CORPORATE FINANCE ASSIGNMENT – 01

HOW DOES FINANCIAL INCLUSION

REDUCE POVERTY

SCHOOL OF LAW

Submitted To : Dr. (Prof.) P.N. Rath

Submitted By : Kushagra Amrit

Roll no. : 1882053
Branch : B.B.A. L.L.B. ‘A’
Semester : 4th
Batch : 2018 – 2023
FINANCIAL INCLUSION

Financial inclusion refers to efforts to make financial products and services accessible and
affordable to all individuals and businesses, regardless of their personal net worth or
company size. Financial inclusion strives to remove the barriers that exclude people from
participating in the financial sector and using these services to improve their lives. It is also
called inclusive finance.

NEED FOR FINANCIAL INCLUSION

Financial inclusion enhances the financial system of the country comprehensively. It

strengthens the availability of economic resources. Most importantly, it toughens the concept
of savings among poor people living in both urban and rural areas. This way, it contributes
towards the progress of the economy in a consistent manner.

Many poor people tend to get cheated and sometimes even exploited by rich landlords as well
as unlicensed moneylenders due to the vulnerable condition of the poor people. With the help
of financial inclusion, this serious and hazardous situation can be changed.

Financial inclusion engages in including poor people in the formal banking industry with the
intention of securing their minimal finances for future purposes. There are many households
with people who are farmers or artisans who do not have proper facilities to save the money
that they earn after putting in so much effort.

Benefits of Financial Inclusion

In order to achieve inclusive development and growth , the expansion of financial services to
all sections of society (financial inclusion) is important as global trends have shown.
Financial exclusion results in widespread inequality in incomes and earning opportunities.
Countries with low levels of income inequality tend to have lower levels of financial
inclusion, while high levels of exclusion are associated with the least equal ones. In Sweden,
less than two per cent to adults did not have an account in 2000 whereas in Portugal, about 17
per cent of the adult populations had no account of any kind in 2000. In GINI index of
income inequality, both Sweden and Portugal have improved with higher financial inclusion.
Well developed and widely spread financial system extends credit facility to those who do
not have adequate finance themselves but have business ideas and zeal to carry
entrepreneurial activities resulting in acceleration of growth.

On the contrary, absence of financial penetration and deepening results in absence of debt
leverage to micro enterprises and they have to either borrow at very high rates of interest or
have to be contented with their own capital. This leads to restricted growth in economic
activities.

The perceived benefits of urban financial inclusion can be sub- divided into two sub
categories : macro benefits and micro benefits.

Major macro benefits are :

(i) higher and better productivity ;

(ii) faster growth in economy ;

(iii) reduction In income inequalities;

(iv) widespread development breaking the barrier of location specific and centres specific
development ;

(v) global admiration and recognition ; reduction in poverty ;

(vi) likely increase in national income ;

(vii) increase in employment and income opportunities ;

(viii) help in more effective distribution of subsidies ;

(ix) helpful in implementation of social security schemes, such as old age pensions, window
pensions and so on ;

(x) helpful in shifting to direct distribution of subsidies by way of crediting bank account of
targeted beneficiary rather than indirect distribution of subsidies ;

(xi) helpful in plugging the leakage through distribution channels.

Major micro level benefits are :
(i) smoothing consumption ;

(ii) buffer against avoidable expenditure ;

(iii) safety of assets from major disruptions ;

(iv) better incomes ;

(v) rational utilization of saving ;

(vi) freedom from clutches of moneylenders;

(vii) increase in risk taking ability;

(viii) enlarges livelihood opportunities;

(ix) saving of time in collection of periodic social security payments by state and central
governments ;

(x) improved self esteem and sense of elevation.

