Impact of Financial Inclusion in Banking Service

Impact of Financial Inclusion in Banking Service                                                       

Introduction  

Financial inclusion is a new term which is used in India in recent years. Specific focus on financial inclusion commenced in November 2005, when the Reserve Bank advised banks to make available a basic banking services to the common man.  In such accounts, banks are required to make available all printed material used by retail customers in the regional language concerned. Financial inclusion concept is taking banking services to the common man.  Promoting financial inclusion-access to banking services affordable credit and free face-to-face money advice to disadvantage and low income group. Financial inclusion means that ideally, the government wants people to have their housing payments paid into a bank account and to set up a standing order to pay the rent to their landlord.

Financial inclusion is not an end in itself. Having a bank account, or an insurance coverage, ipso facto, does not mean an enhancement in the economic position. But it acts as a facilitator. Poverty is a well-known problem in most developing countries. But what is needed is to develop mechanisms which ensures that poverty is not exacerbated by lack of access to financial services. People need information and advice when they get into debt. Such information and guidance can best be delivered by appropriate mechanisms. If such effective mechanisms are put in place, they in turn reinforce the demand for credit.

The Financial Inclusion Committee has defined Financial Inclusion as “the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.” 

According to Mr. V.Leeladhar, Deputy Governor of RBI, financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.

   Mr. C.J. Punnathara stated that financial inclusion means extending the banking habit among the less privileged in urban and rural India. But the path of financial inclusion is daunting. It is an essential pre-condition to building uniform economic development, both partially and temporally, and ushering in greater economic and social equity.

Noble Laureate Muhammad Yunus, founder of the Micro Credit Pioneer Grameen Bank, said that banks for not providing loans to the poor and disadvantaged. Only one-third of the population has access to credit while the rest are not credit worthy for the system. We have left two-third of the world poor, disadvantageous and without a starting point, he said.

Liberalizing the financial sector may be a good way for developing countries to stimulate greater dynamism, innovation and competitive pressure, but it does not  promote financial inclusion. Governments need to create stronger incentives for banks to serve the lower income end of the market. All efforts are being made as financial inclusion can truly lift the financial condition and standards of life of the poor and the disadvantaged.

Financial inclusion is intended to connect people to banks with consequential benefits. More than half of the population in India still live their lives without the most basic financial products. India may be world’s second-fastest growing economy but that may mean nothing to nearly half of Indian’s 1.1 billion because they have no access to loans and insurance. In this hi-tech development about the 10 percent of the households don’t have any bank account and a minimum of 20 percent live without the flexibility of the current account. National sample survey organization’s (NSSO) estimates, 45.9 million farmer households in the country, out of  a total of 89.3 million households, do not access credit at all. Despite the vast network of bank branches, only 27 percent of total farm households are indebted to formal sources, of which one-third also borrow from informal sources. This situation made RBI to bring financial services revolution. In recent times the government has taken steps to provide insurance services to those who are living below poverty line and providing bank account in the name of old age pension scheme and senior citizens. Financial inclusion is a key part of the government, social inclusion policy and it has applied pressure on its departments to review reform and regulate when and where necessary.  

Aims  of Financial Inclusion

The aims of financial inclusion is to see that everyone has access to appropriate financial products, and the confidence and capability to use them to make a positive difference to their lives. It is a financial comparison site for consumers to purchase financial services products such as general insurance, credit cards, loans and savings accounts. Financial inclusion has identified several financial organizations  which offer competitive deals to the public. The main objectives of financial inclusion are;

ð  To focus on more than just price. Product features and service measures should also be included.

ð  To give more advice to customers-making the service open to more than just the financial aware.

ð  To provide more education for the less financially aware.

ð To offer more than a “one size fits all” approach. So customers can pick according to the need.

