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July-September, 2007

100% Financial
Inclusion:
Improving
Access and Usage1
A Study Report on

Gulbarga District Initiative

Minakshi Ramji*
Abstract : A well-developed financial system brings poor
people into the mainstream of the economy and allows them to
contribute more actively to their personal economic
development (United Nations, 2006). In India, in an attempt to
improve access to financial services or financial inclusion, the
Reserve Bank of India (RBI) promulgated a drive for financial
inclusion, where banks take the lead in providing all 'unbanked'
households in a district, with savings accounts. The Centre for
Microfinance2 conducted a study to assess the implementation
of the inclusion drive and usage of banking services by
households in Gulbarga district in Karnataka, one of the first
locations claimed to have achieved 100 per cent financial
inclusion. We find that 36 per cent of our sample remains
excluded from formal or semi-formal savings accounts.
Furthermore, most of the accounts opened during the last year
pertain to the National Rural Employment Guarantee
Programme (NREGP), rather than to the drive for financial
inclusion. Accounts opened have not been used for savings.
Rather, they have been used to receive government assistance.
The most prevalent form of formal/semi-formal savings
accounts was savings through Self-Help Groups. We conclude,
therefore, that while government programmes are often the best
way to reach large numbers of people, especially in the context
of opening bank accounts, in order to motivate people to use the
accounts, financial literacy needs to be promoted. Other
channels of financial services delivery such as the Business
Correspondent Model (BC Model) may also be more effective.

Introduction
Financial inclusion or broad access to finance refers to the
timely delivery of banking services to disadvantaged
sections of society. Research in the last decade leads us
to believe that a well-functioning financial system is linked
to faster and equitable growth (Honohan, 2004). Due, in no
small part, to the stimulus provided by the United Nations
Year of Micro Credit 2005, policy makers across the world
have begun to pay closer attention to increasing financial
inclusion.
However, in spite of the attention on financial inclusion and
the numerous policies devoted to enhancing access to
finance, the dearth of information regarding access to
finance poses a significant challenge in designing
effective policy interventions. The problem of information
is compounded by the fact that access to finance does not
necessarily lead to usage.
In India, in 2005, the Reserve Bank of India (RBI)
promulgated a drive for financial inclusion, where banks
take the lead in providing all 'unbanked' households in a
district, with savings accounts. The Centre for
Microfinance3 conducted a study to assess the
implementation of the inclusion drive and usage of

* Research Associate, Centre for Micro Finance, Institute of Financial and Management Research, Chennai

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banking services by households in Gulbarga district in
Karnataka, one of first locations claimed to have
achieved 100 per cent financial inclusion. This paper
uses data from the study to examine to what extent
opening bank accounts for 'unbanked households' can
further the cause of financial inclusion. Whilst this study
does not measure impact, the results herein could have
important implications for developing better channels for
finance for low-income communities in different parts of
India. Currently, our study is one of the first attempts to
examine the drive in any detail. It should be mentioned,
however, that the RBI plans to initiate some evaluations of
the financial inclusion drive in different parts of India with
the help of independent research institutions.
The paper is organised in the following manner. The next
section reviews past work done in this area. Section 3
provides the background for the policy pertaining to the
financial inclusion drive. Then, the paper clarifies the
methodological approach of the study. Section 5
presents and analyses the empirical evidence collected
for this study. Finally, a conclusion is offered

Literature Review
A well-developed financial system brings poor people
into the mainstream of the economy and allows them to
contribute more actively to their personal economic
development (United Nations, 2006). Access to financial
services allows lower income groups to save money
outside the house safely, prevents concentration of
economic power with a few individuals and mitigates the
risks that poor people face as a result of economic shocks
(Beck, Demirguc-Kunt & Peria, 2006).
The breadth of financial inclusion in a region or a country
is usually measured by the percentage of people in the
region who have access to bank accounts (Beck & De la
Torre, 2006). This is primarily because a bank account
enables poor households to perform important financial
functions such as saving money safely outside the house,
accessing credit, making loan or premium payments and
transferring money within the country. Thus, although a
bank account covers only one aspect of financial
inclusion, it may determine access for many other
financial services (Littlefield et al, 2006).
In India, till recently the discussion on financial inclusion
in policy and academic circles has tended to revolve
around the extension of institutional credit, specifically to
the rural sector (Basu, 2005; Dev, 2006; Mohan, 2006).
The focus on rural banking arises from the fact that

