Micro finance can be defined as the provision of a broad range of financial services such as deposits, loans, payment services, money transfers and insurance to poor and low-income households and their micro-enterprises. Micro finance is a powerful tool for achieving higher levels of financial inclusion in economies. Micro finance is one of the key drivers which affect the financial inclusion. Increased inclusion brings both efficiency and equity benefits. Micro finance is also revealing substantial commercial opportunities and attracting growing private capital flows. Financial Inclusion is enabling of banking services at an affordable cost to the vast sections of disadvantaged and low-income groups. As banking services are in the nature of public service, provision of banking and payment services to the entire population without discrimination should be the prime objective of the public policy. Micro finance programmers are intended to reach poor segments of society as they lack access to financial services. It seeks to reach out to the excluded category of population from the banking system. Financial inclusion is not just credit dispensation; it is about connecting the people with the banking system for availing bouquet of financial services including access to payment system.

1. MICROFINANCE- ONE OF THE KEY DRIVERS OF
FINANCIAL INCLUSION
A Research Paper by: Shrawan Dwivedi

2. Microfinance-One Of The Key Drivers Of Financial Inclusion
ABSTRACT
Microfinance can be defined as the provision of a broad range of financial services such as deposits,
loans, payment services, money transfers and insurance to poor and low-income households and their
micro-enterprises. Microfinance is a powerful tool for achieving higher levels of financial inclusion in
economies. Microfinance is one of the key drivers which affect the financial inclusion. Increased
inclusion brings both efficiency and equity benefits. Microfinance is also revealing substantial
commercial opportunities and attracting growing private capital flows.
Financial Inclusion is enabling of banking services at an affordable cost to the vast sections of
disadvantaged and low-income groups. As banking services are in the nature of public service, provision
of banking and payment services to the entire population without discrimination should be the prime
objective of the public policy.
Microfinance programmers are intended to reach poor segments of society as they lack access to
financial services. It seeks to reach out to the excluded category of population from the banking system.
Financial inclusion is not just credit dispensation; it is about connecting the people with the banking
system for availing bouquet of financial services including access to payment system.
“Only 48% of Indian population is accessing financial services”(According to the World Bank 2008
survey). Expansion of the micro finance sector is also important from the perspective of financial
inclusion. Since 2004 the R.B.I. has also emphasized financial inclusion as an important goal. Financial
Inclusion is a most useful frame of reference for considering how poverty might be reduced through
provision of financial services. And micro finance remains the most potent weapon available for
reducing financial exclusion. Microfinance in Indian region is growing and developing, and the
possibilities for microfinance to play a significant role in an economic development are increasing.
KEYWORDS:
Microfinance, Financial inclusion, Economies, Capital flows, Income group.
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3. Microfinance-One Of The Key Drivers Of Financial Inclusion
INTRODUCTION
Financial Inclusion is the delivery of banking services at affordable costs to vast sections of
disadvantaged and low income groups. Unrestrained access to public goods and services is the sine qua
non of an open and efficient society. It is argued that as banking services are in the nature of public
good, it is essential that availability of banking and payment services to the entire population without
discrimination is the prime objective of public policy. The term Financial Inclusion has gained importance
since the early 2000s, and is a result of findings about Financial Exclusion and its direct correlation to
poverty. Financial Inclusion is now a common objective for many central banks among the developing
nations.
Rangarajan's committee on financial inclusion 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. The
financial system has 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. So far, the focus has only been on delivering
credit (it is called as microfinance but is microcredit) and has been quite successful. Similar success has
to be seen in other aspects of finance as well.
Microfinance is the provision of financial services to low-income clients, including consumers and
the self-employed, who traditionally lack access to banking and related services. The basic principle on
which Microfinance is based has been described as a process in which poor families borrow large
amounts (or lump sums) of money at one time and repay the amount in a stream of small, manageable
payments over a realistic time period using social collateral in the short run and institutional credit
history in the long run. Families can reborrow slightly bigger amounts upon repayment in a predictable
and reliable way.
The
definition
for
microfinance
is
best
given
by
Robinson,
Marguerite.
