Individual Assignment: Essay 1

Status and prospects of financial inclusion in India

A report submitted to

Prof. Sanjiv Phansalkar

Prof. Nirmalya Choudhury

In partial fulfillment of the requirements of the course

Indian Social and Political Environment

By

Anurag Bajpai

166018

Section B

On

14-03-17
Table of Contents

INTRODUCTION ...................................................................................................................................... 2
SIGNIFICANCE OF FINANCIAL INCLUSION .............................................................................................. 2
FINANCIAL INCLUSION: BACKGROUND ................................................................................................. 2
FACTORS HINDERING THE FINANCIAL INCLUSION ............................................................................ 3
GOVERNMENT AND RBI INITIATIVES ..................................................................................................... 4
FINANCIAL INCLUSION: CURRENT STATUS ............................................................................................ 5
FUTURE PROSPECTS ............................................................................................................................... 6
REFERENCES ............................................................................................................................................ 8

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INTRODUCTION
The test of our progress is not whether we add more to the abundance of those who have much; it
is whether we provide enough for those who have too little. - Franklin D. Roosevelt
(1, n.d.)

As mentioned by the Franklin D. Roosevelt, GDP growth rate is not the sole parameter of the
economic development of a nation but if these growth figures include the deprived people of
the nation is important. So, the banking system which can facilitate the mobilization of the
financial resources is required for the overall economic development. The process of
becoming a prosperous nation is to sustain the high growth rate in the long term and such
growth demands the participation from all the sections of the society. In developing
countries, the lack of access to banking and other financial services to a large section of the
society has caused the social and financial exclusion. This exclusion causes a financial disrupt
and hence decline in financial investment which impedes the economic growth. A significant
proportion of the Indian villages doesnt even have a single bank. Considering nearly 70% of
our population that lives in the villages, a large chunk of the population is under the financial
exclusion. RBI has also reported that this financial exclusion leads to the loss of one percent
in the national GDP growth. Hence, in recent years the financial inclusion has become the
priority issue for the government to achieve high sustainable growth. As per some economist
financial development is a stimulant for the overall growth of the economy. Hence most of
the developing countries are including financial growth as a goal in the financial policy.
Similarly under Pradhan Mantri Jan Dhan Yojana (PMJDY), India has set the target of 100%
financial inclusion and seeking to cover each household of the country under financial
inclusion by 2018.

SIGNIFICANCE OF FINANCIAL INCLUSION

Despite providing banking facilities, financial inclusion provides a medium for directly
crediting the social benefits and subsidies provided by the government to the beneficiary
account. Under such bank accounts, banks provide a SATHI or BCs in the beneficiarys village
who helped beneficiary to draw money from their accounts and also to use other banking
service like taking loans at lower rates. So, the initiative helps farmers and other local traders
to obtain loans from banks or other financial institution. Such initiatives prevent them from
the exploitation of the money lenders and hence protect them from the vulnerabilities like
suicide. Currently to achieve the inclusion Government and RBI forces banks to take up
aforementioned tasks with sincerity. These initiatives are important to protect the citizens
from the ongoing financial practices like private loans to farmers at a higher rate and hence
protect them from being overburden by the financial duties. So, the final objective of the
ongoing revolution of financial inclusion is to empower Indian citizen, despite any
discrimination like rural-urban, by enhancing their financial capabilities and hence help them
to achieve their dreams.

FINANCIAL INCLUSION: BACKGROUND

The overall development in all the sections of the society will help the country to achieve
economic, transaction and social security. Thats why financial inclusion has become one of
the major parameters among various government policies. Financial inclusion is not the new
concept in Indian history, the concept first came into the light in 2005-06 when RBI introduced

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the concept of Business correspondents (BCs). In 2011, the government took one step
forward and launched the Swabhiman campaign under which 74,000 villages had provided
with the banking facilities. Although Indian economy has been growing at more than 6% since
last decade which is an impressive figure, the benefits are yet to reach to all sections of the
society. As per fig. 1 in 2011, around 40% of the Indian population didnt even have availability
of banking services. Hence, it has become important to facilitate the schemes that would help
the country to reduce the financial and social inequality.

Fig 1: Availability of banking services (PMJDY, n.d.)

