Financial Inclusion

Financial Inclusion 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 mainstream institutional players.

The vulnerable section in India today also accrue a major proportion of credit and other financial services and products from the uninstitutional players like local moneylenders etc. These players charge exorbitant interest rates, non transparent practices and other stringent terms and conditions on the financial services. The aim of financial inclusion is to provide access to institution credit and other financial services to the section which hitherto have remained outside the coverage of institutional players.

Extent of Financial Exclusion -Global

• 2.5 billion Adults, just over half of world’s adult population, do not use formal financial services to save or borrow.
• 2.2 billion of these unserved adults live in Africa, Asia, Latin America, and the Middle East.
• Of the 1.2 billion adults who use formal financial services in Africa, Asia, and the Middle East, at least two-thirds, a little more than 800 million, live on less than $5 per day.

Hence, financial exclusion is not an India specific problem but a global one.

Extent of Financial Exclusion -India

• In India, almost half the country is unbanked.
• Only 55 per cent of the population has deposit accounts and 9 per cent have credit accounts with banks.
•  India has the highest number of households (145 million) excluded from Banking. 
• There was only one bank branch per 14,000 people.
• In 6 lakh villages in India, rural branches of Schedule Commercial Banks including Regional Rural Banks number 33,495 only.
• Only a little less than 20% of the population has any kind of life insurance and 9.6%  of the population has non‐life insurance coverage.
• Just 18 per cent had debit cards and less than 2 per cent has credit cards.

Financial Inclusion- Need

• It is now widely acknowledged that financial exclusion leads to non accessibility, non-affordability and non-availability of financial products. 
• Limited access to funds in an underdeveloped financial system restricts the availability of their own funds to individuals and also leads to high cost credit from informal sources such as moneylenders.
• Due to lack of access to a bank account and remittance facilities, the individual pays higher charges for basic financial transactions.
• Absence of bank account also leads to security threat and loss of interest by holding cash. All these impose real costs on individuals.
• Prolonged and persistent deprivation of banking services to a large segment of the population leads to a decline in investment and has the potential to fuel social tensions causing social exclusion.

Thus, financial inclusion is an explicit strategy for accelerated economic growth and is considered to be critical for achieving inclusive growth in the country.

Financial Inclusion – Steps Taken in the Past

• Co-operative Movement
• Setting up of State Bank of India
• Nationalisation of banks
• Lead Bank Scheme
• Regional Rural Banks
• Service Area Approach
• Self Help Groups

Financial Exclusion –Why did the approach fail?

• Absence of Banking Technology
• Absence of Reach and Coverage
• Absence of Viable Delivery Mechanism
• Not having a Business Model
• Rich have no compassion for poor

Current scenario w.r.t. Financial Exclusion

• Focus on Inclusive Growth
• Banking Technology has arrived
• Realisation that Poor is bankable

The Indian Way- Multi Agency Approach

• Financial Stability and Development Council (FSDC) mandated to focus on Financial Inclusion and Financial Literacy
• Financial Sector Regulators including the Reserve Bank committed to FI Mission
• Financial Inclusion is a mammoth task- financial services through mainstream financial institutions to 6 lakh villages

​Banking Correspondent Model

The Reserve Bank of India has initiated several policy measures to ensure financial inclusion and increase the outreach of the banking sector. A major initiative taken by the Bank in this direction is the introduction of the business correspondent model.

Under this model RBI has permitted banks to use the services of intermediaries such as business facilitators and correspondents to provide banking services for ensuring greater financial inclusion and increasing the outreach of the banking sector

By using the Information Technolgy now intermediaries are allowed to extend the banking services in the areas which are bankable. 

What has been done so far

• ICT based Business Correspondent (BC) Model for low cost door step banking services in remote villages .
• RBI Board approved Financial Inclusion Plans (FIPs) of banks for 3 years, starting April 2010 .
• Roadmap to cover villages of above 2000 population by march 2012
• Availability of minimum four banking products through ICT model has been ensured
• Mandatory opening of 25 % of new branches in unbanked rural centers.
• KYC documentation requirements significantly simplified for small account
• Guidelines for convergence between Electronic Benefit Transfer and FIP have been issued.
• Pricing for banks totally freed . Interest rates on advances totally deregulated.

Approach adopted by RBI- Some Specifics

• Achieving planned, sustained and structured Financial inclusion.
• Technology-To be fixed first

1. ​All Bank branches must be on Core Banking Solution (CBS). All Regional Rural Banks (RRBs) to be on CBS by September 2011.
2. Multi-channel approach (Handheld devices, mobiles, cards, Micro-ATMs, Branches, Kiosks, etc.)
3. Front-end devices transactions must be seamlessly integrated with the banks’ CBS.

Coverage- Ensuring Transparency

What is meant by Banking Coverage?

A village is covered by banking service if either a bank branch is present or a Banking Correspondent is physically present or visiting that village.

Twin Aspects of Financial Inclusion

Financial Inclusion and Financial Literacy are twin pillars. While Financial Inclusion acts from supply side providing the financial market/services what people demand, Financial Literacy stimulates the demand side – making people aware of what they can demand.