Professional Documents
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Research Paper On Financial Inclusion
Research Paper On Financial Inclusion
CONTENTS
1.
2.
3.
4.
5.
6.
7.
8.
Acknowledgement
Executive summary
Introduction
Objectives
Financial exclusion
The need for financial inclusion
The benefits of financial inclusion
The tools of financial inclusion and the methods
to achieve them.
9. Cross country experience
10. Indian scenario
11. The extent of financial inclusion in India
12. Survey : financial inclusion then and now
13. The significance of financial inclusion in the
current financial crisis
14.Bibliography
Page no
2
3
5
7
8
12
13
14
17
20
22
30
33
35
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ACKNOWLEDGEMENT
Goal achievement is very difficult for any person, but there are motivations,
which make this task very easier. It is our humble duty to acknowledge all of them,
which made our task easier during my project.
Before proceeding further, we would like to express our thanks to all those who have
helped us in one way or any other way for successful completion of this project.
We would like to thank Globsyn Business School, Ahemadabad for having provided
us with a great opportunity to work and learn.
We are deeply indebted to and express our sincere appreciation & gratitude to Prof.
Kalika Bansal for providing her valuable guidance & encouragement throughout
the project for keeping our morale up & making it possible to complete and submit
this project on time.
We are really thankful to the people of the village named Sukhjora,a village in
Jharkhand from where we have conducted our survey. Due to their support &
valuable thoughts, we have successfully completed our survey.
Most of all, we thank to our colleagues for their help& coordination without which
the work could never have been completed. They made us realize the importance of
teamwork. We are grateful to all of them for standing with us & supporting us in this
project.
Last but not the least we thank almighty God & our parents for everything.
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EXECUTIVE SUMMARY
Financial services actively contribute to the humane & economic
development of the society. These lead to social safety net & protect the people
from economic shocks. Hence, each & every individual should be provided with
affordable institutional financial products/services popularly called Financial
Inclusion.
Despite witnessing substantial progress in financial sector reforms in India, it is
disheartening to note that nearly half of the rural households even today do not have
any access to any source of funds- institutional or otherwise. Hardly one-fourth of
the rural households are assisted by banks. Hence the major task before banks is to
bring most of those excluded, i.e. 75% of the rural households, under banking fold.
There is a need for the formal financial system to look at increasing financial
literacy and financial counseling to focus on financial inclusion and distress
amongst farmers. Indian banks and financial market players should actively look at
promoting such programs as a part of their corporate social responsibility. Banks
should conduct full day programs for their clientele including farmers for
counseling small borrowers for making aware on the implications of the loan, how
interest is calculated, and so on, so that they are totally aware of its features. There
is a clearly a lot requires to be done in this area.
This enables the customer to remit funds at low cost. The government can utilize
such bank accounts for social security services like health and calamity insurance
under various schemes for disadvantaged. From the banks point of view, having
such social security cover makes the financing of such persons less risky. Reduced
risk means more flow of funds at better rates.
Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities (municipality,
water, electricity, telephone) can be more easily paid by using cheques or through
internet banking, rather than standing in the queue in the offices of the service.
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INTRODUCTION
Affordable credit
Savings bank account
Payments & Remittance
Financial advice
Credit/debit cards
Insurance facility
Empowering SHGs(self help groups)
fundamental changes over the last two decades. In fact, in order to address the issues of
financial inclusion, the Government of India constituted a Committee on Financial
Inclusion under the Chairmanship of Dr. C. Rangarajan. Not only in India, but
financial inclusion has become an issue of worldwide concern, relevant equally in
economies of the underdeveloped, developing and developed nations. Building an
inclusive financial sector has gained growing global recognition bringing to the fore
the need for development strategies that touch all lives instead of a select few.
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OBJECTIVES
How financial inclusion is the need of the hour for the sustainability and
maintenance of the growth process.
The victims of the financial exclusion and how they are the victims of this financial
exclusion.
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FINANCIAL EXCLUSION
he concept of financial inclusion and its implementation has come a long way
since the last two decades and the results are also quite fair. There has been
much technological advances that has transformed the banking industry from
traditional brick and-mortar infrastructure like staffed branches to a system
supplemented by other channels like automated teller machines, debit and credit
cards, internet banking, online money transfer etc. The moot point, however, is that
access to such technology and services are restricted to only certain segments of the
society. There is a growing divide, with an increased range of personal finance
options for a segment of high and upper middle income population and a significantly
large section of the population who lack access to even the most basic banking
services. This is termed as Financial exclusion.
