FINANCIAL INCLUSION:-

Meaning and Definition:-

It is a method of offering banking and financial services to individuals. It is the process of providing
appropriate financial products and services to all sections of the society in general and vulnerable groups
of the society at affordable cost in transparent manner by institutional players.
The concept of financial inclusion was first introduced in India by the RBI. It provides various
financial services like savings, credit, insurance, cash payment and transfer facilities to the society at
affordable costs.
According to Planning Commission (2009), Financial inclusion refers to universal access to a wide range
of financial services at a reasonable cost. These include not only banking products but also other
financial services such as insurance and equity products.

OBJECTIVES OF FINANCIAL INCLUSION:-

Following are the Objectives:-
1. To provide financial services and products like deposits, loans, insurance etc to poor people at
economical prices.
2. To provide basic banking services to all section of society in rural or urban areas at affordable
cost.
3. To improve financial literacy and financial awareness in the nation.
4. To establish proper financial institutions to cater to the needs of the poor people.
5. To transform money lender dependent rural people into a highly bankable group.
6. To increase awareness about the benefits of financial services among the economically
underprivileged sections of the society.
7. To eliminate the high cost interest regime from the lives of the poor.

BENEFITS/SIGNIFICANT/ROLE OF FINANCIAL INCLUSION:-

Following are benefits:-
1. It helps the poor people to insure themselves against income shocks and enable them to meet
the future contingencies like illness or loss of employment.
2. It helps the poor people to build savings, make investment and avail credit.
3. It helps the poor people to transfer payments into their bank accounts through electronic
benefit transfer system.
4. It is an avenue for bringing the poor people savings into the formal financial intermediation
system.
5. It helps in the overall economic development of the underprivileged population of the country.

FINANCIAL INCLUSION SCHEME IN INDIA:-

Following are the schemes:-
1) Pradhan Mantri Jan Dhan Yojana (PMJDY):-
It is a financial inclusion programme of the government of India open to Indian citizens. It aims to expand
affordable access to financial services like bank accounts, remittances, credit, insurance and pension.
The scheme was announced by Prime minister Narendra Modi on 15/08/2014 and the scheme was
launched on 28/08/2014.
It provides easy access to financial services like remittances, credit, insurance, pension, savings, etc
to the poor and needy section of our society.
2) Atal Pension Yojana (APY):-
It was launched by Prime minister Narendra Modi on 09/05/2015. It was implemented with an objective
to provide pension benefits to individuals in the unorganised sectors. The main benefits of the scheme is
the retirement benefit. Depending on the contributions made, the monthly pension will be paid out.
3) Stand up India Scheme:-
1) It was launched by Prime minister Narendra Modi on 05/04/2016. It was implemented with an
objective to support entrepreneurship among women and scheduled caste and scheduled tribe
communities.
The objective of this scheme is to facilitate bank loans between ₹10 lakhs and ₹1 crore to at least
one SC or ST borrower as per bank branch for setting up a Greenfield enterprise.

4) Pradhan Mantri Mudra Yojana (PMMY):-

It was launched by Prime minister Narendra Modi on 08/04/2015. It was implemented for providing
loans upto ₹10 lakh to the non corporate, non farm small/micro enterprises. These loans are classified as
MUDRA loans under PMMY.
Loans are given by commercial banks, RRBs, Small Finance Banks, MFIs and NBFCs.
5) Pradhan Mantri Suraksha Bima Yojana (PMSBY):-
It was launched by Prime minister Narendra Modi on 08/05/2015. It was implemented with an objective
of providing social security to one year accidental death and disability cover.

