Financial Inclusion : The Indian Perspective

Empowerment
Bank A/Cs - Credit Cards of SHGs
Savings

Payments +
Remittances Financial Inclusion Insurance

Lack of
Financial Affordable Credit Assets (for
Advice
Collateral)
 Why Financial Inclusion?

a. The non-institutional money-lender or ‘ informal’ financial sector

seeks an exploitative economic relationship so that
b. Borrower is squeezed for repayment with high interest rates (due to
risk perception)
c. If income situation worsens, cash supply is tightened and interest
rates are raised.
d. Further loans ensure that borrower can never repay principal
e. Borrower then loses collateral, readying him for another loan
f. Financial institution do not cater for ‘ consumption’ loans as this is
perceived as non-productive and this market is controlled by
money lenders.
 The institutional lending system has
limitations in rural areas

a. Limited staff, non-computerised operations and rural posting is not

welcome due to poor infrastructure like education/housing etc.
b. Staff not oriented to “ marginal “ operations leading to poor
monitoring of small loans
c. Functional style not cost beneficial for generating viable operation.
d. Too much documentation (and hidden cost) and time taken for loan
sanction
e. Lack of viable schemes for implementation unless ‘ directed’ credit
target is imposed.
f. Rent costs and opportunity costs for loans is perceived to be high.
Banking Infrastrucuture
N ABAR D
RBI
S T C oop LT C oop R R Bs
(1 3 5 )

C o m m e rc ia l B a n k s
SC Bs SC AR D Bs 1 4 ,5 0 1 B ra n c h e s
(3 0 ) (2 0 ) ( r u r a l) 105

D C C Bs PC AR D Bs
(3 6 7 ) 768
3 3 4 1 1 B ra n c h e s
PAC s s e m i-u rb a n a n d ru ra l
1 ,0 5 ,0 0 0
 IMPLICATION FOR FINANCIAL INCLUSION

1. Branches of banks rose from 8321 in 1969 to 68282 in 2005

2. Average coverage per branch reduced from 64,000 per branch in 1969
to 16,000 persons per branch in 2005.
3. Despite viability, profitability and competitiveness by banks, basic
banking services not available to large segment of poor people.
4. Increased travel requirements and higher crime incidence
5. General decline in investment and increased rural unemployment
6. Higher cash handling costs and delay in money remittance

(Contd.)
 IMPLICATION FOR FINANCIAL INCLUSION (Contd.)

7. Deprivation of choices and freedom for life cycle needs

8. Need for product simplification and low cost technologies for
inclusion
9. More product / process innovation and dissemination costs.
10. Safety of deposits and how to be more inclusive without adding to
cost.
11. Exclusion imposes cost on individuals impacting livelihoods adversely
- pushing up cost of capital
- Reduces competitive efficiency
- High personnel and enterprise risks
- Cost to society in form of socio-economic inequities and regional
imbalances
 Financial Inclusion – Institutionalisation
milestones since early 1900’s

1904 - Cooperative Societies Act

1954 - Rural Credit Survey Committee
1955 - State Bank fo India created for rural penetration
1969 - 19 Commercial Bank Nationalised, All India Rural Credit
Review Committee
1970 - Lead Bank Scheme - States/Districts
1975 - Regional Rural Bank - Hybrid banks
1981 - 6 more Commercial Banks nationalised
1992 - SHG - Bank Linkage Programme
2001 - Kisan Credit Card/Swarojgar Credit Card/Gramin Tatkal
Card
2006 - Committee on Financial Inclusion Set up
 Measuring Financial Exclusion

R u r a l H o u s e h o ld s
( 1 4 7 . 9 m illio n )

F a rm e rs N o n F a r m in g H o u s e h o ld s
8 9 . 3 5 m illio n h o u s e h o ld s 5 8 . 5 5 m illio n

S m a ll a n d M a r g in a l F a r m e r s O t h e r t h a n s m a ll a n d m a r g in a l fa r m e r s
7 4 . 9 7 m illio n 1 4 . 3 8 m illio n

F in a n c ia lly b y e x c lu d e d F in a n c ia lly I n c lu d e d F in a n c ia lly e x c lu d e d F in a n c ia lly in c lu d e d

4 0 . 2 7 m illio n 3 4 . 7 0 m illio n 5 . 6 6 m illio n 8 . 7 2 m illio n

5 1 . 6 % o f t h e r u r a l h o u s e h o ld s a r e e x c lu d e d .
Analysis of Financial Inclusion
 State wise Exclusion

Extent of States
Financial
Exclusion
> 75% Meghalaya, Arunachal Pradesh, Mizoram,
Manipur, Assam, Uttaranchal, Jharkhand
50 to 75% Bihar, Chattisgarh, Orissa
Himachal Pradesh, J & K, UP, Nagaland, Tripura,
Sikkim
25 to 50% Karnataka, Kerla, MP, Maharashtra,
Punjab, Tamilnadu, West Bengal,
< 25% Andhra Pradesh,
Analysis of Financial Inclusion

 State wise Exclusion

(Figures in ‘000)

Social Population % %
Group Included Excluded
S.C 15592.6 50.23 49.77
S.T 11924.1 36.32 63.68
OBC 37043 51.42 48.58
Others 24688.4 49.42 50.58
Total 89248.1 48.64 51.36
Initiatives for Financial Inclusion

a. SHG - Bank Linkage Programme - 2.2 million SHGs with loans outstanding of
Rs.11397.50 million (average size of SHG - 15 members and 90% women SHGs)
b. MFI - Bank Linkage
c. Women Entrepreneurs Development Programmes (Micro Enterprises) with NGO
assistance
i. Credit - marketing related
ii. Rural Entreprenurship programme with the help of Banks and NGOs (25% women)
iii. Area Development Programmes in clusters - skills upgradation and capacity
building
d. Farmers’ Clubs 18,000 with the help of banks for technological transfer, banking
promotion schemes
e. Joint Liability Groups of Farmers (850 JLGs with Rs. 124 million finance) (4-10
farmers)
 Initiatives for Financial Inclusion

f. Kisan Credit Cards - for quick credit to farmers 59.1 million cards
g. Swarojgar Credit Cards - for unorganised poor people - both rural and
urban
h. Gramin Tatkal Card - project for loans upto Rs.50,000 without collateral
for families credit needs. (pilot schemes launched)
i. Business correspondent and faciliators (January 2006 - to enhance
rural outreach
j. SGSY Scheme for poverty alleviation (restructuring various credit
programmes like IRDP, TRYSEM , SITRA, DWACRA etc.) Cluster
Development Programme (for Credit intensification) with shared
infrastructure, markets, services, common opportunities and threats
(101 already started)
Financial Exclusion means lost or neglected business
opportunities as it limits growth and effectiveness.

a. Excluding the people at the bottom of the pyramid has

economic consequences.
b. In Indian context financial exclusion means stifling of
growth of agricultural sector and the small/unorganised
sector cutting across the secondary and tertiary sectors
which together contribute to 40% of GDP and 80% of the
population.
c. This is a barrier to achieving a high economic growth rate
with sustainability.
d. India cannot afford to have financial exclusion