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Financial Inclusion - Next Engine Of Growth for India

Posted in Finance Articles, Total Reads: 2815 , Published on January 04, 2013

These days we get to hear a lot about financial inclusion, inclusive growth, banking reforms, Rajan taking over RBI Governor but what does it actually mean and how they are interlinked to each other. So let clear our concepts over the above mentioned concept. Financial inclusion is thought to be a core objective for the growth of the developing nations. It is so because it is directly correlated to the poverty in the country. According to World Bank report “Financial inclusion, or broad access to financial services, is defined as an absence of price or non price barriers in the use of financial services.” But in India, financial inclusion means to provide the financial services and the products to the people lying in the bottom of pyramid at an affordable cost. With 12th five year plan (2012—2017) focussing on sustainable and inclusive growth, but we observe this growth is worsening in India especially in the rural parts of the country. Currently, the growth rate of India is 4.4% per annum and India stands 2nd in terms of financial excluded people after China. The above statistics itself show that India needs to travel a long path ahead. At present, 34% of Indian population has access to basic banking services with around 75 million underprivileged people living in town and cities who do not access to any of the service that a bank provides. The reasons attributed to this state are many which we will discuss further.

Image Courtesy: freedigitalphotos.net

Firstly, we should know what the services are provided by a bank

Source: Rangarajan Committee Report

Let’s understand this cycle. If a poor person has some financial knowledge and access to a bank, he would deposit his money in the bank and would enjoy some benefits such as interests, better access to loans, financial advice and many more. Due to this, money laundering would be reduced to great extent. With the cash reserve generated in the bank, it can know use it for further investment according to economy and maintaining a better monetary policy. On the other hand, the poorer people are becoming knowledgeable and using the loan money for investment purpose. So both the parties are at win –win situation, helping the country to grow better rate.

Need for Financial Inclusion

Before we move on further to understand about our country situation, what steps to be taken, we need to be clear why financial inclusion is important at all. Few of the reasons are:

1. Reducing the gap between the different section of the society

2. Reduction In the poverty levels and unemployment

3. Increase in awareness about the financial product

4. Reduction in regional or social disparity

5. Increase in the investment for infrastructure

6. Sustainable livelihood

7. Political Objective

Challenges towards Financial Inclusion

1. Regional distribution of the banks :- There is an uneven distribution of the banks in the four parts of the country

2. Poverty Level: - more than 60 % of population is still not aware of the services that a bank provides to them and the advantages of using it. There exists an inverse relationship between the poverty level and the FI.

3. Bank Branches: - There is a need to increase the number of branches or rather introduces branches at every nook and corner of country.

4. SC/ ST /minority: -Increase in the efforts to provide financial inclusion in areas where the SC/ST or the minority class live.

5. Apprehension of the Bankers towards FI :- Even though many bankers agree to the policy and financial inclusion in the country but in the hindsight they are averse to the cost incurring in opening of no frills account

6. Absence of integration of technology to banking services: - Due to lack of usage of new technology, banks are lagging behind and not able to reach the poor in fast and efficient manner.

Approach of RBI towards the financial inclusion

RBI has taken many steps towards the improvement of FI in India. Some of them are:

1. Viewed FI as a commercial activity for the bank to increase their customer base and position among the competitors in the industry.

2. Seamless integration of technology with the core banking system to provide better reach in the nooks and corner of the country.

3. Development of new and integrated channels for the banks to provide better services to the unbanked people in rural and urban areas.

4. Integrated efforts toward financial inclusion and financial literacy. Some of the initiative in this area taken by RBI are National Strategy for Financial Education (NSFE) has also been finalized under the aegis of the Financial Stability and Development Council (FSDC)

Some of the policy changes taken by RBI are:

1. Increase in number of branches in rural areas: - Mandating to open 25% branches in the rural areas and they need no permission to open up the branches with population less than 1 lakh.