GOVERNMENT INTIATIVES UNDERTAKEN FOR FINANCIAL INCLUSION IN INDIA:-

It includes the following:-
1. No Frills Account:-
It was launched by RBI in the year 2005. It offers banking services to those from the low income
backgrounds. It allows the account holders to open and maintain a savings account with zero balance. It
offers basic banking services such as mobile and internet banking, ATM cum debit card facilities etc. It is
also known as Zero balance Account.
2. Basic Savings Bank Deposit Account:-
In the year 2012 , the Reserve Bank of India replaced no frill account with Basic Savings Bank Deposit
Account. It is a savings account that does not have a minimum balance.
It offers ATM cum debit card, free passbook services, cheque book facility, email statements etc.
An account holder can withdraw money maximum of 4 times in a month including ATM withdrawal.
3. Kisan Credit Card:-
It was launched by Govt of India in the year 1998. It offers short term formal credit to farmers and was
created by NABARD. It was implemented for providing credit to the farmers and other sector.
This was done by helping them avail short term loans and provide them with a credit limit to
purchase equipment and for other expenses.
4. Financial Inclusion Fund:-
It was launched by Govt of India in the year 2007-08 on the recommendation made by the C. Rangarajan
Committee. It’s main objective is to support developmental and promotional activities across the
country, capacity building of stakeholders, research and transfer of technology etc.
5. Others:-
It includes the following:-
a) Pradhan Mantri Jan Dhan Yojana.
b) Atal pension Yojana.
c) Stand up India Scheme.
d) Pradhan Mantri Mudra Yojana etc.
MICRO FINANCE MOVEMENT IN INDIA:-
 Micro finance movement was started in the year 1970.
 The SEWA Bank was set up in the year 1974 as an urban cooperative bank providing banking
services to the poor self-employed women. It is the biggest poor women’s bank in the world and
the first micro finance institution to be set up in India.
 The beginning of the micro finance movement in India could be traced to the Self Help Groups-
Banking Linkage Programme launched by NABARD in 1992.
 NABARD creates guidelines to banks for financing SHGs under a pilot project aimed at financing
500 SHGs across the country through the banking system.
 The Govt of India mentioned about SHG Bank Linkage programme in the year 1999 in union
budget.
 Since then , the SHG Bank Linkage programme has become an innovative strategy for
mainstreaming rural banking.
 In 1993, the Rashtriya Mahila Kosh was established to accelerate the flow of credit to self
employed women in the unorganised sector.
 The micro finance movement in the form of Swarnajayanti Gram Swarozgar Yojana (SGSY) had
been initiated in India on 01/04/1999. Due to this the number of SHGs linked to banks also
increased.
 BASIX a rural financial institution set up in the year 1996.
 Various private micro finance institutions also established to cater the needs of micro finance
sector in India.

EMERGING CHALLENGES OF MICRO FINANCE IN INDIA:-

It includes the following:-
1) Financial Illiteracy:-
One of the major challenge in India towards the growth of the micro finance sector i.e. illiteracy of the
people. This makes it difficult in creating awareness of micro finance and even more difficult to serve
them as micro finance clients.
2) Inability to generate funds:
Micro finance institutions have inability to raise sufficient funds in the micro finance sector which is an
important burning challenge.
3) Heavy dependence on banks and financial institutions:
Micro finance institutions are dependent on borrowing from banks and financial institutions. For most of
the MFIS funding sources are restricted to private banks and apex MFIs.
4) Weak infrastructure:
Most of the micro finance institutions operating in India suffer from lower manpower, weak governance,
defective management structure, lack of adequate internal controls etc which makes their regulation
much more difficult.
5) Regional imbalances:
There is unequal geographical growth of micro finance institutions and SHGs in India. About 60% of the
total SHG credit linkages in the country are concentrated in the southern states.
6) Interest rates:
Uniform policy of rate of interest is not being followed. Generally MFIs followed different pattern of
charging interest rates. All this make the pricing very confusing and hence most of borrowers feel
incompetent in terms of bargaining power.
7) Employees training:-
Inadequate knowledge of working is also a major challenge. Staff should be given periodical training.
They should have knowledge of all relevant issues.