The perceived benefit of urban financial inclusion can also be studied on the basis of various
stakeholders:

Benefits to banker:
At the outset, banks may feel that urban financial inclusion is burden on them and it will
make a dent on their profits but the ground reality is all together different. The Dharavi
experience should give them financial comfort. The benefits accruing to the bankers can be
summarized as under:
● The low cost deposits will offer banks the opportunity to reduce their dependence on
bulk deposits from corporates, HNI’s  and better help in the management of liquidity
risks and asset liability mismatches;
● The low cost deposits will result in increased profits with the perspective of medium
to long term;
 ● They will be able to benefit from the fortune at the bottom of the pyramid;
● Huge opportunity for the banks to cross sell asset products, micro insurance (both life
& non-life), micro pension products, etc.

Benefits to users:
It is rightly said that business opportunity is dependent upon access to financial resources.
Such access is especially useful in urban centeres where opportunities are many. Financial
inclusion provides opportunities to build savings , make investments and avail credit.

FINANCIAL INCLUSION AS A TOOL TO REDUCE THE POVERTY

Financial inclusion is critical as increasing the poor’s access to financial services is often
considered as an effective tool that can help reduce poverty and lower income inequality.

Although financial inclusion has become topical on the global policy agenda for sustainable
development, economic literature on financial inclusion is still in its infancy. Most studies
have looked into the appropriate measures of financial inclusion both at household and
country levels, while some have focused on the role of financial access in lowering poverty
and income inequality. Many have dealt with varying levels of financial inclusion both in
advanced and emerging economies. These have laid the foundations in this field and provide
key policy insights on the importance of financial inclusion on sustainable development.
However, more work needs to be done.

Although there is consensus on how financial inclusion is defined, there is no standard

method by which it can be measured. Consequently, existing studies offer varying measures
of financial inclusion. For instance, Honohan (2007 and 2008) constructed a financial access
indicator which captures the fraction of adult population in a given economy with access to
formal financial intermediaries. The composite financial access indicator was constructed
using household survey data for economies with available data on financial access. For those
without household survey on financial access, the indicator was derived using information on
bank account numbers and GDP per capita. The dataset was constructed as a cross-section
series using the most recent data as the reference year, which varies across economies.
However, Honohan’s (2007 and 2008) measure provides a snapshot of financial inclusion and
might not be applicable for understanding changes over time and across economies.
The fight for financial inclusion on the ground

People in many developing countries are excluded from the financial system, especially in
African and Asian countries such as Bangladesh, Ghana, India, Indonesia, Kenya, Nigeria,
Pakistan, Rwanda, Tanzania and Uganda, among others. The Financial Inclusion Insights
program says big progress is beginning to be made in different fields of action, but there is
still a long way to go. Below are some data to help understand the financial inclusion
challenge:

- 61% of Kenyans are active users of mobile money

- 36% of Nigerians have an online bank account

- 48% of Ghana’s inhabitants already consider themselves included in the financial system

- Women in Pakistan doubled their level of financial inclusion from 3% to 6% from 2014 to
2015

- 79% of Bangladeshi men have a mobile phone compared to 48% of women

- 42% of adult Indians are active users of a bank account

- In Rwanda, 13% of the rural and 40% of the urban population use mobile money

- 73% of the Indonesian population say they have savings

- 46% of Tanzanian adults use smartphones

- In Uganda, 17% of men and 7% of women have bank accounts.

FINANCIAL INCLUSION IN INDIA

In the Indian subcontinent, the concept of financial inclusion was first familiarised in the year
2005 by the Reserve Bank of India by releasing the Annual Policy Statement. Soon, the
concept started to spread in every part of the nation. It was chiefly introduced to touch every
corner of the country without ignoring any remote area. The concept addressed the absence of
a formal financial system and banking system for catering to the monetary requirements of
the poor people.

In the year 2005, the Khan Committee Report was released which mainly discussed rural
credit and microfinance. It spoke about how many people in the nation are missing out on the
benefits of a professional and licensed banking system.

The Khan Committee report laid an emphasis on providing access to essential financial
services by helping them to open a bank account that does not come with any frills or
complicated elements. All banks were asked to minimise regulations regarding account
creation processes for the economically weaker sections of the society. Several banks were
asked to work together towards 100% financial inclusion by taking part in campaigns started
by the RBI.