July-September, 2007

poverty in India is extremely well-entrenched in rural

areas, with over 70 per cent of India's poor residing in its
villages (Basu, 2005). While the area and population
served per rural bank branch in India compares
favourably with other developing nations, an
overwhelming majority of small and marginal farmers do
not have access to savings or credit account (Basu,
2006). As such while India's system can be said to be
financially deep in terms of access, it would appear that it
scores poorly on translating this into usage. Rural
households face several barriers when they attempt to
borrow from banks (Basu, 2005). Firstly, banks demand
collateral which poor people are unable to provide.
Secondly, bank transactions tend to be time-consuming
and expensive. Bribes amounting to 20 per cent of the
loan amount are not unheard of. Furthermore, on average,
bank loans take thirty three weeks to be approved.
Consequently, the share of informal sources of credit
(money-lenders, pawnbrokers, friends and family) has
jumped to 27 per cent in 2002 from 17.5 per cent in 1991
(Mohan, 2006).
The focus on credit has meant that policy and practice has
thus far ignored the provision of a safe place for savings for
rural households (Ghate, 2007), in spite of evidence that
poor people do save4. India has approximately 300 million
savings accounts which would imply that about 59 per
cent of India's adult population has access to a savings
account (Leeladhar, 2005). Since public policy responses
to cope with lack of financial services access have
typically used savings banks to increase access, a strong
and stable savings bank system can be important to
achieve universal access. The drive for financial inclusion,
initiated by the RBI and described below, is thus
significant in that it attempts to extend savings bank
accounts to 'unbanked' households.

Background
The Reserve Bank of India's (RBI) Annual Policy Statement
of April 2005 first brought the issue of financial inclusion to
the notice of banks, saying that 'banking policies tended
to exclude rather than attract vast sections of the
population5.' As a result of a renewed commitment to
financial inclusion, three major moves were initiated.
Firstly, a 'No Frills Account' (NFA) was extended to all
'unbanked' households wherein the minimum balance
required would be nil. Secondly, 'Know Your Customer'
norms (KYC norms) were relaxed so that the needs of rural
households that cannot establish their identity or their
address formally could be accommodated. Lastly, banks

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July-September, 2007

were urged to ensure that their charges were reasonable

and transparent. In addition to these measures, the RBI
announced a drive for financial inclusion to be initiated in
every state whereby the State Level Banking Committees
and the Lead Banks would be responsible for promoting
100 per cent financial inclusion in at least one district in
their home state6.100 per cent financial inclusion implied
that all households in the district which desired a savings
bank account would be provided with one. The first pilot
project was conducted in Pondicherry, led by Indian
Bank and completed in December 2006. Since then,
several drives, typically lasting from six months to a year
each time, have been completed in different parts of
India, the most notable examples being Palakkad in
Kerala and Gulburga in Karnataka.
Before turning to the logistics of the drive for financial
inclusion, let us briefly consider how financial inclusion is
defined by the RBI. Financial inclusion is perceived as the
'delivery of banking services at an affordable cost to the
vast sections of disadvantaged and low income groups'
(Leeladhar, 2005). This includes not only savings
services but also credit and insurance services. In fact,
the financial inclusion drive is seen to have more than one
phase, where each phase provides a more complex
financial service to low-income and excluded
communities. Thus, the first phase provides savings
accounts, the second phase typically provides credit
facilities and the last phase provides insurance services.
In Gulbarga, the financial inclusion drive lasted from
August 2006 to January 2007. In this time, about 26 banks
used the services of 56 NGOs to act on their behalf to
collect applications from financially excluded
households. A total of four lakh No Frills Accounts with
zero balance were opened (Times of India, 19 January
2007). 'Unbanked' households were identified as being
those households where no member had access to a
savings account. Thus, for instance, if a household had a
member whose Self-Help Group (SHG) had a bank
account, that household would not be considered to be
'unbanked.' Initially, the drive did not target those with
post office accounts, but midway through the drive, it was
determined that those who had just post office accounts
would also be targeted to receive bank accounts. In
Gulbarga, the drive for financial inclusion was
implemented about six months after the roll-out of the
National Rural Employment Guarantee Programme
(NREGP)7. NREGP wages are distributed through
savings accounts in Gulbarga. Thus, simultaneous to the
drive, banks were also opening bank accounts for

