Financial Inclusion in Rural Areas in Assam: Issues and Challenges

Rishi Bhargav Das

Assistant Professor
Department of
Commerce
Nowgong College,
Nagaon
rishibhargavdas.du@g
mail.com
Rinki Das
Assistant Professor
Golaghat Commerce
College Golaghat,
Assam
rinkidas.du@gmail.c
om

ABSTRACT:
Financial Inclusion is identified as a key strategy to achieve inclusive development the world
over. It is a necessary condition for financial deepening, which will help address the basic issue
of growth with equity. In India, the process of leveraging financial services sector as the growth
engine for transformation is closely entwined with the progress on financial inclusion. Financial
inclusion provides formal identity, access to payments system & deposit insurance. The objective
of financial inclusion is to extend the scope of activities of the organized financial system to
include within its ambit people with low incomes. Through graduated credit, the attempt must be
to lift the poor from one level to another so that they come out of poverty. There is a need for
coordinated action between the banks, the Government and others to facilitate access to bank
accounts amongst the financially excluded.

INTRODUCTION:
Financial institutions are the pillars of economic growth, development and prosperity of modern
economies. To sustain and accelerate the growth momentum, we have to ensure increased
participation of the economically weak segments of population in the process of economic
growth. Financial Inclusion is the road which India needs to travel towards becoming a global
player. Today, there is a national as well as global focus on inclusive growth. Financial inclusion
has been one of the top priorities of the reserve bank during the recent years. 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. Financial inclusion can truly lift the financial condition and
standards of life of the poor and the disadvantaged. The banking sector has taken a lead role in
promoting financial inclusion.
Financial inclusion denotes delivery of credit and other financial service at cost to the vast
sections of the disadvantage and low income groups. The objective of financial inclusion is to
extend the scope of activities of the organized financial system to include within its ambit people
with low income. "Financial inclusion is 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." - C Rangarajan, Chairman of Committee on Financial
Inclusion. "Financial inclusion is expanding access to financial services, such as payments
services, savings products insurance products, and inflation-protected pensions."- Raghuram
Committee on Financial Sector Reforms (CFSR). It 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. It is also
defined as a delivering of banking services at an affordable cost to the vast section of
disadvantaged and low income groups (Dev, 2006).It is a process that ensures the ease of access,

availability and usage of the formal financial system for all members of an economy. This
definition emphasizes several dimensions of financial inclusion, viz., accessibility, availability
and usage of the financial system. These dimensions together build an inclusive financ ial system
(Sarma, 2010).
REVIEW OF LITERATURE:
Financial inclusion, of late, has become the buzzword in academic research, public policy
meetings and seminars drawing wider attention in view of its important role in aiding economic
development of the resource poor developing economies. In the Indian scenario, the term
financial inclusion is popular in financial circles, especially after the Reserve Bank of India
(RBI) announced a series of measures in its credit policy for 2006-07 to include many of the
hitherto excluded groups in the banking net. Rangarajan Committee (2008) on financial inclusion
stated that: 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 of savings, loans, insurance, credit, payments, etc. The financial system is expected to
provide its function of transferring resources from surplus to deficit units, but both deficit and
surplus units are those with low incomes, poor background, etc. By providing these services, the
aim is to help them come out of poverty. Indian Institute of Banking & Finance (IIBF) opines,
Financial inclusion is delivery of banking services at an affordable cost (no frills accounts,) to
the vast sections of disadvantaged and low income group. Unrestrained access to public goods
and services is the sine qua non of an open and efficient societ y (www.iibf.org.in). A perusal of
literature on finance and economic development reveals that the earlier theories of development
concentrated on labor, capital, institutions, etc., as the factors for growth and develo pment. There
have been numerous researches analyzing how financial systems help in developing economies.
A great deal of consistency exists among economists regarding financial development prompting
economic growth. Many theories have established that, financial development creates favorable
conditions for growth through either a supplyleading or a demand-following channel. According
to Rajan and Zingales (2003), development of the financial system contributes to economic
growth. Empirical evidence time and again emphasizes the relationship between finance and
growth. According to the works of King and Levine (1993) and Levine and Zervos (1998), at the

cross-country level, evidence indicates that various measures of financial development

