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The role of commercial banks in the promotion of financial inclusion
Chapter I
INTRODUCTION
The period of economic reforms has witnessed the key catalytic role played by banks in the
achievement of high growth in the Indian economy. While the benefits of growth due to reforms,
have concentrated in the hands of those already served by the formal financial system, a large
section of the rural poor still does not have access to the formal banking channel. Further, the
backward regions of the country, too, lack basic financial infrastructure. An essential pre-requisite
for inclusive and sustainable growth is capital formation through credit and financial services.
Therefore, access to a well-functioning financial system, by creating equal opportunities, enables
economically and socially excluded people to integrate better into the economy, so as to actively
contribute to development and protect themselves against economic shocks (RBI, 2008). The
Reserve Bank of India (RBI) has, therefore, formulated the policy of financial inclusion with a
view to provide banking services at an affordable cost to the disadvantaged and low-income
groups.
The RBI has observed that out of 600,000 habitations in the country, only about 5 percent
have a commercial bank branch. Also only about 57 percent of the population across the country
has bank account (savings), and this ratio is much lower in the North-Eastern states. Further, 13
percent of the population has debit cards and 2 percent has credit cards. India has a significantly
low level of financial penetration compared with OECD countries (RBI, 2010).
In view of the poor level of financial inclusion in India, RBI has accorded top-most policy
priority to financial inclusion, by advising commercial banks, to formulate specific Board
approved Financial Inclusion Plans (FIP) and to act on them on a mission mode.
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 regulated, mainstream institutional players. Financial Inclusion is important not only
from the perspective of the benefit it provides to the poor but also from the perspective of overall
stability of the social and economic system of the country. Financial Inclusion of the poor has a
Krupanidhi Degree College
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multiplier effect on the economy as a whole, through higher savings pooled from the vast
segments of the population present at the bottom of the pyramid. There is a potential for
transforming the lives of these excluded groups by providing access to formal savings
arrangements and extension of credit by banks for emergency and entrepreneurial purposes,
thereby enabling the poor to create assets, generate stable income, build resilience to meet macroeconomic and livelihood shocks and bring about an improvement in their financial condition and
living standards.
India has seen historic progress and growth in the past decade. While the growth story has
been impressive, there are causes for concern on other dimensions. We have a long way to go in
addressing concerns of absolute poverty. Low-income Indian households in the informal or
subsistence economy often have to borrow from friends, family or usurious moneylenders. They
have little awareness and practically no access to insurance products that could protect their
financial resources in unexpected circumstances such as illness, property damage or death of the
primary breadwinner.
Around 50% of the Indian population suffers from chronic poverty and hunger. Only 31 % of
the Indian population has access to Banking services. The rest 69 % are still deprived of bare
minimum banking services for which they are totally dependent on informal banking sources like
private money lenders.
Unrestrained access to public goods and services is an essential condition of an open and
efficient society. It is argued that as banking services are in the nature of a public good, it is
essential that the availability of banking services to the entire population without discrimination is
the prime objective of public policy. Expectations of poor people from the financial system is
security and safety of deposits, low transaction costs, convenient operating time, minimum paper
work, frequent deposits, and quick and easy access to credit and other products, including
remittances suitable to their income and consumption.
It is now well understood that commerce with the poor is more viable and profitable, provided
there is ability to do business with them. The provision of uncomplicated, small, affordable
products can help bring low-income families into the formal financial sector. Taking into account
their seasonal inflow of income from agricultural operations, migration from one place to another,
and seasonal and irregular work availability and income, the existing financial system needs to be
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designed to suit their requirements. Mainstream financial institutions such as banks have an
important role to play in this effort, not as a social obligation, but as a pure business proposition.
India has grown in all the sectors due to advancement in banking network over all the
places. In spite of spreading its wings to many areas poverty, low income, low productivity etc has
also spread in many urban and particularly in rural areas. Financial inclusion paved way for
educating these areas in knowing credit system, financial markets, and loan facilities without any
issues through opening a no frills account.
To empirically ascertain the determinants of financial inclusion, the state wise percentage
adults in terms of saving and credit accounts (dependant variable) were regressed with
independent variables like the branch density, level of income, literacy and adults covered under
SHGs. The Financial inclusion should remove the financial exclusion of 60% and 39% in urban
and rural areas respectively. Micro finance industries are included to reach these segments
effectively. 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. Internationally, the financial
exclusion has been viewed in a much wider perspective. Having a current account / savings
account on its own, is not regarded as an accurate indicator of financial inclusion. There can be
multiple levels of financial inclusion and exclusion. At one extreme, are 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. At the other extreme,
are the financially excluded, who are denied access to even the most basic of financial products. In
between are 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.
Though, the banking industry has shown tremendous growth in volume and complexity
during the last few decades. Despite making significant improvements in all the areas relating to
financial viability, profitability and competitiveness, there are concerns that banks have not been
able to include vast segment of the population, especially the underprivileged sections of the
society, into the fold of basic banking services. In India, there are approximately 400 million
people in nearly six million villages and semi-urban areas are waiting for small loans and other
banking services. There is scope for lending Rs 45,000 crores to these people. Against this
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potential, only about 20 million have been served so far by the organized financial sector, with
total disbursements of about Rs 3,900 crore.
1.1 FINANCIAL INCLUSION
Importance of financial inclusion arises from the problem of financial exclusion of nearly 3
billion people from the formal financial services across the world. The review of literature
suggests that the most operational definitions are context-specific, originating from countryspecific problems of financial exclusion and socio-economic conditions. Thus, the context-specific
dimensions of financial exclusion assume importance from the public policy perspective. The
operational definitions of financial inclusion, have also evolved from the underlying public policy
concerns that many people, particularly those living on low income, cannot access mainstream
financial products such as bank accounts and low cost loans, which, in turn, imposes real costs on
them -often the most vulnerable people (H.M. Treasury, 2007). Thus, over the years, several
definitions of financial inclusion/exclusion have evolved. In the Indian context, Rangarajan
Committee (Report of the Committee on Financial Inclusion in India (2008)) defines it as:
"Financial inclusion may be defined 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." The financial services include the entire gamut - savings,
loans, insurance, credit, payments etc. By providing these services, the aim is to help them come
out of poverty.
1.2 Financial Inclusion and Economic Development
What economic development paradigm has revealed is that equity is not axiomatic with
economic development. Financial inclusion is an essential pre-condition to building uniform
economic development, both spatially and temporally, and ushering in greater economic and social
equity. There are several government and non-government program aimed at reducing poverty and
bringing greater equity in the country. But few have proved to be inherently productive and
sustainable. Financial inclusion can transform them into productive and self-sustainable projects.
The micro-credit program 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. No-frills account when promoted extensively plough backs the returns
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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. This will make banking; enter into the daily
routine of a common man. Besides nurturing the habit of saving among the masses, it will remove
the apprehensions and fear from their mind towards the financial products and services. This will
encourage under-banked consumers to enter into or make better use of the financial mainstream. It
will also persuade people to take credit for setting up new ventures. In a way provision of easy
credit will encourage the first generation entrepreneurs to initiate new venture; aggravate the
capital formation in the society; create new employment opportunities and thus will help in
escalating the economic development of the country. This also will automatically lower the
increasing crime rates in the society.
Poverty is not merely insufficient income, but rather the absence of wide range of
capabilities, including security and ability to participate in economic and political systems. Today
the term bottom of the pyramid refers to the global poor most of the people who live in the
developing countries. These large numbers of poor are required to be provided with much needed
financial assistance in order to sail them out of their conditions of poverty. Accordingly, there is
felt a need for policy support in channeling the financial resources towards the economic
upliftment of resource poor in any developing economy. The consensus is that finance promotes
economic growth but the magnitude of impact differs. Financial inclusion is intended to connect
people to banks with consequential benefits. Ensuring that the financial system plays its due role
in promoting inclusive growth is one of the biggest challenges facing the emerging economies. We
therefore advocate that financial development creates enabling conditions for growth when access
to safe, easy and affordable credit and other financial services by the poor and vulnerable groups,
disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating growth
and reducing income disparities and poverty. Access to a well-functioning financial system, by
creating equal opportunities, enables economically and socially excluded people to integrate better
into the economy and actively contribute to development and protects themselves against
economic shocks.
1.3 FINANCIAL EXCLUSION
It has been found that financial services are used only by a section of the population.
There is demand for these services but they have not been provided. Mostly, the excluded
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regions are rural and poor, where people live in harsh climatic conditions and hence,
consequently it is difficult to provide these financial services. As per Census 2001, in India only
36% of the people use some kind of banking services. The Boston Consulting Group Report on
financial inclusion in India also affirms that financial exclusion reflects the stark socioeconomic
divide that characterizes the emerging markets (Sinha and Subramanian, 2007). Among the
excluded are the huge groups of viable customers for the banking sector, whose potential has
been greatly undermined.
The broad strategy for financial inclusion in India in recent years comprises the following
elements: (i) encouraging penetration into unbanked and backward areas and encouraging agents
and intermediaries such as NGOs, MFIs, CSOs and business correspondents (BCs); (ii) focusing
on a decentralized strategy by using existing arrangements such as State Level Bankers
Committee (SLBC) and district consultative committee (DCC) and strengthening local institutions
such as cooperatives and RRBs; (iii) using technology for furthering financial inclusion; (iv)
advising banks to open a basic banking no frills account; (vi) emphasis on financial literacy and
credit counseling; and (vii) creating synergies between the formal and informal segments.
1.4 REGULATORY MEASURES

