CHAPTER I INTRODUCTION

Financial inclusion denotes delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups. The financial services include credit, savings, insurance and payments and remittance facilities. The objective of financial inclusion is to extend the scope of activities of the organized financial system to include within its ambit people with low incomes. Through graduated credit, an attempt is made to lift the poor from below poverty line. Access to finance by the poor and vulnerable groups is a prerequisite for poverty reduction and social cohesion. This has to become an integral part of our efforts to promote inclusive growth. In fact, providing access to finance is a form of empowerment of the vulnerable groups. In 2005-06, the RBI exhorted the banks to make available a basic banking no frills savings account either with nil or very low minimum balances. The State Level Bankers Committees (SLBC) identified districts in each state in order to extend basic financial services by opening no frills accounts to disadvantaged and low income groups. Financial exclusion is a problem that exists throughout the world and it arises as a result of various social and economic factors. Achieving financial inclusion is seen necessary to improve and achieve social inclusion. Various countries around the world have come up with different policies in order to achieve financial inclusion. In India, the Government of India and the Reserve Bank of India (RBI) have taken various steps over the years commencing from nationalization of banks in 1969/1980 to the recent policy no frills savings account scheme to achieve financial inclusion.

In the budget speech of 2005-06, the Finance Minister stated that the financial inclusion provides business opportunities to the financial

institutions at the bottom of the pyramid. Reserve Bank of India, in its Annual Policy Statement for the year 2005-06, urged banks to review their existing practices to align them with the objectives of financial inclusion. In the Mid Term Review of the Policy (2005-06), the RBI exhorted the banks to make available a basic banking no frills savings account either with nil or very low minimum balances as well as charges that would make such accounts accessible to vast section of population and in a transparent manner. The conveners of State Level Bankers Committee (SLBC) were advised by the RBI in April 2006 to identify at least one district in each State/Union Territory for achieving 100 per cent financial inclusion by providing no frills account and issuing general purpose credit card. Pursuant to the Annual Policy Statement for the year 2007-08, the banks have been urged to scale up their financial inclusion efforts by utilizing appropriate technology.
1.1 Definition for Financial Inclusion

The Committee on Financial Inclusion (Chairman: Dr.C.Rangarajan, 2008) has defined Financial inclusion as the process of ensuring access to appropriate financial products and services needed by vulnerable groups such as weaker section and low income groups at an affordable cost in a fair and transparent manner by mainstream Institutional players.
1.2 Demand side factors

While financial inclusion can be substantially enhanced by improving the supply side or the delivery systems, it is also important to note that in many regions, large segments of the population and certain sub-sectors of the economy have a limited demand for financial services. In order to

improve their level of inclusion, demand side efforts need to be augmented by improving human and physical resource endowments, enhancing productivity, mitigating risk and strengthening market linkages.
1.3 Measures of financial exclusion

Financially excluded group constitute a significant share of the population especially amongst the low income groups. Based on the AIDIS 2002 survey, showed that 111.5 million households had no access to formal credit. It also showed that 17 million households were indebted to moneylenders. The recent Arjun Sengupta () Report on financing enterprises in the unorganized sector has pointed out that only 2.4 million out of 58 million units in this sector (with investment of less than Rs 25000) have got credit from commercial banks. The AIDIS 2002 also showed that lower the asset class or income, higher the degree of exclusion. These findings are corroborated by Invest India Incomes and Savings Survey (2007). The survey showed that 32.8 per cent of households had borrowed from institutional sources and 67.2 per cent had borrowed from non institutional sources. The survey also found that 70 per cent of earners in the annual income bracket of more than Rs.400, 000 borrowed from institutional sources as compared with only 27.5 per cent in the case of earners in the income bracket of less than Rs.50,000.
1.4 Reasons for increased indebtedness from non institutional sources

The major reason for the increase in the overall household debt and the increase in the share of households indebted to non-institutional sources between 1991 and 2002 was mainly due to significant increase in current farm expenditure and household expenditure, in rural areas.