(including assets of the financial intermediaries, liquid liabilities of financial institutions,
domestic credit to private sector, stock and bond market capitalization) are robustly and
positively related to economic growth. Other studies also establish a positive relationsh ip
between financial development and growth at the industry level, like the one by Rajan and
Zingales (1998). The topical endogenous growth literature structured on learning by doing
processes, allocates a special role to finance (Aghion and Hewitt, 1998 and 2005). The
researchers so far have not only looked at how finance facilitates economic activity, but also
social aspects like poverty, hunger, etc. The consensus is that finance promotes economic
growth, but the magnitude of impact differs.
OBJECTIVE
1. To show the initiatives taken by Financial Institutions for promoting financial inclusion.
2. To Analyze the Threats and Weakness in the growth of Financial Inclusion.
3. To highlight the present scenario and future prospect of financial inclusion in India.

METHODOLOGY
This study is basically empirical in nature. It is an attempt to highlight the different methods of
financial inclusion which are experienced from different sets of studies. This study also presents
a Threat and Weakness analysis of financial inclusion programme that has been in practice over
the last few years. It also make a glimpses into the present and future prospect of Financial
Inclusion in Rural India.
Data Collection: The literature and the review of data are collected from the secondary sources.

To extend the programme of financial inclusion Financial Institutions has made some notable
efforts and developments so far some of them are as follows:

Branch Expansion:
Nationalisation of commercial banks in India was a pioneering step towards accessibility of
banking services to the vast rural population of the country. This was a significant effort towards
financial inclusion, which led to the spread of bank branches in rural and semi urban areas. 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.

SHG-BANK LINKAGE PROGRAMME

One of the early attempts in 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 programme 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 Programme 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 t ime.

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).

Rural Financial Institutions

(a) Regional Rural Banks
Regional Rural Banks (RRBs) are actively involved in promoting financial inclusion by
opening No Frill Accounts, issuing Kisan Credit Cards (KCC) and General Credit Cards
(GCC) and dispensing micro credit under the SHG-Bank Linkage Programme. Considering
the strategic importance of RRBs in the acceleration of financial inclusion RBI has directed
sponsor banks to implement CBS in all RRBs by September 30, 2011. Fifteen RRBs were
identified from 14 States for R & D project on Financial Inclusion with ICT-based solutions,
through use of smart cards, Point of Sale (PoS) devices and mobile technology, in different
regions and client groups in the country.

(b) Rural Cooperative Credit Institutions

The cooperative movement was the first ever experiment with financial inclusion in
India. However, the health of the rural cooperative credit institutions has been a major
cause of concern for policy makers. Financial assistance has been provided under the
Revival Package for the Short-term Cooperative Credit Structure (STCCS) for cleansing
of balance sheets and capital infusion to ensure a minimum Capital to Risk -Weighted
Assets Ratio (CRAR) of 7 percent, subject to legal and institutional reforms. With a view
to furthering the cause of financial inclusion, NABARD has decided to offer support to
cooperative banks in CBS. Cooperative Banks have been advised to express willingness
to opt for the Application Service Provider (ASP) model of CBS.

MFI-Bank Linkage
This model focuses on financing of Microfinance Institutions (MFIs) by banking agencies for
lending to SHGs and other small borrowers. MFIs have been playing a significant role in
facilitating financial inclusion, as they are uniquely positioned in reachin g out to the rural poor.
Many of them operate in a limited geographical area, have a greater understanding of the issues
specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility

in operations providing a level of comfort to their clients. The Committee on Financial Inclusion
(Government of India, 2008) has, therefore, recommended that greater legitimacy, accountability
and transparency will not only enable MFIs to source adequate debt and equity funds, but also
eventually enable them to take and use savings as a low cost source for on lending.

Technological Innovations
(a) CBS, Smart Cards, Biometric Cards
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 Unique Identification Number (UID) project, CBS
in RRBs and cooperative credit institutions, mobile banking, hand -held devices, smart
cards, biometric cards, tech-savvy BCs (Business Correspondents), routing of payment
under government social schemes through banks and microfinance have the ability to
catapult financial inclusion into mainstream banking business.