The Indian government also initiated the ‘Pradhan Mantri Jan Dhan Yojna’ with the sole
purpose of motivating and encouraging poor individuals to open bank accounts. This
programme targeted at least 75 million individuals to open bank accounts by the year 2015.

In 1947, RBI conducted a survey on Rural Credit, wherein it was found that the share of
banks in the total rural credit was only about 1 %, the major proportion being bagged by the
money lenders .As per the reports available, around 139 districts in the country are financially
excluded The poorer the group, the greater is the exclusion (Rangarajan, 2007). The efforts
of the government to increase financial inclusion has been immense .To ensure the
participation of large number of people, especially the poor ,the scheme of the cash transfer

subsidy was launched ,which requires the beneficiary to hold a bank account if he wants to
avail the benefits of the scheme. The account holders will also be required to hold the Aadhar
card. In order to promote the banking services sand make it more popular, the RBI has made
many amendments’ in the procedure to be followed in opening a bank account .To have more
people in to the banking regime, the rules of KYC (Know tour Customer) have been relaxed
by the banks for small deposits .The facility of nil balance or low minimum balances have
been allowed to people for low income groups. The banks also have to print materials which
give full information about the facilities to the people in the local language .There was a
proposition to install Micro ATMs, The Unique Identification Authority of India (UIDAI) has
launched a micro ATM device that would enable beneficiaries like MG-NREGA workers
with Aadhaar to withdraw money near their doors through core banking system. This was to
ensure that the poor or low income wage earners also get to use the banking service without
going much distance; also it was seen as a big step towards financial inclusion. Apart from
the above measures, the services of NGO and Business correspondents (BC), were taken in
order to spread the network of financial services .The services of the BC can enable the
banks to spread their network without establishment of formal branches at each location.
Apart from this the ( GCC ), General Purpose credit card facility was also introduced in
order to provide the holder with the drawing limit of 25,000 from the banks ,i.e. a financial
assistance was provided through these cards .The banks have also used the services of t their
agents , NGOs and village volunteers to promote the advantages of bank accounts to each
household, to create an awareness and spread financial literacy . The information to the
people are provided through websites and other modes of advertisement also. A multilingual
website in 13 Indian languages on all matters concerning banking and the common person
has been launched by the Reserve Bank on 18 June 2007. The following table shows the
coverage of the banking network across various regions of the country. The data clearly
shows that still a lot needs to be done in order to enhance the coverage of financial services
across all sections of the population. In the monetary policy statement of 2013-14, there had
been special provision for credit delivery to MSME and financial inclusion. The banks are
advised to open up bank accounts based on Aadhar numbers for the beneficiaries of direct
benefit transfer .Along with this, a plan has been formulated for 2016 The implementation of
the Financial Inclusion Plan (FIP) 2010-13, introduced for the first time in April 2010, has
led to the establishment of banking outlets in more than 2 lakh villages. In order to take
financial inclusion to the next stage of providing universal coverage and facilitating
Electronic Benefit Transfer (EBT), banks have been advised to draw up the next FIP for the
period 2013-16. Thus now IT intervention is also planned for the future of financial inclusion,
like bio metric recognition, smart cards, etc.

: Coverage of Banking Services across Various Regions of India ((Ratio of

Demand Deposit Accounts to the adult Population)
Region Current Saving Total Adult Total No. No. of No. of acc.
Account Account Populati of acc. per per
on Populatio accounts 100 of
n populati 100 of
on adult
 (Above 19 population
years)

Northern 4215701 5241612 1326764 67822312 5663182 43 84

5 62 6
3849508
North-Eastern 476603 6891081 19708982 7367684 19 37
9
4787614 2276130 12213613 4969035
Eastern 1814219 22 41
0 73 3 9
6425418 2557134 12931667 6645640
Central 2202217 26 51
9 95 7 6
4952510 1490717 5270320
Western 3178102 86182206 35 61
1 47 3
8338689 2234453 13557422 8805291
Southern 4666014 39 65
8 81 5 2
1655285 30434953 10270152 54103155 32090239
All-India 31 59
6 4 47 3 0