The household expenditure includes expenditure incurred on purchase of residential plot; purchase, construction, addition/alteration of

building for residential purposes; purchase of durable households assets, clothes, among others and expenditure on medical treatment, education, marriages, and ceremonies. Thus, the household expenditure includes many items for which households may find it difficult to obtain loans from institutional sources. The IIMS Survey also suggests that a large portion of loan is taken by the households for meeting financial emergency, medical emergency and social obligations. In the case of emergencies, people find it convenient to approach non-institutional sources for their credit needs. Financial emergencies, for instance, include unplanned expenditure on business, consumption and marriage, among others, which may not be financed by banks and other institutional agencies.
1.5 Challenges in achieving Financial Inclusion for inclusive growth

The financial inclusion has to be an urgent national priority in order to achieve inclusive growth. However the major challenges by banks extending in services to the excluded section of society are large costs of covering the huge numbers (cost of enrolment), relative high maintenance costs for such accounts, small ticket size for each transaction, need for communication modes suited to the illiterate and in local language, affordability of the product or service, need for local acceptance and involvement of locally acceptable personnel, need for large scale coverage including over difficult geographic terrain and areas where there is no electric power or normal telecommunication facilities. Further, the recent surveys by AIDIS and IIMS, have indicated that offering financial services to low income households and unorganized enterprises due to absence of collateral security.

1.6 RBI initiatives for Financial Inclusion

The RBI in 2005-06, directed all Commercial Banks and RRBs to open no frills or a basic banking account to all those desirous of opening a bank account. Several other policy measures were also indicated such as simplified KYC, OTS for loans upto Rs 25000, offering a GCC/simplified overdrafts etc. A decentralized approach was advocated through targeting 100% financial inclusion district by district involving the DCC banks and government officials to facilitate enrolment and identification. Another very important policy measure initiated by RBI in January 2006 was to allow banks to adopt the agency model or what is known as the Business facilitator /Business Correspondent model for achieving greater outreach through intermediaries /agents. The results have been extremely impressive. In just two years the number of no frills accounts opened by banks has increased from around half a million accounts in March 2006 to 15 million in 2008. The evaluation by external agencies appointed by RBI has shown that while the first stage of opening no frills accounts has been quite impressive, due to inadequate follow up, cost of transaction and access constraints, in many cases the accounts have not been operated at all by the account holders. In order to improve access and use of these accounts, banks will have to offer the services much closer to the customer either through mobile branches, satellite offices, extension counters or using

intermediaries like SHGs/MFIs or through business correspondents using IT to increase scale, access and reduce cost. The recent studies and surveys have clearly indicated that if the low income borrowers have to be brought into the formal system the financial services offered by banks has to be simple covering all the needs of small borrowers.

1.7 SHGs and Micro Finance Institutions role in Financial Inclusion

The need for informality in credit delivery and easy access is demonstrated by the fact that SHGs and MFIs constitute the fastest growing segment in recent years in reaching out to small borrowers. These institutions are able to effectively address the small ticket and last mile issues. Between 2003 and 2007, small borrower bank accounts (credit) i.e. upto Rs 25000 increased marginally from 36.9 million to 38.6 million, while SHGs borrowing members grew from 10 million to 40.5 million and MFIs borrowers grew from 1.1 million to 8 million. In 200708, MFIs have added 6 million clients increasing their outreach to 14 million. Hence there is a need to include SHGs and MFIs to extend financial services to larger section of poor in the rural areas.
1.8. Role of ICT in Financial Inclusion

To be able to ensure that the challenges of banking the unbanked are met effectively and converted into growing and sustainable business for banks, there is also need to adopt of ICT solutions on a very large scale and range. ICT solutions are required to capture customer details, facilitate unique identification, ensure reliable and uninterrupted connectivity to remote areas and across multiple channels of delivery, offer multiple financial products (banking, insurance, capital market) through same delivery channel while ensuring consumer protection, develop comprehensive and reliable credit information system so essential for efficient credit delivery and credit pricing, develop appropriate products tailored to local needs and segments, provide customer education and counselling, enable use of multimedia and multi-language for dissemination of information and advice.