Big push for the business correspondent model by Banks
Mandatory Government to Person (G2P) payments in Banks and Post Office accounts using
electronic transfers
Rolling out of the concept of a no frills account for small value transactions
Enabling of the provision of micro-insurance services through facilitating regulation
Establishment of funds to finance promotional activities that support the above measures and
reinforce the work of microfinance institutions
Attempt to revive the cooperative credit system along with a number of small steps that
facilitate inclusion within the existing system like
Simplified Know Your Customer (KYC) norms and interest rate deregulation for small value
accounts
An increased emphasis on devising payment systems that address the needs of low income
families
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Small investments but increasing realization of the significance of financial literacy to ensure
meaningful financial inclusion and increased emphasis on consumer protection. In practice, each
regulatory and promotional measure has been constrained by overemphasis on aspects by
regulators.
The BC model met with limited success for four years before the decision to liberalize it was
taken.
Even today, its future success is yet to be determined given the non-existence of an
established replicable business model. Use of the no frills account is minimal despite its linkage
to government welfare payments
Micro-insurance is yet to be rolled out in a big way outside the limited confines of microcredit
cover
The funds allocated to promote financial inclusion are administered within the traditional
framework and do not sufficiently emphasize innovation and
The cooperative credit system has undergone several rounds of revival and yet its true potential
remains to be tapped.
Financial discrimination, financial illiteracy, financial exclusion, financial exploitation is
to be completely reversed with the help of financial inclusion. Financial inclusion broadly means
the provision of affordable financial services, viz., access to payments and remittance facilities,
savings, loans and insurance services by the formal financial system to those who tend to be
excluded. Since late nineties, the sophisticated and competitive financial services enable access
to a wide range of financial products and opportunities to meet emerging credit needs. Realizing
the importance of Financial Inclusion even developed countries like the United Kingdom has
been aggressively pursuing the same since 1997 and set up a Task Force in 2005, which
continuously monitors the progress and advises the Government to expedite the program.
Financial inclusion as the access to appropriate financial services for every person for enabling
him to manage his money on day-to-day basis, effectively, securely and confidently, plan for
future and cope with financial pressure in short term with the help of long-term funds and deal
effectively with financial distress like long term sickness, unemployment, or family break down
by availing money management advice and insurance. The coverage under financial inclusion is
assessed in terms percentage of adults, having bank accounts. The bank accounts may be all
types of deposit and credit accounts but generally only the saving accounts have been considered
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more realistic measure. The persons having low income and less geographical access to banks
are likely to exclude from the financial inclusion. Such persons may be mostly the families of
land-less agricultural laborers, marginal farmers, oral lessees, migrant laborer and the
educationally and economically deprived groups like tribal and women.
India has made enormous strides towards greater financial inclusion, there is a long way
to go, and about 500,000 villages are yet to be provided with banking services. The financial
inclusion for the underprivileged will lead to hosts of downstream opportunities with an
estimated 500,000 jobs for the participants to work as BCs at remote villages.
In a networked India in which banking services are extended to all villages, ultimately, a
so-called model will emerge where customers will have the option to transact with the bank of
their choice in any village by using UID (unique identity)-enabled micro-ATMs (automated teller
machines), reducing the dependence on cash and lowering transaction costs. Though it is a
difficult task, it can be achieved through financial awareness, preparation of comprehensive plan
to cover all villages, providing financial products at reasonable price and convenience etc.
Nationalization of banks, branch expansion, regional rural banks, no-frill accounts,
formation of NABARB, Self Help Group etc are some of the measures taken by RBI for the
successful financial system and financial inclusion process.
Financial inclusion envisages low-cost banking services to the financially excluded
population and regions of the country. At the same time it has proved to be a cost effective
business proposition for banks. This is possible by harnessing low cost technology, and provision
of technical, financial and policy support from Government of India, RBI and NABARD. RBI has
been taken a lot of measures for successful financial inclusion and the result is seen in the
financial sector and the reach ability of the financial services.
I would like to know more about the measures taken by RBI for financial inclusion, the area
which still does not have the access to the banking services, threats and scope in financial
inclusion. I hope this research study help me out to have a deep look on the same.
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Chapter-II
2. Review of Literature &Research Design
It is very much essential to know what the researchers have already been done on the
topic which we are going to study. Review of literature gives us a guideline to conduct the
research and sometimes it is used as a secondary source for the study also. I have taken some of
the studies done by researchers which are published in different journals to get the idea about the
research.
Bhanot, et al (2012) explored that the factors which are crucial in determining the extent
of financial inclusion in geographically remote areas. The study also aims to provide suggestive
measures for banks to tap unexplored markets. Findings Level of financial inclusion in northeast India remains very low. Income, financial information from various channels and awareness
of self help groups (SHGs), and education are influential factors leading to inclusion. Nearness to
post office banks increases the likelihood of inclusion. Factors like area terrain and receipt of
government benefit individually do not facilitate inclusion. However, recipients of government
benefits in plain areas show increased level of inclusion. Practical implications Banks and
policy makers should work in close co-ordination to spread financial information as those efforts
are seen to directly impact inclusion, thereby providing new business opportunities to banks. The
study is unique in capturing the conditional relationships among variables which are bound to
exist in real life scenarios. The findings of the paper are valuable for banks and policy makers.
Kumar, et al (2013) analyzed that the market for mobile financial services in India is
growing steadily. With 41 percent of India's adults financially excluded, however, promoting
financial literacy requires serious attention. They present Banking 101-a contextually relevant,
mobile storytelling tool that, if integrated with mobile financial offerings, can offer a holistic
solution to financial exclusion.
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Vighneswara Swamy P.(2011) says that the access to finance by the poor is a
prerequisite for poverty reduction and sustainable economic development. Importance
of financial inclusion arises from the problem of financial exclusion of nearly 3 billion people
from the formal financial services across the world. The study has critically analyzed the issues
and challenges involved in financial inclusion for inclusive growth and have also successfully
attempted to highlight the factors that can aid in achieving financial inclusion for inclusive
growth in India, particularly in the context of the feared global slowdown and negative impact of
high inflation on the Indian economy. The paper has also suggested some policy choices for
successful implementation of significant attempt to understand and emphasize the importance of
the topic
Kumar, et al (2012) revealed the financial inclusion mission has gained tremendous
relevance in an emerging economy like India. Financial exclusion seems to be more severe in
rural and backward locations. In this respect, the current analysis is an attempt to explore the
behavior of inclusion/ exclusion across varied population groups. The pooled dataset spanning
over the period from 1990 to 2008 for rural and urban regions separately has been employed. A
set of control variables have been included to disentangle the role of various demographic and
institutional factors. Bank group size, as captured by assets, has a direct influence on the number
of operating branches. Ownership effect also plays a key role in determining the number of
branches operating. Finally, structural change has also been observed in terms of the number of
functioning branches. The result is a testimony to the fact that inclusion policies are actually
translating into significant improvement of branch density in India.
De
Koker,
et
al
(2013)explored
that
the financial Action
Task
Force
embraces financial inclusion as complementary to anti-money laundering and counter-terrorist

financing, as it enhances transparency. This support is based on the premise that the increased
use of formal financial services leads to a reduction of usage of informal services. The paper
presents the evidence on eight African countries that both are not negatively associated.
Moreover, informal employment and cash preference reduce the inclination to use mobile
financial services. If an increase in transparency acts as disincentive to use formal services, the
alignment of financial inclusion and integrity will fail.
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Bihari, et al (2011) explored that financial inclusion is delivery of financial services at an

affordable cost of the vast sections of the disadvantaged and the low-income groups. The
various financial services include credit, savings, insurance and payments and remittance facilities.
Importance of financial inclusion arises from the problem of financial exclusion of nearly three
billion people from the formal financial services across the world. With only 34 percent of
population engaged in formal banking, India has a vast majority of financially excluded
households. The study deals with the various reasons behind this are and suggests way to
ameliorate the same.
Myers, et al (2012) analyzed that not having access to mainstream financial services,
such as a bank account or a credit card, can lead to a variety of social and economic exclusions.
In a number of countries, particularly Ireland, Spain, Canada and the UK, credit unions-memberowned financial co-operativesplay a significant role in reaching under-served and excluded
communities, as well as providing safe avenues for savings and credit. Yet many credit unions
are facing financial and operational problems. This article looks at the experience of Welsh credit
unions. The research has implications for policy development and governmentcredit union
relations in Wales and further research on credit unions and financial inclusion.
Radhika Dixit, et al (2013) revealed India is one of the largest and fastest growing
economies of the world, but what has been the most disturbing fact about its growth is that its
growth has not only been uneven but also discrete. It has been uneven in the sense that there has
been no uniformity in its growth performance and it has been discrete and disconnected with
regard to growth and distribution of growth benefits to certain sectors of economy. And thus the
need for inclusive growth comes in the picture of Indian economic development. However for
attaining the objectives of inclusive growth there is a need for resources, and for resource
generation and mobilization financial inclusion is required. It plays a very crucial role in the
process of economic growth. The present paper focuses on to understanding inclusive growth
phenomenon its need and financial inclusion as an instrument to attain it with reference to its
extent in Indian States. The research has been done using secondary data source. Analysis of
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natural hierarchical grouping cluster is done considering parameters like GDP per capita, literacy
rate, unemployment rate and index of financial inclusion.
Kumar, et al (2011) explored that financial inclusion is a development policy priority

aimed at improving conditions of vulnerable groups in many countries. Several initiatives
for financial inclusion supported by legislative measures have come from financial regulators,
banks and governments. One such initiative taken by the SAARC countries is the provision of
microfinance. The comparison of Financial Access 2010 survey on various issues of
financial inclusion agenda of the SAARC countries suggests that enforcement mechanisms are
weaker than legislative requirements in all the SAARC countries. In India microfinance promotion
is very impressive but high interest rate has increased household debt burdens leading in some
cases to suicides.
Priyadarshee, et al (2010) revealed that analysis of empirical evidence from three
Indian states suggests that financial inclusion strategies may be inefficient if designed without
accounting for the government social protection program. Social protection program generate
additional needs for financial services among the poor, meeting which can also deepen the
impact of such program. Being a government department and the largest financial serviceproviding network, India Post may be most suitably located to implement such synergistic
strategies. An examination of the official data on India Post indicates that the approach of
diversifying its financial products to target higher-end clients in largely urban areas may not be
appropriate
due
to
its
competitive
disadvantage.
The
study
argue
that
delivery
of financial services through post offices, built around social protection, may contribute
to financial inclusion in rural areas while improving revenues of India Post.
Sankaramuthukumar.s, et al (2011) studies aims at developing an index for
insurance inclusion for India and her states. It also ranks the he states according to the
insurance inclusion index,
and
compares
the
insurance inclusion index
with
the
latest financial inclusion index for Indian states. The average Insurance Inclusion Index (III)
for India is 0.29 which means that the insurance penetration is only 29% in the country. When
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compared to Life Insurance Inclusion Index (LIII), the General Insurance Inclusion Index (GIII)
is too low in India. The national average is just 0.19. LIII for the country as a whole is 0.34,
which is above the III. There is a positive correlation between III and FII. The authors suggests
that a comprehensive financial inclusion measurement with all financial services including
banking, insurance, micro finance institutions, cooperatives, payment and remittance must be
developed to track financial inclusion targets and achievements in the country.
Bihari (2011) revealed that financial inclusion is the ease of access, availability and use
of the formal financial system by all members of the economy. The growing literature
on financial inclusion
has
provided
plenty
of
evidence
of
the
merits
of
an
inclusive financial system. However, we notice an absence of a comprehensive measure that can
be used to measure the extent of financial inclusion in an economy. This study is an attempt to
fill this gap, and, thus, make an original contribution. We propose an index of financial
inclusion (IFI) following a multidimensional approach. The IFI developed here can be used to
compare levels of financial inclusion across economies at a particular point of time. It can also
be used to monitor the progress of policy initiatives for financial inclusion over a period of time.
And, most important, such an index can be of interest to the research community in order to
investigate empirical questions on relationship between development and financial inclusion. The
IFI
developed
here
incorporates
information
on
various
dimensions
of
an
inclusive financial system, and it is easy to compute.