‘Microfinance refers to small-scale financial services for both credits and deposits — that are provided
to people who farm or fish or herd; operate small or microenterprises where goods are produced,
recycled, repaired, or traded; provide services; work for wages or commissions; gain income from
renting out small amounts of land, vehicles, draft animals, or machinery and tools; and to other
individuals and local groups in developing countries, in both rural and urban areas.
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4. Microfinance-One Of The Key Drivers Of Financial Inclusion
OBJECTIVE:
The main purpose of the paper is to demonstrate the effects of Microfinance as a part of Financial
Inclusion in India. Microfinance is often considered as a tool in the fight against poverty while it has to
be understood first and foremost as a tool against financial exclusion. This clarification is essential and
the term "financial inclusion" is much more appropriate than "microfinance".
SCOPE:
Financial Inclusion should include access to financial products and services like,
 Bank accounts – check in account
 Immediate Credit
 Savings products
 Remittances & Payment services
 Insurance - Healthcare
 Mortgage
 Financial advisory services
 Entrepreneurial credit
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5. Microfinance-One Of The Key Drivers Of Financial Inclusion
CURRENT STATUS:
Though there has been widespread prevalence of exclusion, it is, however, important to recognize that
in the policy framework for development of the formal financial system in India, the need for financial
inclusion and covering more and more of the excluded population by the formal financial system has
always been consciously emphasized by the Reserve Bank of India and the Central Government not to
speak of the initiatives of commercial banks.
The spread of banking facilities, though impressive, has been uneven in the country, throwing up
challenges for achieving financial inclusion. In fact, despite impressive growth of branch network in
India, the vast sections of the society remain financially excluded and continue to remain away from the
formal system and thereby access to financial services including savings, credit and insurance. The
banking industry in India has shown tremendous growth in volume and complexity during the last few
decades. We have an extensive banking infrastructure comprising 33,411 rural and semi-urban branches
of commercial banks over 14,501 branches of RRBs, around 12,000 branches of DCCBs and nearly
1,00,000 cooperatives credit societies at the village level. There is at least one retail credit outlet on an
average for about 5,000 rural people, which translates into one outlet for every 1,000 households. This
is a remarkable and extensive work. Given this network the moot question would be “Are the financial
services needs of the rural poor comprehensively met by this network?'
The picture is none too impressive, going by the available data on the number of savings accounts and
even assuming that one person has only one account, on an all India basis only 59 per cent of adult
population in the country has bank accounts. The unbanked population is higher in the North Eastern
and Eastern Regions as compared to other regions. Further, the extent of credit inclusion is even lower
at 14 per cent of adult population. The financially excluded sections largely comprise 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.
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6. Microfinance-One Of The Key Drivers Of Financial Inclusion
ISSUES AND CHALLENGES:
The vast segments of population particularly poor segment of society are out of the formal
financial system. The financial inclusion process should take the banking services to the poor
rather than poor people coming to the bank for availing the services.
For sustaining the financial inclusion, the financial literacy becomes a very critical component.
There is a need to simultaneously focus on the financial literacy part besides the delivery /
access.
Penetration of insurance services – Insurance services largely remain as the urban phenomena.
It should reach out to the rural and remote areas and to the poor segments of the societies.
Micro Insurance Services should be given greater importance while extending the financial
services.
Cost effective technologies and applications in appropriate manner.
Access to payment services through technology.
Regional imbalances in the financial inclusion process are quite visible and there is a need for
the microfinance movement to the broad based in North India to make the financial inclusion
more meaningful and inclusive.
Why Low-Income Families Like/Dislike Banks In India..?
LIKES:
Very low interest rates

In the south, large loans easily obtained against gold

Very little or no follow up on the loans and little pressure to repay

Likely waiver of the loans by the government because of political reasons

The Kisan Credit Card (KCC) enables easy access to credit for farmers for at least the first year.
DISLIKES:
Bank loans involve multiple time-consuming formalities

Mainly accessible to those with contacts or who can bribe officials

For subsidized loans under priority sector schemes, the local panchayats decide the list of
beneficiaries, which is subject to favoritism

The poor do not have everything to offer as collateral (land or gold) and, therefore, cannot
obtain regular bank loans.