1.8. ICT for Financial Inclusion RBI initiatives

The very first initiative was emphasizing the use of IT solutions while adopting the agency or BC model for financial inclusion has been undertaken by RBI. The RBI has envisaged a scheme for providing satellite connectivity for remote area branches. The reports of three working groups set up by RBI to consider support to RRBs and UCBs in computerizing their operations and adopt IT solutions for financial inclusion have been placed in public domain for comments. The working groups have recommended that the IDRBT can offer interest free loans to UCBs and RRBs for adoption of IT. The NFS is also offerings nationwide networking of ATMs and can facilitate banking transactions including remittances through ATMs linked to the NFS.
1.9. Financial inclusion models 1.9.1. Business Correspondent Model

Extending outreach on a scale envisaged under National Rural Financial Inclusion Plan would be possible only by leveraging technology to open up channels beyond branch network. By adoption of appropriate technology has enabled the many bank branches to go where the customer is present instead of the other way round. This, however, is in addition to extending traditional mode of banking by targeted branch expansion in identified districts. The Business Facilitator/Business Correspondent (BF/BC) models riding on appropriate technology can deliver this outreach and has formed the core of the strategy for extending financial inclusion.

1.9.2. Bank Self Help Groups Linkage Model

The SHG-Bank Linkage Programme is a major plank of the strategy for delivering financial services to the poor in a sustainable manner. As an innovative credit channel, the Self Help Group approach was introduced in 1992, to link poor people with bank credit. Under this programme, about 40 million rural families have been linked with banks up to March 2007 (NABARD). The distinguishing feature of this approach as compared to other sponsored credit schemes is the learning the management of own money by the poor before availing bank loan. Moreover, the SHG approach does not involve any subsidy; hence, it is sustainable with its own strength. A number of studies have found that SHG approach reduces the transaction cost for banks and loan availing cost of borrowers. In financing SHGs, the requirement of collateral by banks has been replaced by peer group pressure and hence this approach has enabled social and economic inclusion of women by waiving the requirement of collateral. Some important highlights of SHGachievements in India are as under.
y

Upto March 2007, 2.925 millions SHGs & about 40.95 million families have been linked with bank credit.

y y y

Of the total SHGs, women groups are 86 per cent. During 2006-07, 0.686 million SHG linked with banks. During 2006-07 loan amount of Rs 664.3 million disbursed to SHGs.

y y

Average Bank Loan per SHG is Rs 61000. Upto March 2007, Bank loan of Rs 180000 million provided to SHGs.

1.9.3. Micro Finance Institutions- MF NBFC Model

The Micro Finance Institutions have emerged as an important means of financial inclusion. "India Microfinance Equity Fund" of Rs. 100 crore has been created for providing equity to smaller MFIs to help maintain growth and achieve scale and efficiency in operations. To empower women and promote their Self Help Groups (SHGs), Womens SHGs Development Fund with a corpus of Rs. 500 crore has been created.
1.9.4. Post Office Model

The India Post network with over 155,000 branches is twice as large as the outreach of all commercial banks in India put together. Over the years, the Post Office Savings Bank (POSB) has emerged as significant component of India Post operations and its revenues from financial services as a share of its total revenue have steadily increased over time to 45 percent today. Nearly 16 crore people use India Post to save Rs. 3,23,781 crore as on March 31, 2009. Out of this, deposits in savings bank account alone is Rs.16,789 crore.
1.9.5. Micro Insurance model

Micro-insurance model is providing greater economic and psychological security to the poor as it reduces exposure to multiple risks and cushions the impact of a disaster. Micro-insurance in conjunction with micro savings and micro credit could go a long way in keeping this segment away from the poverty trap and would truly be an integral component of financial inclusion.

1.10. Role of Cooperative Credit Institutions in Financial Inclusion

Rural credit cooperatives, in India, have a very long history. The cooperative movement was envisaged as a mechanism for pooling the resources of people with small means and providing them with access to different financial services to the unbanked and excluded sector of the society. In the backdrop of the reform process underway for cooperative banks, they have a very significant role in facilitating greater financial inclusion.
1.11. Self Help Group, Joint Liability Groups and Micro Credit:

Government, through NABARD and Banking Institutions, is encouraging formation of SHG and Joint Liability Groups [JLGs] of farmers. The target of providing KCCs to financially excluded farmers, particularly tenant farmers, oral lessees and farmers belonging to weaker sections can be best achieved by linking this programme with promotion of JLGs/SHGs. Further ministry of Agriculture, GOI, has advised the Banks to cover all eligible farmers under KCC scheme. SLBC has been advised to decide Bank wise targets for number of farmers/accounts to be covered during 2011-12.