Shetty (2009) explored that the increasing gap between demand and supply
of financial services has led to the 'exclusion' of large number of rural population from
formal financial institutions. As a response to the failure of formal financial institutions in
reaching the poor, the 'microcredit' or more broadly 'microfinance' approach was innovated and
institutionalized in the Indian rural credit system. It was aimed at overcoming the twin problems of
formal credit systemnon-availability and poor recovery performance of the existing rural credit
institutions. As a result, Microfinance Institutions (MFIs) have made inroads into the rural areas to
improve and extend timely, easy and adequate access to financial services. In this context, the
present paper examines the nature and type of new institutions that emerged in the
Indian financial system to include the excluded. The study finds that SHG-bank linkage and MFI
models are the two dominating microfinance approaches in the post-financial reforms in India.
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The study also finds that the microfinance sector in India is growing with the genesis of new
institutions on the one hand and, on the other hand, the NGOs are transforming themselves into
financial institutions and entering the business of microfinance. The study concludes that the
suitable regulatory environment is the prime concern for sustainable delivery of microfinance
in India.
T.S.Shibin (2012) analyzed that Majority of the population of the country resides in rural
India. Indian banks are very much reluctant to reach and serve the rural people.
Shafi Mohammad, et al (2012) revealed that financial Inclusion poses policy challenges
on a scale and with an urgency that is unique for developing countries which house more than
90% of the world's unbanked population. Developed countries policy makers have recognized
that there are complex and multi-dimensional factors that contribute to financial exclusion and
therefore require a comprehensive variety of providers, products and technologies that best suits
the socio-economic, political, cultural and geographical conditions in these countries. India's
experience as a developing country towards ensuring financial inclusion and weeding
out financial exclusion has been unique. Indian economy has achieved a phenomenal economic
growth during the last decade or so. But this growth has not been inclusive. Mobile phones, EMail, E-Commerce, Swanky Cars, trendy dresses, plastic money and 24-hour banking through
ATMs have all become a reality in the country but only in the cities and towns. One of the
reasons for this exclusive growth witnessed in the country has been attributed to the failure of the
second generation reforms which were broadly related with financial sector reforms aimed to
achieve greater financial inclusion.
Ensuring Financial Inclusion via Mobile Money (2012)
The article discusses the move of International Finance Corp. (IFC) to campaign for
expanded mobile access to a range of cost effective financial services. IFC has focused on the
goal toward financial inclusion of financial services such as savings, remittances, and insurance
by 2013 to micro clients and small and medium enterprises. IFC is also pushing for the
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development of novel mobile technologies and business models for retail payments, bill
payments, and fund transfers.
Diniz Eduardo, et al (2012) determined that Financial inclusion can be defined as the
access to formal financial services at an affordable cost for all members of an economy, favoring
mainly low-income groups. It has been recognized as a critical element in policies for poverty
reduction and economic growth. Some successful experiences with financial inclusion reported
in developing countries are associated with the use of information and communication
technology (ICT)-based branchless banking. One of these experiences is the Brazilian
correspondent model, an ICT-based network responsible for delivering financial services to tens
of millions of poor Brazilians, most of them having no other way to access banking services.
This article presents a case study of financial inclusion in Autazes, a county in the Amazon
region not served by banks until 2002, when a correspondent started its operations there. Since
then, Autazes has experienced economic and social changes, due in part to government social
benefits and other banking services delivered at the local level. The results of our field study in
Autazes suggest that financial inclusion through the correspondents process positively
contributes to local socio-economic development but, at the same time, presents clear negative
signs such as low-income population over-indebtedness, reproduction of social exclusion
practices and reinforcement of power asymmetries. It is concludes by saying that although access
to financial resources is a fundamental way to promote local development to low-income
population,
such
access
should
be
accompanied
by
other
inclusive
mechanisms
like financial education in order to be effective.

Kodan Anand Singh (2011) analyzed that the Rangarajan Committee (2008) defined
financial inclusion as the process of ensuring access to financial services and timely and
adequate credit needed by the vulnerable groups, such as the weaker sections and low-income
groups, at an affordable cost. This paper makes an exhaustive examination of the status of
financial inclusion in the seven northeastern states of India. This is followed by an analysis of the
financial inclusion policy adopted by RBI. The paper provides indications and implications on
future course of action that can be initiated by the apex bank of the country.
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Nagadevara Vishnuprasad (2009) revealed that theoretically, financial development

creates enabling conditions for growth through either a supply-led or a demand-pull
process. Financial inclusion implies provision of affordable financial services, such as access to
payments and remittance facilities, savings, loans and insurance services by the
formal financial system to those who tend to be excluded. The factors that influence supply and
demand side of financial inclusion are analyzed in this paper. Artificial Neural Networks are used
to identify specific factors that influence different financial products on the supply side and
different sources of borrowing on the demand side. These factors can be used for evolving
appropriate strategies for enhancing financial inclusion.
TAYLOR
MARCUS (2012) examined that the concept of 'financial inclusion' has
become a central trope that legitimates a wide range of contemporary development practices. By
constructing a new object of development - the 'financially excluded' - it facilitates the expansion
of an increasingly corporatized microfinance technocracy. Through an examination of the 2010
Andhra Pradesh microfinance crisis, it demonstrates key contradictions within the discourse and
practices of commercial microfinance. In so doing, it demonstrates why the narrative
of financial inclusion and its correlate notion of 'consumption smoothing' are inadequate tools
with which to conceptualize the political economy of contemporary agrarian change.
Barman Deepak (2009) explored that Microfinance intervention is considered an
important component of development strategy to mainstream the poor rural households with the
formal financial system in India. However, there is some evidence for the reverse, that
microfinance may, in fact, increase informal money lending, if clients need to 'top up'
microloans, or borrow to repay according to the installment schedule. The objective of this paper
is to examine the relationship between the level of indebtedness to moneylenders and the type of
microfinance model through a case study in Varanasi, U.P. Comparing two microfinance models
prevalent in the research area, the authors conclude that the level of indebtedness to
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moneylenders is higher in the case of clients of Microfinance Institutions (MFI) model and
without complete information on the credit-worthiness of borrowers, MFIs may contribute to the
over-indebtedness of their clients as well as damage in their performance.
Sarma Mandira (2011) examined the relationship between financial inclusion and
development through the empirical identification of country specific factors that are associated
with the level of financial inclusion. A description of the Index of Financial Inclusion (IFI) is
presented the relationship between IFI and the Human Development Index is examined. It
discusses the importance of income, inequality, literacy, urbanization and physical infrastructure
for connectivity and information.
Dhar Satyajit (2012) analyzed the experience of few selected Indian banks in the area
of financial inclusion. This paper contributes to the literature on financial inclusion from a micro
perspective of bank level performance. Instead of using macro data pertaining to banking
industry as a whole, bank level data available through annual reports of the selected banks for the
year ended 31st March 2011 was analyzed. Five banks namely State Bank of India, Syndicate
Bank, UCO Bank, ICICI Bank & HDFC Bank were selected in public and private sector. To find
out the performance in the financial inclusion front as reported by the sample banks, a detailed
study was done with the help of the annual reports of the selected banks. An attempt was made to
analyze the methods adopted by the sample units in presenting their performance, the place of
disclosure, the parameters used for such reporting etc.
Goyal
Chandan Kumar (2008) analyzed that financial development stimulates
economic growth. In recent times, banking sector has played a significant role in strengthening
Indian financial system. However, equally true has been the allegation that banks have not been
able to reach and bring the vast segment of population, especially the underprivileged sections,
into the fold of basic banking services. Economists have recognized this 'financial exclusion' as a
pressing concern, imposing both economic and social costs. This paper looks into the
circumstances that led to the growing consensus about financial inclusion/exclusion in recent
years. It attempts to make a comparative analysis of the status of financial inclusion in Assam
and north east region. Addressing the issue of financial inclusion from the perspectives of both
supply and demand, the paper concludes by suggesting various means to deal with these
constraints on financial inclusion.
Page 17
Bi Zohra, et al (2011) explored that microfinance in India has been viewed as a

development tool which would alleviate poverty and enhance growth of the country
through financial inclusion. Out of 6 lakh villages in India, only approximately 50000 have
access to finance. India is a country which has the highest number of households which are
excluded from banking. With the Andhra crisis of microfinance institutions and issues that
microfinance institutions have a mission drift, the aim of the paper is to study the performance
and efficiency of microfinance. A sample of microfinance institutions in India have been selected
based on their ratings given by microfinance information exchange (MIX) for the study. The
performance of these sample MFIs as well as their performance with respect to commercial
banks in India have been studied using statistically tools. A microfinance institution is measured
for financial sustainability based on its good financial accounts and the recognized accounting
practices they follow according to Meyer (2002).
Pandit Vikram S (2011) revealed that promoting financial inclusion should be a core
mission of the banking industry. He cites the two principal threats to broader financial inclusion,
which are the unintended effects of new financial regulation and the inclination of bank
management to silo financial-inclusion efforts under the auspices of corporate social
responsibility. He remarks that a lot of bankers understand the value of improving
financial inclusion but do not perceive a clear business rationale.
From the critical analysis of all the above mentioned studies it can be inferred that there
is not a single study particularly related with research topic that is The Role of Commercial
banks in the Promotion of Financial Inclusion. Hence in order to bridge the gap in the available
literature, the researcher has undertaken the present study.
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2.2 STATEMENT OF THE PROBLEM

Banking is the growing industry in India all the time. Banks are the backbone of Indian
financial system. The main motive of RBI is to have a balanced development. But to achieve this
service of the bank should reach all parts of the country. Growth and scope of banking industry is
now in rural and semi urban areas.
Financial inclusion envisages low-cost banking services to the financially excluded
population and regions of the country. At the same time it has proved to be a cost effective
business proposition for banks. This is possible by harnessing low cost technology, and provision
of technical, financial and policy support from Government of India, RBI and NABARD.
Profitable models for financial inclusion need to be adopted by banks in the form of No Frill
accounts, BCs, BFs, SHG-Bank Linkage Program, Joint Liability Group financing, Financial
Literacy, CBS and ICT-enabled KCC/GCC, multipurpose smart cards, mobile banking, and
mobile banking vans in the supply side. Demand side factors like IT innovations, development of
rural infrastructure and development initiatives in the farm sector in the form of a synergy
between e-Choupal of ITC and Farmers Club Program could lead to widespread and sustainable.
2.3 SCOPE OF THE STUDY
The study is conducted to understand the measures taken by Reserve Bank of India and the
Role of commercial banks in the financial inclusion. Coverage of banking services in India and the
steps taken through the commercial banks in order to promote the financial inclusion. All
commercial banks in India i.e. Public sector Banks, Private Sector Banks, Regional Rural Banks
and Foreign Banks will come under the study.
2.4 OBJECTIVE OF THE STUDY

The following are the objectives of the study. They are to;
Analyze the role of commercial banks in the Indian financial system.
Analyze the role of commercial banks in financial inclusion.
Study the RBI measures on financial inclusion
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Give recommendations for the successful financial inclusion planning.

