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KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011
39
Financial Inclusion through Commercial Banks in India
Financial Inclusion through Commercial Banks in
India
Dr .C.Paramasivan,
Assistant Professor in Commerce,
Periyar EVR College, Tiruchirappalli, Tamilnadu
paramselp@yahoo.in
AbstracIt
Financial inclusion is delivery of financial services, at an affordable cost, to the vast sections of
disadvantaged/low-income groups who tend to be excluded from the formal financial system.
Notwithstanding the widespread expansion of the banking sector during the last three decades, a
sizeable proportion of the households, especially in rural areas, remain outside the coverage of the
formal banking system. An important step to bring the financially excluded people within the fold of
the formal financial sector was the promotion of micro finance in India. The SHG-bank linkage
programme was launched by NABARD in 1992, with policy support from the Reserve Bank to
facilitate collective decision making by the poor and provide ‘door step’ banking
Key words: financial inclusion, financial exclusion, no frills accounts, financial services
Introduction
Financial inclusion is an innovative concept
which makes alternative techniques to promote
the banking habits of the rural people. India is
considered as largest rural people consist in the
world. Financial inclusion is aimed at providing
banking / financial services to all people in a fair,
transparent and equitable manner at affordable
cost. Households with low income often lack
access to bank account and have to spend time
and money for multiple visits to avail the
banking services, be it opening a savings bank
account or availing a loan. These families find it
more difficult to save and to plan financially for
the future. Thus, the unbanked public is largely
cut off from the Banking products/services. It is
the endeavor of the Bank to provide the basic
banking facility of SB a/cs to all the unbanked.
Reserve Bank of India’s Initiatives on
Financial Inclusion
RBI in its Annual Policy Statement 2005-06
and during its midterm review policy announced
during October 2005 reiterated that the Financial
Institutions should initiate all possible measures
to ensure that hitherto unbanked population of
the nation is being reached and assisted with
adequate financial support. Further to this
direction, Dr.Y.V. Reddy, Governor, Reserve
Bank of India, stressed the need for the banks to
reach the unreached and announced at his special
address to Bankers in Pondicherry on 21.11.2005
that National Pilot Project On Financial Inclusion
will be launched on 30.15.2005 and implemented
in the UT of Pondicherry for a period of one year
commencing from 01.01.2006 and advised its
State Level Banker Indian Bank to put in place
the project guidelines for operation. Union
Territory of Pondicherry is ideal location for
launched the project on account of the following
reasons.
i. Compactness of area
ii. High literacy rate
iii. Electoral photo identity card issued to
all the people in the UT of Pondicherry
iv. Responsive State government.
v. Excellent cooperation extended by
member banks in operationalizing schemes.
vi. Good liaison between government
officials and bankers.
Reserve Bank of India has taken various
measures like relaxation of service area
norms to facilitate the process. As the time
limit to complete the projects is one year
KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011
40
Financial Inclusion through Commercial Banks in India
Governor RBI requested the bankers to take
all out efforts to cover all the people in the
allotted area.
Pilot Project for 100 per cent Financial
Inclusion
The convenor banks of the State Level/ Union
Territory Level Bankers’ Committees
(SLBC/UTLBC) in all States/Union Territories
were advised in April 2006 to identify at least
one suitable district in their respective
jurisdiction for achieving 100 per cent financial
inclusion by providing ‘no-frills’ accounts and
issue of GCCs and gradually extending the
endeavour to other areas/ districts. The
SLBCs/UTLBCs were further advised to allocate
villages to various banks operating in the State
for taking the responsibility of ensuring 100 per
cent financial inclusion and also to monitor
financial inclusion in the meetings of the
SLBC/UTLBC from September 2006 onwards.
342 districts have been identified for 100 percent
financial inclusion so far and the target reported
to be achieved in 155 districts in 19 States and
six Union Territories with Haryana, Himachal
Pradesh, Karnataka, Kerala, Uttarakhand,
Puducherry, Daman and Diu, Dadra and Nagar
Haveli, Goa and Lakshdweep reporting
achievement of 100 per cent financial inclusion
in all districts.
