amount
outstanding
16202
6163.7
64840.4
2313112.2
2385736.4

Of which total credit to

small borrowers
No of
Amount
accounts
outstanding
6944
356192.5
8348
487708
2473
155968
1031
53071.5
18796
1052940

Of which total credit to

small borrowers
No of
Amount
accounts
outstanding
15076
765735
9957
579168.7
5071
320362.1
3685
243816.5
33788
1909082.2
Of which total credit to
small borrowers
No of
Amount
accounts
outstanding
07
5
334.3
182
5802.7
8531
226216.2
8718
232353.9

Table 2: Number of Branches of Scheduled Commercial Banks Population wise

Year

Number of branches of scheduled commercial banks population

wise
8262
30202
57699
64939
80214
105078

1969
1979
1989
1999
2009
2013
Source: Compiled from bulletins of RBI and reports

Figure 2: Number of branches of scheduled Commercial banks population wise

Number of branches of scheduled commercial banks
population wise
120000
100000
80000
60000

Number of branches of
scheduled commercial
banks population wise

40000
20000
0
1969

1979

1989

1999

2009

31

2013

Table 2 and figure 2 depicts the increase in the number of branches of scheduled commercial
banks population wise from 1969 till 2013.From 1969 to 1979 there has been a percentage
increase of 265.55% in the number of branches, from 1979 to 1989 an increase of 91.04% has
been seen whereas from 1989 to 1999, there was an increase of 12.54%.From 1999 to 2009,
there has been an increase of 23.52% in the number of branches. While in the last 6 years i.e.
from 2009 to 2013, an increase of 30.99% has been observed.

4.2To critically analyze the Government, RBI and banks initiative on

Financial inclusion and literacy in India
1) RBI initiated multilingual websites in 13 languages on all matter concerning banking.
RBI has also created a sub-site for the general public to give them the ease of access
information for use in dealing with banks.
2) The community finance learning initiative (CFLIs) were also commenced with a view
to encourage fundamental financial literacy.
3) State bank of India has laid down up 100 centers in Agri-lending branches for
agriculture counseling.
4) Union bank of India and Dena bank established 198 village knowledge centers to
convey knowledge to farmers. These centers also offer necessary infrastructure,
internet connection and library facility.
5) Union bank of India pioneered Union Mitra Scheme for imparting financial
education and debt counseling services to rural population free of cost.
6) Dena bank initiated Dena Bhoomiheen Kisan Credit Card for renter farmers, share
croppers and landless labourers.
7) The important financial inclusion initiatives of RBI were Introduction of No-Frills
account, Relaxing 'Know Your Customer'(KYC) norms, General Purpose Credit Card
(GCC) Schemes, Role NGOs, SHGs and MFIs, Business Facilitator (BF) and
Business Correspondent (BC) Models, Nationwide Electronic Financial Inclusion
System (NEFIS),Project Financial Literacy, Financial Literacy and Credit Counseling
(FLCC) centers, National Rural Financial Inclusion Plan (NRFIP),Financial Inclusion
Fund (FIF),Financial Inclusion Technology Fund (FITF).
8) RBI has allowed domestic Scheduled Commercial Banks to open branches in Tier 2
to Tier 6 Centers without the need to take authorization from RBI, subject to
reporting.
9) RBI has also allowed SCBs (excluding RRBs) to open branches in rural, semi urban
and urban centers in North Eastern States and Sikkim without the need to take
acquiescence from RBI, subject to reporting.
10) Regional Rural Banks (RRBs) are also allowed to open branches in Tier 2 to Tier 6
centers without the need to take permission from the Reserve Bank subject to
reporting, provided they discharge few conditions
11) RRBs have been advised to allocate at least 25 percent of the total number of
branches proposed to be opened during a year in unbanked rural areas and private
sector banks also to ensure that at least 25% of their total branches are in semi-urban
and rural centers on an ongoing basis.
12) The DBT Scheme was launched in 2013 is to ensure that money under different
developmental schemes reaches beneficiaries unswervingly and without any delay.
The proposal was initiated in a phased way with 26 welfare schemes in 43 districts.
13) Spreading out of ATM network: Banks are required to make sure an onsite ATM in
all the branches
32