Identify the challenges and constrains in the effective financial inclusion.
2.5 RESEARCH METHODOLOGY

It is based on Descriptive research method. The study is based on the secondary data so
descriptive research method is suitable for this study.
Secondary data is used for the research. This study is not based on the primary data so
need not to use any sampling techniques. Secondary data from RBI websites and articles from
published sources are using for the study.
Data analysis: Interpretation and analysis of data which is collected from various secondary
sources.
2.6 LIMITATIONS OF THE STUDY
Time allotted for the study is very limited to have a detailed study about the area of
research.
This research is purely based on the secondary data. So there are chances for error
Scope of the study is very vast, so it is very difficult to collect the information and
interpret.
2.7 PROPOSED CHAPTER SCHEME

I.
II.
III.
IV.
V.
Introduction
Review of literature
Industry profile
Analysis and interpretation
Findings, suggestions and conclusion
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Chapter III
BANKING INDUSTRY PROFILE
Indian banking is the lifeline of the nation and its people. Banking has helped in
developing the vital sectors of the economy and usher in a new dawn of progress on the Indian
horizon. The sector has translated the hopes and aspirations of millions of people into reality. But
to do so, it has had to control miles and miles of difficult terrain, suffer the indignities of foreign
rule and the pangs of partition. Today, Indian banks can confidently compete with modern banks
of the world. Before the 20th century, usury, or lending money at a high rate of interest, was widely
prevalent in rural India. Entry of Joint stock banks and development of Cooperative movement
have taken over a good deal of business from the hands of the Indian money lender, who although
still exist, have lost his menacing teeth.
In the Indian Banking System, Cooperative banks exist side by side with commercial
banks and play a supplementary role in providing need-based finance, especially for agricultural
and agriculture-based operations including farming, cattle, milk, hatchery, personal finance etc.
along with some small industries and self-employment driven activities. Generally, co-operative
banks are governed by the respective co-operative acts of state governments. But, since banks
began to be regulated by the RBI after 1st March 1966, these banks are also regulated by the RBI
after amendment to the Banking Regulation Act 1949. The Reserve Bank is responsible for
licensing of banks and branches, and it also regulates credit limits to state co-operative banks on
behalf of primary co-operative banks for financing SSI units.
Banking in India originated in the first decade of 18 th century with The General Bank of
India coming into existence in 1786. This was followed by Bank of Hindustan. Both these banks
are now defunct. After this, the Indian government established three presidency banks in India.
The first of three was the Bank of Bengal, which obtains charter in 1809, the other two presidency
bank, viz., the Bank of Bombay and the Bank of Madras, were established in 1840 and 1843,
respectively. The three presidency banks were subsequently amalgamated into the Imperial Bank
of India (IBI) under the Imperial Bank of India Act, 1920 which is now known as the State Bank
of India.
Page 21

A couple of decades later, foreign banks like Credit Lyonnais started their Calcutta
operations in the 1850s. At that point of time, Calcutta was the most active trading port, mainly
due to the trade of the British Empire, and due to which banking activity took roots there and
prospered. The first fully Indian owned bank was the Allahabad Bank, which was established in
1865. By the 1900s, the market expanded with the establishment of banks such as Punjab
National Bank, in 1895 in Lahore and Bank of India, in 1906, in Mumbai both of which were
founded under private ownership. The Reserve Bank of India formally took on the responsibility
of regulating the Indian banking sector from 1935. After Indias independence in 1947, the
Reserve Bank was nationalized and given broader powers. As the banking institutions expand
and become increasingly complex under the impact of deregulation, innovation and
technological up gradation, it is crucial to maintain balance between efficiency and stability.
During the last 30 years since nationalization tremendous changes have taken place
in the financial markets as well as in the banking industry due to financial sector reforms. The
banks have shed their traditional functions and have been innovating, improving and coming out
with new types of services to cater emerging needs of their customers. Banks have been given
greater freedom to frame their own policies. Rapid advancement of technology has contributed to
significant reduction in transaction costs, facilitated greater diversification of portfolio and
improvements in credit delivery of banks. Prudential norms, in line with international standards,
have been put in place for promoting and enhancing the efficiency of banks. The process of
institution building has been strengthened with several measures in the areas of debt recovery,
asset reconstruction and securitization, consolidation, convergence, mass banking etc. Despite
this commendable progress, serious problem have emerged reflecting in a decline in productivity
and efficiency, and erosion of the profitability of the banking sector. There has been deterioration
in the quality of loan portfolio which, in turn, has come in the way of banks income generation
and enhancement of their capital funds. Inadequacy of capital has been accompanied by
inadequacy of loan loss provisions resulting into the adverse impact on the depositors and
investors confidence. The Government, therefore, set up Narasimham Committee to look into
the problems and recommend measures to improve the health of the financial system. The
acceptance of the Narasimham Committee recommendations by the Government has resulted in
transformation of hitherto highly regimented and over bureaucratized banking system into
Page 22

market driven and extremely competitive one. The massive and speedy expansion and
diversification of banking has not been without its strains.
The banking industry is entering a new phase in which it will be facing increasing
competition from non-banks not only in the domestic market but in the international markets
also. The operational structure of banking in India is expected to undergo a profound change
during the next decade. With the emergence of new private banks, the private bank sector has
become enriched and diversified with focus spread to the wholesale as well as retail banking.
The existing banks have wide branch network and geographic spread, whereas the new private
banks have the clout of massive capital, lean personnel component, the expertise in developing
sophisticated financial products and use of state-of-the-art technology. Gradual deregulation that
is being ushered in while stimulating the competition would also facilitate forging mutually
beneficial relationships, which would ultimately enhance the quality and content of banking. In
the final phase, the banking system in India will give a good account of itself only with the
combined efforts of cooperative banks, regional rural banks and development banking
institutions which are expected to provide an adequate number of effective retail outlets to meet
the emerging socio-economic challenges during the next two decades. The electronic age has
also affected the banking system, leading to very fast electronic fund transfer. However, the
development of electronic banking has also led to new areas of risk such as data security and
integrity requiring new techniques of risk management.
Cooperative (mutual) banks are an important part of many financial systems. In a number
of countries, they are among the largest financial institutions when considered as a group.
Moreover, the share of cooperative banks has been increasing in recent years; in the sample of
banks in advanced economies and emerging markets analyzed in this paper, the market share of
cooperative banks in terms of total banking sector assets increased from about 9% to 14%.
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3.1 INDUSTRY SCENARIO OF INDIAN BANKING INDUSTRY:
The growth in the Indian Banking Industry has been more qualitative than quantitative
and it is expected to remain the same in the coming years. Based on the projections made in the
"India Vision 2020" prepared by the Planning Commission and the Draft 10th Plan, the report
forecasts that the pace of expansion in the balance-sheets of banks is likely to decelerate. The
total assets of all scheduled commercial banks by end-March 2010 is estimated at Rs 40,90,000
crores. That will comprise about 65 per cent of GDP at current market prices as compared to 67
per cent in 2002-03. Bank assets are expected to grow at an annual composite rate of 13.4 per
cent during the rest of them decade as against the growth rate of 16.7 per cent that existed
between 1994-95 and 2002-03. It is expected that there will be large additions to the capital base
and reserves on the liability side.
The Indian Banking industry, which is governed by the Banking Regulation Act of India,
1949 can be broadly classified into two major categories, nonscheduled banks and scheduled
banks. Scheduled banks comprise commercial banks and the co-operative banks. In terms of
ownership, commercial banks can be further grouped into nationalized banks, the State Bank of
India and its group banks, regional rural banks and private sector banks (the old/ new domestic
and foreign). These banks have over 67,000 branches spread across the country. The Public
Sector Banks(PSBs), which are the base of the Banking sector in India account for more than 78
per cent of the total banking industry assets. Unfortunately they are burdened with excessive Non
Performing assets (NPAs), massive manpower and lack of modern technology. On the other hand
the Private Sector Banks are making tremendous progress. They are leaders in Internet banking,
mobile banking, phone banking, ATMs. As far as foreign banks are concerned they are likely to
succeed in the Indian Banking Industry.
In the Indian Banking Industry some of the Private Sector Banks operating are IDBI
Bank, ING Vyasa Bank, SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd.
and banks from the Public Sector include Punjab National bank, Vijaya Bank, UCO Bank,
Oriental Bank, Allahabad Bank among others. ANZ Grindlays Bank, ABN-AMRO Bank,
American Express Bank Ltd, Citibank are some of the foreign banks operating in the Indian
Banking Industry. As far as the present scenario is concerned the Banking Industry in India is
going through a transitional phase. The first phase of financial reforms resulted in the
nationalization of 14 major banks in 1969 and resulted in a shift from Class banking to Mass
Page 24

banking. This in turn resulted in a significant growth in the geographical coverage of banks.
Every bank had to earmark a minimum percentage of their loan portfolio to sectors identified as
priority sectors. The manufacturing sector also grew during the 1970s in protected environs
and the banking sector was a critical source. The next wave of reforms saw the nationalization of
6 more commercial banks in 1980. Since then the number of scheduled commercial banks
increased four-fold and the number of bank branches increased eight-fold. After the second phase
of financial sector reforms and liberalization of the sector in the early nineties, the Public Sector
Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the
foreign banks. The new private sector banks first made their appearance after the guidelines
permitting them were issued in January 1993. Eight new private sector banks are presently in
operation. These banks due to their late start have access to state-of-the-art technology, which in
turn helps them to save on manpower costs and provide better services.
During the year 2000, the State Bank Of India (SBI) and its 7 associates accounted for a
25 percent share in deposits and 28.1 percent share in credit. The 20 nationalized banks
accounted for 53.2 percent of the deposits and 47.5 percent of credit during the same period. The
share of foreign banks (numbering 42), regional rural banks and other scheduled commercial
banks accounted for 5.7 percent, 3.9 percent and 12.2 percent respectively in deposits and 8.41
percent, 3.14 percent and 12.85 percent respectively in credit during the year 2000. In the Indian
Banking Industry some of the Private Sector Banks operating are IDBI Bank, ING Vyasa Bank,
SBI Commercial and International Bank Ltd, Bank of Rajasthan Ltd. and banks from the Public
Sector include Punjab National bank, Vijaya Bank, UCO Bank, Oriental Bank, Allahabad Bank
among others. ANZ Grindlays Bank, ABN-AMRO Bank, American Express Bank Ltd, Citibank
are some of the foreign banks operating in the Indian Banking Industry.
As far as the present scenario is concerned the Banking Industry in India is going through
a transitional phase. The first phase of financial reforms resulted in the nationalization of 14
major banks in 1969 and resulted in a shift from Class banking to Mass banking. This in turn
resulted in a significant growth in the geographical coverage of banks. Every bank had to
earmark a minimum percentage of their loan portfolio to sectors identified as priority sectors.
The manufacturing sector also grew during the 1970s in protected environs and the banking
sector was a critical source. The next wave of reforms saw the nationalization of 6 more
commercial banks in 1980. Since then the number of scheduled commercial banks increased
Page 25

four-fold and the number of bank branches increased eight-fold. After the second phase of
financial sector reforms and liberalization of the sector in the early nineties, the Public Sector
Banks (PSB) s found it extremely difficult to compete with the new private sector banks and the
foreign banks.
The new private sector banks first made their appearance after the guidelines permitting
them were issued in January 1993. Eight new private sector banks are presently in operation.
These banks due to their late start have access to state-of-the-art technology, which in turn helps
them to save on manpower costs and provide better services.
3.2 AGGREGATE PERFORMANCE OF THE BANKING INDUSTRY:
Aggregate deposits of scheduled commercial banks increased at a compounded annual
average growth rate (Cagr) of 17.8 percent during 1969-99, while bank credit expanded at a Cagr
of 16.3 percent per annum. Banks investments in government and other approved securities
recorded a Cagr of 18.8 percent per annum during the same period. In FY01 the economic
slowdown resulted in a Gross Domestic Product (GDP) growth of only 6.0 percent as against the
previous years 6.4 percent. The WPI Index (a measure of inflation) increased by 7.1 percent as
against 3.3 percent in FY00. Similarly, money supply (M3) grew by around 16.2 percent as
against 14.6 percent a year ago. The growth in aggregate deposits of the scheduled commercial
banks at 15.4 percent in FY01 percent was lower than that of 19.3 percent in the previous year,
while the growth in credit by SCBs slowed down to 15.6 percent in FY01 against 23 percent a
year ago.
The industrial slowdown also affected the earnings of listed banks. The net profits of 20
listed banks dropped by 34.43 percent in the quarter ended March 2001. Net profits grew by
40.75 percent in the first quarter of 2000-2001, but dropped to 4.56 percent in the fourth quarter
of 2000-2001.
On the Capital Adequacy Ratio (CAR) front while most banks managed to fulfill the
norms, it was a feat achieved with its own share of difficulties. The CAR, which at present is 9.0
percent, is likely to be hiked to 12.0 percent by the year 2004 based on the Basle Committee
recommendations. Any bank that wishes to grow its assets needs to also shore up its capital at the
same time so that its capital as a percentage of the risk-weighted assets is maintained at the
stipulated rate. While the IPO route was a much-fancied one in the early 90s, the current scenario
Page 26

doesnt look too attractive for bank majors. Consequently, banks have been forced to explore
other avenues to shore up their capital base. While some are wooing foreign partners to add to
the capital others are employing the M& A route. Many are also going in for right issues at prices
considerably lower than the market prices to woo the investors.
3.3 GOVERNMENTAL POLICY:

