Financial Inclusion and the Indian

Economy A study on the changing nature of the financial

services

Mr. Pema Lama

Ms. Madhumita Dasgupta
Assistant Professor
Research Scholar
Department of Commerce

Layout of the Presentation

Introduction

Literature Review

What is financial inclusion and financial literacy

Stages of financial inclusion

Indian Scenario

Challenges

Improvement measures

Conclusion

Introduction

With growth of the financial sector across the world, there

is an increasing need of more and more households and
individuals becoming a part of the organized financial
world.

Policy-makers at both the national and global level are

embracing
financial
inclusion
as
an
important
development priority.

This is also gaining importance since it forms the

fundamental block of sustainable development.

It has the ability to generate positive externalities

Literature Review

Ravichandran (2009) on comprehensive study of the villages in

south India and states that financial inclusion would not only benefit
the customers but would also be beneficial for the financial
institutions and would help in bringing up the standard of living of
the particular region.

Handoo (2010) tries to capture the effect of the different reform

measures that were brought up by the government and the efforts
by the policymakers to bring about an drastic change in the
economic growth through the inclusion of the weaker sections of
the society . It tries to analysis a branchless banking and financial
inclusion ecosystem for the world as a whole and India in specific.

Ramakrishnan (2011) states that there is a strong correlation

between the propensity to consume and propensity to save. The
paper emphasizes on the fact that India needs a higher financial
literacy since there is a large section of the population which still
remains out of the formal financial set-up especially in the rural
areas. The keystone of financial literacy is a perception that
disciplined saving is important.

What is financial inclusion and

financial literacy?

Financial Inclusion is the process of ensuring access to

appropriate financial products and services needed by all
sections of the society in general and vulnerable groups
such as weaker sections and low income groups in
particular at an affordable cost in a fair and transparent
manner by institutional players.

Financial literacy is one of the components of financial

skills it is expressed as information about finances,
financial trends and as the ability to understand or the
expertise of financial products , risks and their returns

In order to achieve broad based improvement in the living

standards of all citizens of the nation, the objective of
financial inclusion is to provide an opportunity of formal
financial services such as credit, deposit, insurance and
pension to the large sections of the hitherto financially
excluded Indian population.

Stages of financial inclusion

The above figure clearly shows the different stages of

financial inclusion through digital awareness.
Stage I - critical mobile coverage and penetration of rural
poor.

Stage II - use of digital devices by the poorer sections for

personal

transfers and government payments.

Stage III - use digital media for savings , credit and insurance
services.

Indian Scenario

According to IISS , 55% of all the households do not have bank

accounts, 97% do not have any health insurance and 61 %. do not
have life insurance.

According to a study , it is seen that the costs of a no-frills savings

account is much higher compared to the number of transactions in
that account and to reach break-even, the average balance is higher
than the maintained by retail customers.

From the demand side, a higher cost of financial services results in

discouraging of financial inclusion.

India stands 29 in a list of 55 countries based on the country's

performance in banking penetration, availability of the banking
services, and the usage of the banking system.

The electronic payment system for the poor household is not a perfect
solution for promoting banking activities. The electronic payment
system is outstanding proposal if it follows top to bottom approach.
The access to formal banking system among the rich class is higher in
comparison to the middle and the poor income groups; however
usage of electronic payment system is very low in all the classes at
present in India.

Methods to enhance the penetration

of banking services to the rural areas
Automated Teller Machine (ATM)

Electronic Clearing System (ECS)

Debit card and Credit card

Electronic Fund Transfer (EFT)

National Electronic fund Transfer (NEFT)

Real Time Gross Settlement (RTGS)

Some statistics

Through RBIs efforts since 2005, the number of branches of

Scheduled Commercial Banks increased from 68,681 in March
2006 to 1,02,343 in March 2013, spread across country.

In rural areas, the number of branches increased from 30,572

to 37,953 during March 2006 to March 2013.

As compared with rural areas, number of branches in semiurban areas increased more rapidly.

Total number of banking outlets in villages increased from

67,694 in March 2010 to 2,68,454 in March 2013.

Of total branches, banking outlets through BCs increased from

34,174 to 2,21,341 during the same period (increased around
6.5 times).

Banks have been advised to issue KCCs to small farmers for

meeting their credit requirements. Up to March 2013, the total
number of KCCs issued to farmers remained at 33.79 million
with a total outstanding credit of Rs.2622.98 billion

Source:RBI

Some statistics
contd.

Source : CRISIL

Some statistics
contd

Source : CRISIL

Challenges for financial inclusion

Low literacy levels

Lack of understanding of banking and financial products

and services.

Absence of reach and coverage

Inaccessibility, distance and lack of proper infrastructure.

Regulation frameworks are not always adapted to local

contexts.

Non-availability of branches in required areas.

Non-adapted products and services for low income

populations and the informal economy.

Non- involvement of the state

administration at grass root level.

and

the

local

Some improvement measures

One of the fundamental reforms that government carried

out was the nationalization of banks. Setting up NABARD
and SIDBI was another major milestone.

The Reserve Bank of India has also introduced a number

of policies like no-frills accounts, simplification of KYC
norms, General Credit Crad schemes and the Business
Correspondents and Business Facilitators model.

Conclusion

Opening up of more and more bricks and mortar

branches across the rural areas.

Ensuring a more customer friendly environment in the

branches and bridging the language barrier.

restructuring the financial system in the rural areas to

improve sustainable development.

the local administrative bodies and panchayat should be

included in the financial literacy programs to ensure
higher reach to the masses.

The expenditure pattern of rural areas should be

considered while formulating products for the rural
sector. Customized products for them would result in
more participation from rural customers.

Opening up of more and more customer service centers

in the rural areas to cater to their specific needs and
queries.

Thank you