The data clearly shows that still a lot needs to be done in order to enhance the coverage of
financial services across all sections of the population. In the monetary policy statement of
2013-14, there had been special provision for credit delivery to MSME and financial
inclusion. The banks are advised to open up bank accounts based on Aadhar numbers for the
beneficiaries of direct benefit transfer .Along with this, a plan has been formulated for 2016
The implementation of the Financial Inclusion Plan (FIP) 2010-13, introduced for the first
time in April 2010, has led to the establishment of banking outlets in more than 2 lakh
villages. In order to take financial inclusion to the next stage of providing universal coverage
and facilitating Electronic Benefit Transfer (EBT), banks have been advised to draw up the
next FIP for the period 2013-16. Thus now IT intervention is also planned for the future of
financial inclusion, like bio metric recognition smart cards, etc.

FINANCIAL INCLUSION SCHEMES IN INDIA

The Government of India has been introducing several exclusive schemes for the purpose of
financial inclusion. These schemes intend to provide social security to the less fortunate
sections of the society. After a lot of planning and research by several financial experts and
policymakers, the government launched schemes keeping financial inclusion in mind. These
schemes have been launched over different years. Let us take a list of the financial inclusion
schemes in the country:
 ● Pradhan Mantri Jan Dhan Yojana (PMJDY)

● Atal Pension Yojana (APY)

● Pradhan Mantri Vaya Vandana Yojana (PMVVY)

● Stand Up India Scheme

● Pradhan Mantri Mudra Yojana (PMMY)

● Pradhan Mantri Suraksha Bima Yojana (PMSBY)

● Sukanya Samriddhi Yojana

● Jeevan Suraksha Bandhan Yojana

● Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes (SCs)

● Venture Capital Fund for Scheduled Castes under the Social Sector Initiatives

● Varishtha Pension Bima Yojana (VPBY)

Once in an interview in november 2018 Lt. Arun Jaitley(then Finance Minister) said that
Financial inclusion has been a top priority of the government for targeted benefits and
poverty alleviation.

Highlighting the progress achieved under the present dispensation, Jaitley said, “Just four to
five years ago, we were living in a system where 48 per cent of our population, that is, nearly
600 million people had never seen a bank in their life and were not connected to the banking
system. Today, they have bank accounts.”

Jaitley was speaking at the 25th World Congress of Saving and Retail Bank (WCSRB).

Biometric identity
Commenting on the reforms undertaken by the Centre to aid targeted benefits and support,
Jaitley said, “India took an experiment which is unique, where every Indian has a biometric
identity. Each Indian has got a unique identification number linked with his bank account.”

He also said that a high rate of economic growth is necessary to alleviate poverty and ensure
that benefits of development reach the poor.
Commenting on the economic growth outlook and poverty alleviation measures, Jaitely said,
“Economies like ours all over the world need a high rate of growth. We want to use growth as
a mechanism to pull the maximum number of people out of poverty, improve upon quality of
life but we are conscious of the fact that dangers of development and progress benefiting a
few and leaving many others out of the inclusion system are also there.”

The two-day 25th World Congress of Savings and Retail Banks was attended by World
Savings and Retail Banking Institute (WSBI) members, savings and retail banks, banking
policy-makers and banking industry experts. Commenting on the progress made by WSBI
under the pledge to provide “an account for everybody”, which was outlined in 2012,
outgoing WSBI President Heinrich Haasis said, “Since our World Bank Universal Financial
Access 2020 commitment made in 2015, WSBI members have added 340 million accounts
for 234 million people into the formal financial system thanks to their efforts.”