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NREGP beneficiaries who did not have accounts through

the village panchayat. While prior to the drive, these
accounts were not always No-Frills, once the drive began,
all NREGP accounts opened were also 'No Frills Account.'

Research Methodology
The data for this study was collected in twenty-five villages
each in two blocks of Gulbarga district in northern
Karnataka, Gulbarga and Shorapur by a combination of
household surveys and open-ended individual interviews.
Specifically, the study targeted poor households,
identified via state-issued ration cards, since it is precisely
the economically disadvantaged who face the greatest
hardship in accessing formal finance. While there are
claims of considerable distortions in the classification of
BPL status in ration cards all across the nation, this in fact
was logistically the least challenging method to examine
some of the changes in financial behaviour in low-income
households, as defined by the state. The total number of
respondents in the survey portion of the study equalled
nine hundred and ninety-nine.
Gulbarga, covering about 8.46 per cent of the total area of
Karnataka, has 1378 revenue villages and a population of
31.25 lakhs. The percentage of BPL families in the district
equals about 33.85 per cent. Gulbarga is one of the more
backward districts of Karnataka, placing 26th out of 27th
on Karnataka's Human Development Report, registering
an HDI of 0.564, compared to an HDI of 0.650 for
Karnataka and an all-India HDI of 0.621.

Financial Inclusion Drive: Some Salient

Points
Table 1 (overleaf) encapsulates
features of the households that
sample. Table 2 shows the salient
accounts which were opened
inclusion drive.

some of the salient

were part of survey
details of all the bank
during the financial

As Table 1 shows, respondents were largely illiterate. Even

though the data shows that over 80% of the households
have over one literate member in the family, these tend to
be children or younger members of the family rather than
those in decision-making positions. A majority of the
households are involved in agricultural activities and they
typically receive wages on a daily or weekly basis.
In theory, No Frills Accounts were specifically targeted at
households who were completely cut off from banks. Table
2 reveals that in practice, No Frills Accounts have tended
to be opened for those who already have other accounts

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Table 1: Characteristics of Households Interviewed
Religion
Hindu
Muslim
Other
Caste Category
Scheduled Caste
Scheduled Tribe
Other Backward Caste
General
Other
Household
Average HH Size
Average No. of Adults
% of HH whose heads reported never
having attended school
Land Ownership
% of HH which owned land
Average Land Holding
Livelihoods (1)
Agriculture
Agricultural Labour
Casual Labour
Type of Income (2)
Daily
Weekly
Monthly
Seasonally

88%
11%
1%
43%
9%
41%
6%
1%
6.1
3.4
74%
58%
3.2 acres
51%
58%
48%
47%
65%
9%
51%

(1)&(2) These figures add up to more than 100% because

some households have more than 1 livelihood.

through their post office, SHG or even another bank

account. Even though the definition used in Table 2 is
more expansive than the definition used by banks to
define excluded households, we find that after the drive,
36 per cent of our sample continue to remain excluded
from some form of formal or semi-formal method to save.
We examine some of the reasons behind why after such a
large-scale effort to increase financial inclusion seems to
have not affected access to savings accounts for
unbanked individuals.
Of the 172 accounts opened in the last one year, only 77
have been reported as zero minimum balance accounts.
Due to multiple account opening by households, only 63
households in our sample can be determined as having
opened zero minimum balance accounts. Our analysis
looks at all 172 savings accounts rather than the smaller
subset of 77 for the following two reasons. Firstly, even in
the 77 self-professed zero minimum balance accounts, it