Poorer women (especially in the north) lack confidence, contacts, and understanding of bank
procedures.
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7. Microfinance-One Of The Key Drivers Of Financial Inclusion
Poor people borrow from informal moneylenders and save with informal collectors. They receive loans
and grants from charities. They buy insurance from state-owned companies. They receive funds
transfers through formal or informal remittance networks. It is not easy to distinguish microfinance from
similar activities. It could be claimed that a government that orders state banks to open deposit
accounts for poor consumers, or a moneylender that engages in usury, or a charity that runs a heifer
pool are engaged in microfinance.
Some principles that summarize a century and a half of development practice were encapsulated in
2004 by Consultative Group to Assist the Poor (CGAP) and endorsed by the Group of Eight leaders at the
G8 Summit on June 10, 2004.
1. Poor people need not just loans but also savings, insurance and money transfer services.
2. Microfinance must be useful to poor households: helping them raise income, build up assets
and/or cushion themselves against external shocks.
3. Microfinance can pay for itself. Subsidies from donors and government are scarce and
uncertain, and so to reach large numbers of poor people, microfinance must pay for itself.
4. Microfinance means building permanent local institutions.
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8. Microfinance-One Of The Key Drivers Of Financial Inclusion
5. Microfinance also means integrating the financial needs of poor people into a country's
mainstream financial system.
6. The job of government is to enable financial services, not to provide them.
7. Donor funds should complement private capital, not compete with it.
8. “The key bottleneck is the shortage of strong institutions and managers." Donors should focus
on capacity building.
9. Interest rate ceilings hurt poor people by preventing microfinance institutions from covering
their costs, which chokes off the supply of credit.
10. Microfinance institutions should measure and disclose their performance – both financially
and socially.
Microfinance is clearly distinguishable from charity. Families who are destitute, or so poor they are
unlikely to be able to generate the cash flow required to repay a loan, should be recipients of charity.
Others are best served by financial institutions.
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9. Microfinance-One Of The Key Drivers Of Financial Inclusion
FINANCIAL INCLUSION IN INDIA STATISTICS:
Financial inclusion in developing economies is different than that of developed economies. In latter
where inclusion is a minority, informer it could be a majority.
Anil Ambani, the billionaire chairman of Reliance-Anil DhirubhaiAmbani Group, said in the recent annual
general meeting of one of his group firms that nearly 400 million Indians have bank accounts. That’s less
than 40% of the country’s population.
Reserve Bank of India deputy governor, in a recent presentation on financial inclusion in Mumbai, said
about 40% Indians have check-in accounts. Going by his presentation, 51 out of every 100 Indians had
bank accounts in 1993. This has marginally gone up to 54 in 2007.
Yet another presentation by another central banker, a few years back, had said 59% of adult population
in India has bank accounts and that there is a large gap between the coverage of banking services in
urban and rural pockets. In rural India, the coverage among the adult population is 39% against 60% in
urban India. This, of course, doesn’t necessarily mean that 60 out of every 100 Indian adults in cities
have bank accounts as many people operate multiple accounts.
100
80
60
Metropolitan
40
Urban
Semi-urban
20
Rural
0
1969
1996
2005
2006
2007
Source: Rakesh Mohan, RBI, IDBI Gilts Ltd.
Figure 1: Distribution of Bank offices in India (in %)
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10. Microfinance-One Of The Key Drivers Of Financial Inclusion
Figure 1 shows that rural and Semi-urban offices constitute a majority of the Commercial Bank offices in
India. Rural bank offices as a % of total have increased from 22% in 1969 to 41% in 2007. This is mainly
because of the inclusive focus of the policymakers mentioned above. However, that is just one part of
the story.
100%
80%
60%
Metropolitan
urban
40%
Semi-urban
Rural
20%
0%
Source: Rakesh Mohan, RBI, IDBI Gilts Ltd.
Figure 2: Sources of Deposits and Credit in India (in %)
If we look at figure 2, it can be seen that bulk of the deposits received and credit allocated is to the
urban and metropolitan areas. In fact, the share of rural and semi-urban in deposits and credit has been
declining. Table 1 provides further clarity providing a break-up of the deposit accounts. Both the deposit
and credit accounts are lower in rural households than urban households. Hence despite the rural-push,
the rural population has not come forward and avail even basic banking services.