Table No.1: Coverage of Banking Services

(Ratio of Demand Deposit Accounts to the adult population)

Region/State/Union Territory	Current Accounts	Savings Accounts	Total Population	Adult Population (Above 19 years)	Total No. Of accounts	No. of acc. Per 100 of population	No. of acc. Per 100 of adult pop.
NORTHERN REGION	4215701	52416125	132676462	67822312	56631826	43	84
Haryana	572660	8031472	21082989	11308025	8604132	41	76
Himachal Pradesh	134285	2433595	6077248	3566886	2567880	42	72
Jammu & Kashmir	277529	3094790	10069917	5379594	3372319	33	63
Punjab	1156137	13742201	24289296	14185190	14898338	61	105
Rajasthan	689657	12139302	56473122	28473743	12828959	23	45
Chandigarh	80607	1126696	900914	546171	1207303	134	221
Delhi	1304826	11848069	13782976	7929589	13152895	95	166
NORTH-EASTERN REGION	476603	6891081	38495089	19708982	7367684	19	37
Arunachal Pradesh	10538	209073	1091117	544582	219611	20	40
Assam	378729	5071058	26638407	14074393	5449787	20	39
Manipur	12514	200593	2388634	1222107	213107	9	17
Meghalaya	24305	458779	2306069	1088165	483084	21	44
Mizoram	3441	117885	891058	476205	121326	14	25
Nagaland	13819	195452	1988636	995523	209271	11	21
Tripura	33257	638241	3191168	1784212	671498	21	38
EASTERN REGION	1814219	47876140	227613073	122136133	49690359	22	41
Bihar	464511	13225242	82878796	40934170	13689753	17	33
Jharkhand	166007	5834341	26909428	13737485	6000348	22	44
Orissa	228160	7030004	36706920	21065404	7258164	20	34
Sikkim	4097	125365	540493	288500	129462	24	45
West Bengal	942733	21544753	80221171	45896914	22487486	28	49
Andaman & Nicobar Islands	8711	116435	356265	213660	125146	35	59
CENTRAL REGION	2202217	64254189	255713495	129316677	66456406	26	51
Chhattisgarh	192067	3346898	20795956	11209425	3538965	17	32
Madhya Pradesh	553381	11731918	60385118	31404990	12285299	20	39
Uttar Pradesh	1324509	45804350	166052859	82229748	47128859	28	57
Uttaranchal	132260	3371023	8479562	4472514	3503283	41	78
WESTERN REGION	3178102	49525101	149071747	86182206	52703203	35	61
Goa	81551	1584177	1343998	891411	1665728	124	187
Gujarat	955964	16220262	50596992	28863095	17176226	34	60
Maharashtra	2127240	31568184	96752247	56207604	33695424	35	60
Dadra & Nagar Haveli	6076	69308	220451	122765	75384	34	61
Daman & Diu	7271	83170	158059	97331	90441	57	93
SOUTHERN REGION	4666014	83386898	223445381	135574225	88052912	39	65
Andhra Pradesh	1156405	23974580	75727541	44231918	25130985	33	57
Karnataka	1086662	19147819	52733958	30623289	20234481	38	66
Kerala	600065	17669723	31838619	20560323	18269788	57	89
Tamil Nadu	1786514	22052812	62110839	39511038	23839326	38	60
Lakshadweep	491	22997	60595	33686	23488	39	70
Pondicherry	35877	518967	973829	613971	554844	57	90
ALL-INDIA	16552856	304349534	1027015247	541031553	320902390	31	59

Source: Reserve Bank of India

Table No.1 revealed that region wise and State wise deposit account holders to the adult population. Only 31 percent of account holders cover under financial inclusion. 59 percent of adult population cover under financial inclusion in our country. Region wise Chandigarh State stands first in financial inclusion coverage, next comes under Delhi (figure shows on the table no.1). In North-Eastern Region Meghalaya State stands first with 21 percent of population and 44 percent of adult population comes under financial inclusion. In the Eastern Region Andaman and Nicobar Islands stands first with 35 percent of population and 59 percent of adult population comes under financial inclusion. In the  Central Region Uttar Pradesh stands first with 41 percent of the population and 78 percent of adult populations covers under financial inclusion.