(b) IT-Enabled Kisan Credit Card/General Credit Card

Kisan Credit Card (KCC) aims at providing adequate and timely support from the
banking system to the farmers for their short term credit needs. Banks need to convert
KCC and General Credit Cards (GCC) to electronic credit cards, which could enable
farmers to withdraw cash from ATMs anywhere in the country. Banks may consider
issuing multipurpose cards which could function as Debit Cards, KCC, and GCC, as per
customers needs. Any other financial services/products could also be embedded in the
multipurpose card. The RBI has advised banks to consider introduction of a GCC facility
up to INR 25,000 at their rural and semi-urban braches.

(c) ICT-Enabled Mobile Banking Vans

As directed by the RBI scheduled commercial banks have prepared ICT - based roadmap
for providing banking services to all villages with population above 2,000 falling under
the lead district programme by March 2012. In this context ICT-enabled Mobile Banking
Vans (MBV) could provide efficient and cost-effective banking services in the unbanked
and remotest corners of the country. Bank of Baroda and Indian Bank have introduced
MBVs to provide banking services in the financially excluded regions. The MBVs units
have CBS connectivity to provide all banking services, including deposit and withdrawa l
of money. The model has already been successfully tested by Bank of Baroda in Gujarat
and Bihar

Rural Infrastructure Development

It is widely acknowledged that lack of infrastructure is a major constraint for growth and poverty
alleviation. Improvement in rural infrastructure is, therefore, crucial for broad-based inclusive
growth. Under Rural Infrastructure Development Fund (RIDF), NABARD provides loans to
State Governments for the creation of rural infrastructure, broadly under agriculture and related
sectors, rural connectivity and social sector. Completed projects under RIDF have led to the
realisation of economic and social benefits in terms of creation of additional irrigation potential;
generation of additional employment for the rural people; contribution to the economic wealth of
the country; all weather connectivity/ improved connectivity to villages and marketing centres;
and improvements in quality of life through better facilities in education, health and drinking
supply. Such infrastructure facilities promise to improve the accessibility of the rural poor to
banks, and also improve their savings habit and credit absorption capacity.

Opportunity and Threat Analysis

Opportunity
1. Availability Of Untrapped Areas Of Implementation
Indias total population is more than 1000 million and out Of 350 million is living below
poverty line. So there is a huge opportunity for the MFIs to meet the demand of that
unnerved customers and Micro Finance should not leave any stones unturned to grab the
untapped market.

2. Huge Demand And Supply Gap

In a developing country like India there is no shortage of opportunity for implementation
of financial inclusion services in rural sectors on a large scale. Around 350 million of the
people are the population below the poverty line and only few MFIs (For E.g.,
NABARD, NEDFi, IIE, Banks including RRB and co-operative banks, government
organization like DRDA, SIRD) there to serving them there is huge opportunity for the
MFIs to serve the poor people and increase their living standard.
3. A Source Of Employment
Financial Inclusion through micro finance helps the poor people by not only providing
them with loan but also helps them in their business; educating their children etc. So in
this way micro finance helps in creating valuable human resources who can find
employment at par with their education qualification.
4. An Opportunity For Private Banks
Many Pvt. Banks are shying away from to serve the People are unable to access big
loans, because of the high intervention of the Govt. But the door open for the Pvt. Players
to get entry and with flexible rules Pvt. Banks are attracting towards this segmen t.
Threats
1. Unhealthy competition
This is a serious threat for the Micro Finance industry, because more and more players
will come in the market, their competition will rise , and we know that the MFIs has the
high transaction cost and after entrance of the new players their transaction cost will hike
further. There is a threat that emphasis on quantity will injure the sense of quality.
2. An Infant Concept
Financial inclusion through micro finance is not a new concept because it was earlier
through informal sources. The application of some formal source is still in infant stage
and going through a pilot phase in many rural areas. It is too early to predict a success
story.

3. Shortage Of Funds With The MFIs

Most of the NGOs in the state are formed as societies and trusts and the concerned
legislations under which they are registered do not allow them to undertake any
commercial operations. They are non-profit organizations and their inherent
characteristics make their task of financial intermediation difficult because NGOs do not
have any equity capital base and consequently they can never be capital adequate in
leveraging funds from higher financing institutions.