The sources of these information are different and I cannot vouch for their accuracy but the fact remains
that the coverage of banking services in the world’s second fastest growing major economy is very low,
compared with a developed country. A British Bankers’ Association survey says 92-94% of the
population in the UK has either current or savings accounts.
The low coverage is true for other financial services as well. Ambani’s presentation says barely 45 million
Indians invest in mutual funds. This is about 4% of India’s population. The comparable figure for the US
is 31%. When it comes to direct investment in equities, the number drops drastically and only 15 million
Indians hold demat (electronic share) accounts that one needs to buy stocks.
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11. Microfinance-One Of The Key Drivers Of Financial Inclusion
The situation has definitely changed for the better with banks aggressively opening “no-frill accounts”,
that require very low or zero minimum balance but a recent study by Skoch Development Foundation, a
strategy and management consultancy, says only 11% of 25.1 million such basic banking accounts,
opened between April 2007 and May 2009, are operational. This means the business correspondent or
BC model that the Indian central bank is using to spread banking services across the country has failed.
This model allows non-governmental organizations, self-help groups, microfinance organizations,
farmers’ clubs, post offices, cooperatives, panchayats and many others, including IT-enabled rural
outlets of corporate entities and insurance agents to act as intermediaries on commission.
The regulator and the banks need to address this immediately. Mere opening of accounts and branch
expansion will not solve the problem. The biggest challenge before Indian banks is lowering transaction
costs for small loans and deposits, using technology.
India has around 403 million mobile users of whom, about 46%, or 187 million, don't even have bank
accounts. People can do without bank accounts but not mobile phones. Nearly 400 million Indians have
bank account that’s less than 40% of the country’s population. About 40% Indians have check-in
accounts. 51 out of every 100 Indians had bank accounts in 1993.This has marginally gone up to 54 in
2007.
59% of adult population in India has bank accounts and that there is a large gap between the coverage
of banking services in urban and rural pockets. In rural India, the coverage among the adult population
is 39% against 60% in urban India. This, of course, doesn’t necessarily mean that 60 out of every
100 Indian
adults
in
cities
have
bank
accounts.
About 45 million Indians invest in mutual funds. When it comes to direct investment in equities, the
number drops drastically and only 15 million Indians hold Demat accounts that one needs to buy stocks.
Nearly 80% of the Indian population is without life, health and non-life insurance coverage. While life
insurance penetration is 4%, non-life cover is even lower at 0.6%. The per capita spend on life and nonlife insurance is just about Rs2,000 and Rs300, respectively, compared with a global average of at
least Rs18,000 and Rs13,000.
Only 5.2% of India’s 650,000 villages have bank branches even though 39.7% of the overall branch
network of Indian banks, or 31,727, are in rural India. The population covered by each branch has come
down from 63,000 in 1969 to 16,000 in 2007 and the total number of check-in accounts held at
commercial banks, regional rural banks, primary agricultural credit societies, urban cooperative banks
and post offices during this period has risen from454.6 million to 610.3 million. Still, very few people in
the low-income bracket have access to formal banking channels. Only 34% of people with annual
earnings less than Rs50,000 in urban India had a bank account in 2007. The comparative figure in rural
India is even lower, 26.8%.
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12. Microfinance-One Of The Key Drivers Of Financial Inclusion
Population per Bank Branch (SCBs)
……….. (In Thousands)
End-March
Rural
Urban
Total
1969 (June)
82
33
63
1981
20
17
19
1991
14
16
14
2001
16
15
16
2007
17
13
16
Source: Report on Currency and Finance 2006-08 (BSR of SCBs)
Number of Savings Accounts
……………. (In Millions)
Institution / End-March
1993
2002
2007
Scheduled Commercial Banks
246
246.5
320.9
Regional Rural Banks
30.5
36.7
52.7
89
102.1
125.8
Urban Co-operative Banks
41.6
42
50
Post Offices
47.5
60.2
60.8
Total
454.6
487.1
610.3
Total Accounts per 100 Persons
51
46
54
Primary
Societies
Agricultural
Credit
Source: Report on Currency and Finance 2006-08
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13. Microfinance-One Of The Key Drivers Of Financial Inclusion
Earners Having a Bank Account-2007
(Per cent of Total Earners)
Annual Income (Rs.)