Financial exclusion can be geographical exclusion, exclusion on the grounds of
charges, exclusion due to ignorance & also self exclusion. One of the oldest
definitions by Leyshon and Thrift (1995) define financial exclusion as referring to
those processes that serve to prevent certain social groups and individuals from
gaining access to the financial system. According to Sinclair (2001), financial
exclusion means the inability to access necessary financial services in an appropriate
form. Exclusion can come about as a result of problems with access, conditions,
prices, marketing or self-exclusion in response to negative experiences or
perceptions. Carbo et al. (2005) have defined financial exclusion as broadly the
inability (however occasioned) of some societal groups to access the financial
system.
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NO SAVINGS
NO BANK
ACCOUNT
NO ASSETS
FINANCIAL EXCLUSION
NO INSURANCE
NO ACCESS TO
MONEY ADVICE
NO AFFORDABLE CREDIT
Marginal farmers
Landless labourers
Self employed and unorganized sector enterprises
Urban slum dwellers
Migrants
Ethnic minorities and socially excluded groups
Senior citizens and women, etc.
Large pockets of population in North East, Eastern, and central regions
of India.
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BENEFITS OF FINANCIAL
INCLUSION.
Financial inclusion has many benefits. Following are some of the benefits
summed up.
It paves the way for establishment of an account relationship which helps the
poor to avail a variety of savings products and loan products for housing ,
consumption, etc.
An inclusive financial system facilitates efficient allocation of productive
resources and thus can potentially reduce the cost of capital.
This also enables the customer to remit funds at low cost. The government can
utilize such bank accounts for social security services like health and calamity
insurance under various schemes for disadvantaged. From the banks point of
view, having such social security cover makes the financing of such persons
less risky. Reduced risk means more flow of funds at better rates.
Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities
(municipality, water, electricity, telephone) can be more easily paid by using
cheques or through internet banking, rather than standing in the queue in the
offices of the service.
Transfer of money can be done more safely and easily by using the cheque,
demand draft or through internet banking.
A bank account also provides a passport to a range of other financial products
and services such as short term credit facilities, overdraft facilities and credit
card. Further, a number of other financial products, such as insurance and
pension products, necessarily require the access to a bank account.
Lastly, the Employment Guarantee Scheme of the Government which is being
rolled out in200 districts in the country would bring in large number of people
through their savings accounts into the banking system.
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Product design
The requirements of people without financial products are not unrealistic. For dayto-day money management they require a simple account which would allow them
to retain tight control over their money. It should offer basic money transfer
facilities, including a facility for spreading the cost of bills.
Products offering longer-term financial security should be simple and transparent so
that users 'know where they are' and the costs associated with regulation compliance
are low. They should be based on regular and automatic saving; flexible, so that
products can be retained even during times of hardship; and give restricted access to
the money saved. To reduce the likelihood of people cashing in long-term savings
plans because of short-term needs for cash, long-term savings products could be
used as collateral for small loans.
The key issue for home contents insurance is affordability and, in particular, options
for spreading the cost of premiums across the year. Wider availability of simpler,
cheaper products such as indemnity insurance (second-hand replacement value
rather than new-for-old), or catastrophe-only policies could also widen access.
Moreover short-term credit facilities should also be offered: small, one-off, fixedterm loans rather than ongoing credit commitments such as credit cards or
overdrafts; fixed, automatic repayments; and the use of technology in the
distribution of loans and collection of repayments, which could reduce costs and
therefore allow lower interest rates than are currently available from moneylenders.
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Delivery systems
People on the margins of financial services want to deal with organizations which
are financially secure, trustworthy and understand their needs. It is not, however,
necessary for the same organization to both provide the product and deliver it to the
customer. Indeed, experience shows that the use of intermediaries offers many
advantages. For example, many local authorities run insure with rent schemes for
tenants wanting home contents policies, which they are able to offer at a substantial
saving on similar policies bought direct or through a broker. The Post Office is also
exploring a similar role as financial service intermediary, as are a small number of
credit unions and housing associations. New technology offers some opportunities
for product delivery at the end of the market. Electronic cards and electronic money
transmissions are likely to be the most acceptable.
Encouraging take-up
Knowledge of and about financial products is remarkably low among households
that are without them. This is compounded by marketing policies which reinforce
the belief that financial services are 'not for the poor'. Measures to encourage take-up
must, therefore, tackle the widespread mistrust which such households have of many
financial providers, particularly those which are geographically remote. Use of
trusted intermediaries could overcome these barriers. Targeted marketing and
delivery of new products as they become available would also increase take-up.