In the Western Region, Goa State stands  first in financial inclusion. In the Southern Region, Pondicherry first with 57 percent of population and 90 percent of adult population cover under financial inclusion. In the entire country Manipur stands least with 9 percent and 17 percent of adult population comes under financial inclusion. The table gives a clear indication the steps to be taken by the Central and State Governments, RBI, NGOs, for financial inclusion and to bring awareness among the people.    

Financial Inclusion Via Financial Exclusion

Financial Exclusion means bank users  who  don’t have access to basic financial services like bank saving account, credit card account, retail banking, utilization of Automatic Teller Machines(ATM),  and electronic bank facilities  etc. Many people, particularly those living on low incomes, cannot access mainstream financial products such as bank accounts and low cost loans. This financial exclusion imposes real costs on individuals and their families-often the most vulnerable people in the society.      

Lack of awareness is a major factor for financial exclusion. RBI is taking a number of measures for increasing financial literacy and credit counselling. A multilingual website in 13 Indian languages on all matters concerning  banking has been launched in June 18, 2007. Comic type books  introducing banking to school children have already been put on the website and financial literacy programmes are being launching in each State.

In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and exclusion. At one extreme, it is possible to identify the ‘super-included’, i.e., those customers who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products.  Those who use the banking services only for deposits and withdrawals of money. But these persons may have only restricted access to the financial system, and may not enjoy the flexibility of access offered to more affluent customers.

  Financial exclusion laysdown  at the core of a framework in which huge rural areas of the people  continue in poverty with no hope of improving a lot. Consequences of financial exclusion will vary depending on the nature and extent of services denied. According to some researches, financial exclusion can lead to social exclusion.

Financial Inclusion Should Focus On:

Financial inclusion is about ensuring that all have access to appropriate financial services, enabling them to:

ð  Provision of full range of financial services i.e., going beyond credit to deposit and payment services.

ð  Meet requirements of individuals ranging from consumption to basic education, health and other services  

ð  Manage their money on a day-to-day basis, effectively, securely and confidently

ð  Plan for the future and cope with financial pressure, by managing their finances to protect against short-term variations in income and expenditure and to take advantage of longer-term opportunities;

ð A small but significant minority of people are unable to access even the most basic financial services and instead find themselves trapped outside the financial mainstream.    

ð  Basic bank accounts can also be used at Post Offices where cash can be withdrawn at no cost. Basic bank account holders have full access to branch and counter services and the ATM network.

ð  Low-income groups do not have access to the formal banking systems, as they usually do not have the documents needed to open a bank account. The individual who wants to open a bank account needs to be certified by an existing account holder with whom all the Know-Your-Customer (KYC) norms have been completed.

ð  No-frills bank accounts are of a restricted nature and put a limit on the number of transactions.

Table No. 2: Spatial Distribution of Banking Services                                                                                                                                           

                                                                                                                     (Per cent)

                                      Offices                           Deposits                            Credit

	1969	1996	2005	1969	1996	2005	1969	1996	2005
Rural	22.2	51.2	45.7	6.4	14.4	12.2	3.3	11.4	9.5
Semi-urban	40.4	21.3	22.3	21.8	19.5	16.9	13.1	13.1	11.3
Urban	19.2	15.2	17.6	21.5	22.4	21.5	21.8	17.7	16.4
Metropolitan	18.2	12.3	14.4	45.3	43.7	49.4	61.8	52.8	16.2
Total	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0	100.0

Source: Reserve Bank of India

The table no. 2  reveales that, the share of deposits and credit in rural and semi-urban areas is on the decline. In contrast, the share in metropolitan areas is rising. The share of credit is lower than that of 9 deposits in all regions except metropolitan, implying that resources get intermediated into metropolitan areas. This in itself may not necessarily be undesirable or unexpected if resources are being intermediated to their best uses.  

  

Changing Trends in  the Banking Services

            The financial sector in India has been primarily dominated by the banking system. Scheduled commercial banks occupy a predominant position in the financial system, accounting for around three-fourths of the total assets. As at end-March 2007, the public sector banks accounted for 70 percent of the total assets of scheduled commercial banks. Foreign banks operating in India accounted for about 8 percent of the assets of scheduled commercial banks. The regional rural banks (RRBs)and the cooperative banks, with two broad segments of urban and rural co-operative banks also form an integral part of the Indian financial system.