MEASURES TO OVERCOME CHALLENGES:-

The following are some measures to overcome the challenges faced by micro finance institutions:-
1) Proper regulation:
The micro finance sector in India completes almost two decades of age with a high growth rate. So there
must be a regulatory institution who protects the interest of stakeholders as well as promotes growth.
2) Field Supervision:-
It should be adopted as a medium for monitoring the working conditions of the MFIs. Corrective action
should be taken if needed. This will keep an eye on the performance of ground staff of various micro
finance institutions and their recovery practices.
3) Encourage rural penetration:-
Micro finance institutions should be encouraged to opening their branches in the areas of low micro
finance penetration. It should be done by providing financial support and guidance to the MFIs.
4) Transparency of interest rates:-
Uniform rate of interest should be followed by MFIs. This can makes the sector more competitive and
the people gets freedom to compare different financial products before purchasing.
5) Complete range of products:-
MFIs should provide complete range of products including credit, savings, remittances, financial advice
and also non-financial services like training and support. It enables the poor people to avail all services.
6) Technology to reduce operating cost:-
MFIs should use new technologies and tools to reduce their operating costs. Micro finance institutions
should be encouraged to adopt cost-cutting measures to reduce their operating costs.

DEMAND FOR MICRO FINANCE SERVICES IN INDIA:-

1) M-CRIL, a leading micro Credit rating agency estimates the demand of 60-70 million poor
families with an average credit demand of ₹ 8000.
2) The current annual credit demand by the poor people in the country is between ₹ 15,000 to ₹
45,000 crore. ( Estimate by Mahajan and Ramola, 2003.)
3) The number of households needing micro finance services ranges between 70 and 80 million.
4) The overall annual credit demand for households with income below Rupees 100 per day is from
rupees 2833 Bn to rupees 5064 Bn.
5) The overall annual micro credit and housing would be in the range of ₹3562 Bn to 5962 Bn.

SUPPLY OF MICRO FINANCE SERVICES IN INDIA:-

1) Currently on an estimate overall 66% of the micro finance supply is distributed through the help
of SHG-Bank linkage model, largely financed by the NABARD.
2) The rest 34% is comes from the micro finance institutions, largely backed by commercial banks.
3) Sa-Dhan, an association of 139 community development finance institutions states that the total
portfolio outstanding its members has risen 2.5 times from 2004 to 2005.
4) World Bank estimates that the Indian micro finance activity currently reaches only 4% of the
poor.
 5) In a sample study of 40,000 households cited by Sa-Dhan, the money lender is still supreme,
holding average outstanding loans at $418 (Rs. 20,908).
6) Similarly, in 2003, national government survey found that 22 percent of all cultivator households
access credit from informal sources and only 27 percent from formal sources.

NABARD AND MICRO FINANCE:-

 The National Bank for Agriculture and Rural Development (NABARD) was set up on 12 July, 1982
by an Act of Parliament as an apex institution for financing agricultural and rural sectors.
 It was set up with an initial paid up capital of Rs. 100 crore is subscribed by the Government and
the RBI in equal amounts.
 Today NABARD is fully owned by Government of India. The headquarters of NABARD is in
Mumbai and it has many branches, district offices and regional divisions.
Mission:-
 To promote sustainable and equitable agriculture and rural prosperity through effective credit
support, related services, institution development and other innovative initiatives.

ROLE OF NABARD:-
Following are the roles:-
1) Serve as an apex financial agency for those institutions that provides production and investment
credit for promoting various developmental activities in rural areas.
2) Undertake monitoring and evaluation of projects refinanced by it.
3) It promotes research in the fields of rural banking, agriculture and rural development.
4) It regulates the cooperative banks and regional rural banks.
5) It regulates the institution which provides financial help to the rural economy.
6) It provides training facilities to the institutions working the field of rural upliftment.
7) It refinances the financial institutions which Finance the rural sector.
8) It co-ordinates the rural credit financing activities of all the instructions engaged in
developmental work.
9) It sets the linkage between self help groups in the country.

