finveda mudra financial inclusion

7/27/2019 Finveda Mudra Financial Inclusion

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Financial Inclusion

Rohan Harsh ([email protected]/ [email protected])

(Goa Institute of Management)

Contact: 7507775139

“What do you call an Indian with a small piece of land, a few pieces of jewellery and a job

that only pays about $80 per month?

While many Westerners would say "poor," Emory University scholar Jagdish Sheth says

"opportunity." According to Dr. Sheth, the problem is not the technology; it's the banks,

which unlike the retail and life insurance industries, have failed to change the way they reach

out to India's rural consumers. An economic "caste system" blinds many to the sleeping giant

that is India's rural population, which could hold more than $2 trillion worth of gold” [7]

Picture: A rural bank

Introduction

The committee on financial inclusion under chairmanship of Dr. C. Rangarajan has defined

financial inclusion “as the process of ensuring access to financial services and timely and

adequate credit as needed by vulnerable groups such as weaker sections and low income

groups at an affordable cost” [2]. The key objectives of financial inclusion are (a) including

the weaker and less privileged sections of society into formal banking domain, (b) limiting

the role of unorganized money lending practices, (c) helping a large section of the society

make formal financial decisions. Achieving equitable growth is one of the major purposes of

financial inclusion. Several countries across the globe now look at financial inclusion as the

means for a more comprehensive growth, wherein, each citizen of the country is able to use

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his/her earnings as a financial resource that they can put to work to improve their future

financial status and simultaneously contribute to the nation‟s progress.

The RBI has operated on product, process, institution and policy level in its endeavour for a

bank – led financial inclusion solution for people, particularly in rural areas [1].

(a) Product-Basic Savings Bank Deposit Accounts, („ No frills account‟ the name now

dropped by RBI for zero savings account on the basis of stigma attached with it),

general credit card, and overdrafts associated with no frills account.

(b) Process-Simplified account opening, electronic credit of wages such as that of

MNREGA.

(c) Institution-Business correspondents, networking of business correspondents

companies and self help groups.

(d) Policy-Relaxing KYC norms for no frill accounts, relaxed branching policy in rural

areas, enhancing the role of regional rural banks.

Establishment of regional rural banks, service area approach, self help group bank linkage

programme are the various path breaking initiatives over the years to increase access to

banking for the poorer sections of the society [2].

Case of Fortune at The Bottom of The Pyramid

By improving commercial Infrastructure at the bottom of the pyramid like improving access

through (a) distribution systems (BC/BF/ATM's), (b) Communications links (Mobile

banking), one can increase buying power of the masses (70% of population lives in rural

India), by providing them access to credit through these medium and opening new avenues

for income generation which will lead to shaping aspirations for purchase of goods and

services.

Financial literacy is about changing consumer behaviour, and this is the right time to sow the

seeds of change. Consumer education is most essential for sustainable development in this

regard. Banking in rural areas can only be promoted if it is tailored for local solutions which

can be obtained by targeted product development and providing bottom-up innovation.

Though over thirty three thousand villages have appeared on the banking map of the country

as a result of the thrust on rural banking, more than five lakh villages are yet to be covered by

banks. Gramin banks are yet to take up the installation of ATMs in rural areas and



particularly those installed in off site locations [3]. 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. Also only about 57 percent of the population across the country has

bank account (savings). 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 [4]. The main under banked states in India are Bihar, Chhattisgarh,

Jharkhand, Orissa, Rajasthan, and Uttar Pradesh. [5].

Table 1: Key Statistics on Financial Inclusion in India: A Survey

(Per cent)

Share with anaccount at a formal

financial institution

Adults saving inthe past year

Adultsoriginating a

new loan inthe past year

Adults

withacreditcard

Adultswith an

outstandingmortgage

Adults paying

personally for healthinsurance

Adults

usingmobilemoney inthe

pastyear

Alladults

Poor estincomequintile

Women

Using aformalaccount

Using acommunity-basedmethod

From aformalfinancialinstitution

Fromfamily or friends

1 2 3 4 5 6 7 8 9 10 11 12

India 35 21 26 12 3 8 20 2 2 7 4

Wor ld 50 38 47 22 5 9 23 15 7 17 7

Source: Asli Demirguc - Kunt and Klapper , L. (2012): „Measuring Financial Inclusion‟, Policy

Research Working Paper, 6025, World Bank, April. [1]

The main issue in the case of financial inclusion is that many of the no frills accounts are

dormant with minimal transactions and low average balances, the main purpose of these

accounts being payment of MNREGA wages, that are fully drawn down within days of

government crediting these accounts, thus empty accounts and one way transaction raises a

big question mark over this method of financial inclusion. Therefore the major structural

challenges for the banks are (a) Branch expansion, (b) Human resource, and (c) Cost. The

concept of mobile banking is still in early stages with respect to semi urban and rural areas as

it needs to spread at a faster rate to overcome the brick and mortar banking problem posed in

the Indian context.

Business correspondents find viability doubtful; they are not willing to pay security deposit,

finding trustworthy locals for setting up customer service points pose another challenge.