As financial inclusion  continues to evade a large segment of rural and urban poor, the country’s financial assets remain heavily skewed in favour of urban India. Recent figures from the central bank reveal that the 85 commercial banks with their predominant presence in urban India account for 78 percent of the country’s financial assets. The 3,000 co-operative banks account for just 9 percent and the regional rural banks contribute a mere 3 percent. Compounding the problem, several co-operative and RRBs have been trying to gain a foothold in semi-urban and urban pockets, even as the commercial banks continue to shy away from rural India. But for the strict RBI guidelines and vigilant enforcement, rural banking would have remained a mere tokenism.          

Public sector banks would rather think on these lines and support professional institutions and organizations that can deliver real services. Banks will be encouraged to embrace the concept of total financial inclusion. Government will request all scheduled commercial banks to follow the example set by some public sector banks and meet the entire credit requirements of self help group members through;

i).  Income generation activities,

ii). Social needs like housing, education, marriage etc and

iii).Debt swapping.

Indian economy in general and banking services in particular have made rapid strides in the recent years. However, a sizable section of the population, particularly the vulnerable groups, such as weaker sections and low income groups, continue to remain excluded from even the most basic opportunities and services provided by the financial sector. These services are:

ð  A savings product suited to the pattern of cash flows of a poor household.

ð  Money transfer facilities.

ð  A non- frills banking account for making and receiving payments.

ð  Small loans and overdrafts for productive, personal and other purposes, and

ð  Micro-insurance.

RBI Policy on Financial Inclusion

The RBI Governor Dr. Y.V.Reddy addressed that financial inclusion is not a matter of philosophy but can lead to a win-win situation for the banks and the customers. Treat financial inclusion as an investment for business. It’s the mass movie that makes money. Commercial consideration is important, yet the banks should provide banking services to all segments of the population on equitable basis. He recommended banks about several privileges they have been bestowed, with especially of seeking public deposits on highly leveraged basis.   He included the following points in the paragraph, as antidotes to exclusion.

ð  Policies to encourage banks that provide extensive services and disincentivising those that are not responsive to the banking needs of the community, including the underprivileged.  

ð  Monitoring the nature, scope and cost of services, to assess whether there is any denial, implicit or explicit of basic banking services to the common man.

The RBI has also decided to place details relating to service charges of individual banks for the most common services in its website. The Reserve Bank of India (RBI) urged banks to review their existing practices to align them with the objective of financial inclusion.

i). No-Frills Accounts

The RBI has asked banks to make a basic banking ‘no-frills’ account available for low-income individuals, with either zero or low minimum balances and charges.
The nature and number of transactions in such accounts would be limited, the details of which would be made known to customers in advance in a transparent manner. The RBI has also urged all banks to give extensive publicity to such ‘no frills’ accounts to enable financial inclusion.

  A large number of the schemes are proving successful, it is time that banks started playing a more pro-active role. No-frills account  should be promoted to plough back the returns from these projects into bank coffers, thus encouraging the savings habit and ensuring that banks act as a repository of savings and sources of credit. There are several rural and urban development programmes  promoted by the government to eradicate poverty. If banks are also made an effective intermediary, greater financial inclusion could be one of the meritorious outcomes. As some of the projects become successful and self-sustaining, greater financial inclusion would become possible. 

The no-frills bank account introduced by several commercial banks a few months ago had all the potential to revolutionize India’s rural agricultural economy, as well as usher in the banking habit amongst a large number of the less privileged population. Though the RBI promoted the no-frills savings bank account with the express intention of bringing greater financial inclusion among the people, banking continues to remain an elitist to lower middle-class pursuit, restricted mainly to urban India.

ii). Know Your Customer (KYC)

The RBI has also eased the ‘Know your customer’ (KYC) norms to keep the procedural hassles involved in opening a bank account, to the minimum. This is to enable those belonging to low-income groups to open bank accounts without documents of identity and proof of residence.