4.3 To analyze the financial inclusion in India through the lens of Crisil
Inclusix index with respect to state orientation.
CRISIL Inclusix is Indias first inclusive measure of financial inclusion in the form of an
index. It is a comparative index that has a scale of 0 to 100, and mingles three very significant
parameters of basic banking services branch penetration (BP), deposit penetration (DP),
and credit penetration (CP) together into one sole metric. CRISIL appraises financial
inclusion at the national/ regional/ state/ district level. A CRISIL Inclusix score of 100
signifies the idyllic state for each of the three parameters.
The key findings of the analysis are:
The all-India CRISIL Inclusix score of 40.1 is reasonably low which reflects underpenetration of formal banking facilities in most parts of the country. In actuality, the
bottom 50 scoring districts have just 2 % of the countrys bank branches. Conversely,
it is also heartening to note that 618 out of 632 districts reported a progress in their
scores during 2009-2011.
Broad disparities subsist across India and within states in terms of access to financial
services. Indias six largest cities have 11% of the countrys bank branches. There are
four districts in the North-Eastern region with only one bank branch each.
Deposit penetration is the chief driver of financial inclusion.
On the whole financial inclusion is inhibited by lack of Credit Penetration. It is
witnessed by its score which is least amongst all three parameters in almost all regions
apart from southern part.
Southern Region shows maximum financial inclusion with a CRISIL Inclusix score of
62.2 in 2011. 6 out of the top 10 states with the highest CRISIL Inclusix score are
from the Southern part. It leads across all three dimensions of financial inclusion.
Table 3: Top states/Union territories and districts are listed below
Top 5

Bottom 5

States
Puducherry
Chandigarh
Kerala
Goa
Delhi
Arunachal Pradesh
Chhattisgarh
Bihar
Nagaland
Manipur

Districts
Pathanamthitta
Karaikal
Thiruvananthapuram
Ernakulam
Kottayam
Kurung kumey
Kiphire
Mon
South garo hills
Tamenglong

Source: Crisil

4.4To compute a comprehensive measure of financial inclusion for each

state.
Table-4 shows that the average number of deposit account is 63 while the average number of
credit account is only 9.2 per hundred populations. As a result, average savings widening of
the states shows a reasonable picture of financial inclusion, still there is a wide discrepancy.
Conversely, the figure of credit widening is disappointing. The standard deviations of the
number of banks per lakh population and per thousand square kilometers show that bank
branches have been extended in accord with the strength of population but not in accordance
with the physical area. It may be a ground of the high level financial exclusion of the north33

eastern states of India. The average saving-income ratio of the states is quite high. 47% of net
state domestic income has been covered by institutional credit which appears to be an
excellent indication of financial inclusion. It is seen that there is a wide deviation among the
states in terms of per capita savings and in terms of per capita loan outstanding. There has
been a conspicuous increase in the number of SHGs across the states.
Table 4: Statistics
Statistics

Mean
S. D
Min.
Max.

No of
banks
per
thousand
kms
(credit
extensio
n)
29.29
28.46
0.95
113.54

No of
banks
per
lakh
popula
tion

Credit
net
state
domesti
c ratio

Deposit
net
state
domesti
c
product
ratio

No of
deposits
accounts
per
hundred
populatio
n

No. of
credit
accounts
per
hundredpopulatio
n

Per capita
Savings
(, '000)
(saving
widening)

Per capita
Loan
Outstandin
g (, '000)
(Credit
Widening)

Cred
it
depo
sit
ratio
(%)

No. of
SHGs
per
hundre
d poor
populat
ion

9.29
5.39
3.42
31.87

46.59
32.15
17.55
172.91

88.94
32.04
48.71
189.56

63
42.59
20.83
251.84

9.2
6.18
2.99
27.8

37.03
32.58
11.20
172.60

19.1
19.43
3.63
92.47

50.6
23
26.2
109.

2.65
4.34
0.40
24.33

The value of Kaiser-Meyer-Olkin (KMO) is 0.72 which indicates that the sample size in this
study is satisfactory for factor analysis. The value of chi-square in Bartletts Test of
Sphericity is statistically noteworthy. It authenticates that the selected indicators of financial
inclusion are inter correlated. Consequently, PCA is suitable for analyzing the magnitude of
the selected indicators in financial inclusion.
Table 5: KMO and Bartletts test Results
0.72
379.529
45
.000

Kaiser-Meyer-Olkin Measure of Sampling Adequacy

Bartlett's Test of Sphericity
Approx. Chi-Square
Df
Sig.

