FINANCIAL INCLUSIONS

DEFINITION- According to the definition given by NABARD "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”. In simple words we can also say
that financial inclusion is delivery of the banking services at affordable costs to vast sections of
disadvantaged and low income groups. Banking services should be such that they are for the
benefit of all the segments of the society and not just one, and that is the aim of financial
inclusions.Microfinance is looked upon as a panacea to solve the problems pertaining to financial

inclusion. “Microfinance is an umbrella term used for financial services provided by financial
institutions to the poor”

The aims of Microfinance are:

Structural change that includes financial inclusion, regulation of informal financial practices, job
creation

Outreach into the secluded areas and bring excluded people in the main stream and
development of regions

Provide credit plus services to break the vicious circle of poverty and microenterprise
development

Growth with equity and social justice

Consequently, empowerment of the poor and vulnerables

To address the issue of financial exclusion in a holistic manner, it is very essential to ensure that
a range of financial services and products available to every individual. These products and
services are :
 
 A no-frills banking account for making and receiving payments( it was in November
 2005 that RBI asked banks to offer basic banking “ no frills account” with zero or
minimum balances and minimum charges to expand the outreach of such accounts to the
low income group)

 Easier credit facility(Banks were asked to introduce General purpose Credit card i.e.
GCC facility up to 25000 rupees )
 
 Money transfer facilities ( The RBI is in consultation with the state governments to
encourage them to adopt Electronic Benefit System by banks)
 
 Small loans and overdrafts for productive, personal and other purposes.
 
 Micro-insurance (life and non-life)

 Overdraft and cheque facility.

 Financial advice.

 Pension to old age people and various investment schemes for them.

 Entrepreneurial and micro credits.

 Remittances and payment services.

 
To address the issues of financial inclusion, the Government of India constituted a “Committee
on Financial Inclusion” under the Chairmanship of Dr. C. Rangarajan, which submitted its final
report to Finance Minister on 04 January 2008.

The major recommendations of the Committee include :

 
 1. Launching of a National Rural Financial Inclusion Plan (NRFIP) in mission mode with
a clear target to provide access to comprehensive financial services, including credit to
at least 50% (which is almost 55.77 million rupees) of the financially excluded rural
 cultivator and non-cultivator households by 2012 through rural and semi-urban
branches of Commercial Banks and Regional Rural Banks . The remaining households
have to be covered by 2015.For this purpose a National Mission on Financial
Inclusion (NMFI) is proposed to be constituted comprising representatives from all
stakeholders to aim at achieving universal financial inclusion within a specific time
frame.

 
 2. Constitution of two funds with NABARD – the Financial Inclusion Promotion &
Development Fund(FIPF) and the Financial Inclusion Technology Fund(FITF) with an
initial corpus of Rs. 500 crores each to be contributed by GoI / RBI / NABARD. The
FIPF will focus on interventions like, “Farmers’ Service Centers”, “Promoting Rural
Entrepreneurship”, “Self-Help Groups and their Federations”, “Developing Human
Resources of Banks”, “Promotion of Resource Centers” and “Capacity Building of
Business Facilitators and Correspondents”, while the FITF will focus on funding of
low-cost technology solutions.

   
. 3. Increasing the outreach of microfinance programmes through financing of
SHG/JLGs and setting up of a risk mitigation mechanism for lending to small marginal
farmers/share croppers/tenant farmers through JLGs

   
4. Use of PACS as Business Facilitators and Correspondents.

   
5. Micro finance – Non Banking Finance Companies (MF-NBFCs) should be permitted
to provide thrift, credit, micro-insurance, remittances and other financial services up to
a specified amount to the poor in rural, semi-urban and urban areas. Such MF-NBFCs
may also be recognized as Business Correspondents of banks for providing only
savings and remittance services and also act as micro insurance agents.

   
6. Opening of specialized microfinance branches and cells in potential urban centers for
exclusively catering to microfinance and SHG - bank linkages requirements of the
urban poor. An enabling provision be made in the NABARD Act 1981 permitting
 NABARD to provide micro finance services to the urban poor.

ADVANTAGES

 To boost up the economy by increasing the financial access of the people.

