Financial Products Accessibility By Rural Poor - Financial Exclusion

Posted in Finance Articles, Total Reads: 6302 , Published on 14 February 2012

“At 14, I first withdrew money from the nearby ATM; At 16, I had my own Savings Account and debit card; At 18, I started trading in Stock Markets; At 22, I have my own credit card and what’s appalling or rather surprising to hear is – even at 65, Mr. Ram Vilas, residing in a small village of Uttar Pradesh, haven’t seen a bank throughout his lifetime.”

The biggest losers in such a scenario are the banks which have failed to realize that “Fortune lies at the bottom of pyramid”.

Financial Exclusion

Current Situation - Financial exclusion is the inability of individuals, households or groups to access necessary financial services in an appropriate form. It can stem from problems with access, prices, marketing or financial literacy, or from self-exclusion in response to negative experiences or perceptions.


Desired Situation - Financial Inclusion, which is the delivery of financial services at affordable cost to the vast section of disadvantaged and low-income groups. Access to financial services such as loans, savings, deposits, health insurance etc. by the population living in the rural and deep-rural segments has been limited and been the major deterrent of growth in these segments.

Broad Challenges to financial Inclusion


Socio Economic Factors: Constraints such as illiteracy, low income, low savings, unavailability of identification documents, and generally low levels of awareness has led to inaccessibility to funds.

Infrastructural Bottlenecks – Regional Disparities:Poor Infrastructure coupled with remoteness and sparse population in Eastern parts of India has resulted in limited access.

High operational costs: High Transaction Costs as a result of small value accounts has made the idea of providing financial services to unbanked areas financially unviable.

Fit-to-Use Technology is still not enabled: Proliferation of e-financial inclusion or the application of innovative, stable and reliable Information and Communication Technology (ICT) is indispensable for Rural Financial Inclusion. Integrating the daily transactions done through hand held devices with the bank’s main server is a challenge especially for products like savings cum overdraft accounts, pure savings products, remittance products and entrepreneurial credit such as KCC and GCC.

Reducing financial uncertainty for the poor: Natural calamities can have a devastating impact on rural areas and on basic needs of the poor. The losses are imposed upon the poor disproportionately and this may lead to permanent poverty.

Innovative ways to move money: Poor people often find it difficult to move money around safely and make small payments for their transactions. M-payment (Payment through mobile) can be very useful in this context but it requires educating the people and more technological development.

Governance Issue: Historical problems such as the governance issues facing the cooperative credit system and RRBs which need a substantial effort to discipline and reorient thinking, an effort that requires political will in short supply in a system that is geared to populist thinking on account of frequent elections at various levels of government.

Traditional products

Traditional Products

Product Specific Challenges



No Frills Account

Location of banks at a distant place

Lack of Information

Seasonal and Irregular Flow of Income

Bank Correspondent Model

Limited use by banks of BCs

Huge costs of IT Infrastructure

Risk of Reputation Erosion

Cash Settlement within 24 hours by BCs

Credit Counseling Centers

Lack of Trained Staff

Serves as a Marketing Center

Limited Sensitization of Banks

Kisan Credit Cards

MIS related Operational Issues (NABARD Issue)

Unwieldy Documentation

Limited Credit Availability for farmers

Mobile Banking

Security Breach Issues

Difficult to engage Mobile Service Providers(MSPs)

Handset Incompatibility


Difficulty to measure Risk

Inefficient Distribution Channel

Some Innovative Products

Index-based weather insurance: Nature can be disastrous at times for the rural people. It is one of the major reasons of trapping them in poverty. Small farmers are more vulnerable to these weather risks. Index based weather insurance can improve their financial security and protect them from the uncertainties of the weather.

Warehouse receipt system: Farmers have to sell their crops immediately as most of them have no place to store them. During the harvest season, crop prices are the lowest. As a result, most of the farmers have very small financial gains on their crops. To improve this condition, warehouse receipt system can be introduced. Farmers can store their products in a warehouse and they will be given a receipt for the same. This receipt can be used as collateral to get credit up to 70% value of the deposited stocks at reasonable rates. After some time, when the prices go up, the farmers can sell their crops improving their financial gains.

Business models for microfinance

Bank-MFI Partnership model

Bank MFI Partnership Model

Business Facilitator model

Bank facilitator model


SWOT Analysis of Rural Financing:

SWOT Analysis

  • Private capital markets can provide finances for the rural financial products using donor future commitments as collateral to issue bonds.
  • Financial immunity can be provided to the rural people against various financial uncertainties.
  • Technological innovation can significantly reduce the cost, distance and access constraints for the poor and include them in the mainstream.
  • In India, the government has given highest priority to financial inclusion. It has set up UIDAI to improve delivery of public services and also revamp bank and post offices to become outreach units for financial inclusion completed by business correspondents aided by technology.

Big Ticket Idea:

Financial Products

While there are many challenges in sustainably meeting the needs of rural low-income population through microfinance, overcoming these challenges and ensuring that rural men & women have access to finance is critical to the development of the sector by providing services.

This article has been authored by Kuntal Chatterjee from JBIMS, Mumbai.

Image: digitalart /


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