Urban
Rural
Total
< 50,000
34.1
26.8
28.3
50,000 – 100,000
75.5
71.2
73
100,000 – 200,000
91.8
87.4
89.9
200,000 – 400,000
95.5
93.6
94.9
> 400,000
98.0
96.3
97.6
All
61.7
38.0
44.9
Source: Report on Currency and Finance 2006-08 (IIMS, 2007)
Sources of Loans
Annual Income
(Per cent of Indebted Earners)
Banks
Money Lenders
Other Institutional &
Non-Institutional
Sources
Total
< 50,000
13.0
34.9
52.1
100
50,000 – 100,000
34.5
19.6
45.9
100
100,000 – 200,000
49.3
12.0
38.7
100
200,000 – 400,000
51.6
11.8
36.6
100
> 400,000
62.8
5.5
31.7
100
 People having Annual Income less than Rs.50,000 bracket still heavily dependent on money
lenders
Source: Report on Currency and Finance 2006-08 (IIMS Survey, 2007)
Purpose of Loans
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14. Microfinance-One Of The Key Drivers Of Financial Inclusion
No. of Loan Taking Earners (Millions) Per cent to Loan Taking Earners
Purpose of Loan (All Sources)
Rural
Urban
Rural
Urban
Meeting Financial Emergency
20.2
4.7
26.3%
31.0%
Medical Emergency
12.5
1.8
16.3%
11.7%
Business Needs
7.1
2.1
9.3%
14.0%
Others
36.8
6.5
47.1
43.3
Total
76.6 mn
15.1 mn
100%
100%
From Non-Institutional Sources
Meeting Financial Emergency
15.4
3.4
29.4%
34.3%
Medical Emergency
10.5
1.5
20.1%
14.8%
Business Needs
3.9
1.2
7.5%
12.3%
Others
22.6
3.8
43.0%
38.6%
Total
52.4 mn
9.9 mn
100%
100%
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15. Microfinance-One Of The Key Drivers Of Financial Inclusion
From Institutional Sources
Meeting Financial Emergency
4.8
1.3
19.6%
24.9%
Medical Emergency
2.0
0.3
8.1%
6.0%
Business Needs
3.2
0.9
13.0%
17.1%
Others
24.2
5.3
59.3%
52.0%
Total
24.2 mn
5.3 mn
100%
100%
Source: Report on Currency and Finance 2006-08 (IIMS Survey, 2007)
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16. Microfinance-One Of The Key Drivers Of Financial Inclusion
FINDINGS:
As per the census of 2001 only 27.78% population of the country lives in the urban segment while the
rest are still residing in the inherently characteristic Rural India. The things however have changed
significantly since independence when around 82% of the population lived in the rural segment. The
rural segment is distinct in respect of various features such as purchasing power, development, social
system etc. These distinctions relate directly to the kind of distinct demand patterns that the rural sector
has in various product segments especially when it comes to financial services.
Financial inclusion is the biggest problem in front of the financial system today in rural India and
infrastructural bottlenecks are worsening it even further with each passing day. Banking and other
financial services were acknowledged as the ultimate growth drivers in rural India at the time of
independence. The role of the banking sector in financing rural households was envisioned in the 1950s,
in pursuance of the recommendations of the RBI survey, viz. All-India Rural Credit Survey,(AIRCS), which
observed that “Agricultural credit fell short of the requirements, was not of the right type, did not serve
the right purpose and often failed to go to the right people”.
Despite the insignificant role played by cooperatives in financing rural households at that time, a
proactive role for cooperatives was suggested stating that “Cooperation has failed, but
cooperation must succeed”. Commercial banks were also inducted in the 1970s into the ambit of
financing agriculture and other priority sectors. Thus both commercial and cooperative banks have been
financing the rural segment holding a major share in institutional finance. However a lot remains to be
achieved. We will thus analyze the role of Micro finance Institutions in providing cheap and prompt
access to financial services in the rural terrain so as to explore a massive untapped segment of the
financial market in India.