National Pilot Project for Financial Inclusion
India is a country with diverse socio-
economic condition along with diverse agro
climate situation. This diversity is prominent in
every aspect of life; even financial services are
not free from this. India with a population of
more than 1 billion has nearly 350-400 India
poor people, most of whom lack access to even
basic financial services like savings. On the other
extreme there are people who are enjoying all
kinds of services starting from savings to
insurance to net banking that too at their
doorstep.
a) Of the 6.34 lakh villages in India, only
9000 villages have more than one bank branch.
b) Close to 60 per cent of rural households
do not have a bank account and only 21 per cent
have access to credit from a formal source.
c) Out of the 428.0 million deposit bank
accounts in the country. Only 30 per cent are in
the rural areas. Over 70 per cent of marginal
farmers have no deposit account.
d) According to India’s 10th
Five-Year Plan
(2002-2007), of the 400 million workers in the
country only 50-60 million i.e. 12 per cent to 15
per cent are covered by some form of social
security.
The lack of financial services has impact on
the economic condition of the people as well as
economic health of country. Financial exclusion
is a symptom and cause of poverty. This presents
itself in the form of a low GDP per capita. A
large number of the poor still depend on informal
sources of savings.
Financial Inclusion Opportunities
Reaching out of the people lying at the bottom
of the pyramid has become the order o the day.
Whether it is a non-profit organization of for-
profit organization both realize the importance of
the outreach. All have come to know that the
future depends on these people and the latent
opportunity is lying there, which needs to be
tapped. Financial sector is one that has the most
important role to play in unleashing this
potential. Here comes the role of financial
inclusion. We understand that financial exclusion
is both symptom and cause of poverty. It is
nothing but lack of opportunities to the people.
Financial exclusion can be translated in the
form of not having access to the financial
services or presence of unfair or inappropriate
products, which are of no use to a vast section of
population. No clear data is available on this, but
its extend can be gauged from various parameters
as stated below.
Out of the 428.0 million deposit accounts in
the country, 30 per cent are in the rural areas.
With a rural population of 741.6 million, the
rural penetration of banks with respect to deposit
accounts is as low as 18 per cent.
According to India’s 10th
Five-Year Plan
(2002-2007), of the 400 million workers in the
country only 50-60 million i.e. 12 per cent to 15
per cent are covered by some form of social
security.
KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011
41
Financial Inclusion through Commercial Banks in India
Total bank credit to GDP ratio is now 35 per
cent while consumer debt to GDP is only 7 per
cent.
In 2004, India’s loan assets were 31 per cent of
GDP. In case of China, it was 130per cent.
Taiwan has even a higher ratio of 151 per cent of
GDP. For Singapore, it is 118 per cent, 114 per
cent in the case of Malaysia, 100per cent of
Thailand, 82 per cent for Japan, 73 per cent for
Korea and 43 per cent for the Philippines.
The deposit portfolio of the Indian banking
system was 49 per cent of the country’s GDP in
2004 against 176 per cent in the case of China.
Here again, Taiwan is at the top (188 per cent),
followed by China, Malaysia (139 per cent),
Singapore (132 per cent) Thailand (109 per cent),
Japan (107 per cent), Korea (69 per cent) and the
Philippines (58 per cent).
A Mckinsey Personal Financial Services
Survey last year revealed that in urban
households with an annual income between
Rs.25,000 and Rs.2,00,000 – which account for
about 32 per cent of the total urban households –
the credit card penetration was only 4 per cent
and this was negligible in the case of auto loans.
Technology banking is available only to a small
segment of retail customers in urban India
(ATMs are present in 250 out of 435 Indian
cities). In 2004, there were only 10 ATMs in
India for every one million people. The
comparable figure in Brazil is 790, 501 in Korea,
211 in Poland and 53 in China. Similarly, only 3
per cent of Indian population have credit or debit
card, against 174 per cent in Korea, 71 per cent
in Brazil and 61 per cent in China.