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Table1.1. Number of Kisan Credit Cards Issued: Agency-wise and Year-wise Number of Kisan Credit Cards Issued: Cooperative Banks Regional Rural Banks Number of Amount Number of Amount Cards Cards 35,94,869 3,606 1,73,301 405 56,14,445 9,412 6,48,324 1,400 54,35,859 15,952 8,33,629 2,382 45,78,923 15,841 9,63,950 2,955 48,78,236 9,855 12,74,289 2,599 35,55,783 15,597 17,29,027 3,833 25,98,226 20,339 12,49,474 8,483 22,97,640 13,141 14,05,874 7,373 20,91,329 19,991 17,72,498 8,743 13,43,845 8,428 14,14,647 5,648 17,43,253 7,606 19,49,785 10,132 37,887,761 1,40,594 13,421,219 53,964 40.4 32.9 14.4 12.6 Agency-wise and Year-wise Commercial Banks Total

Year

2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010

Total Percentage share in Tota Source : NABARD

Number of Amount Number of Amount Cards Cards 13,65,911 3,537 51,34,081 7,548 23,89,588 5,615 86,52,357 16,427 30,71,046 7,524 93,40,534 25,858 26,99,883 7,481 82,42,756 26,277 30,94,108 9,331 92,46,633 21,785 43,95,564 14,756 96,80,374 34,186 41,64,551 18,779 80,12,251 47,601 48,07,964 26,215 85,11,478 46,729 46,05,775 59,530 84,69,602 88,264 58,33,981 39,009 85,92,473 53,085 53,13,085 39,940 90,06,123 57,678 42,363,847 2,33,190 93,672,827 4,27,748 45.3 54.5 100 100

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1.12. Achievements of RBI in Financial inclusion

a) Number of No-Frill Accounts 28.23 million (as on Dec.31, 2008) b) Number of rural bank branches 31,727 constituting 39.7% of total bank branches (as on June. 31, 2009) c) Number of ATMs 44,857 (as on May 31, 2009) d) Number of POS 4,70,237 (as on May 31, 2009) e) Number of Cards 167.09 million (as on May 31, 2009) f) Number of Kisan Credit Cards 76 million (Source: CMIE publication 2007-08) g) Number of Mobile phones403 million (as on Apr.30, 2009) Out of which 187 million (46%) do not have a bank account (Source: Cellular Operators Association of India)
1.13. Statement of the problem

Financial exclusion is excluding people without of affordable credit, savings, insurance assets and money and bank advices. The financial excluded section largely comprises marginal framers, landless labourers, self employed and unorganized sector enterprises, urban slum dwellers, migrants, ethnic minorities and socially excluded groups, senior sector and women. To achieve greater financial inclusion, financial services should reach the poor of socially excluded groups particularly poor and under privileged people. Micro finance banks and other financial institution have played a vital role in filling up this gap. This study helps us to know the socio economic profile of the respondents, financial inclusion position, awareness level towards no frills account and saving and credit behavior of the poor and under privileged people.
1.14. Importance of the study

In this backdrop an attempt has been made to analyze socio-economic profile and financial level of farmers and the poor viz., in terms of financial status. The overall results that emerge from the study would enable us to

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examine to what extent financial inclusion through no frills accounts has created impact on the large section of the poor in rural areas.
1.15. Objectives of study

1. To analyze the socio-economic profile of no-frills bank account holders. 2. To analyze the awareness level of the respondents towards various financial products. 3. To study the constraints faced by the respondents in operating no-frills bank account. 4. To document the perceptions of account holders about no-frills account.
1.16. Hypothesis of the study

2. Majority of the no-frills bank account holders are very poor. 3. The awareness level of the respondents towards various financial products offered by the financial institutions is very poor. 3. Majority of the no-frills bank account holders have positive opinion about the scheme.
1.17. Limitations of the study

The study is based on the primary data collected from sample rural households by personal interview. Poverty and poor educational level of respondents posed difficulties in getting accurate information. The Study relied heavily on respondents memory to gather information pertaining to certain variables under study. Hence it would be difficult to draw precise generalizations regarding the implications of the study. The findings in this study, interpretations and conclusions drawn could be best seen with in these limitations.