After the first phase and second phase of financial reforms, in the 1980s commercial
banks began to function in a highly regulated environment, with administered interest rate
structure, quantitative restrictions on credit flows, high reserve requirements and reservation of a
significant proportion of lendable resources for the priority and the government sectors. The
restrictive regulatory norms led to the credit rationing for the private sector and the interest rate
controls led to the unproductive use of credit and low levels of investment and growth. The
resultant financial repression led to decline in productivity and efficiency and erosion of
profitability of the banking sector in general. This was when the need to develop a sound
commercial banking system was felt. This was worked out mainly with the help of the
recommendations of the Committee on the Financial System (Chairman: Shri M. Narasimham),
1991.
The resultant financial sector reforms called for interest rate flexibility for banks,
reduction in reserve requirements, and a number of structural measures. Interest rates have thus
been steadily deregulated in the past few years with banks being free to fix their Prime Lending
Rates(PLRs) and deposit rates for most banking products. Credit market reforms included
introduction of new instruments of credit, changes in the credit delivery system and integration
of functional roles of diverse players, such as, banks, financial institutions and non-banking
financial companies (Nbfcs). Domestic Private Sector Banks were allowed to be set up, PSBs
were allowed to access the markets their cars.
Page 27
3.4 BANKING INDUSTRY VISION

The financial system is the lifeline of the economy. The changes in the economy get mirrored
in the performance of the financial system, more so of the banking industry. The Committee,
therefore felt, it would be desirable to look at the direction of growth of the economy while
drawing the emerging contours of the financial system. The India Vision 2020" prepared by the
Planning Commission, Government of India, is an important document, which is likely to guide
the policy makers, in the years to come. The Committee has taken into consideration the
economic profile drawn in India Vision 2020 document while attempting to visualize the future
landscape of banking Industry.
India Vision 2020 envisages improving the ranking of India from the present 11th to 4th
among 207 countries given in the World Development Report in terms of the Gross Domestic
Product (GDP). It also envisages moving the country from a low-income nation to an upper
middle-income country. To achieve this objective, the India Vision aims to have an annual
growth in the GDP of 8.5 per cent to 9 per cent over the next 20 years. Economic development of
this magnitude would see quadrupling of real per capita income. When compared with the
average growth in GDP of 4-6% in the recent past, this is an ambitious target. This would call for
considerable investments in the infrastructure and meeting the funding requirements of a high
magnitude would be a challenge to the banking and financial system.
India Vision 2020 sees a nation of 1.3 billion people who are better educated, healthier, and
more prosperous. Urban India would encompass 40% of the population as against 28 % now.
With more urban conglomerations coming up, only 40% of population would be engaged in
agricultural sector as against nearly two thirds of people depending on this sector for livelihood.
Share of agriculture in the GDP will come down to 6% (down from 28%). Services sector would
assume greater prominence in our economy. The shift in demographic profile and composition of
GDP are significant for strategy planners in the banking sector.
Small and Medium Enterprises (SME) sector would emerge as a major contributor to
employment generation in the country. Small Scale sector had received policy support from the
Government in the past considering the employment generation and favourable capital-output
ratio. This segment had, however, remained vulnerable in many ways. Globalization and opening
up of the economy to international competition has added to the woes of this sector making
Page 28

bankers wary of supporting the sector. It is expected that the SME sector will emerge as a vibrant
sector, contributing significantly to the GDP growth and exports.
Indias share in International trade has remained well below 1%. Being not an export led
economy (exports remaining below 15% of the GDP), India have remained rather insulated from
global economic shocks. This profile will undergo a change, as country plan for 8-9% growth in
GDP. Planning Commission report visualizes a more globalised economy. Our international trade
is expected to constitute 35% of the GDP
In short, the Vision of India in 2020 is of a nation bustling with energy, entrepreneurship and
innovation. In other words, India hope to see a market-driven, productive and highly competitive
economy. To realize the above objective, India need a financial system, which is inherently
strong, functionally diverse and displays efficiency and flexibility. The banking system is, by far,
the most dominant segment of the financial sector, accounting for as it does, over 80% of the
funds flowing through the financial sector. It should, therefore, be our endeavor to develop a
more resilient, competitive and dynamic financial system with best practices that supports and
contributes positively to the growth of the economy.
The ability of the financial system in its present structure to make available investible
resources to the potential investors in the forms and tenors that will be required by them in the
coming years, that is, as equity, long term debt and medium and short-term debt would be critical
to the achievement of plan objectives. The gap in demand and supply of resources in different
segments of the financial markets has to be met and for this, smooth flow of funds between
various types of financial institutions and instruments would need to be facilitated.
Governments policy documents list investment in infrastructure as a major area which needs
to be focused. Financing of infrastructure projects is a specialized activity and would continue to
be of critical importance in the future. After all, a sound and efficient infrastructure is a sine qua
non for sustainable economic development.
Infrastructure services have generally been provided by the public sector all over the world in
the past as these services have an element of public good in them. In the recent past, this picture
has changed and private financing of infrastructure has made substantial progress. This shift
towards greater role of commercial funding in infrastructure projects is expected to become more
prominent in coming years. The role of the Government would become more and more of that of
Page 29

a facilitator and the development of infrastructure would really become an exercise in public
private partnership. India Infrastructure Report (Rakesh Mohan Committee - 1996) placed
financing of infrastructure as a major responsibility of banks and financial institutions in the
years to come. The report estimated the funding requirements of various sectors in the
infrastructure area at Rs 12,00,000 crore by the year 2005-06. Since the estimated availability of
financing from Indian financial institutions and banks was expected at only Rs 1,20,000 crore, a
large gap is left which needs to be filled through bilateral/multilateral/government funding.
It has been observed globally that project finance to developing economies flows in where
there is relatively stable macro-economic environment. These include regulatory reforms and
opening of market to competition and private investment. Liberalized financial markets,
promoting and deepening of domestic markets, wider use of risk management tools and other
financial derivative products, improved legal framework, accounting and disclosure standards etc
are some of the other aspects which would impact commercial funding of infrastructure
projects.
The India Vision document of Planning Commission envisages Foreign Direct Investments
(FDI) to contribute 35% (21% now) to gross capital formation of the country by 2020.
Government has announced a policy to encourage greater flow of FDI into the banking sector.
The recent amendment bill introduced in Parliament to remove the 10% ceiling on the voting
rights of shareholders of banking companies is a move in this direction. The working group
expects this to have an impact on the capital structure of the banks in India in the coming years.
Consequent to opening up of the economy for greater trade and investment relations with the
outside world, which is imperative if the growth projections of India Vision 2020 were to
materialize, India expect the banking Industrys business also to be driven by forces of
globalization. This may be further accentuated with the realization of full convertibility of the
rupee on capital account and consequent free flow of capital across the borders. An increase in
the income levels of the people would naturally lead to changes in the spending pattern also. This
could result in larger investments in the areas like entertainment and leisure, education,
healthcare etc and naturally, these would attract greater participation of the banking system.
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3.5 SOME OF THE MEASURES TAKEN BY THE RBI AND GOVERNMENT
3.5.1 BRANCH EXPANSION
Nationalization of commercial banks in India was a pioneering step towards accessibility
of banking service to the vast rural population of the country. This was significant effort towards
financial inclusion, which led to the spread of bank branches in unbanked rural and semi urban
areas. However, in spite of the enhanced out reach of banks in rural and semi-urban areas and the
Implementation of directed credit, farmers and rural artisans still did not receive adequate credit
from banks during the post-nationalization period. Moreover accessibility to avenues for savings
in the formal banking channel was limited. There has been a consistent increase in the penetration
of banking services in India in recent years. However, the rate of increase in the penetration of
banking services in the rural and semi-urban areas has been much lower than that in the urban
areas. Further, penetration of banking services has been lower in the central, eastern and
northeastern regions of the country compared to the more developed northern, southern and
western regions. In order to address this issue, the branch authorization policy was liberalized in
December 2009 giving freedom to domestic scheduled commercial banks to open branches at Tier
3 to 6 centers (with population of up to 49,999 as per the Population Census of 2001) without
having the need to take permission from RBI in each case, subject to reporting.
3.5.2 SHG-BANK LINKAGE PROGRAM
One of the early attempts at financial inclusion during the period of economic reforms in
India has been the launching of the Pilot Project on SHG-Bank Linkage in February 1992 by
NABARD. It proved to be a revolutionary program for alleviating poverty through capacity
building and empowerment of the rural poor, especially women. Microcredit extended either
directly or through any intermediary is reckoned as part of banks priority sector lending. The
SHG-Bank Linkage Program provides opportunities for the rural poor to participate in the
development process. It is cost effective, and ensures that more and more people are brought under
sustainable developmental activities, within a short span of time.
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3.5.3 BUSINESS CORRESPONDENT (BC) MODEL
It has been widely recognized that it is not feasible to have physical banking facility in
every habitation. Hence, the financial inclusion strategy largely focuses on the use of information
and communication technology (ICT) to expand access to banking facilities through Business
Correspondent (BC), who carries a hand-held device which is networked to the banks systems.
RBI issued guidelines in January 2006 for the engagement of BCs by banks for providing
banking and financial services in addition to the traditional brick and mortar model. Under the
BC Model, banks have been permitted to use the services of various entities like NGOs/SHGs,
Farmers Clubs (FC), PACS, Microfinance Institutions (MFIs) and other Civil Society
Organizations (CSOs), companies registered under Section 25 of the Companies Act, 1956, for
profit companies, retired Government/bank employees/teachers, ex-servicemen, individual
owners of kirana/medical/Fair Price shops/individual PCO operators, agents of small savings
schemes of GoI/Insurance companies, individuals who own petrol pumps, and Post Offices to act
as BCs.
3.5.4 FINANCIAL LITERACY
Financial literacy is instrumental in expanding financial inclusion, which in turn is
helpful in further expanding financial literacy, thus, mutually reinforcing each other in a positive
manner (Chakrabarty, 2011). NABARD is working with the Indian School of Microfinance for
Women and has identified state level partners on modalities for alliance, monitoring systems and
impact evaluation mechanism, for formulating a National Alliance on Financial Literacy
(NABARD, 2011).
3.5.5 BUSINESS FACILITATOR (BF)
As per extant RBI guidelines, banks are encouraged to use intermediaries, such as NGOs,
Farmers' Clubs, cooperatives, community based organizations, IT enabled rural outlets of
corporate entities, post offices, insurance agents, well functioning Panchayats, Village
Knowledge Centres, Agri Clinics/Agri Business Centres, Krishi Vigyan Kendras and
KVIC/KVIB units, as Business Facilitator (BF) for providing facilitation services, viz.
identification of borrowers and fitment of activities; collection and preliminary processing of
Page 32

loan applications including verification of primary information/data; creating awareness about
savings and other products and education and advice on managing money and debt counseling;
processing and submission of applications to banks; promotion and nurturing SHGs/ JLGs; post
sanction monitoring; monitoring and handholding of SHGs/JLGs/Credit Groups/others; and
follow-up for recovery.
3.5.6 NO FRILL ACCOUNTS
Basic banking No Frill accounts have nil or very low minimum balances as well as
charges that make such accounts accessible to vast sections of the population. With a view to
encourage transactions in No Frill accounts RBI has advised banks to provide small overdrafts
(ODs) in such accounts. Up to end March 2011, banks have provided 4.2 million ODs amounting
to INR 199 crore (RBI, 2011). No Frill accounts make access to savings bank accounts
affordable for the poor. They also help banks maintain higher Current Account and Savings
Accounts (CASA), which would enable them to improve margins.
3.5.7
FINANCIAL INCLUSION
FUND
(FIF)
AND
FINANCIAL INCLUSION
TECHNOLOGY FUND (FITF)