 In such cases, banks can take the individual’s introduction from an existing account holder on whom the full KYC procedure has been completed and has had satisfactory transactions with the bank for at least six months. The photograph and address of the prospective account holder need to be certified by the person who introduces him/her. These simplified KYC norms are applicable to those who intend to keep balances not exceeding Rs 50,000 in all their accounts taken together. The total credit in all the accounts taken together should not exceed Rs 1 lakh in a year.

iii).Financial Inclusion Through Biometric ATMs

          Banks in India are recognizing the importance of technology to retain their competitiveness and customer loyalty in the rapidly changing business environment. Migrating routing transactions to the Automated Teller Machine(ATM) channel enables banks to free resources while focusing on revenue generation and improving customer satisfaction. Most importantly, the need is to establish and maintain consumer trust in self-service, using a portfolio of fraud prevention measures and a holistic approach to security. Banks in India will now be able to deploy ATMs to the most remote sites in India, thereby enabling them to offer banking services to the un-banked rural population.    Banks will be able to increase their ATM penetration with reduced overhead costs, faster deployments, better security, improved efficiency and functionally compared to other legacy technology being used.  

Manager-NCR Corporation Mr. P.P Manjunath  expressed  that one in every 9 persons on earth is a rural India, nearly 70 percent of Indian villagers do not have a bank account, and tapping them would require multiple banking channels. Low-cost ATMs, smart cards and mobile payments are some of the solutions. The recent directive from the RBI on financial inclusion is a  key driver for the growth of such solutions in India.              

            Banks in India are looking at deploying biometric ATMs targeted to reach the un-banked  population in rural India. Using thumbprint and voice guidance in ATMs reduces literacy requirements to a considerable extent. Thus, establishing the identity of a rural depositor through biometrics makes it possible for illiterate or barely literate people to become part of the banking user community. A simplified menu on ATMs coupled with possible audio guidance in local language enables easy use for rural masses. So far, bank ATMs are dependent on PIN (Personal identification number) verification. The fingerprint authentication method is Non-PIN based, and this requires enhancements to the standard switch environment. Though identification can be via face, voice, retina or iris, fingerprinting has the advantage of being a familiar concept worldwide. Many  Indian banks have  started implementing biometric applications in retail branch applications for officer authentication. Elsewhere in the world, efforts are on enabling payments through Kiosks based on fingerprints (non-card based). ATM enhancements with biometric support envisaged by vendors eliminate the need for PIN entry, and authenticate customer transactions by thumb-impressions. 

             

iv). Activities of RRB

Identifying that the Regional Rural Banks (RRBs) with their dominant presence in backward and tribal areas can become powerful instruments of financial inclusion, measures have been taken to strengthen them through consolidation of the 196 banks into 92 banks, making sponsor banks responsible for their performance, liberalizing branch licensing in their area of operation, recapitalizing RRBs having negative net worth and providing them with facilities to upgrade their staff skills. Working groups have been set up to explore how these banks could be supported to bring in core banking solutions for financial inclusion. To strengthening of the RRBs could be one major policy intervention for promoting greater financial inclusion. The operations of RRBs could be expanded to 80 hitherto uncovered districts. 

v). Role of MFIs  in Rural Economy

          Financial inclusion is a new buzzword in banking circles. Taking services to the hitherto unbanked categories in the rural and semi urban areas through various methodologies such as banking correspondents, banking facilitators, financial intermediaries, Micro-Financial Institutions(MFIs) etc. is an important agenda for national bank for agricultural and rural development (NABARD). Government of India is also contemplating to make NABARD as the regulatory authority for the MFIs in the country.