The Present Scenario

The present scenario of financial inclusion in India reveals still a scene of exclusion which is led
by many negative elements like lack of regular substantial income which is a hindrance for
getting a loan as the it does not provide adequate safety and collateral for the bank, the wide
geographical variety of the country that hinders the service of financial inclusion to be spread,
lack of financial illiteracy. The deprived sections include marginal farmers, landless labourers,
self employed and unorganized sector enterprises, socially excluded groups, women etc.

Various Dimensions Of Access Problems

Low Income Households And Their Micro And Small Enterprises
Majority With No Access To Finance At All

A Small Minority With Access To Finance

Very Large Proportion Is Underserved

Very Small Proportion With Full Access

Significant Number

Many Have Access

A Significant

Proportion

Depends On

To Deposit Services

Proportion Has

Access To Banking

Services Of

State Owned

Access Only To

Services

Unsustainable

Financial

Credit From Micro

Limited.

Institutions

Institutions And Co-

Credit Institutions.

With
Is

Very

Access To
Insurance Service
Is Very Limited.

Operatives

Clients Have To Pay

Withdrawing Funds

Poor Credit Quality

Long Processing

Low

High Transaction

Is Not Always Easy

Costs

Time High

Transparency

Minimum Loan
Requirements

(Source: Asian development bank report, 2010)

The Future
With a view to achieve inclusive growth, the Government, the RBI and the implementing
agencies need to put up mind and hearts together to evolve methods and measures to take
forward the financial inclusion. Though the BC model at the initial stage may not be
commercially viable due to high transaction costs for banks and customers, the appropriate use
of technology can help in reducing this. Basically, banking services need to be marketed to
connect with large population segments and these may be justifiable promotional costs. The
financial institutions, especially the banks, can accelerate the financial inclusion process by
increasing enrolment of SHGs through bank linkage programme, Designing appropriate product
on the basis of the requirement of a particular group of borrower, leveraging technology to
reduce the opportunity cost of financial inclusions in the rural areas, applying business facilitator
and correspondent model more intensively, inspecting the infrastructure of rural branches of the
banks etc.
The problems of financial inclusion in India can be tackled with the application of information
technology. It can be effectively used to speed up the process of financial inclusion programme
in India. Two of the IT techniques that can be implemented on a large scale are as under:

Postal Network
The government can be launch tie ups with private banks to deliver financial solutions to the
virgin areas through its extensive postal network. The reach of the existing postal system
supplemented by banking functions can be ask of the day to tackle the problem
geographical hindrances.

Mobile Banking
The hindrance of high transaction cost can be controlled with implementation of mobile banking.
The costs, ease of access for the consumers and the profitability of providers will ultimately
decide the level of wireless penetration.

Conclusion:
Financial Inclusion is needed for rural and deprived section of masses that are the future growth
engine of the economy. From the recent initiatives undertaken by the Indian Government with
RBI the need to include the economically underprivileged in the mainstream banking sector
seems more important. The role of various ICT tools and associated technologies in providing
financial solutions to the unbanked is also substantial. Rural ATMs, plastic cards (like smart
cards, biometric cards, etc.) and mobile payment technologies do have the ability to engage the
unbanked sections. Steps have been taken by the Government for the expansion of banking
services and linking of opportunities among various segments of financial sector like capital
markets, insurance, etc. to achieve its aim of Inclusive Growth. High GDP growth in India,
triggered by an open economy has created job opportunities in urban and semi-urban India and it
has further potential to go further into rural India, increasing the opportunity for growth to vast
sections of disadvantaged and low income groups.

References:
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For

Rebalancing Growth, Dev. M.S (2006), Financial Inclusion: Issues And Challenges,
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Chakrabarty, K. C., 2009, Banking: Key Driver For Inclusive Growth, Address
Delivered By At Clarity Through Debate' Series Organized By The Mint On August
10th, 2009 At Chennai, RBI Monthly Bulletin, September 2009.

4. Bihari. C. S (2011), Financial Inclusion The Key To Emerging India,

Asian Journal Of
Research In Social Sciences And Humanities

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Gardeva. A & Rhyne. E (2011), Opportunities And Obstacles To

Financial Inclusion Survey Report

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ASCI Journal Of
Management 55-68
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