Two funds, viz. Financial Inclusion Fund (FIF) for meeting the cost of developmental and
promotional interventions of financial inclusion, and Financial Inclusion Technology Fund
(FITF) for meeting the cost of technology adoption, were set up in NABARD during 2007-08,
based on the recommendations of the Committee on Financial Inclusion (Chairman: Dr C
Rangarajan) (Government of India, 2008). The corpus of each Fund is `500 crore, to be
contributed by the Government of India (GoI), RBI and NABARD in the ratio of 40:40:20 in a0
phased manner over a period of five years.
3.5.8 TECHNOLOGICAL INNOVATIONS

Financial inclusion could be a cost-effective business proposition if appropriate low-cost
technology is adopted by commercial banks and rural financial institutions. Such technology
should be able to reduce transaction costs of providing banking services in the rural, unbanked
and backward areas of the country. In this context, there is a need for banking service providers
to enter into passive infrastructure sharing arrangements. Technology-enabled projects, viz. the
Page 33

Unique Identification Number (UID) project, CBS in RRBs and cooperative credit institutions,
mobile banking, hand-held devices, smart cards, biometric cards, tech-savvy BCs (trained out of
FITF), routing of payment under government social schemes.
3.6 ESSENTIALS OF FINANCIAL INCLUSION
Access to payment systems
Delivery of Banking & Financial Services
Timings & other conveniences
Cost
Product Range
Education - Health, Insurance, equity, etc.
Penetration to deepest geographies
Segmented approach
Functional Financial Inclusion
3.7 FINANCIAL INCLUSION AND INCLUSIVE GROWTH IN INDIA

From an annual average growth rate of 3.5 per cent during 1950 to 1980, the growth rate of
the Indian economy accelerated to around 6.0 per cent in the 1980s and 1990s. In the last four
years, the Indian economy grew by 8.8 per cent. In 2005-06 and 2006-07, the Indian economy
grew at a higher rate of 9.4 and 9.6 per cent, respectively. Reflecting the high economic growth
and a moderation in population growth rate, the per capita income of the country also increased
substantially in the recent years. Despite the impressive numbers, growth has failed to be
sufficiently inclusive, particularly after the mid-1990s. Agricultural sector which provides
employment to around 60 per cent of the population lost its growth momentum from that point,
though there has been a reversal of this trend since 2005-06. The percentage of Indias population
below the poverty line has declined from 36 per cent in 1993-94 to 26 per cent in 1999-2000.
While India has witnessed unprecedented economic growth in recent past, its development has
been lopsided with the country trailing on essential social and environmental parameters of
development. The approach paper to the Eleventh Plan indicated that the absolute number of poor
Page 34

is estimated to be approximately 300 million in 2004-05. Accordingly, the 11th Five Year Plan has
adopted faster and more Inclusive growth as the key development paradigm.
The importance of this study lies in the fact that India being a socialist, democratic
republic, it is imperative on the policies of the government to ensure equitable growth of all
sections of the economy. With only 34% of population engaged in formal banking, India has, 135
million financially excluded households, the second highest number after China. Further, the real
rate of financial inclusion in India is also very low and about 40% of the bank account holders use
their accounts not even once a month. It is universally opined that the resource poor need financial
assistance at reasonable costs and that too with uninterrupted pace.
However, the economic liberalization policies have always tempted the financial
institutions to look for more and more greener pastures of business ignoring the weaker sections of
the society. In India, the financially excluded sections comprise largely rural masses comprising
marginal farmers, landless laborers, oral lessees, self-employed and unorganized sector
enterprises, urban slum dwellers, migrants, ethnic minorities and socially excluded groups, senior
citizens and women. Some of the important causes of relatively low extension of institutional
credit in the rural areas are risk perception, cost of its assessment and management, lack of rural
infrastructure, and vast geographical spread of the rural areas with more than half a million
villages, some sparsely populated (Mohan, 2006). It is essential for any economy to aim at
inclusive growth involving each and every citizen in the economic development progression. It is
in this context that financial inclusion should be aimed at inclusive growth in the Indian context.
3.8 Current Indian Scenario
The industry is currently in a transition phase. On the one hand, the PSBs, which are the
mainstay of the Indian Banking system are in the process of shedding their flab in terms of
excessive manpower, excessive non Performing Assets (Npas) and excessive governmental
equity, while on the other hand the private sector banks are consolidating themselves through
mergers and acquisitions. PSBs, which currently account for more than 78 percent of total
banking industry assets are saddled with NPAs (a mind-boggling Rs 830 billion in 2000), falling
revenues from traditional sources, lack of modern technology and a massive workforce while the
new private sector banks are forging ahead and rewriting the traditional banking business model
by way of their sheer innovation and service. The PSBs are of course currently working out
Page 35

challenging strategies even as 20 percent of their massive employee strength has dwindled in the
wake of the successful Voluntary Retirement Schemes (VRS) schemes.
The private players however cannot match the PSBs great reach, great size and access to
low cost deposits. Therefore one of the means for them to combat the PSBs has been through the
merger and acquisition (M& A) route. Over the last two years, the industry has witnessed several
such instances. For instance, Hdfc Banks merger with Times Bank Icici Banks acquisition of
ITC Classic, Anagram Finance and Bank of Madura. Centurion Bank, Indusind Bank, Bank of
Punjab, Vysya Bank are said to be on the lookout. The UTI bank- Global Trust Bank merger
however opened a pandoras box and brought about the realization that all was not well in the
functioning of many of the private sector banks.
Private sector Banks have pioneered internet banking, phone banking, anywhere banking,
mobile banking, debit cards, Automatic Teller Machines (ATMs) and combined various other
services and integrated them into the mainstream banking arena, while the PSBs are still
grappling with disgruntled employees in the aftermath of successful VRS schemes. Also,
following Indias commitment to the W To agreement in respect of the services sector, foreign
banks, including both new and the existing ones, have been permitted to open up to 12 branches
a year with effect from 1998-99 as against the earlier stipulation of 8 branches. The FDI rules
being more rationalized in Q1FY02 may also pave the way for foreign banks taking the M& A
route to acquire willing Indian partners. Meanwhile the economic and corporate sector slowdown
has led to an increasing number of banks focusing on the retail segment. Many of them are also
entering the new vistas of Insurance. Banks with their phenomenal reach and a regular interface
with the retail investor are the best placed to enter into the insurance sector. Banks in India have
been allowed to provide fee-based insurance services without risk participation, invest in an
insurance company for providing infrastructure and services support and set up of a separate
joint venture insurance company with risk participation.
Bank nationalization in India marked a paradigm shift in the focus of banking as it was
intended to shift the focus from class banking to mass banking. The rationale for creating Regional
Rural Banks was also to take the banking services to poor people. The branches of commercial
banks and the RRBs have increased from 8,321 in the year 1969 to 68,282 branches as at the end
of March 2005. The average population per branch office has decreased from 64,000 to 16,000
during the same period. The new Branch Authorization Policy of Reserve Bank encourages banks
Page 36

to open branches in these under banked states and the under banked areas in other states. The new
policy also places a lot of emphasis on the efforts made by the Bank to achieve, inter alia, financial
inclusion and other policy objectives. But the study of Distribution of Commercial Bank
Branches-Region /State/Union Territory shows that , there are certain under-banked states such as
Bihar , Orissa, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, West Bengal and a large
number of North-Eastern states such as Assam, Manipur and Nagaland , where the average
population per branch office continues to be quite high compared to the national average of 16,000
people per bank branch. The study also shows that even after the implementation of the new
Branch Authorization Policy of Reserve Bank, out of a total of 1,250 new branches that were
opened during July 2004-June 2005 only 1.2 % branches were actually opened in the un-banked
areas. During the same corresponding period during 2005-06, 933 new branches were authorized
to operate and out of which only 0.21 % were opened in the un-banked areas.
Another benchmark employed to assess the degree of reach of financial services to the
population of the country, is the quantum of deposit accounts (current and savings) held as a ratio
to the IIMK adult population.
According to the information available with the Reserve Bank of India, about 5 lakh nofrill accounts , with and without value-added features , have been opened until March 31, 2006, of
which about two-third are with the public sector and one-third with the private sector banks.
Though the RBI promoted no-frills savings bank account, 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. The product was lost among a myriad of financial offerings and
most banks have shown little verve and vitality in marketing it and banking continues to remain an
elitist to lower middle-class pursuit, restricted mainly to urban India
Page 37
Chapter IV
Data Analysis & Interpretation
Analysis of data is a process of inspecting, cleaning, transforming, and
modeling data with the goal of highlighting useful information, suggesting conclusions, and
supporting decision making. Data analysis has multiple facets and approaches, encompassing
diverse techniques under a variety of names, in different business, science, and social science
domains.
Table 4.1
Bank Group wise number of branches as on 31.12.2012
Bank Group
Rural
Semiurban
Urban
Metropolitan
Total
Public Sector
Banks
22812
18422
14454
13502
69190
Private Sector
Banks
1701
4974
3665
3755
14095
Foreign Banks
63
248
328
Regional Rural
Banks
12451
3190
865
158
16664
Total
36972
26595
19047
17663
100277
*Source: RBI Annual Report
Page 38

Figure 4.1
No of bank branches in India-group wise

25000
20000
Sum of Rural
15000
Sum of Semi-urban
10000
Sum of Urban
5000
Sum of Metropolitan
Analysis
Table 4.1 is showing the total number of scheduled commercial banks in India as on March
2013. It is the area wise data of Public, Private, Foreign and Regional Rural Bank branches all
over India. The number of Banks (36972) working in rural area is more than the other areas.
When it comes to semi-urban, urban and metropolitan cities we can see a gradual decrease in the
number of the banks. Regional Rural Banks also contributing a major role in the banking sector.
Interpretation
Financial Inclusion being the current objective of the RBI and Government, there is an
increase in the number of banks in the country in order to avail the service to the people. Rural or
village people are the one who financially excluded. The data available shows that the more
number of branches of all types of banks are situated in the rural area. It is one of the strict rule
by RBI that each commercial banks should open mostly in rural areas and must provide financial
literacy and financial services.
Page 39
Table 4.2
Coverage of Banking Services in India
Region
Total No. Of
Accounts
Total
Population
No. of acc. Per

100 of population
116318260
232676462
49
112676840
484950897
23
69690359
427613073
26
86456406
285713495
30
72703203
169071747
43
108052912
253445381
42
565897980
1207015245
46
North
North East
East
Central
West
South
All India
*Source: Assessment Survey, National Sample Survey Organization
Page 40