NABARD has been closely involved in entire programme by way of organizing training programmes for SHGs, banks, conduct of orientation meets, studies, devising accounting systems, training in book keeping etc. Financial inclusion is also aimed to be achieved through the formation and financing of Rythu Mitra Groups(RMGs) in the State. RMGs are groups of small and marginal farmers, tenant farmers, share croppers, oral lessees etc., who will be benefited with bank credit. Besides, as on the lines of SHGs, RMGs will also be empowered with transfer of technology, access to market information, training etc. Besides the Kisan Credit Cards( KCCs), banks have been asked to consider introduction of a General purpose Credit Card (GCC) facility up to Rs. 25,000 at their rural and semi-urban branches. This facility is in the nature of revolving credit, which entitles the holder to withdraw up to the limit sanctioned.

In Andhra Pradesh phenomenal success, has already been achieved in the sphere of financial inclusion for micro credit to rural poor through the SHG Bank linkage programme. As on 31^st  March, 2006 there were 5.87 lakh SHGs in the State out of which 2.24 lakh have been credit linked to banks. This formed 26 percent of the total SHG bank credit linkage achieved in the country. The average per group finance stood at Rs. 74,000.

            MFIs in the A.P. State became very popular as they could address some of the issues such as delivery of bank credit at the doorstep of the farmers. It may be a good idea for the banks to borrow some of the practices followed by MFIs. The time seems to have come when experiments such as “barefoot banking” may have to be started. A growing component of inclusive banking is the lending by MFIs that are societies, trusts, co-operatives or ‘not for profit’ companies or non-banking financial  companies (NBFC) registered with the Reserve Bank. This sector currently covers 8.32 million borrowers. The NBFC segment within this sector accounts for 42.8 percent of the borrowers and is the fastest growing segment.

 Financial  inclusion can transform some of them into productive and self-sustainable projects. The micro-credit programme launched through numerous non-government organizations has found fancy with the banking industry and can prove to be an excellent tool to bring in greater equity through financial inclusion. Several of the micro-credit schemes have been eminently successful and have brought rich rewards to the beneficiaries. With hardly any non-performance assets(NPAs) in micro-credit disbursal, banks have begun to pursue and extend micro-credit aggressively. Some banks have been able to double micro-credit disbursal during the last one year even as some larger players are contemplating entering the arena in a big way. Micro-credit should not only be used to redress poverty and usher in greater equity, but should prove a tool to bring the rural and urban under-privileged into total financial inclusion as well. Most of the beneficiaries continue to view non-government organisations and banks as conduits of credit.          

Committee on Financial Inclusion

           

  The Government of India constituted a ‘Committee on Financial Inclusion’ under the Chairmanship of Dr. C. Rangarajan. The committee submitted its report to Union Finance Minister on 4^th January 2008.  He is also Chairman of the Prime Minister’s Economic Advisory Council. The major recommendations of the committee include:

ð  To make the banking services available to everyone, technology has to be leveraged to create channels beyond branch network to reach the un-banked al over the country.

ð  On making rural branches more effective in credit delivery system, he said rural lending requires a specific type of organizational ethos, culture and attitude. Rural branches of banks have to be farmer-friendly.

ð  There is need for an attitudinal change, there is need for a change in organizational structure and there is need for innovative models of delivery at the doorstep. Financial inclusion is no longer an option, it is a compulsion.  

ð  At least 80 percent of the assets of MF NBFCs should be in the form of micro-credit.

ð  The formation of a National Mission on Financial Inclusion comprising representatives from all stakeholders (the RBI, Central and State Governments), which will aim at achieving financial inclusion within a specific time frame.

ð  The commercial and regional rural banks should set themselves a minimum target of covering 250 new cultivator and non-cultivator households per branch per annum “In five years, and hope to cover around 50 percent of financially excluded households, say 55.77 million households. The balance can be covered by 2015.”    Including RRBs, to add at least 250 rural household accounts every year at each of their rural and semi-urban branches.

ð  The committee recommended an amendment to the NABARD Act to enable it to provide micro-finance services to the urban poor.   

ð  The success of self help groups has promoted the committee also to recommend the formation of “Joint Liability Groups” which would cater to share croppers, oral lessees and tenant farmers whose loan requirements are much larger but who have no collaterals to offer. “Compared to an SHG which has 12-15 members, these groups will have fewer members.”  