Table-6 has shown the comprehensive results of the PCA which disclose the variance after
extraction and after rotation. The components have been pulled out using Kaiser Criteria and
rotated imposing Varimax rotational method. This study has reflected three principal
components which have Eigen value greater than 1. Rotation Sums of Squared Loadings
show that the first rotated principal component has explained 39.015% of total variation in
financial inclusion of the states. The 2nd and 3rd rotated principal components have
explained 35.248 % and 11.680 % of variance correspondingly. Three components in total
accounts for 85.943% of total variation in the financial inclusion of the states.
Table 6: Result of Principal Component Analysis
Component
Number

Original eigen values

total

1
2
3
4
5
6
7
8
9
10

5.303
2.145
1.130
.778
.342
.124
.089
.037
.015
.004

% of
variance
51.075
21.447
10.402
8.111
3.220
1.317
.885
.369
.150
.041

Extraction sums of squared loadings

Rotation sums of squared loadings

Cumulative%

total

Cumulative%

Total

51.095
75.142
86.243
94.207
97.127
99.155
99.440
99.809
99.959
100.000

5.309
2.145
1.240

51.995
75.42
86.24

3.402
4.225
1.178

% of
variance
51.95
22.347
10.92

34

% of
variance
38.015
36.248
12.180

Cumulative%
38.01
75.26
86.23

Table-7 symbolizes the rotated factor loadings analogous to the selected indicators of
financial inclusion. The indicators which have maximum factor loading on component 1 are
the number of banks per thousand square kilometer, number of banks per lakh population,
number of deposit accounts per hundred-population and per capita savings. These indicators
overall explicate the highest percent of total variation in financial inclusion. Consequently,
these are the most important indicators of financial inclusion. Likewise, for component 2, the
indicators, exclusively, credit and state domestic product ratio, credit deposit ratio, deposit
and state domestic product ratio, number of credit account per hundred population and per
capita loan outstanding have the maximum loading. These indicators elucidate the second
largest variance in the sample. To conclude, the only indicator, number of SHGs per hundred
poor populations, loads high in component 3. It substantiates that it an auxiliary indicator of
financial inclusion in India.

Table 7: Result of Rotated Factor Loading

Component
1
.217
.218

All factor loading

Component Component
2
3
-.046
.195
-.118
.002

-.094

.312

-.092

.079

.093

-.316

-.148
.265

.303
-079

.113
.052

.236
.018

-.020
.253

-.093
.202

.029
.050

.228
.038

-.062
.822

Indicators of financial inclusion

No. of Banks per thousand KM2

No. of Banks per hundred thousand
population
Credit Net State Domestic Product
Ratio (%)
Deposit Net State Domestic Product
Ratio (%)
Credit deposit ratio (%)
No. of deposit accounts per hundred
population
Per capita Savings (, '000)
No. of credit accounts per hundredpopulation
Per capita Loan Outstanding (, '000)
No. of SHGs per hundred poor
population

Highest factor loading

Component Component Component
1
2
3
.227
.286
.310
.093
.303
.277
.231
.251
.226
.803

The relevant rotated component scores have been obtained by applying regression method
(see table-8). To calculate the composite index of financial inclusion these three rotated
principal components have been taken into account. The obtained rotated component scores
have been multiplied with the resultant percentage of variations explained by the relevant
component. Lastly, the products have been summed up to obtain the composite scores of the
states. This combined score associated with the state has been named as Composite Index of
Financial Inclusion (CIFI).As per CIFI; Goa is the best in terms of financial inclusion
followed by Maharashtra with score 124 followed by Kerala. The states of western region
excluding Gujarat have done well in financial inclusion. Though recently Gujarat is a rapid
budding economy, its presentation in financial inclusion is not pleasing. Among the states in
India the highest numbers of SHGs are in Andhra Pradesh which has got 6th position in terms
of financial inclusion. It has been observed that among the 6 leading states, four states
namely Kerala (third), Tamil Nadu (fourth) Karnataka (fifth) and Andhra Pradesh (sixth) are
from southern region.

35

Table 8: Result of Regression Analysis

NAME
Goa
Maharashtra
Kerala
Tamilnadu
Karnataka
Andhra Pradesh
Punjab
Tripura
Himachal Pradesh
Haryana
West Bengal
Uttarakhand
Sikkim
Gujarat
Jammu Kashmir
Rajasthan
Orissa
Mizoram
Uttar Pradesh
Madhya Pradesh
Meghalaya
Jharkhand
Assam
Arunachal Pradesh
Nagaland
Chhattisgarh
Bihar
Manipur

FACTOR-1
4.45414
0.1417
1.14810
-0.17421
0.10795
-0.35051
0.73721
-0.03781
0.54127
0.18347
-0.13221
0.60331
0.15035
-0.21036
-0.18151
-0.81878
-0.46800
-0.553944
-0.27350
-0.67261
-0.2785
-0.33214
-0.54766
-0.33203
-0.64198
-0.70190
-0.40045
-0.95685

FACTOR-2
-0.72952
3.838
0.48624
1.94773
1.32276
1.23474
0.24351
-0.46570
-0.50386
-0.12504
-0.02869
-0.50115
-0.08407
0.04445
-0.1645
0.22393
-0.2355
-0.22078
-0.4768
-0.11956
-0.76361
-0.64131
-0.65933
-0.67136
-0.70292
-0.53571
-0.82500
-0.78631