2. Agent Banking – with the help of the intermediaries such as bank correspondents (BC), they are able to do the cash in/out transaction for the rural people at a nearby branch themselves avoiding them to travel.

3. Relaxing the KYC norms – It helps many people to open and maintain an account despite of having few documents. Allowed self-certification in presence of bank officials. Linking to the aadhar card

4. Reduction of minimum balance and interest rates

5. Direct Benefit Transfer: - Opening up of new accounts on the aadhar basis so as to transfer the amount directly to beneficiary bank account.

Extent of Financial Inclusion

FI in India is measured by the financial inclusion index which is then divided into the three ranges – high, medium and low. The distribution of the Indian states in the three ranges is given below:


Source: RBI working paper on Financial inclusion in India: A case study on Bengal by Sadan Kumar Chattopadhay

We see that still 50% of states lie in low level of FI (less than 0.3) which is major area of concern for the government with respect to the growth of the country. States like Assam, Nagaland and Manipur need special attention at this point of time. If see in terms of number of branches:

From the above data we see that there is sharp and huge growth in the number of banks but still the FI is not moving at respectable growth rate.

From the above data we analyse that only 22 % population of rural have formal bank accounts compared to the 35% in urban areas. Secondly these people are ready to approach a bank for lending purposes rather than to save their money.

How other Economic factors affect Financial Inclusion

1. GDP growth rate: - The gross domestic product growth rate is positively correlated to financial growth in the country. As GDP comprises of the production in the country and net transfers, we see that if India has a rise in the manufacturing sector then the cash generated and required would result in the increase in the usage of the banking services and product by many excluded people. It has observed that the current account deficit (CAD) to GDP ratio has come down to 3.8 per cent in Q4 of 2012-13 from its historic high of 6.5 per cent in Q3 of 2012-13, indications are that it may have increased again in Q1 of 2013-14.

2. Gold: - Even today many people in the population show confidence in the bank only when it has brick and mortar presence. Due to lack of branches in many regions of country, a poor or an uneducated person tends to create his and his family saving by investing in gold. Gold rather than an ornament or jewellery is more resonated with savings of a person. If on average we start looking at a personal saving of poor Indian, we find that even though they may not have a stable earning, but they have on average gold for Rs 2 lac. Trade deficit has widened in Q1 of 2013-14 on account of contraction in exports and sharp increase in gold imports. To avoid investment in gold, government has increased the import duty on yellow metal to 8 % from 6% on September 6, 2013. It is done to curb the demand, and allowing the people to invest in banks.

3. Rupee falling: - These days with rupee on a downward trend reaching 63.92 on September 14, 2013 people are losing confidence in the market with economic scenario going for turmoil. Also as the rupee falls the CAD is increasing and cost of providing services for Financial Inclusion creates a burden on the bank. Therefore it creates a negative impact on the bank perspective.

Current Happenings

Raghuram Rajan has announced several short term measures for the strengthening of rupee and is still focussing on the long term measures such as financial exclusion.

This article has been authored by Rohit Dhir , NMIMS and Swati Chopra , MDI Gurgaon


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2. http://rbi.org.in/scripts/BS_SpeechesView.aspx?Id=813

3. http://www.rupeetimes.com/article/personal_loan/need_of_financial_inclusion_making_the_country_financially_literate_3370_P4.html

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6. http://www.worldbank.org/en/country/india

7. Chattopadhyay, S. (2011) Financial Inclusion in India: A case-study of West Bengal. “Financial Inclusion and Banks: Issues and Perspectives”, RBI Monthly Bulletin, November 2011.

8. Financial Inclusion For Inclusive Growth Of India - A Study Of Indian States,Radhika Dixit & Munmun Ghosh

9. Communiqué Meeting of Finance Ministers and Central Bank Governors Moscow, 19-20 July 2013

10. An Analytical Study: Relevance of Financial Inclusion For Developing Nations by,Dr. Anupama Sharma, 2, Ms. Sumita Kukreja

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