ð  The committee has proposed setting up two funds for the poor. The financial inclusion fund (FIF) and the financial inclusion technology fund (FITF) with an initial corpus of Rs. 500 crores. FIF aims at economic betterment of the poor, while FITF will invest in information technology aimed at promoting financial inclusion.  The government and the RBI would be contributing 40 percent each of the corpus. While NABARD would contribute towards the balance 20 percent. 

Dr. Rangarajan said that;

ð  He suggested that at least one branch of the lead bank at the block or taluk level can be designated as a nodal branch to address the issue of exclusion.

ð  He said that banks must take the initiative   to remove the obstacles that come in the way of an extended use of facilitators and correspondents.

ð  He is not in favour of using money lenders as business correspondents. Ultimately, banks should endeavour to have a business correspondent touch point in each of the 600,000 villages in the country. Banks should also look at expanding branch network in under-banked areas.

ð  He said that the move will help access to financial services to at least 50 percent of the financially-excluded households by 2012. The remaining households will have to be covered by 2015.  

ð  He suggested that a portion of the funds’ money can be used to strengthen the self-help group bank linkage. The objective of  financial inclusion is to extend the scope of activities  of the organized financial system to include within its ambit people with low incomes.

         

Government Policy Context

Financial inclusion is a key part of the government’s social inclusion policy and it has applied pressure on its departments to review, reform and regulate where necessary. The government’s main goals for financial inclusion are about ensuring that everyone has access to appropriate financial services, enabling them to:

ð  Manage their money on a day-to-day basis, effectively, securely and confidently;

ð  Plan for the future and cope with financial pressure, by managing their finance to protect against short-term variations in income and expenditure, and to take advantage of long-term opportunities; and

ð  Deal effectively with financial distress, as unexpected events lead to serious financial difficulty.

Major Steps Taken Towards Financial Inclusion

In the context of initiatives taken for extending banking services to the common  man, the mode of financial sector development until 1980’s was characterized by

ð  A hugely expanded bank branch and cooperative network and new organizational forms like RRBs;

ð  A greater focus on credit rather than other financial services like savings and insurance, although the banks and cooperatives did provide deposit facilities;

ð  Lending targets directed at a range of ‘priority sectors’ such as agriculture, weaker sections of the population, etc;

ð  Significant government subsidies channeled through the banks and cooperatives, as well as through related government programmes;

ð  A dominant perspective that finance for rural and poor people was a social obligation and not a potential business opportunity.

Financial inclusion on private sector involvement and solution for extending reach to poor yields better and sustainable results. In India private sector with supportive government environment played an instrumental role in promoting financial inclusion. Extending the reach of formal financial institutions among the poorest of the poor should mean taking them out of the clutches of money lenders.  

i). Action Plan (2008-11)

The government’s action plan for financial inclusion, “financial inclusion an action plan for  2008-2011, sets out in detail how the government will use the $ 130 million financial inclusion fund, announced in the CSR, to achieve its financial inclusion objectives over the next three-year spending period from April 2008 to March 2011. The action plan sets out a range of measures –in three priority areas-access to banking, access to affordable credit, and access to free face-to-face money advice.            

ð  An extension to the ‘Financial Inclusion Taskforce’ until March 2011, so that it can continue to monitor and evaluate progress and advise the Government  on financial inclusion developments, and

ð  A ministerial working group chaired by the Economic Secretary to the Treasury, with members from the department for work and pensions, the department for business, enterprise and regulatory reform, the department for communities and local government, the cabinet office and the Ministry of Justice to develop an action plan for financial inclusion in 2008-11.     

ii) Asset Based Welfare Policy

          The anti-poverty lobby and living wage campaign are well established. A very recent innovation is asset based welfare policy. It is suggested that increasing an individual’s or community’s asset holding can increase social mobility and offers a positive route. Research shows that people in lower incomes are least likely to save or hold assets. The saving gateway is one policy the government is piloting to encourage low income households into savings.