July-September, 2007

Table 2: Bank Accounts Opened During the Drive

Before the drive
% of HH without Bank Accounts
82%
During the drive
% of HH who opened accounts
17%
% of HH who reported 0 minimum
balance
6%
% of HH with zero minimum a/cs
2%
who at the time of account opening
did not have access to any other
savings accounts (1)
Currently
% of HH without bank accounts
68%
% of households who don't have
36%
access to savings accounts(1)
(1) Savings accounts refers to any one of the following:
bank accounts, post office accounts, neighbourhood
savings groups, SHG groups, savings with MFIs
and chitfunds

is clear that the targeting of account holders was not

appropriate since only 22 of these account holders had no
access to any other form of savings accounts. Secondly,
the larger subset gives us a better understanding of what
new accounts are used for.
The most striking finding of this study is that respondents
consistently recall opening bank accounts for receiving
disbursal under NREGP, rather than under the financial
inclusion drive.
In Table 3, of the 11 per cent who knew that banks were
opening zero minimum balance accounts for unbanked
households, an overwhelmingly 75 per cent were
receiving assistance under the NREGP. Similarly, the
involvement of Village Panchayat officials and notably, the
lack of NGO involvement, demonstrated that most of these
accounts were opened in order to receive NREGP
assistance, rather than under the financial inclusion drive.
Only 4 per cent reported opening accounts for saving
money. It comes as no surprise; therefore, that majority of
these accounts were opened precisely in order to receive
some form of government assistance.
We now examine usage of these accounts. Since SelfHelp Groups (SHGs) and bank accounts were most
prevalent in our sample (33 per cent of sampled
households have a bank account and 50 per cent of
households have an SHG member in their household). The

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Bank Officials
Gram Panchayat officials
NGO
Relative
Neighbour
Government Official
Other (specify)

Table 3: NREGP and Financial Inclusion Drive

Do you know that banks are opening zero
minimum balance accounts for everyone?
Yes
No

11%
89%

How did you come to know that banks were

opening zero minimum balance savings
accounts?
Bank Officials
SHG Members
NGOs
Neighbours
Village Panchayat Members
Others

What were the reasons that you or members of

your household opened the account?

2%
1%
2%
4%
81%
4%

Did somebody help you open the account?

Yes
No

76%
20%

Table 3: Usage and Access

Average Balance
% of HH making regular deposits
Top reason for making regular deposits
Top reason for not making regular deposits

Self Help Groups

Rs. 1,183
73%
Required

Frequency of deposits

45% Monthly
17% Weekly
Rs. 60 Average
Rs. 50 Mode
0%
45%
38% As required

% of HH never made a deposit in this a/c

% of HH who make regular withdrawals
Frequency of withdrawals

4%
2%
5%
3%
63%

Receive Govt payments from govt

schemes apart from Employment
Guarantee Scheme

22%

1%
1%
2%

Bank Accounts (1 year and below)

Rs. 158
5%
39% Insufficient Income
52% Receive Govt. Assistance

table 4 considers the usage of accounts which are

approximately one year old.
Table 4 shows that in comparison to bank accounts,
SHGs are used more consistently for savings. Bank
accounts, on the other hand, are used primarily to receive
government assistance as observed earlier.
Unstructured interviews reveal that respondents believe
bank accounts to be for larger amounts of savings.
Furthermore, belonging to an SHG obligates members to

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For saving money

For safekeeping
For receiving remittances
To request loans
Receive Govt payments from
Employment Guarantee Scheme

Improves social Status

Dont really use the account
Other (specify)

Who helped you open the account?

Average Deposit Amount

4%
82%
0%
2%
6%
1%
2%

52%
47%
30% As and when govt. assistance is deposited
12% As required

save on a weekly/monthly basis, which respondents

mentioned as an important motivation to save. This is, by
no means, an indication that this may not change in the
future. While a majority of the SHG accounts are over a
year old, bank account prevalence has only just spread in
Gulbarga and as such, it is entirely possible that savings
behaviour will increase in these accounts as households
improve their familiarity with their new accounts.
Given that the new accounts are used primarily for