Challenges in Financial Inclusion
There are several barriers to financial
inclusion, some are characteristics of service
providers, and some are customers. The
characteristics of financial service providers,
which add to financial exclusion, are:
Spread of banking services: There are only
32227 rural bank branches, which account for
45per cent of the total branch network. Deposit
their spread the accessibility is poor on account
of various constraints such as bad motcrable
roads, lack of transport facilities etc.
Hours of operation: Many of the times the branch
timing are inconvenient for the poor people, as
they have to visit their farmers or go for wage
earning. In that case visiting branch during
daytime would mean loss of wages for a day.
Information on possibilities of services: Service
providers are not able to provide the information
about the gamut of services being provided by
them. Lack of such information restricts people
from accessing the banks voluntarily.
Institutional Culture: Poor people need
courtesy; respect and openness from the service
providers, in absence of which they restrict
themselves from accessing them.
Restrictions : At bank : Some things like
personal identification, cheque holding policy,
specific product availability, price of the product
(including all transaction costs) & technologies
adopted at Branches also restrict the people.
Reliability and reputation of provider: People
tend to bank where their money is considered
safe. If the reputation of the provider is not good,
then that not only makes existing users to
withdraw but also prevents others from accessing
it.
Conclusion
Financial inclusion mainly focuses on the
poor who do not have formal financial
institutional support and getting them out of the
clutches of local money lenders. As a first step
towards this, some of our banks have now come
forward with general purpose credit cards and
artisan credit cards which offer collateral- free
small loans. The RBI has simplified the KYC
(know your customer) norms for opening ‘No
Frill’ account. This will help the low income
individual to open a ‘No Frill’ account without
identify proof and address proof.
References
Anju Das, Financial Inclusion: An Economic
Growth Driver, Financial Inclusion:
Concepts and Strategies, The Icfai University
Press,
Arokia Jerold. V, Prahald. C.K. (2008), Financial
Inclusion And Literacy In India - A Critical
KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011
42
Financial Inclusion through Commercial Banks in India
Study, Indian Journal of Finance, July,
Vol.II, No.3,
Bhaskaram.R, The Journal of Indian Institute of
Banking and Finance, October - December,
Vol.79, No.4,
Chakrabarty.KC, Financial Inclusion: Reaching
the unreached, Financial Inclusion :
Concepts and Strategies, The Icfai University
Press,
Chandan Kumar Goyal, (2008), Financial
Inclusion In The Northeastern Region of
India With Special Reference to Whom It
May Concern: Assam, The Icfai Journal of
Applied Finance, Dec., Vol.14, No.12,
Devaki Muthukrishana (2008), Financial
Inclusion, The Journal of Indian Institute of
Banking Finance, April - June, Vol. 79,
No.2,
Farooqi. S & Seyd Adeem Ahmed (2008),
Branches Banking ‘BB’ - A New Dimension
of Financial Inclusion, Banking Finance,
November,
John D Conroy, Successful Microfinance in the
Pacific : Achieving Financial Inclusion,
Financial Inclusion : Concepts and
Strategies, The Icfai University Press,
Leeladhar.V, Taking Banking Services to the
Common Man – Financial Inclusion,
Financial Inclusion : Concepts and
Strategies, The Icfai University Press,
Mahendra Dev. S (2006), Economic and Political
Weekly, October, Vol. XLI, No. 41,
Mathew. PM (2008), Micro Finance and
Financial Inclusion, YOJANA, January,
MBN Rao, Financial Inclusion: An Economic
Growth Driver, Financial Inclusion:
Concepts and Strategies, The Icfai University
Press,
Paulraj.T, Mobile Banking : Right call for
Financial Inclusion, Financial Inclusion :
Concepts and Strategies, The Icfai University
Press,
Rakesh Mohan, Economic Growth, Financial
Deepening and Financial Inclusion, at the
Annual Bankers’ Conference 2006, at
Hyderabad on Nov.3.
Ramakumar.T N, Financial Inclusion and the
Indian Banks, Financial Inclusion : Concepts
and Strategies, The Icfai University Press,
Sarma.R H, Financial Inclusion – How to
Succeed, Financial Inclusion: Concepts and
Strategies, The Icfai University Press.