FACTORS HINDERING THE FINANCIAL INCLUSION

Some of the major factors that are hindering the reach of financial inclusion to its full
potential are

Lack of identity and address proof

Unavailability of banks in the proximity
Lack of basic education and hence lack of banking/financial knowledge
Low income in collaboration with the psychological barrier like banks are for rich
people
The remuneration provided to the BCs and BFs was very poor
Technology deficient as the BCs operated off-line which constraint their usability and
also restrict a customer with a particular BCs i.e. single source of information instead
of the capability of that particular BCs
Since villages with more than 2000 population have been provided with the banking
facilities, entire geography hasnt been covered
Despite the tremendous of the overall Indian economy, financial and social inequality still
persist in the system. Hence in 2014, government announced PMJDY which targets to
provide banking services to atleast new 7.5 crore citizens. Aside from government policies
RBI has also initiated various measures regarding the financial inclusion such as opening of
non-frills accounts, relaxation on KYC norms, engaging business facilitators (BFs) and
business correspondents (BCs), general purpose credit cards (GCC), simplified branch

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authorization opening of branches in unbanked rural centres, Aadhar enabled bank
accounts etc.

GOVERNMENT AND RBI INITIATIVES

The government has making the efforts towards the financial inclusion since 2005 by means
of different schemes, policies, and supervision. But the major breakthrough comes in 2014
with the launch of Pradhan Mantri Jan Dhan Yojana (PMJDY).
PRADHAN MANTRI JAN DHAN YOJANA
In 2014, Honourable PM Narendra Modi announced Pradhan Mantri Jan Dhan Yojana (PMJDY)
scheme (PMJDY). Till Dec2015 under this scheme more than 194 million account has been
opened. As per the scheme, government has put the responsibility of financial inclusion on
the shoulder of state banks as these banks account for 70% of the banking sectors assets.
These banks have fulfilled their responsibilities since 78% of the aforementioned accounts
has been opened through these banks. The scheme has been associated with another
initiative to provide Aadhar card, a unique biometric card, to each citizen of India. Since many
rural citizens didnt have the identification card required under the KYC, Aadhar card will help
such people to comply with the banks requirements. The government is promoting the
scheme through a number of initiatives to encourage the demand of the bank accounts. The
most important initiative is that these accounts will be used for every cash transfers, like
government subsidies, between government and citizens. Aside from the financial inclusion,
it will also benefit the state from the lower administration cost and prevention of corruption
on different hierarchy level. Under this scheme, the government is also providing the
subsidized life insurance, pension plans, and other accidental coverage plans. The financial
inclusion measures covered under the scheme are helping certain sections of the society that
has been excluded from the mainstream since a long time such as farmers, BPL household
and day laborer.
Swabhimaan- the Financial Inclusion
In Feb2011, government launched Swabhimaan as a financial inclusion scheme under
which banking service had been ensured to unbanked villages having more than 2000
population, as per 2001 census. The scheme had covered around 74,000 habitations and
engaged 62,000 BCs. Around 3 crore accounts have been opened under the Swabhimaan
campaign within one year. Considering the success of the campaign, it has been extended
further to 45,000 habitations of north-eastern and hilly terrain area with population more
than 1000 and also to other habitations having the population between 1600 and 2000.
Aside from government policies, RBI has also initiated various measures regarding the
financial inclusion.

No-frill accounts: No-frills accounts are providing the facilities to open accounts with
zero or minimum balance and also the charges on the services are very low. It makes
bank accounts accessible to the major section of the society.
Engaging business correspondents (BCs): The Reserve bank has permitted state
banks to engage business correspondents (BCs) business facilitators (BFs) as
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 intermediaries while providing the banking services. Under BC model, banks are
allowed for providing doorstep delivery of services, like cash in-cash out transactions
and hence resolving the last-mile problem.
Simplification of KYC norms: As per RBI guidelines, customer should provide identity
and address proof to open a regular bank account. But most of the rural Indian
citizen dont have the required documents to open the bank account as per KYC
norms. So for customer whose balance wont exceed Rs. 50,000, the account
opening norms and guidelines has been simplified. Also, the Aadhar card facilities
has also been initiated to help such citizens since Aadhar card will work both as
identity and address proof.
Financial Literacy and credit counseling centers (FLCCs): RBI has also initiated the
financial literacy programs to provide financial education to aware people about the
basic financial services provided by bank and government. Under this objective, RBI
has been providing support to FLCCs whose objective to provide financial/banking
education.
New branches in unbanked rural locations: As per new norms, banks have been
mandated to allocate at least 25% of the total number of branches to be opened
during a particular year to the unbanked rural centers.