Equally, the language and cultural barriers faced by some potential users need to be
taken into account.
There is also a need for an independent information and advice service. Lack of
knowledge and experience of financial products renders some households especially
vulnerable to mis-selling, as well as deterring them from taking up financial
services.
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t has been estimated by Consultative Group to Assist the Poor (CGAP) that about
2.5 to 3billion people around the world are still excluded from basic financial
services. The situation is particularly dire in the Least Developed countries. In most
of the developing countries like India & China the extent of exclusion is in the range
of 25%-65%. So, taking into cognizance the importance of financial inclusion, the
international community has taken a number of measures to mitigate the hiatus
between the financially excluded & non- excluded. The following analysis describes
the extent & measures taken by different countries to mitigate financial exclusion.
USA
In USA 10%-15% of total households & 22% of the low income households go
without bank accounts. Community Reinvestment act & Home Mortgage Disclosure
act binds the banks there to provide banking services to all the needy. Some states
like New York made it mandatory for the banks to provide accounts to all citizens.
U.K.
Nearly 12 percent of Englands households are unbanked. Free face to face money
advice to targeted groups in the areas of high exclusion is in vogue. The govt has set
up a Financial Inclusion fund of 120 mn pounds to support initiatives to tackle
financial exclusion. . An enhanced legislative environment for credit unions has
been established, accompanied by tighter regulations to ensure greater protection for
investors. A Post Office Card Account (POCA) has been created for those who are
unable or unwilling to access a basic bank account. The concept of a Savings
Gateway has been piloted. This offers those on low-income employments 1 from
the state for every 1 they invest, up to a maximum of 25 per month. In addition
the Community Finance Learning Initiatives (CFLIs) were also introduced with a
view to promoting basic financial literacy among housing association tenants.
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Australia
Only 3% of adults lacked bank account in Australia till 2002-03. This has been the
result of continuous joint efforts by government & the banks in educating the people
about the benefits of financial products.
France
In 1984 the bank of France through Banking Act made access to bank accounts a
legal right in France. In 1992 the banking industry in France signed a charter to
provide bank account to all.
Bangladesh.
Grameen bank of Bangladesh under the stalwartship of Md. Yunus has
revolutionized the movement of financial inclusion. It targeted low income people
especially the women (97% of total borrowers) who were denied credit by other
com. Banks. It has successfully posted a recovery rate of 98.85%. It has also recently
included the beggars within its credit network under a special program i.e.
Struggling Members programmed. Approximately 81000 beggars have already been
benefited by the programme.
South Africa.
More than half of the population here are below poverty line. Only 4% of total
populace has bank accounts & 1% only avail credit from formal sources. To deal
with the situation Dakar Conference ha been organized under the banner of U.N. In
2004, UNDP & UNCDF jointly lunched a program called Building Financial
Security in Africa.
IMF, U.N. & World Bank have extended very good support for building an inclusive
society in the world. U.N. has framed Blue Book in consultation with the
developed & underdeveloped countries as a tool & guide for policy makers who
seek to build inclusive financial growth.
In the first-ever Index of Financial Inclusion (IFI) prepared by a New Delhi-based
organization, ICRIER (Indian Council for Research on International Economic
Relations), to find out the extent of the reach of banking services in 100 countries
worldwide pointed out that Spain has occupied the top position in IFI, which is
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based on data from 2004, followed by Canada and Portugal, while countries
including Nepal, Zimbabwe and Botswana are at the bottom of the list. Among the
important countries, Germany has been placed at 4th position, the UK 17th, USA
21st and Japan 22nd. India has been ranked poorly at 50th position, much above
Russia but below China, even below African countries such as Kenya and Morocco.
Similarly, the report pointed out that domestic deposit as percentage of GDP was
54.9 per cent in India, against 123.9 per cent in Malaysia
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INDIAN SCENARIO
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The micro finance and self help groups are also playing great role in proving
financial services to a large mass of people in the rural and semi urban areas.
Looking at the profitability side of providing newer financial products the private
sector organization is also entering into the market. Reliance Capital, the financial
services arm of Anil Dhirubhai Ambani Group, has funded two microfinance
institutions in Gujarat - MAS Financial Services and Vardan Trust. The Soros
Economic Development Fund (SEDF), Omidyar Network, and Google.org hosts a
Small to Medium Enterprise Investment Company with an initial corpus of $17
million targeted at Missing Middle between microfinance and commercial capital
markets in India. Hyderabad-based SKS Microfinance has attracted investors like
Vinod Khosla, Sequoia Capital India, SIDBI and Units, among others .