Sheety.V P, Challenges of Inclusive Banking,
Financial Inclusion: Concepts and Strategies,
The Icfai University Press.
Subba Rao.KGK (2007), Financial Inclusion: an
Introspection, Economic and Political
Weekly, Sameeksha Trust Publication,
February 3, Vol : XLII, No:5,

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36 financial inclusion through commercial banks in india

  • 1. KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011 39 Financial Inclusion through Commercial Banks in India Financial Inclusion through Commercial Banks in India Dr .C.Paramasivan, Assistant Professor in Commerce, Periyar EVR College, Tiruchirappalli, Tamilnadu paramselp@yahoo.in AbstracIt Financial inclusion is delivery of financial services, at an affordable cost, to the vast sections of disadvantaged/low-income groups who tend to be excluded from the formal financial system. Notwithstanding the widespread expansion of the banking sector during the last three decades, a sizeable proportion of the households, especially in rural areas, remain outside the coverage of the formal banking system. An important step to bring the financially excluded people within the fold of the formal financial sector was the promotion of micro finance in India. The SHG-bank linkage programme was launched by NABARD in 1992, with policy support from the Reserve Bank to facilitate collective decision making by the poor and provide ‘door step’ banking Key words: financial inclusion, financial exclusion, no frills accounts, financial services Introduction Financial inclusion is an innovative concept which makes alternative techniques to promote the banking habits of the rural people. India is considered as largest rural people consist in the world. Financial inclusion is aimed at providing banking / financial services to all people in a fair, transparent and equitable manner at affordable cost. Households with low income often lack access to bank account and have to spend time and money for multiple visits to avail the banking services, be it opening a savings bank account or availing a loan. These families find it more difficult to save and to plan financially for the future. Thus, the unbanked public is largely cut off from the Banking products/services. It is the endeavor of the Bank to provide the basic banking facility of SB a/cs to all the unbanked. Reserve Bank of India’s Initiatives on Financial Inclusion RBI in its Annual Policy Statement 2005-06 and during its midterm review policy announced during October 2005 reiterated that the Financial Institutions should initiate all possible measures to ensure that hitherto unbanked population of the nation is being reached and assisted with adequate financial support. Further to this direction, Dr.Y.V. Reddy, Governor, Reserve Bank of India, stressed the need for the banks to reach the unreached and announced at his special address to Bankers in Pondicherry on 21.11.2005 that National Pilot Project On Financial Inclusion will be launched on 30.15.2005 and implemented in the UT of Pondicherry for a period of one year commencing from 01.01.2006 and advised its State Level Banker Indian Bank to put in place the project guidelines for operation. Union Territory of Pondicherry is ideal location for launched the project on account of the following reasons. i. Compactness of area ii. High literacy rate iii. Electoral photo identity card issued to all the people in the UT of Pondicherry iv. Responsive State government. v. Excellent cooperation extended by member banks in operationalizing schemes. vi. Good liaison between government officials and bankers. Reserve Bank of India has taken various measures like relaxation of service area norms to facilitate the process. As the time limit to complete the projects is one year
  • 2. KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011 40 Financial Inclusion through Commercial Banks in India Governor RBI requested the bankers to take all out efforts to cover all the people in the allotted area. Pilot Project for 100 per cent Financial Inclusion The convenor banks of the State Level/ Union Territory Level Bankers’ Committees (SLBC/UTLBC) in all States/Union Territories were advised in April 2006 to identify at least one suitable district in their respective jurisdiction for achieving 100 per cent financial inclusion by providing ‘no-frills’ accounts and issue of GCCs and gradually extending the endeavour to other areas/ districts. The SLBCs/UTLBCs were further advised to allocate villages to various banks operating in the State for taking the responsibility of ensuring 100 per cent financial inclusion and also to monitor financial inclusion in the meetings of the SLBC/UTLBC from September 2006 onwards. 