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receiving government assistance and were opened by
Village Panchayats, it would be fair to assume that these
accounts were opened under the NREGP or other
programmes, rather than under the financial inclusion
drive. However, while households understand the
significance of saving to face future economic shocks,
they clearly do not save in their bank accounts. Given the
lack of usage and understanding of a bank account, it is
possible that households that previously opened
accounts under the drive do not remember doing so at
the present time.
It would be tempting to say that this drive has not
achieved its set goals which was to increase access to
formal finance for excluded households. Intuitively, zero
minimum balance accounts that are empty and show low
usage are not beneficial to their account holders and
indeed detract from the limited resources that a bank may
have. On the other hand, accounts which do see some
transactions in the form of deposit and withdrawal of
government assistance may prove to be a useful service
for customers. Banks would also be more willing to
service these accounts. In different districts of India,

July-September, 2007

NREGP assistance is distributed via post offices, the

business correspondence model, amongst other
methods, many of which are subject to corruption, thereby
reducing the total amount disbursed to beneficiaries.
Gulbarga's experience with the drive for financial inclusion
suggests that savings accounts can be an important way
to reach government programme beneficiaries.
Government employment and social security
programmes have the ability to reach the largest number
of BPL households in India. Using this network can prove
to be extremely beneficial in reaching large numbers of
people. NREGP accounts became zero balance accounts
precisely because the timing of the drive for financial
inclusion. As such, extension of NREGP accounts has not
resulted in increased savings in banks. In order to promote
formal savings in previously unbanked households, it is
not enough to provide a bank account. These efforts need
to be supported by financial education campaigns as well.
One other option is the promotion of Business
Correspondents who can act as financial intermediaries
between customers and banks, thus ,making doorstep
banking a reality.

Conclusion
This paper examines the recent financial inclusion drive in Gulbarga district in order to assess to what extent the goals of this
drive have been fulfilled. This paper does not profess to be a rigorous impact evaluation of the drive for financial inclusion.
The data collected, thus far, is a quick and convenient way to assess some of the ways in which access to these new
accounts have affected usage.
We find that while the proliferation of new accounts to excluded households has been quite small, accounts have gone to
households that already had access to savings accounts. 36 per cent of our sample continues to remain excluded from any
form of formal or semi-formal savings mechanism such as a bank account and savings account with SHGs, neighbourhood
groups or MFIs or chit funds and close to 70 per cent of our sample remains without a bank account.
On the other hand, savings accounts which were opened in order to enable account holders to receive government
assistance have tended to be used for deposit by Village Panchayats and for withdrawal by the beneficiaries. This method
of going through bank accounts to deliver assistance to beneficiaries is often less corruptible and thus, leaves the
beneficiary better off. Furthermore, unlike accounts which are simply opened to encourage a savings habit, these
accounts which are earmarked to receive assistance see more transactions and also provide cash reserves to the bank,
thus, making the bank more motivated to service these accounts. Lastly, these accounts allow people to develop
relationships with banks and bank officials, which may at a later date, encourage them to use other banking services as well.
As mentioned earlier, the financial inclusion drive has not changed the savings pattern of the beneficiaries of the new
account. SHGs continue to be the mainstay of those who choose to save formally and semi-formally. A partial explanation
for this may lie in the fact that it will take time for people to become habituated to using a bank account. Perhaps, a bigger
issue is that many of our respondents viewed banking as being for richer individuals and thus, not relevant for them.
Furthermore, our study found that knowledge regarding the financial inclusion drive was quite minimal on the ground,
whereas the level of knowledge about the NREGP was higher. Thus, there is a clear need for greater marketing and
education of the drive itself. Additionally, there is a need for greater education about the need for savings and alternative
ways to save.

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This study indicates that there is one critical area for further research. It would be helpful to get a sense of alternative
channels by which access to formal finance can be improved, for example, through a business correspondent model. Due
to the fact the BC model provides doorstep delivery of banking services, it may encourage non-sophisticated users of these
accounts make greater use of their accounts.
To conclude, the drive for financial inclusion in Gulbarga district did not improve savings behaviour for most of the account
holders. In fact, many of the individuals who qualified for a No Frills Account did not receive one. However, No Frills
Accounts which were coupled with government assistance have provided an important facility for the beneficiaries and
have shown usage. Thus, the drive for financial inclusion when coupled with other policy measures can be beneficial for
disadvantaged communities. On the other hand, the provision of a bank account without an obvious utility can only mean
greater costs for banks and will not translate into greater usage for end users.