PROBLFMS OF MICRO FINANCE IN INDIA:-

Some of the main problems of micro finance in India are as follows:-
1. Deserving poor are still not reached:
About 75 million households in India are poor and about 22 percent of these poor households are
currently receiving micro finance services. Therefore, it can be said that large groups of poor population
have been excluded from availing the benefits Micro finance.
2. Regional Disparity:-
Micro finance programme is mainly run by formal financial institutions with the help of SHGs. As a result,
micro finance programme is progressing in those areas of the country where there is tremendous growth
of formal financial institutions.
3. Limited spread in poorer states:-
The coverage of micro finance programme is comparatively low in the states which have a larger share of
the poor. Unfortunately, these seven states namely, Orissa, Bihar, Chhattisgarh, Jharkhand, Uttaranchal,
Madhya Pradesh and UP are lagging behind in micro finance programme.
4. High Interest rates:-
The rate of interest charged by Private MFIs as well as formal banking sector are not regulated. MFIs
adopt different approaches for fixing the interest rate to members. Although the interest rates of some
MFIs are regulated but they impose some charges like transaction costs, the cost of documents and
some other charges. This increases the cost of borrowing and thus making it less attractive.

5. Low depth of outreach:-

Another problem faced by the micro finance programme is the depth of services provided. Though the
outreach of the programme is expanding, large number of people are provided with micro finance
services but the amount of loans is very small.
6. Lack of Insurance Services:-
The current micro finance programme in India is just focused on regular savings and micro credit. SHG-
Bank linkage programme developed by NABARD is also providing saving and credit services. However,
some of the MFIs have started providing insurance services but the efforts are still on an experimental
state.
7. Financial illiteracy:
One of the major challenges in the growth of the micro finance sector is the financial illiteracy of the
people. This makes it difficult in creating awareness micro finance and even more difficult to serve them
as micro finance clients.
8. Dropouts and migration of group members:
Majority of the micro finance loan are disbursed on group lending concept and a past record of the
group. The two major problems with the group concept are dropouts and migration. Most MFIs lend on
the basis of the pat record of the group and also on the individuals repayment performance.
9. Inability to generate sufficient funds:
Inability of MFIs to raise sufficient fund remains one of the important concern in the micro finance
sector. In absence of adequate funding from the equity market the major source of funds for MFIs are
the bank loans, which is the reason for high debts equity ratio of most MFIs.

PROSPECTS OF MICRO FINANCE IN INDIA:-

It includes the following:-
1) Growth prospects: Micro finance programme has a wider prospect in future. According to
Ghate, micro finance programme has covered just 16.5 million of the total 75 million poor
households. So, there is an ample scope to over these unreached poor people.
2) Reducing Regional disparity: The spread of micro finance programme is unequal in various
regions of India and there is limited spread in the poorer states. NABARD has recently identified
13 states to scale up the micro finance programme in these states in order to reduce the regional
disparity.
3) Schemes to support MFIs: Formal financial institutions hesitate to provide loans to micro
finance institutions. As a result, they face shortage of funds which becomes a obstacle in
expanding the micro finance programme. To tackle this problem, some schemes may be adopted
to provide support and help for the capacity building of MFIs for the expansion of micro finance
programme.
4) Regulation of MFIs:-In India Micro finance institutions are regulated by different laws under
which they are registered. Lack of single regulatory authority restricts the growth of micro
finance sector. Keeping in view all the problems, government of India has proposed legislation
and formulated a bill.
5) Flexibility in the programme:-In order to expand the outreach of the programme to the poorer
people, there is a need to introduce more flexible systems such as the one adopted in
Bangladesh, where even the beggars are provided with micro loans by the Grameen Bank.
6) Technical Innovation:-In order to improve the quality of micro finance services some technical
innovations may be introduced. A number of electronic devices are being used in different
countries to expand the outreach and to improve the micro finance functioning. Some of these
devices are mobile phones, ATMs, processor cards, computers etc.