Micro financing has emerged as the promising arena to channelize the savings of millions of rural
citizens all over the world to create a sustainable model of growth, development and empowerment.
India is home to the largest population of poor in the world. Microfinance in India has emerged as a
powerful tool for financial inclusion. The ‘`SHG–Bank Linkage’ programme plays a predominant role in
the financial inclusion of poor. The programme is coming up well and being implemented widely across
the country. But there is a need to strengthen the SHG-Bank Linkage Programme to fully mainstream it
with the commercial banking system. The programme is scaling up at a rapid pace in South India, while
the progress in other regions is slow. The variations in performance across the regions, both in terms of
reach and quality needs immediate attention.
Lack of knowledge and understanding of services and its attendant policy and processes among the poor
population are important factors that impediment their financial inclusion. In other words, financial
literacy is critical for financial inclusion. The vulnerable situation faced by the poor like irregular
employment, unemployment, seasonality, illiteracy and growing trend of globalization also throw
challenges for financial inclusion of poor. It is clear from the above that access to affordable financial
services by the poor is a serious issue.
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17. Microfinance-One Of The Key Drivers Of Financial Inclusion
Access to Finance: Major milestones
1969 : Nationalization of Banks
1971 : Establishment of Priority Sector lending norms
1975 : Establishment of Regional Rural Banks
1982 : Establishment of NABARD
1992 : Launching of the SHG – Bank Linkage
1993 : Establishment of Rashtriya Mahila Kosh
1998 : NABARD sets a goal for linking one million SHGs by 2008
2000 : Establishment of SIDBI Foundation for Microcredit
2005 : MFDEF doubled to Rs 200 crores
2005 : One million SHG linkage target achieved 3 years ahead of date
2006 : Committee on Financial Inclusion
2007 : Proposed bill on microfinance regulation introduced in parliament
2008 : Number of No-Frill Accounts – 28.23 million
2008 : Number of Kisan Credit cards – 76 million
2009 : Number of ATMs – 44,857
2009 : Number of POS – 4,70,237
2009 : Number of rural bank branches – 31,727 constituting 39.7% of total bank branches
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18. Microfinance-One Of The Key Drivers Of Financial Inclusion
Conclusion:
Microfinance is not a panacea to all problems of poverty. However, it is considered as a vital tool to
break the vicious circle of poverty that characterized by low income, low savings and low investment.
In order to generate higher incomes, savings and more investment, there is need to inject capital in the
form of microfinance.
The empirical evidence in this study showed that credit plus services of microfinance has positively
correlating with the improving in household expenditure, income, assets and employment.
Microfinance has contributed in improving the access to credit for consumption
Consumption and productive purposes. Most (formal) institutions regarded low-income households as
“too poor to save”. But microfinance programs nullify the argument and showed that even vulnerable
poor can save if he/she having the accessibility and reward from it (Hulme et al., 1996). Generally, the
life of poor is often hindered by many contingencies or risks. Insuring against these risks makes people
to bear the large uncertain losses with certainty of small and regular payments. Thus, the credit plus
services of microfinance introduced the micro-insurance services to reduce vulnerability (result of risk
and uncertainty) of the poor. The Microfinance has tried to bring out the poor from below poverty line
and fight against the poverty though deploying the financial and non-financial services.
The context for this paper derives from the current overriding emphasis on microfinance in rural finance
discourse and its celebration as the new ‘magic wand’ in the fight against poverty. The paper also
discusses the factors and theoretical position associated with evolution of microfinance and its global
acclaim based on it being a Win-Win proposition for both Micro Finance Institutions (MFIs) and Clients.
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19. Microfinance-One Of The Key Drivers Of Financial Inclusion
REFERENCE:
 www.wikipedia.org
 Financial inclusion: A new microfinance initiative for APEC By John D Conroy.
 Presentation in the NAC by M S Sriram.
 The Microfinance promise in FI and welfare of the poor: Evidence from India By Naveen K.
Shetty
 Micro finance and Financial Inclusion By INAFI India.
 Pushing Financial Inclusion – Issues, Challenges and Way Forward By Dr. K.C.Chakrabarty.
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