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he extent of financial inclusion in India can be well studied from the analysis of
the following points.
Population
(current+saving)
(in 000)
No. of Accounts
per
100 population
(in 000)
2001
2005
2001
2005
2001
2005
50944
58777
132679
141599
38
42
N.Eastern 7536
7729
34495
411083
20
19
Eastern
47838
51888
227617
242920
21
21
Central
63498
69424
255714
272906
25
25
Western
48120
55178
149073
159095
32
35
Southern
79531
94725
223437
238459
36
40
All India
1096063
29
31
Northern
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SOUTHE
RN, 36
NORTHE
RN, 38
N.Easter
n, 19
Southern
, 40
Eastern,
21
N.EASTE
RN, 20
WESTER
N, 32
CENTRA
L, 25
Central,
25
Western,
35
EASTER
N, 21
2001
2005
It can be seen from the table that in All-India level there was only 29 account
holders per 100 in 2001 which inched up to 31 in 2005.
Northern region has highest no. of accounts i.e. 42 per 100 population in 2005.
North Eastern region recorded lowest figure of only 19 42 per 100 in 2005 which is
paradoxically lower than 20 in 2001.
Table2
Number of Savings Accounts to Adult Population-2005
Region
Northern
N.Eastern
Eastern
Central
Western
Southern
80
37
34
52
60
66
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80
80
70
66
60
52
60
50
37
34
40
30
20
10
0
Northern
N.Eastern
Eastern
Central
Western
Southern
Southern
20%
Northern
24%
N.Eastern
11%
Western
18%
Central
16%
Eastern
11%
words 41 per cent of the population is unbanked. In rural areas the coverage is 39per
cent against 60 per cent in urban areas. The unbanked population is higher in the
North Eastern and Eastern regions.
Table 3 - Number of Loan Accounts to Adult Population 2005
Region
Northern
N.Eastern
Eastern
Central
Western
Southern
India
25
25
20
15
13
12
7
10
5
0
Northern
N.Eastern
Eastern
Central
Western
Southern
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Southern
34%
Northern
16%
N.Eastern
9%
Eastern
11%
Western
18%
Central
12%
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SBI
Associates
Of SBI
Nationalized
Other PSUs
PSBs
Pvt. Sector
Foreign Banks
RRBs
196
11922
(82%)
2134
(15%)
396
(3%)
20
(0%)
14472
(100%)
11922
(82%)
Scheduled
Co m. Banks
284
32087
(48%)
15142
(23%)
11063
(16%)
9001
(13%)
67293
(100%)
32091
(47%)
4
(20%)
9
(45%)
7
(35%)
Nil
20
(100%)
4
(17%)
288
32091
(48%)
15151
(23%)
11070
(16%)
9001
(13%)
67313
(100%)
32095
(47%)
Non-scheduled
Banks
Total
2158
(15%
)
1538
7
(23%
)
9
(39%
)
1539
6
(23%
)
Metr
o
Total
1023
(11
%)
744
(16)
9036
(100%
)
4625
(100%
)
5812 33625
(17
(100%
%)
)
60
159
(38
(100%
%)
)
7639 47445
(16
(100%
%)
)
6121
(100%
)
249
(100%
)
401
14501
(3%)
(100%
)
11494 9344 68316
(17%) (14
(100%
%)
)
10
(44%)
1479
(24
%)
206
(83
%)
20
(0%)
Nil
23
(100%
)
11504 9344 68339
(17%) (14
(100%
%)
)
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2.
National Sample Survey Organisation (NSSO),, Informal Sector in India, Salient Features, NSSO, Ministry of Statistics and Programme
Implementation, Government of India, New Delhi,.
3.
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ANS TO Q 1
1.
2.
3.
4.
5.
PERCENTAGE OF PEOPLE
At home.
In the post-office
Saved in provident fund
Invested in land and gold
Lend money to others at high interest
ANS TO Q 2
1.
2.
3.
4.
36%
20%
12%
64%
21%
PERCENTAGE OF PEOPLE
35%
27%
40%
38%
From the above answers to Q1&2 it is clear that the concept of financial
inclusion was very low in those days. People did not have access to banks .The only
profitable investment people thought in those days were of investing in land and
gold and the only official method of saving in the area was the village post-office.