 To make the people living in BPL more self reliant and dependant.
 It will make possible for the government to pay social security transfers.
 It brings the savings of the poor into formal financial intermediation system and
channelizes them into investment.
 Large number of low cost deposits would reduce the dependence of banks on the bulk
deposits and help them to better both liquidity risks and asset- liability mismatches.
 It makes people access the financial and credit market.
 To educate the people about financial matters.
 Poverty Alleviation:
Provides affordable credit
Low loans portfolio default rates
Simplified mortgage requirements
Provides agricultural and business development services
Simplified loan grants to marginal and sub marginal farmers
Reduction of onerous debt situations
Low transaction costs
 Social Impact
Improvement of Human Capital - Education, Health, Skill, Confidence
Social Development - Development of Networks, Mobility of members
 Empowerment of poor, women and vulnerable sections of society
Cultural Emancipation

 Regional Development:
Outreach to secluded areas to bring the unbanked people into the mainstream
Provide a tool for local and regional development through investments in the
deprived communities
Foster indigenous growth
 Growth with equality.
 Job Creation :
Small enterprises are job motors for any country
Microinvestments enable the enterprise to grow and create more jobs
Opportunities to deprived and deplored to come out of vicious poverty chain
through trainings and awareness programs
 Get rid of poverty.
 Safe savings along with financial services-People will have safe savings along with
allied financial services like insurance cover, entrepreneurial loans, payments etc.
 This would inflate the national income by increasing business opportunities which will
boost GDP.

DISADVANTAGES

 From Demand side- The biggest barriers are lack of awareness about financial services
and products. Many of the generic financial products are unsuitable for the poor and no
there is absolutely no effort made design products suited to their needs. Exorbitant and
at times non transparent fees structure combined with the burdensome terms and
conditions dampens the demand.

 From supply side-The main barrier is the transaction costs that bankers perceive.
Because of the current low volumes banks find that extending financial services is not
 cost effective. Lack of infrastructure, lack of communication, language barriers, low
literacy rates all raise the cost of providing services and inhibit bankers from taking
initiative from the supply side.
 The absence of proper penetration and delivery mechanism.

 No proper business model for implementing financial inclusion.

 And even lack of proper technology is one factor.

NATIONAL RURAL FINANCIAL INCLUSION PLAN

This plan focuses on-

 Ways and means to effect improvement within the existing formal credit delivery
system.
 Suggest measure for improving credit absorption capacity especially among the
marginal and sub marginal farmers and poor non cultivator households.
 Leverage on technological solutions to facilitate large scale inclusion.

Table

This plan would comprise of mapping out on state wise and district wise basis , the rural
households having no access to formal sources of credit and says that tasks should be assigned
to district level consultative committees of banks on a priority basis.
 CONTRIBUTION OF RBI

 No-Frills account.
 Overdraft in Saving Bank Accounts.
 BC / BF Model.
 KCC / GCC Guidelines.
 Liberalized branch expansion.
 Liberalized policy for ATM.
 Introducing technology products and services-(Pre-Paid cards, Mobile Banking etc.)
 Allowing RRBs’ and Co-operative banks to sell Insurance and Financial Products.
 Financial Literacy Programs.
 Creation of Special Funds.
 431 districts identified by the SLBC convenor banks for 100 per cent financial inclusion
across various States/UTs and the target in 204 districts of 21 States and 7 UTs has
reportedly been achieved.

   
HOW FAR WE HAVE REACHED?

 Number of No-Frill Accounts – 28.23 million (as on Dec.31, 2008)

 Number of rural bank branches – 31,727 constituting 39.7% of total bank branches (as
on June. 31, 2009)
 Number of ATMs – 44,857 (as on May 31, 2009)
 Number of POS – 4,70,237 (as on May 31, 2009)
 Number of Cards – 167.09 million (as on May 31, 2009)
 Number of Kisan Credit cards – 76 million (Source: CMIE publication 2007-08)
  Number of Mobile phones–403 million (as on Apr.30, 2009) – out of which 187 million
(46%) do not have a bank account.

NUMBER OF SAVINGS ACCOUNT

Table

ROLE OF COMMERCIAL BANKS

 Micro insurance is one field where commercial banks can play a vital role by distributing
micro insurance products.
 The banks can develop medium and long term saving instruments by issue of pre printed
deposit receipts to the SHGs which in turn could be sold to the SHG members.
 Banks can develop such products which cater to the felt need of the poor.
 Credit within the limit can be made available in 2-3 tranches, with the second and
subsequent tranches disbursed based on the repayment behavior of the first tranche. This
is to ensure that vulnerable groups do not get into the debt trap; which ensures good
credit dispension.
 A special fund should be allocated for farmer’s service centre.
 Commercial banks should consider setting up institutions like farmer training centers and
rural and self employment training institutes (RUDSETI) for developing skill among
farmers and rural entrepreneurs for efficiently managing the funds allocated to them.
 According to Rangrajan committee the basic aim of these banks were to provide
sufficient and timely credit at reasonable rate of interest to as large a section of rural
population as possible. The strategy to achieve this was threefold –expansion of
institutional base, directed lending to disadvantaged borrowers and credit provisions at
concessional rates of interests.

ROLE OF RRBs
 RRBs have recently adopted CBS (core banking solutions) which would serve as
a big growth driver to draw more revenues from the domestic market.
 It is helping to take baking technology to places which were remote.
 Increasing the ease of operations for the poor people.