Figure No: 4.2
No. of acc. Per 100 population

60
50
40
No. of acc. Per 100

population
30
20
10
0
North North East
East
Central
West
South
Analysis
Having an account with a commercial bank is the first step that RBI can take for the
successful financial inclusion plan. The above table shows the number of people having current
account or savings account with any commercial banks in India. India is a 1.2 billion population
country, but the number of people having bank account is just 46% of the population. In the
north Indian states 49% of the population having account, whereas in the north east states it is
only 23%. East and Central regions also fall under less than 30%. West and South holds 43% and
42% respectively.
Interpretation
The table clearly says that the banking and financial penetration in India. Less than 50%
of the population having bank account with a commercial bank. North east, east and central
regions of the country population is mostly farmers and village people with less literacy or no
literacy. The graph shows there are some regions which are not even attained 35% of the
populations having bank account. This is where Indian economic system need to concentrate.
Page 41
Table 4.3
Position of households availing banking services
As per census 2001
Household
s
Total
number of
household
s
Number
of
household
s availing
banking
services
Rura
l
138,271,55
9
Urba
n
Total
As per census 2011
Number of
households
availing
banking
services
Percen
t
Total
number of
household
s
41,639,94
9
30..
1
167,826,73
0
91,369,80
5
54.
4
53,692,37
6
26,590,69
3
49.
5
78,865,93
7
53,444,98
3
67.
8
191,963,93
5
68,230,64
2
35.
5
246,692,66
7
144,814,78
8
58.
7
*Source: NABARD Reports
Page 42
Percen
t
Figure No: 4.3
Position of housholds availing bank services

80
70
60
Rural
50
Urban
40
30
20
10
0
Analysis
The urban and rural population and the number of people using banks as their mode of
financial services is given in the table 4.3. As per the 2001 census in rural area it is 30.1%
whereas in the urban area it is 49.5%. In the 2011 census it has increased 24.3% within the span
of 10 years. There is an increase in the percentage of urban people using banking services also. If
you look at the total percentage of people using banking services as of 2011 census, it is 58.7%,
23.2% increase from 2001.
Interpretation
Mainly the banking services are availed by the urban people though the most of the
population reside in the villages and rural areas of the country. The people who avail banking
services are very low in the rural areas as compared to the urban areas, but there is a positive
growth in the financial system of the country and the banking sector as well. Within the span of
10 years India could able to achieve more than 20% increase in the providing banking services to
both urban and rural population.
Page 43
Table 4.4
Financially excluded people in India- Region wise
Region
No of people who are Total

not having access to
Population
financial services
Percent
North
116358202
232676462
50
372274057
484950897
77
357922714
427613073
74
199257089
285713495
70
96368544
169071747
57
14539246
253445381
58
641117265
1207015245
54
North East
East
Central
West
South
All India
Figure No: 4.4
Financially excluded people in India- Region wise
North
15%
North East
13%
East
Central
15%
20%
West
South
18%
19%
Page 44
Analysis
The above table shows the financial exclusion percentage in India in different regions. The
percentage of people excluded from the financial inclusion all over the country is 54%. 50% of
the population is excluded in north India on the other hand 77% of the population excluded in
north east; it is the highest among the entire region. East and central followed by north east with
74% and 70% respectively. South and west regions are better as compared to the north east,
central and east.
Interpretation
India has long way to travel on the financial inclusion process. 54% of the population is
still not using the banking services is a threat to the economic development of the country.
Literacy rate and standard of living of the people in north, west and south is very high as
compared to the other regions. This is one of the main reasons for financial exclusion. For the
village people it is very difficult to access the banking service without making them aware of the
services that they can avail and the how to process it.
Page 45
Highlights of progress in achieving financial inclusion

Table 4.5
Number of branches of Scheduled Commercial Banks opened during last three years
Population Group
2009-10
2010-11
2011-12
Rural
974
1280
2051
Semi-urban
1704
2186
2479
Urban
1398
890
1065
Metropolitan
1116
958
908
Grand total
5192
5314
6503

Figure No: 4.5
Number of branches of Scheduled Commercial Banks opened during last three years
3000
2500
2009-10
2000
2010-11
2011-12
1500
1000
500
0
Rural
Semi-urban
Urban
Metropolitan
Page 46
Analysis
Branch expansion is one of the main strategies for the successful implementation of
financial inclusion policy. The data given in the above table shows the increase in the number of
branches of commercial banks in different population of the country. During the year 2009-2010,
5192 branches were opened whereas it has increased to 6503 within 2 years. Number of branches
opened in rural areas showing a gradual increase from 974 to 2051, whereas in Metropolitan
cities, it is showing a reversal trend. In the urban area, though there is a decline in the year 20102011, it is showing positive move in the next year. Within 3 years more than 1300 branches were
opened all over the country.
Interpretation
Government had issued detailed strategy and guidelines on Financial Inclusion in
October 2011, advising banks to open branches in all habitations of 5,000 or more population in
under-banked districts and 10,000 or more population in other districts. Branch expansion
increases the reach of banking services to the people especially by opening branches in the
villages. More than 2050 branches were opened in villages during last 3 years. It shows that
government and RBI has taken the problem very seriously and taking measures on the same.
Page 47
Table 4.6
Number of banking outlets opened in villages
Year
With population above 2000
With population less than 2000
Total
27353
26905
54258
54246
45937
100183
82300
65234
147534
54947
38329
93276
2010
2011
2012
Variation
Figure No: 4.6
Number of banking outlets opened in villages

90000
80000
70000
60000
With population above

2000
50000
With population less than

2000
40000
30000
20000
10000
0
2010
2011
2012
Page 48
Analysis
The table showing the number of banking outlets opened in villages with more than 2000
population and less than 2000 population. Within 3 years 54947 branches were opened in
villages with population above 2000 and 38329 branches were opened in villages with
population less than 2000.
Interpretation
It is the guidelines given by the RBI that every commercial banks should open their
branches mostly in villages in order to increase the financial penetration. People in villages are
still not literate and they are not using the banks are the mode of financial transaction.
Concentrating more on the financial literacy of the village people and financial inclusion will
help for the development of the country and the financial system as well.
Page 49
Table 4.7
Number of banking outlets opened through different modes
No of outlets
Opened through;
2010
2011
2012
Branches
21475
22662
24701
3226
Business
Correspondents
Other modes
32684
77138
120355
87671
383
2478
2379
Total
54258
100183
147534
93276
99
Variations

Figure No: 4.7
Number of banking outlets opened through different modes
1%
Branches
Business
correspondents
23%
Other modes
76%
Page 50
Analysis
Banking outlets can be opened through branches, business correspondents, and other
modes. Outlets opened through Business correspondents are more when compared to branches.
Within the span of 3 years 87671 outlets were opened through Business correspondents. Banking
outlets opened through branches are very less (3226) than through the business correspondents.
Interpretation
The Business Correspondent (BC) model has been recommended by the RBI to provide
an alternative structure to branch-based banking to achieve financial inclusion. The Business
Correspondent is an agent authorized to undertake transactions for pre-defined levels of cash on
behalf of a specific financial institution. The business correspondent model is achieving success
in both rural and urban areas with increase in the number of BCs deployed. The rural and urban
branches have increased .The increase through BC model has been more successful than other
sources. Supplementing the BC model with technology can improve security, speed up
enrolments and transactions, and extend the size of the physical territory that agents can cover.
Even with enabling technology, the agent model in isolation, will always be limited to the size of
the physical territory that can be covered.
Page 51
Table 4.8
Number of No-frill accounts opened during last 3 years
Year
In Number(million) In Amount(Billion)
2010
50.3
42.6
2011
75.4
57.0
2012
105.5
93.3
Variation
55.2
50.7
Figure No: 4.8
No of No frill accounts(in million)

120
100
80
No of No frill
accounts(in million)
60
40
20
0
2010
2011
2012
Page 52
Analysis
No frill accounts are the accounts opened with zero balance or very minimum balance.
This is one of the first steps taken by the RBI to promote the financial inclusion process. In the
year 2010 50.3 million people have no frill accounts it has increased to 105.5 million by the year
2012. Within the span of 3 years 55.2 million no frill accounts were opened newly. There is a
huge increase in the amount of cash flow i.e., 50.7 billion.
Interpretation
Banks were advised to make available a basic banking 'no-frills' account either with 'nil'
or very low minimum balance as well as charges that would make such accounts accessible to
vast sections of population and making the basic banking facilities available in a more uniform
manner across banking system. There is an increase in the opening of no frills account, but
observed that there is still work to be done. The reason for not much increase in the no frills
account is that many people are not aware of these schemes and even if they are aware people do
not know how to operate these accounts.
Page 53
Table 4.9
Number of ATMs in the country as on 30th September, 2012
Rural
Semi-Urban
Urban
Metropolitan
Total
6926
15638
20075
17934
60573
Old Private
Sector Banks
615
2356
2046
1489
6506
New Private
Sector Banks
1739
6146
10703
14718
33306
Foreign Banks
33
22
254
1052
1361
Total
9,313
24,162
33,078
35,193
101,746
Type of bank
Public Sector
Banks

Figure No: 4.9
Number of ATMs in the country as on 30th September, 2012

25000
20000
Public Sector Banks
15000
Old private banks

new private banks
foreign banks
10000
5000
0
Rural
Semi-Urban
Urban
Page 54
Metropolitan
Analysis
ATMs are one of the way which helps to make the people financially included. The data given in
the table is the number of ATMs in different regions. There are 60573 ATMs of different public sector
banks and 33306 ATMs of new private sector banks. In rural area, the number of ATMs is less when
compared to other regions of the country. Foreign banks ATMs are less in numbers but still there is high
scope for the growth.
Interpretation
The data shows that financial penetration through ATMs is too less in village area. The
main reason for the low penetration is, most of the people does not know the facility which is
available and how to operate the ATM. There is a greater concentration of ATMs in urban areas
than in rural areas. However, the number and percentage of ATMs in rural areas has been on a
steady rise in recent years. There is an urgent need to expand ATM network in the financially
excluded regions of the country.
Page 55
Table 4.10
Agency wise kisan credit cards issued and amount sanctioned
Cards issued (in lakhs)
Amount sanctioned (Rs. In

crores)
2010
2011
2012
Agency
2010
2011
2012
Co operative
banks
17.43
28.12
29.59
7606
10719
10642
RRBs
19.50
17.74
19.96
10132
11468
11516
Commercial
banks
53.13
55.83
68.03
39940
50438
69518
Total
90.06
101.69
117.58
57678
72625
91676
Figure No: 4.10
Page 56
Agency wise kisan credit cards issued

80
70
60
Co operative banks
50
RRBs
40
Commercial banks
30
20
10
0
2010
2011
2012
Analysis
The number of credit cards issued by co operative banks, regional rural banks and
commercial banks has increased from 90.06 lakh in 2009-10 to 117.58 lakh in 2012. There is a
considerable increase in the amount sanctioned by these institutions from Rs. 57678 crores in
2009 to Rs. 91676 crores in 2012. Commercial banks have issued more ckisan credit cards as
compared to the other agencies.
Interpretation
The Kisan Credit Card scheme has been an important initiative for universal access of
farmers to institutional credit. There is a considerable increase in the amount sanctioned by the
banking institution. Credit flow to agricultural sector has resulted in the expansion of
employment opportunities and increase income generation.
Page 57
Table 4.11
General purpose Credit Card (GCC) issued;
Year
No of GCC (in millions)
Outstanding amount (in billions)
2010
0.9
25.8
2011
1.0
21.9
2012
1.3
27.3
0.4
1.6
Variations
Figure No: 4.11
Outstanding amount in general purpose credit cards(in millions)