In the case of taking credit and managing finance in times of emergency we see the
people had to take pains. Mortgage loans from zamindars were common phenomena.
Unlawful money lenders also had a good time. People expressed their sorrows and
woes which they had to face particularly during their daughters marriage and in
times of sickness.
Thus financial inclusion services were still a dream in those days.
1.
2.
3.
4.
5.
6.
7.
ANS TO Q 3
Post offices
At homes
In co-operative banks and local banks
In private sector banks
In equity shares
In gold and land
In kishan bikas patra &alike
PERCENTAGE OF PEOPLE
16%
12%
70%
11%
2%
24%
18%
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ANS TO Q 4
1.
2.
3.
4.
5.
6.
1.
2.
3.
4.
PERCENTAGE OF PEOPLE
63%
22%
12%
10%
21%
37%
ANS TO Q 5
PERCENTAGE OF PEOPLE
Good
Average
Below average
Needs a lot of improvement
36%
42%
14%
8%
From the answers of Q3&4 it is clear that financial inclusion services are in
services now. We see people have bank accounts now. Though the spread of the
public sector banks are more but the spread of private sector banks are also
happening. On surveying the area , it is found that what was a nil bank area has now
five banks and in each of the banks the no. of customers have exceeded their limits.
In case of credit taking banks have become the priority.
But the rating of financial services by the people are still average. One of the prime
causes of this reason is that people have become educated about the financial
services in the urban areas. Thus, they feel that less development has taken place in
their area.
(For question no. 1,2,3&4 the total of the percentage of people giving the answers
is not 100 because more than one option of answer has been given as a response )
32 | P a g e
he current tsunami in the financial sector triggered by the subprime crisis has
had a telling impact on the global economy from which it will take some time to
recover. The role of the banking sector will be vital for India if it were to stay as one
of the fastest growing economies. The multilayered Indian banking system
compromising 82 scheduled commercial banks (SCBs) , 92 regional rural banks
(RRBs), four local area banks (LABs), 1813 urban cooperative banks (UCBs) and
109497 rural co-operative credit institutions has the ability to convert what was
largely perceived as a social responsibility into a viable growth : providing access to
finance to all , irrespective of geography , income or education.
According to a study Banking in 2050 shows that the structure of global ranking
will undergo a complete realignment with the E7 (Brazil, Russia India, China,
Indonesia, Mexico and Turkey ) driving growth.
Over the next 25 years, banking sectors will grow much faster than the GDP
of these countries.
Total domestic product in the E7 will exceed those of G7 countries in the next
40 years.
India is likely to emerge as the third-largest domestic banking market by
2040, and could even grow faster than China.
In India, government-owned banks channel about 70 per cent of the net savings of
the economy into government- and state-owned enterprises, and finance a huge
budget deficit of about 9 per cent of GDP. Reducing the governments dependence
on these funds would require a change in the way the banking sector thinks and
looks at itself, moving towards participating more formally in financial inclusion.
Currently, local banks have a long way to go in bringing the unbanked areas within
the banking fold. As competitive intensity hots up and ripples from international
competition touch the Indian shores in search of virgin markets, banks will have to
revisit their cost models. Some estimates indicate that the lack of financial inclusion
from the banking system reduces potential GDP by nearly 1.5 per cent.
As per the Planning Commissions India Vision 2020 document, the growth of
banking is likely to be more qualitative than quantitative. While reliance on
borrowed funds has increased for many of the global banks, the pace of deposit
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growth among local banks over the last couple of years has been encouraging. But it
needs to be sustained with constant monitoring of quality of the deposit base.
The present trend shows a strong shift among younger consumers from traditional
branch-banking to alternate channels. Electronic delivery channels, such as the
internet, ATMs and phones, have emerged as effective channels for distribution of
products and services. Branches though will continue to be used more for crossselling products and managing client relationship. The business challenge would be
to ensure continuous compliance with cyber laws and other regulatory directives.
Thus, it can be summed up that financial inclusion is one of the
viable routes through which banks can maintain their development and also survive
the current financial crisis. But in order to do that there should be extensive efforts
both from the governments side as well as the banks themselves. According to the
Boston Consulting Groups 2007 report, The Next Billion Banking Customers the
most effective marketing campaigns will have to include equal parts of education
and sales pitch. To include their next customers, bank will have to access them, and
be accessible.
(The entire information on this particular section has been extracted from
Businessworld Issue 18-24 Nov 2008)
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www.nssoresults .co in
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www.egovonline.net
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