342 districts have been identified for 100 percent financial inclusion so far and the target reported to be achieved in 155 districts in 19 States and six Union Territories with Haryana, Himachal Pradesh, Karnataka, Kerala, Uttarakhand, Puducherry, Daman and Diu, Dadra and Nagar Haveli, Goa and Lakshdweep reporting achievement of 100 per cent financial inclusion in all districts. National Pilot Project for Financial Inclusion India is a country with diverse socio- economic condition along with diverse agro climate situation. This diversity is prominent in every aspect of life; even financial services are not free from this. India with a population of more than 1 billion has nearly 350-400 India poor people, most of whom lack access to even basic financial services like savings. On the other extreme there are people who are enjoying all kinds of services starting from savings to insurance to net banking that too at their doorstep. a) Of the 6.34 lakh villages in India, only 9000 villages have more than one bank branch. b) Close to 60 per cent of rural households do not have a bank account and only 21 per cent have access to credit from a formal source. c) Out of the 428.0 million deposit bank accounts in the country. Only 30 per cent are in the rural areas. Over 70 per cent of marginal farmers have no deposit account. d) According to India’s 10th Five-Year Plan (2002-2007), of the 400 million workers in the country only 50-60 million i.e. 12 per cent to 15 per cent are covered by some form of social security. The lack of financial services has impact on the economic condition of the people as well as economic health of country. Financial exclusion is a symptom and cause of poverty. This presents itself in the form of a low GDP per capita. A large number of the poor still depend on informal sources of savings. Financial Inclusion Opportunities Reaching out of the people lying at the bottom of the pyramid has become the order o the day. Whether it is a non-profit organization of for- profit organization both realize the importance of the outreach. All have come to know that the future depends on these people and the latent opportunity is lying there, which needs to be tapped. Financial sector is one that has the most important role to play in unleashing this potential. Here comes the role of financial inclusion. We understand that financial exclusion is both symptom and cause of poverty. It is nothing but lack of opportunities to the people. Financial exclusion can be translated in the form of not having access to the financial services or presence of unfair or inappropriate products, which are of no use to a vast section of population. No clear data is available on this, but its extend can be gauged from various parameters as stated below. Out of the 428.0 million deposit accounts in the country, 30 per cent are in the rural areas. With a rural population of 741.6 million, the rural penetration of banks with respect to deposit accounts is as low as 18 per cent. According to India’s 10th Five-Year Plan (2002-2007), of the 400 million workers in the country only 50-60 million i.e. 12 per cent to 15 per cent are covered by some form of social security.
  • 3. KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011 41 Financial Inclusion through Commercial Banks in India Total bank credit to GDP ratio is now 35 per cent while consumer debt to GDP is only 7 per cent. In 2004, India’s loan assets were 31 per cent of GDP. In case of China, it was 130per cent. Taiwan has even a higher ratio of 151 per cent of GDP. For Singapore, it is 118 per cent, 114 per cent in the case of Malaysia, 100per cent of Thailand, 82 per cent for Japan, 73 per cent for Korea and 43 per cent for the Philippines. The deposit portfolio of the Indian banking system was 49 per cent of the country’s GDP in 2004 against 176 per cent in the case of China. Here again, Taiwan is at the top (188 per cent), followed by China, Malaysia (139 per cent), Singapore (132 per cent) Thailand (109 per cent), Japan (107 per cent), Korea (69 per cent) and the Philippines (58 per cent). A Mckinsey Personal Financial Services Survey last year revealed that in urban households with an annual income between Rs.25,000 and Rs.2,00,000 – which account for about 32 per cent of the total urban households – the credit card penetration was only 4 per cent and this was negligible in the case of auto loans. Technology banking is available only to a small segment of retail customers in urban India (ATMs are present in 250 out of 435 Indian cities). In 2004, there were only 10 ATMs in India for every one million people. The comparable figure in Brazil is 790, 501 in