FACTOR-3
-0.32618
-1.11728
1.52053
0.8056
-0.15031
1.13211
-0.1916
4.09405
0.08164
0.01388
0.06785
-0.97446
-0.99385
-0.28051
-0.90326
-0.07241
0.11307
0.260
-0.35350
-0.43051
-0.21352
-0.6283
0.04026
-0.74112
0.16174
-0.22326
-0.47366
-0.21781

CIFI
141.25
131.21
77.7
70.27
48.08
41.07
33.11
28.93
3.31
2.81
-5.18
-5.41
-8.61
-8.82
-21.43
-23.9
-24.25
-25.33
-30.61
-34.52
-41.33
-43.90
-44.24
-45.38
-46.93
-47.81
-54.21
-68.60

RANK
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
21
22
23
24
25
26
27
28

Southern part of India has come forward in terms of financial inclusion. Despite of existence
of sturdy network of banks and cooperatives West Bengal has got 11th position. Five states
from the north-east India are close to the bottom rows. It is due to lack of well
communication and non-availability of the financial service outlets. Most of the states have
low or very low level of financial inclusion. There is a high level of discrepancy among the
states with respect to their performance in financial inclusion. The causes of the low level
financial inclusion are region-specific like low education and low income may be the causes
of low level financial inclusion in Bihar, Jharkhand, Chhattisgarh, and Madhya Pradesh. In
Manipur and Nagaland poor information technology incises the problem of financial
exclusion.

SECTION 5.CONCLUSION AND SUGGESTIONS

Financial inclusion has been made an essential part of the banking sector policy in India. RBI
is furthering financial inclusion in a mission mode through mishmash of strategies like
liberalization of regulatory guidelines, innovative products, encouraging use of technology
for achieving sustainable financial inclusion. Financial inclusion is the entryway for
achieving inclusive growth in India. All the commercial banks including cooperative banks
are vigorously involved in financial inclusion process through opening of new branches in
rural and urban areas. This study has developed a composite index of financial inclusion for
each state using wide range of indicators. The computed values of CIFI reveal that till date
the plight of the states in India is not commendable. This Index would help governments or
financial regulators or other bodies of policy-makers in near future to augment financial
inclusion. Generally the marginalized groups of population are financially excluded. Their
livelihoods are not monetized and they are destitute of financial inclusion. Our results
36

coincide with the Crisil Inclusix Index. Both reveal that the top most states indulged in
Financial Inclusion are basically from Southern India and the bottom most are Arunachal
Pradesh, Nagaland, Chhatisgarh, Bihar and Manipur. In addition, they are unaware of the
available banking services; in additional, banking officials are not also conscious of the needs
and capacity of the people. Consequently, mass financial literacy and awareness among the
marginalized sections of people are enormously indispensable to achieve financial inclusion.
In contrast, financial institutions will have to be socially responsible as well as accessible to
achieve absolute financial inclusion. As a result, financial inclusion has enough capacity for
economic growth, raising standard of living of people, equality etc. On the basis of above
schemes and projects we can conclude that a day will come when all Indians have their bank
accounts and everyone will take part in financial inclusion.

SECTION 6.REFERENCES
1. Chattopadhyay, S. (2011) Financial Inclusion in India: A case-study of West Bengal.
2. Dr. Vighneswara Swamy and Dr. Vijayalakshmi, Role of Financial Inclusion for
Inclusive Growth in India- Issues & Challenges, 2010.
3. Financial Inclusion and Banks: Issues and Perspectives, RBI Monthly Bulletin,
November 2011.
4. Financial Literacy and Consumer Protection Necessary Foundation for Financial
Inclusion, RBI Bulletin, May2012.
5. FICCI Report on Promoting Financial Inclusion, 2013.
6. Jessica Mary Innovation Management for Inclusive Growth in India, Advances In
Management Vol. 5, Aug. 2012
7. Johnson, R.A & Wichern, D.W. (2000). Applied Multivariate Statistical Analysis.
IVth-Edition.
8. Keynote Address by Dr. K. C. Chakrabarty, Deputy Governor, Reserve Bank of India
at the BIS-BNM Workshop on Financial Inclusion Indicators at Kuala Lumpur on
November 5, 2012
9. Measuring Financial Inclusion, Policy Research Working Paper, 6025, World
Bank.
10. RBI Annual Report 2011-12 (p. 88-92) contains the detailed India specific survey
findings as per the World Banks policy Research Working paper and latest status of
Financial inclusion in India.
11. www.rbi.org.in

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