VI. Bibliography
Basu, Priya (2005). A Financial System for India's Poor.
Economic and Political Weekly. September 10, 2005. pp.
4008 4012
Basu, Priya (2006). Improving Access to Finance for
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Beck, Thorsten and de la Torre, Augusto (2006). The
Basic Analytics of Access to Financial Services Mimeo
Das, V (2006).
Financial Inclusion Initiatives
Innaugural Address for delivered at the 'National
Conference on Financial Inclusion and Beyond: Issues
and Opportunities for India '. September 19-20, 2006
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Dev, Mahendra S (2006). Financial Inclusion: Issues and
Challenges. Economic and Polical Weekly. October 14,
2006. pp. 4310 4313
Ghate, Prabhu.
Consumer Protection in India
Microfinance: Lessons from Andhra Pradesh and the
Microfinance Bill. Economic and Political Weekly, March
31, 2007
Honohan, Patrick (2004).
Financial Development,
Growth and Poverty: How Close Are the Links? In Charles
Goodhart, ed. Financial Development and Economic
Growth: Explaining the Links. London: Palgrave.

Common Man Financial Inclusion Commemorative

Lecture by Deputy Governor Reserve bank of India at the
Fedbank Hormis Memorial Foundation at Ernakulam on
December 2, 2005
Littlefield, Elizabeth; Helms, Brigit; Porteous, David
(2006). Financial Inclusion 2015: Four Scenarios for the
Future of Microfinance CGAP Focus Note No 39
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Survey (2007). How Indian Earns, Spends and Saves
Mohan, Rakesh (2006). Economic Growth, Financial
Deepening and Financial Inclusion Address by Dr.
Rakesh Mohan at the Annual Bankers' Conference 2006,
at Hyderabad on November 3,2006
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RBI/2005-06/233
R P C D . R F. B C . 5 4 / 0 7 . 3 8 . 0 1 / 2 0 0 5 - 0 6 d a t e d
13.12.2005.http://www.iibf.org.in/financeq/docs/RBI_circ
ular_13.12.2005_Fin_Inclusion.doc Accessed on 8.5.07
Union Budget 2007-08.
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http://www.banknetindia.com/banking/budget79.htm
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Leeladhar, V (2005). Taking Banking Services to the

1
A report on this study by the author was included at the Microfinance India Conference, held 9-10 October 2007 in New Delhi. The author is grateful to Annie
Duflo, Coordinator and Aparna Krishnan, Research Associate at the Centre for Microfinance (CMF) for guidance and Praveen Nimrod, CMF Intern, for
assistance during the duration of this research project. Usual disclaimer applies.
2
Details regarding this study and other projects undertaken at the Centre are available at www.ifmr.ac.in/cmf
3
Details regarding this study and other projects undertaken at the Centre are available at www.ifmr.ac.in/cmf
4
Max New York Life NCAER, India Financial Protection Survey (2007) shows that over 81% of households surveyed save
5
Financial Inclusion
RBI Circular No.
R B I / 2 0 0 5 - 0 6 / 2 3 3 R P C D . R F. B C . 5 4 / 0 7 . 3 8 . 0 1 / 2 0 0 5 - 0 6 d a t e d 1 3 . 1 2 . 2 0 0 5 .
http://www.iibf.org.in/financeq/docs/RBI_circular_13.12.2005_Fin_Inclusion.doc Accessed on 8.5.07
6
The State Level Banking Committee (SLBC) is a committee consisting of representatives from all banks in the state, the state government and RBI which meets
regularly to coordinate banking activities within the state. The lead bank in a state is that bank which has the maximum number of branches and hence, outreach
in that state. The lead bank is also the Convener of the SLBC.
7
The NREGP is a social security scheme through which village panchayats provide one hundred days of employment to at least one member of any household
that desires it. Wages for the NREGP are distributed in different ways depending on the district and state in question. For more information, refer to
http://nrega.nic.in/.

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