Korea, 211 in Poland and 53 in China. Similarly, only 3 per cent of Indian population have credit or debit card, against 174 per cent in Korea, 71 per cent in Brazil and 61 per cent in China. Challenges in Financial Inclusion There are several barriers to financial inclusion, some are characteristics of service providers, and some are customers. The characteristics of financial service providers, which add to financial exclusion, are: Spread of banking services: There are only 32227 rural bank branches, which account for 45per cent of the total branch network. Deposit their spread the accessibility is poor on account of various constraints such as bad motcrable roads, lack of transport facilities etc. Hours of operation: Many of the times the branch timing are inconvenient for the poor people, as they have to visit their farmers or go for wage earning. In that case visiting branch during daytime would mean loss of wages for a day. Information on possibilities of services: Service providers are not able to provide the information about the gamut of services being provided by them. Lack of such information restricts people from accessing the banks voluntarily. Institutional Culture: Poor people need courtesy; respect and openness from the service providers, in absence of which they restrict themselves from accessing them. Restrictions : At bank : Some things like personal identification, cheque holding policy, specific product availability, price of the product (including all transaction costs) & technologies adopted at Branches also restrict the people. Reliability and reputation of provider: People tend to bank where their money is considered safe. If the reputation of the provider is not good, then that not only makes existing users to withdraw but also prevents others from accessing it. Conclusion Financial inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders. As a first step towards this, some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral- free small loans. The RBI has simplified the KYC (know your customer) norms for opening ‘No Frill’ account. This will help the low income individual to open a ‘No Frill’ account without identify proof and address proof. References Anju Das, Financial Inclusion: An Economic Growth Driver, Financial Inclusion: Concepts and Strategies, The Icfai University Press, Arokia Jerold. V, Prahald. C.K. (2008), Financial Inclusion And Literacy In India - A Critical
  • 4. KKIMRC IJRFA Vol-1, No-2 Dec-Feb 2011-2011 42 Financial Inclusion through Commercial Banks in India Study, Indian Journal of Finance, July, Vol.II, No.3, Bhaskaram.R, The Journal of Indian Institute of Banking and Finance, October - December, Vol.79, No.4, Chakrabarty.KC, Financial Inclusion: Reaching the unreached, Financial Inclusion : Concepts and Strategies, The Icfai University Press, Chandan Kumar Goyal, (2008), Financial Inclusion In The Northeastern Region of India With Special Reference to Whom It May Concern: Assam, The Icfai Journal of Applied Finance, Dec., Vol.14, No.12, Devaki Muthukrishana (2008), Financial Inclusion, The Journal of Indian Institute of Banking Finance, April - June, Vol. 79, No.2, Farooqi. S & Seyd Adeem Ahmed (2008), Branches Banking ‘BB’ - A New Dimension of Financial Inclusion, Banking Finance, November, John D Conroy, Successful Microfinance in the Pacific : Achieving Financial Inclusion, Financial Inclusion : Concepts and Strategies, The Icfai University Press, Leeladhar.V, Taking Banking Services to the Common Man – Financial Inclusion, Financial Inclusion : Concepts and Strategies, The Icfai University Press, Mahendra Dev. S (2006), Economic and Political Weekly, October, Vol. XLI, No. 41, Mathew. PM (2008), Micro Finance and Financial Inclusion, YOJANA, January, MBN Rao, Financial Inclusion: An Economic Growth Driver, Financial Inclusion: Concepts and Strategies, The Icfai University Press, Paulraj.T, Mobile Banking : Right call for Financial Inclusion, Financial Inclusion : Concepts and Strategies, The Icfai University Press, Rakesh Mohan, Economic Growth, Financial Deepening and Financial Inclusion, at the Annual Bankers’ Conference 2006, at Hyderabad on Nov.3. Ramakumar.T N, Financial Inclusion and the Indian Banks, Financial Inclusion : Concepts and Strategies, The Icfai University Press, Sarma.R H, Financial Inclusion – How to Succeed, Financial Inclusion: Concepts and Strategies, The Icfai University Press. Sheety.V P, Challenges of Inclusive Banking, Financial Inclusion: Concepts and Strategies, The Icfai University Press. Subba Rao.KGK (2007), Financial Inclusion: an Introspection, Economic and Political Weekly, Sameeksha Trust Publication, February 3, Vol : XLII, No:5,