            The need of the hour is to take an asset based welfare policy. The financial institutions must come into use by each and every individual of our country. Hence, the financial institutions play a key role in bringing awareness to the rural people regarding financial inclusion. In our country postal department is also operating a vital role in the financial inclusion. But there are some restrictions for operating in certain schemes in post-offices. Voluntary sector has a key role in promoting initiatives like saving gateway and other community banking programmes. Similarly some parts of financial sector need to open their doors more widely and become aware of the changing economic trends of the world in which they work in promote a more outward-looking customer centric model to work alongside their target based profit driven model.

            Financial inclusion includes several benefits to the consumers and the economy. Establishing of an account relationship can pave the way for the customer to avail the benefits of a verity of financial products, which are not only standardized, but also provided by institutions that are regulated and supervised  by credible regulations, and are hence, safer. The bank accounts can also  be used for multi-purpose activities. The economy benefits as greater financial resources become transparently available for efficient intermediation and allocation that have the highest returns. The single gateway of banking accounts can be used for several purposes and represents a beneficial situation for all the economic units in the country, improvement in rural infrastructure will  lead to better over all supply chain management, enhance productivity of physical resources in the rural areas and greater addition in agriculture.  These developments would lead to much greater demand for banking activity in rural areas. Hence the economy begins to grow rapidly and the banking system will be expected to increasingly provide larger quantum of funds to existing and emerging enterprises.   

 

Conclusion       

             The banking system must also take it a challenge, maximum branches must be opened in rural areas. The government policy on self help groups only helps two percent of the population. Educational institutions must bring awareness among the rural masses and urban unemployed youth to utilize the banking services to the maximum for earning the daily bread and butter. Financial inclusion imparts formal identity and provides access to the payment system. Therefore, financial inclusion  is considered to be critical for achieving inclusion growth which itself is required for ensuring overall sustainable growth in the country.  

In this liberalized economy rich becoming  very rich and poor becoming very poor leading to inequalities. There are many issues which need to be taken into account when considering the best course towards financial inclusion. A recent report on poverty suggests that there has been little change over the last six years in the number of financially included people. There is still a long way to go, but the need for change becomes ever more acute. One of the main characteristics of the work should be that it is collaborative and ‘joined-up’, harnessing the strengths and expertise of all those involved, whether in policy, government, regulation, education, industry or the voluntary sector.

India is an agrarian country and even after 61 years of independence, we find barter system in rural India. People speak of hi-tech administration, which is not reaching to the rural masses. In January 2006 the RBI permitted banks to utilize the services of non-government organisations, self-help groups, micro-financial institutions, and other civil society organization as intermediaries in providing financial and banking services through the use of business facilities and business correspondent model. The business correspondent model allows banks, to do “cash-in and cash-out” transactions at a location much closer to rural population.

The health of an economy depends very much on the kind of banking services.  After a decade of reforms, the banking services are slowly emerging stronger. Regulations are forcing the banks to adopt better operational strategies. They will also have to enact new laws and regulations relevant to the new developments. Existing institutions will have to be geared up to withstand new challenges of future. Banks need to have good models in place to understand and manage them on a regular basis. Therefore, in the Indian economy the banking services has been shaped as an instrument of economic development.  

Banks could have to evolve specific strategies to expand the outreach of their services in order to promote financial inclusion.  Banks should give wide publicity to the facility of no frills account.  In remote areas, ATMs machines can be modified suitably to make them user friendly for people who are illiterates. The RBI has been encouraging the use of information communication technology  solutions by banks for enhancing their outreach with the help of their business correspondents. Mobile phones has been developed to serve as card readers.  

            It is high time  that banking sector executives along with government officers and voluntary agencies must come forward in making the people to know about the worthfullness  of  banks and their services. Today majority of government job holders, private sector job holders are financial excluded because they don’t know how to utilize the finances in a proper  economic way. Financial institutions are not meant for simply crediting the money and withdrawing the money and  salaries. People have the notion that financial institutions are meant for traders, business persons and getting more profits. Financial institutions  are meant for serving the people and growth of the nation. That notion must be changed from the minds of the people and financial institutions must try  the best to utilize their services by the each and every individual.         

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