CASE STUDY

Around the world, those with low, irregular and uncertain incomes are the least able to access
the services that would help them plan for the future and protect themselves from the
unexpected. When the poor are able to save, it is most often in the form of cash, hidden under
mattresses or in glass jars, which can be all too easy to spend under stress. Cash is also
extremely vulnerable to theft. Meanwhile, the informal saving services that are available in
both developed and emerging markets often come with substantial administration fees. This
leaves the poor vulnerable, as an unplanned health emergency, theft or loss can push people
into total poverty.

As global leaders developed the post-2015 Sustainable Development Goals, enabling

financial inclusion and improving financial literacy must be a priority. An overwhelming
body of evidence shows that providing people with the ability to save and borrow efficiently
and securely improves well-being and encourages enterprise, ultimately reducing global
poverty and increasing economic growth. Through a combination of effective public policy,
public-private partnerships and the thoughtful application of the latest technology, financial
services can and must be offered to all.

In Indonesia, where the banked population is only 36%, the government has made financial
inclusion a priority. Its National Financial Inclusion Strategy is focused on providing access
to the poor, as well as migrant workers, women and remote communities. Financial inclusion
is also a key concern for the central bank, Bank Indonesia, as well as the Financial Services
Authority, the OJK. New branchless banking regulations and the establishment of a basic
savings account are focused on enabling inclusion.

Encouragingly, the fundamental first step of ensuring that citizens have a unique identity is
already in place. Indeed, Indonesia already has one of the largest national identity systems in
the world, e-KTP. The World Bank has predicted that the government and central bank
programmes could help 130 million unbanked Indonesians gain access to financial services.

However, despite progress, widespread adoption of effective and secure services faces a
number of hurdles. Due to current legislation, the available e-money services only allow
customers to spend the money they’ve deposited into their account on goods and services
offered by the same provider. As such, a person earning a monthly wage of $200 will not
want to put what little money he or she has in multiple e-money accounts to pay bills or
merchants operating on different networks.

While there is constructive dialogue underway to address this, the current situation means
that most new initiatives are limited by the scale and resources of the provider, where an
interoperable solution could increase the reach and lower the costs of these e-money services
for both consumers and businesses.

In addition, considerable efforts are needed to drive financial literacy. Indeed, a recent
MasterCard report on banking for Indonesia’s poor showed that the poor rely heavily on
respected members of the community to vouch for new products and services; and so
intensive and ongoing financial education efforts at the community level are critical if
financial inclusion programmes are to succeed.

Finally, the sheer complexity of a country than spans three time zones and over 17,000
islands creates unique challenges that cannot be underestimated. To be attractive, products
and services must be widely available, easily understood, affordable and secure.

The widespread adoption of mobile phones – as of 2012, there were over 143 million mobile
subscribers in Indonesia, more than double the number of bank accounts – presents the most
exciting opportunity to enable mass adoption of financial services and facilitate financial
inclusion.

Meanwhile, there is positive dialogue underway to address the challenges via a combination
of direct government action, coordinated regulation, and business and NGO-led initiatives,
which will most likely be delivered via a series of public-private partnerships. Indeed, the
combination of top-down government efforts and innovative business-driven solutions could
transform Indonesia from one of the most underbanked populations in the world to a
financially inclusive society. The potential is there to transform the lives of the most
disadvantaged, and that would be truly priceless.
REFERENCES
● https://www.activesustainability.com/sustainable-development/financial-inclusion-key-to-
reducing-poverty/
● https://www.investopedia.com/terms/f/financial-inclusion.asp
● https://www.bankbazaar.com/personal-loan/financial-inclusion.html
● https://www.researchgate.net/publication/308740844_Does_Financial_Inclusion_Reduce_Po
verty_and_Income_Inequality_in_Developing_Asia
● http://scienceandnature.org/IJEMS-Vol6(4)-Oct2015/IJEMS%20Vol6(4)-2.pdf
● https://www.thehindubusinessline.com/news/financial-inclusion-is-a-top-priority-for-poverty-
alleviation-jaitley/article25508456.ece
● http://indiamicrofinance.com/benefits-financial-inclusion-india.html
THANK
YOU