FINANCIAL INCLUSION: CURRENT STATUS

PMJDY is seeking to achieve 100% financial inclusion by the end of second phase, Aug18, of
the scheme. After the success of the Swabhimaan campaign, PMJDY has targeted the villages
and sections which are still excluded. Till now, the scheme is successful in achieving the target
and as per ICE 360 99% of Indian households have atleast one family member with the bank
account. But out of 27 crores account, around 24% are zero balance accounts (fig 2). As per
RBI nearly 30% of accounts opened under the scheme zero-balance accounts are dormant
means they have minimum transactional activity. It has been observed that in 20% of the
households with the banking facilities doesnt use the banking services to save. In many rural
households, the breadwinner doesnt have accounts on his name, so they may not want to
save their earnings in others accounts. Since a large proportion of the rural population are
illiterate, lack of education has also become a reason of inefficient use of the banking services.
Also, the facilities of BCs or BFs havent make an impact since most of these BCs are not
trained and are also underpaid. Banks dont reimburse transportation cost or any other
operational cost incurred by these BCs. Hence, the efficiency of the BCs program is also very
low. Under the PMJDY crores of accounts has been opened within 2 years but still 42%
household in the rural areas still dont use banking services to save their earnings while in
case of metros city the percentage comes down to 5%. Hence in current scenario, number of
bank accounts is not the issue instead the actual issue is the usage of these accounts. Another
issue came forward through the surveys is the accounts duplication. Duplication means such
account holders who already have a bank account. As per the surveys, under PMJDY 33% of
the accounts are come under the duplication means these people havent widened the
percentage of the financial inclusion. These duplication is accounted for the target fulfilment
approach followed by the banks.

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 Pradhan Mantri Jan - Dhan Yojana
(Accounts Opened as on 01.03.2017)
(All Figures in Crores)
NO OF % OF ZERO-
AADHAAR BALANCE IN
Bank Name RURAL URBAN TOTAL RUPAY BALANCE-
SEEDED ACCOUNTS
CARDS ACCOUNTS
Public Sector
Bank 12.21 10.08 22.3 17.37 14.25 50250.28 24.25
Regional Rural
Bank 4 0.64 4.64 3.45 2.58 11810.42 21.12
Private Banks 0.54 0.36 0.9 0.83 0.4 2227.51 34.96
Total 16.75 11.09 27.84 21.65 17.22 64288.21 24.07
Fig 2: Accounts opened as on 01.03.2017 (PMJDY, n.d.)

FUTURE PROSPECTS
Since last decade the financial system has been developing at a very fast rate. The
geographical and functional reach of the financial service is really impressive but still data is
showing an opposite picture in which financial exclusion is still exist and poorer and rural
sections of the society arent able to utilizing the banking services. The prime reason behind
this underutilization are the low income and illiteracy. Although India has become the 3rd
largest economy (as per PPP) in the world but still its per capita income is only US$ 5630 and
it ranked 106th among 164 countries. The main reason behind this ambiguous data is social
and financial inequality. Henceforth, financial inclusion of all the sectors of the society has
become the prime objective of the country. Thus, government, RBI and other central and
state agencies should align their efforts towards the development and implementation of
inclusive growth. Hence, PMJDY scheme should be supplemented by the programs which
helps in improving the productivity of small farmers and other smaller and rural
entrepreneurs so that they can utilize financial services, like loans, efficiently. Government
should take initiatives to increase the literacy level of these people so that farmers and other
businessmen can utilize the funds provided by the banks. Government should also initiate
programs to increase the earning capacity of financially excluded sections. Hence, Banks and
government together can initiate the required revolution of the can bring about the desired
change of greater inclusion quickly.
One of the leading challenge has arisen for the banks and other financial institution is to make
profit from the customers or households with very low income. As per current status,
although PMJDY is successful while opening large number of bank accounts but still the
usability of the scheme is very low since 34% of the accounts opened have zero balance while
total deposits is around 4.1 million dollar i.e. $20 per account. Hence, the sustainability of the
scheme is based on the use of new technologies. Because of the high operational cost the BCs
and BFs model wasnt feasible at the initial stage, hence results in the lower deposit, but the
proper use of technology can change the scenario. In recent years the mobile phones and
mobile network have penetrated every single village. Thus, digital financing services are
expected to grow at a faster rate. Financial institution in collaboration with the mobile app

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builder are introducing innovative techniques to bring and educate the unbanked population
of the country. So, the operation cost of BCs can be minimized with the mobile and internet
technology services. Hence, the technology that can minimize the cost and also implemented
on a large scale holds the key for the success of financial inclusion.
Only 55% of the countrys population have deposit bank accounts and only 9% have credit
bank accounts. The number of credit card users hasnt been showing any remarkable growth
since last 6 years. The numbers for other financial services have further deteriorated like the
life insurance services have been perceived by less than 20% of population and less than 10%
has perceived any other insurance coverage. Hence, a large proportion of Indian population
has excluded from the financing services. Thus, financial institutions should harden their
efforts towards the financial inclusion. Rural penetration should be the foremost step towards
the financial inclusion. So, financial institution and government should penetrate the rural
section to improve overall health of the economy. Mobile banking in collaboration with
mobile service provider can be a breakthrough for targeting the financial inclusion of these
untapped customers. Thus in future, there is a prospect to achieve 100% financial inclusion
and hence achieve a rapid sustainable growth in Indian economy.
Words Count: 2561

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Document/PDF/English.pdf

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