Social challenges include lack of active campaign, illiteracy and fear of approaching bank

branches.

Regulatory challenges include customer identification, customer confidentiality, distance

criteria, bank‟s responsibility for agents etc.

The main objective should be financial inclusion rather than banking inclusion. The access to

financial services must bring a difference to the life of the user, savings must not be the sole

aim but access to credit in a hassle free manner should also be promoted. Government bank

co-ordination in this regard is of utmost importance, proper selection of financially excluded

section should also be done judiciously, agent driven financial inclusion should be promoted

with proper allotment of villages, and participation of self help group should be promoted.

Financial inclusion it must be reiterated is not the end in itself; it is one of the means for

enabling specially the rural poor to improve their economic conditions. Banking schemes

have to be suitably modified to match their requirements [3]. The two major problems are (a)

the market not supplying products to appropriate consumer needs, (b) the market not making

appropriate products easily accessible.[8]

Financial exclusion may lead to increased travel requirements, higher incidence of crime,

general decline in investment, difficulty in gaining access to credit, increased unemployment

and so on [5].

Crisil‟s Inclusix on Financial Inclusion:

CRISIL Inclusix is a comprehensive index for measuring the progress of financial inclusion

in the country, down to the district-level. CRISIL Inclusix will be a key enabler in taking

financial services to the bottom of the pyramid. It measures financial inclusion on the three

critical parameters of basic banking services - branch penetration, deposit penetration, and

credit penetration. The index uses parameters that focus only on the 'number of people' whose

lives have been touched by various financial services, rather than on the 'amounts' deposited

or loaned. [9]



Figure 1: (Source: Crisil)

The major findings of the report are: (1) One out of every two Indians has a savings account,

but only one in seven has access to bank loan, (2) India‟s six largest cities have 11 per cent of

the country‟s bank branches while four distr icts have only one branch each with bottom 50

districts have just 2 per cent of the country‟s bank branches, (3) Region wise the southern

region leads in financial inclusion with a Crisil Inclusix score of 62.2.The western region

stands second with an score of 38.2, followed by the northern region (37.1), eastern region

(28.6), and north-eastern Region (28.5). (Report released on June 25, 2013)

New Bank Licenses and Financial Inclusion:

The RBI has announced that for obtaining new bank license the banks need to open one out

of four of its branch in the unbanked area, which is a positive step for financial inclusionconsidering the RBI‟s move to go for bank led financial inclusion rather than one based on

non banking financial services. Also twenty six applicants have applied for banking license

which include big corporate names as Tata, Birla and Ambani. They can bring much needed

funds for these new banks and provide competition for customers much alike the telecom

firms which have penetrated deep inside India‟s rural market. The big surprise is the request

for banking license from India post. In banking an extensive branch network is always

desired and India Post is unbeatable in this with over 1.55 lakh post offices across the



country, 90 per cent of them in rural areas which if gets the license puts the mission fully on

track.

Conclusion

This is just the beginning of accessing the surface of what is the biggest potential market

opportunity in the history of commerce. Managers in the private sector who commit their

companies to a more inclusive capitalism have the opportunity to prosper and share their

prosperity with those who are less fortunate. 41 million Kisan Credit cards have been issued

in rural areas as against 22 million credit cum debit cards in urban areas is just indicative of

the future of the market. The aim of inclusion should be to expand the coverage of the formal

financial system in the country so as to become a key objective for the emerging economy. In

a very real sense, the fortune at the bottom of the pyramid will be one of the most successful

goals targeted till now by the means of financial illusion.

REFERENCES

1. Financial Inclusion framework is it inclusive? (N.Srinivasan: Bank Quest „Financial

inclusion‟ April-June 2012).

2.

Financial inclusion: Road Ahead (D. Rama Krishna Reddy: Bank Quest „Financialinclusion‟ April-June 2012)

3. Role of rural banks in achieving financial inclusion (Dr. N.K. Thingalaya: Bank Quest

„Financial inclusion‟ April-June 2012)

4. Financial Inclusion in India Emerging Profitable Models by Dr Debesh Roy Assistant

General Manager NABARD.

5. Towards Financial inclusion in India Karmakar, Banerjee, Mohapatra SAGE South

Asia.

6. http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?id=749

7. http://www.globalatlanta.com/article/26110/banks-must-rethink-the-poor-indian-

consumer/#largeBanner

8. http://facultylive.iimcal.ac.in/sites/facultylive.iimcal.ac.in/files/WPS-630_1.pdf

9. http://crisil.com/about-crisil/crisil-inclusix.html#open

REFERNCE FOR TABLE

1. http://www.rbi.org.in/scripts/AnnualReportPublications.aspx?Id=1041



REFERENCE FOR FIGURE

1. http://crisil.com/about-crisil/crisil-inclusix.html#open

ABBREVATIONS

1. MNREGA: Mahatma Gandhi national rural employment guarantee act.

2. RBI: Reserve Bank of India.

3. OECD: Organization for economic co-operation and development.

4. BC: Business Correspondent.

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