30
25
20
Outstanding amount(in
millions)
15
10
0
2010
2011
2012
Page 58
Analysis
General credit cards issued for the general purpose including the consumption. In 2010,
0.9 million general purpose cards were issued. Within 3 years it has increased to 1.3 million.
Though there is an increase in the usage of general purpose credit card, the increment is not so
high.
Interpretation
General Credit Card Scheme has been introduced as an important measure in the area of
Financial Inclusion to provide hassle free credit to Rural and Semi-urban households without
insistence on security, purpose or end use of the credit. 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 braches. This strict guideline is reflecting in the data which is shown in the table.
Page 59

Table 4.12
Number of Business Correspondents deployed in the last 5 years
Year
Number of BCs deployed
2008
11829
2009
24332
2010
33042
2011
57329
2012
95767
Variation
62725
*Source: NABARD Annual Report
Figure No: 4.12
Number of Business Correspondents deployed in the last 5 years

120000
100000
80000
Number of BCs
deployed
60000
40000
20000
0
2008
2009
2010
2011
2012
Page 60
Analysis
The given table 4.11 shows the number of Business Correspondents deployed during the 5 years.
We can see a tremendous growth in the Business Correspondents model. In the year 2008, it is 11829
where as in the year 2012, it has increased to 95767. The variation within 5 years is 62725.
Interpretation
The Business Correspondent (BC) model has been recommended by the RBI to provide
an alternative structure to branch-based banking to achieve financial inclusion. It is analyzed that
the business correspondent model is achieving success in both rural and urban areas with
increase in the number of BCs deployed. The rural and urban branches have increased .The
increase through BC model has been more successful than other sources.
Page 61
Table 4.13
Urban location covered through Business Correspondents
Year
Number of locations covered
2010
433
2011
3757
2012
5875
Figure No: 4.13
Urban location covered through Business Correspondents

7000
6000
5000
Number of locations
covered
4000
3000
2000
1000
0
2010
2011
2012
Analysis
Business correspondents model is not just concentrating on the rural people, even in urban area
also we can see the successful implementation of the model. In the year 2010 the number of business
correspondence in urban area is just 433 but, by 2012 it has reached to 5875.
Interpretation
Urban population is mostly using the banking services effectively. Being the literate people, they
know the different services of the bank and how to process it. So the scope for the Business
correspondents model is less in urban area as compared to the rural population.
Page 62
Table 4.14
ICT based Accounts through Business Correspondents
Year
No of ICT based
accounts (in millions)
No of transactions during
the year (in millions)
2010
12.6
18.7
2011
29.6
64.6
2012
52.1
119.3
Variations
39.5
183.9
Figure No: 4.14
ICT based Accounts through Business Correspondents

60
50
40
No of ICT based
accounts (in million)
30
20
10
0
2010
2011
2012
Page 63
Analysis
Number of ICT based accounts opened during last 3 years showing the upward trend. In 2010, the
number of ICT based accounts is 12.6 millions; it has increased to 52.1 million by 2012. Within the span
of 3 years 39.5 accounts opened newly. 183.9 transactions were newly made.
Interpretation
ICT enabled services always helps the banks in quick transactions. The graph shows that there is
a tremendous increase in the usage of technology for the banking transactions. It helps for the growth of
the banking and economy as well.
Page 64
Table 4.15
Growth of Credit Linkage of SHGS- Regional wise
% of SHG s Credit Linkage

Region
2009-10
Number
2011-2012
2010-2011
%
Number
Number
North
257245
18
321471
17
543412
22
East
75416
126008
258655
10
Central
331530
23
424012
23
579819
23
West
274312
19
331415
18
398426
16
South
507713
35
647547
35
716549
29
1850453
100
2496861
100
Total
1416216
100
Figure No: 4.15
Page 65
Growth of Credit Linkage of SHGS- Regional wise

40
35
30
2009-10
25
2010-11
20
2011-12
15
10
5
0
North
East
Central
West
South
Analysis
Table 4.14 shows the growth of Credit Linkage of SHGS- Regional wise. The data gives the
idea that percentage of credit linkage on south India is more when compared to the other regions
of the country. East region is having very low penetration of self help group linkage. Central
zone is maintaining the constant growth of 23% during last 3 years. In west and south, the
percentage growth has been decreased from the year 2010 to 2012.
Interpretation
Self Help Group is one of the popular system which is still having the growth in rural
population. Penetration of the microfinance industries, NBFCs and the Business Correspondent
Model is more in the south region, because of that reason the percentage growth in south region
also high.
Page 66
Chapter V
FINDINGS, SUGGESTIONS &CONCLUSION
5.1 FINDINGS
Financial Inclusion being the current objective of the RBI and Government, there is an
increase in the number of banks in the country in order to avail the service to the people.
Rural or village people are the one who financially excluded. The data available shows
that the more number of branches of all types of banks are situated in the rural area.
India is 1.2 billion population country, but the number of people having bank account is
just 46% of the population. In the north Indian states 49% of the population having
account, whereas in the north east states it is only 23%. East and Central regions also fall
under less than 30%. West and South holds 43% and 42% respectively.
North east, east and central regions of the country population is mostly farmers and
village people with less literacy or no literacy.
Page 67
As per the 2001 census in rural area it is 30.1% whereas in the urban area it is 49.5%. In
the 2011 census it has increased 24.3% within the span of 10 years.
The people who avail banking services are very low in the rural areas as compared to the
urban areas, but there is a positive growth in the financial system of the country and the
banking sector as well.
The total percentage of people using banking services as of 2011 census, it is 58.7%,
23.2% increase from 2001
The percentage of people excluded from the financial inclusion all over the country is
54%. Literacy rate and standard of living of the people in north, west and south is very
high as compared to the other regions. This is one of the main reasons for financial
exclusion. For the village people it is very difficult to access the banking service without
making them aware of the services that they can avail and the how to process it
During the year 2009-2010, 5192 branches were opened whereas it has increased to 6503
within 2 years. Number of branches opened in rural areas showing a gradual increase
from 974 to 2051, whereas in Metropolitan cities, it is showing a reversal trend. Branch
expansion increases the reach of banking services to the people especially by opening
branches in the villages.
Within 3 years 54947 branches were opened in villages with population above 2000 and
38329 branches were opened in villages with population less than 2000.
Within the span of 3 years 87671 outlets were opened through Business correspondents.
Banking outlets opened through branches are very less (3226) than through the business
correspondents. The BC model with technology can improve security, speed up
enrolments and transactions, and extend the size of the physical territory that agents can
cover. Even with enabling technology, the agent model in isolation, will always be
limited to the size of the physical territory that can be covered.
In the year 2010 50.3 million people have no frill accounts it has increased to 105.5
million by the year 2012.

The reason for not much increase in the no frills account is that many people are not
aware of these schemes and even if they are aware people do not know how to operate
these accounts.
Page 68
In India there are 60573 ATMs of different public sector banks and 33306 ATMs of new private
sector banks. In rural area, the number of ATMs is less when compared to other regions of the
country. . The main reason for the low penetration is, most of the people does not know
the facility which is available and how to operate the ATM.
In 2010, 0.9 million general purpose cards were issued. Within 3 years it has increased to
1.3 million.
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 braches. This strict guideline is
reflecting in the data on the GCC issued.
Government deployed Business correspondents for the financial inclusion in the rural
area. In the year 2008, 11829 were deployed. In 2012, it has increased to 95767.
In the year 2010 the number of business correspondence in urban area is just 433 but, by
2012 it has reached to 5875.
Credit flow to agricultural sector has resulted in the expansion of employment
opportunities and increase income generation.

Number of ICT based accounts opened during last 3 years showing the upward trend. In
2010, the number of ICT based accounts is 12.6 million; it has increased to 52.1 million
by 2012.
ICT enabled services always helps the banks in quick transactions. The graph shows that
there is a tremendous increase in the usage of technology for the banking transactions. It
helps for the growth of the banking and economy as well. The percentage of credit
linkage on south India is more when compared to the other regions of the country.
Penetration of the microfinance industries, NBFCs and the Business Correspondent
Model is more in the south region, because of that reason the percentage growth in south
region also high.
Page 69
5.2 RECOMMENDATIONS AND SUGGESTIONS
There is a need for coordinated action between the banks, the Government and others to
facilitate access to bank accounts amongst the financially excluded.

Financial inclusion or opening of bank accounts should be perceived more as an obligation
than a business opportunity by the banks.

There is a need to introduce new products according to the needs of population both rural and
urban.
As people in India are still not aware of banking services there is a need for financial literacy
program in rural areas as well as urban slum areas.

The business correspondent model should be used more by the banks and should be made
available in remotest parts of India.

Farmers in India who need financing should be approached through the business
correspondent models they need to be educated on financial schemes made for them so that
they do not have to approach informal sources like the money lenders.
There is need to reduce paper work and the regulatory norms in disbursing credit. The
product needs to be proactively promoted.
Page 70
All terms and conditions must be explained in detail when clients are not aware. Focus more
on customer service, education and protection .

There is also a need of financial literacy at the time of account opening, incentives for branch
managers delivering on socially responsible schemes, documentation of best practices on
such projects, etc.

Create a Financial Inclusion Index (FII). Facilitate rural infrastructure development.
Access through ICT is quiet good and so this model should be used more.
Adequate publicity for the project of financial inclusion should be provided.
Financial inclusion should be a social responsibility of all commercial banks.
5.3 CONCLUSION
Empirical evidence shows that economic growth follows financial inclusion. Boosting
business opportunities will definitely increase the gross domestic product, which will be
reflected in our national income growth. People will have safe savings along with access to allied
products and services such as insurance cover, entrepreneurial loans, payment and settlement
facility, etc. The dream of inclusive growth will not be complete until India create millions of
micro-entrepreneurs across the country. All budding entrepreneurs have to face these challenges
and find solutions. People working in the social sector should work for filling up the deficit
existing in the economic and social arena.
To sum up, financial inclusion is the road that India needs to travel toward becoming a
global player. Financial access will attract global market players to our country and that will
result in increasing employment and business opportunities. Inclusive growth will act as a source
of empowerment and allow people to participate more effectively in the economic and social
process.
Page 71
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The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

1.4 REGULATORY MEASURES

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

the financial Action

embraces financial inclusion as complementary to anti-money laundering and counter-terrorist

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Bihari, et al (2011) explored that financial inclusion is delivery of financial services at an

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Kumar, et al (2011) explored that financial inclusion is a development policy priority

insurance inclusion index

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

inclusive financial system, and it is easy to compute.

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

like financial education in order to be effective.

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Nagadevara Vishnuprasad (2009) revealed that theoretically, financial development

MARCUS (2012) examined that the concept of 'financial inclusion' has

The role of commercial banks in the promotion of financial inclusion

Chandan Kumar (2008) analyzed that financial development stimulates

The role of commercial banks in the promotion of financial inclusion

Bi Zohra, et al (2011) explored that microfinance in India has been viewed as a

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

2.2 STATEMENT OF THE PROBLEM

2.4 OBJECTIVE OF THE STUDY

The role of commercial banks in the promotion of financial inclusion

Give recommendations for the successful financial inclusion planning.

2.5 RESEARCH METHODOLOGY

2.6 LIMITATIONS OF THE STUDY

2.7 PROPOSED CHAPTER SCHEME

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

The role of commercial banks in the promotion of financial inclusion

3.3 GOVERNMENTAL POLICY:

Krupanidhi Degree College

The role of commercial banks in the promotion of financial inclusion

3.4 BANKING INDUSTRY VISION