FINANCIAL INCLUSION IN INDIA

ABSTRACT:

The government of India & RBI has out with a major initiative towards ensuring the inclusive growth through financial inclusion so that the access of financial service will reach to the mass population. The main theme of this paper is to highlight the requirement of financial inclusion and to estimate the social benefit from these initiatives. As Reserve Bank of India data shows that as many as 139 districts suffer from massive financial exclusion, with the adult population per branch in these districts being above 20,000 and only 3 percent with borrowings from banks. On the assumption that each adult has only one bank account (which does not hold good in practice, so that actual coverage is likely to be worse) on an all India basis, 59 percent of the adult population in the country has bank accounts. 41 percent of the population is, therefore, unbanked. In rural areas the coverage is 39 percent against 60 percent in urban areas. The unbanked population is higher in the poorer regions of the country, and is the worst in the North-Eastern and Eastern regions. This paper seeks to provide evidence on impact of financial inclusion in India, the various issues of financial exclusion, and present status of financial services of India. This paper studied secondary data to draw the conclusion. The study found that with this initiative the poorer section of the society will get benefit for their development and growth.

OBJECTIVE OF THE PAPER

Highlight the issue of financial exclusion Impact on Indian economy of financial inclusion RBI initiatives & guideline Scope & effects of financial inclusion in India Further suggestion

History of strategies for Inclusive Growth/Livelihood improvement/ Financial Inclusion in India

Phase I (1960 1980) Social control of Banks (1960) Nationalisation of Banks (1969) Setting up of Regional Rural Banks (1975) Priority sector lending stipulation by RBI - (1972) Lead Bank scheme (1969)

Phase II (1980 2005) India Microfinance program SHG Bank linkage facilitated by NABARD Integrated Rural Development program/ SGSY promoted by Govt. Of

Phase III (2005 onwards) Development of MFIs Financial Inclusion in a MISSION mode

Initiatives for Promoting Financial Inclusion Pre 2005

India has a long history of banking development. After Independence, the major focus of the Government and the Reserve Bank was to develop a sound banking system which could support planned economic development through mobilization of resources/deposits and channel them into productive sectors. Accordingly, the Governments desire to use the banking system as an important agent of change was at the core of most policies that were formulated after Independence. In order to expand the credit and financial services to the wider sections of the population, a wide network of institutions has been established over the years. The organized financial system comprising commercial banks, regional rural banks (RRBs), urban co-operative banks (UCBs), primary agricultural credit societies (PACS) and post offices caters to the needs of financial services of the people. Besides, MFIs, self-help groups (SHGs) also meet the financial service requirements of the poorer segments. Furthermore, development of the institutional framework in recent years has focused on new models of expanding financial services involving credit dispensation using multiple channels such as Civil Society Organizations (CSOs), nongovernment organizations (NGOs), post offices, farmers clubs, and panchayats. Specific financial instruments/products were also developed in order to promote financial inclusion.

Overall Approach
Financial inclusion in the Indian context implies the provision of affordable financial services, viz., access to payments and remittance facilities, savings, loans and insurance services by the formal financial system to those who tend to be excluded. Besides access, emphasis is also placed on affordability (low-cost) of financial services such as savings, loan, and remittance to the underprivileged segments of the population. Although the term financial inclusion was not in vogue in India then, since the late 1960s both the

Government and the Reserve Bank have been concerned about the non-availability of banking facilities to the under-privileged and weaker sections of the society. Accordingly, several initiatives have been taken over time. The initiatives undertaken for the purpose of promoting financial inclusion in India can be broadly categorized into the following four phases. In the first phase during the early years of independent India from 1947 -1967, the focus was on channeling of credit to the neglected sectors of the economy, especially agriculture and the spread of banking in the unbanked and rural areas. Special emphasis was also laid on weaker sections of the society. In the second phase beginning 1967 till the early 1990s, the focus was mainly on nationalization of private sector banks, the spread of banking, institution of directed credit through introduction of priority sector lending norms and setting up of Regional Rural Banks. The third phase from 1991-92 onward still 2005 focused on improving the credit delivery system to the rural sector and SMEs.

Developments during 1947-1967

The banking scenario that prevailed in the early independence phase had two distinct disquieting features. Firstly, there was large concentration of resources from deposits mobilization in a few hands of business families or groups. Banks raised funds and on-lent them largely to their controlling entities. Secondly, agriculture was neglected insofar as bank credit was concerned. However, with the advent of planning for economic development and the growing social awareness of the role of bank credit in the economy, it was felt that the then commercial bank lending system had little social content and that it aided concentration of economic power. It was felt that the system was unresponsive to the needs of the weaker sections of the economy, small industry and agriculture, as it concentrated on lending to large customers. This period also witnessed several controls such as the credit authorization scheme and selective credit controls to ensure that credit was not concentrated in the hands of a few and that it was well disbursed.

Lending to Agriculture and Spread of Banking to Rural Area

With independence, not only did the operating environment change but policies were also geared towards planned objectives. Regulation was aligned to the attainment of these objectives. Banks were considered unique among financial institutions and were assigned a developmental role from the beginning of the planned era. The Reserve Bank assumed a unique role in this context that was occasioned by the predominantly agricultural base of the Indian economy and the urgent need to expand and co-ordinate the institutional credit structure for agriculture and rural development. Emergence of Administered Structure of Interest Rate This period was difficult for monetary policy as it had to accommodate fiscal policy that was under pressure on account of two wars and a drought. The rising deficit and the accompanying inflation led to an administered structure of interest rates and several other micro controls. In early years, the Reserve Bank relied on direct control over the lending rates of banks, rather than indirect instruments such as the Bank Rate for influencing the cost of bank credit. This was generally done by stipulating minimum rates of interest. The period during 1961 to 1967 was particularly difficult for the nation. Inflation was high and at times, shortages also developed.

Developments during 1967-1991

During this period, several initiatives were undertaken for enhancing the use of the banking system for sustainable and equitable growth. These included nationalization of private sector banks, introduction of priority sector lending norms, the Lead Bank Scheme, branch licensing norms with focus on rural/semi-urban branches, interest rate ceilings for credit to the weaker sections and creation of specialized financial institutions to cater to the requirement of the agriculture and the rural sectors having bulk of the poor population. The

National Credit Council was set up in February 1968 mainly to assess periodically the demand for bank credit from various sectors of the economy and to determine the priorities for grant of loans and advances. The administrative framework for rural lending in India was provided by the Lead Bank Scheme introduced in 1969, which was an important step towards implementation of the two-fold objectives of deposit mobilization on an extensive scale and stepping up of lending to weaker sections of the economy. Realizing that the flow of credit to employment oriented sectors was inadequate, the priority sector guidelines were issued to the banks by the Reserve Bank to step up the flow of bank credit to agriculture, small-scale industry, self-employed, small business and the weaker sections within the sectors. The target for priority sector lending was gradually increased to 40per cent of advances for specified priority sectors. The National Bank for Agriculture and Rural Development (NABARD) was setup in 1982 mainly to provide refinance to the banks extending credit to agriculture. RRBs, which were set up in 1975 to cater, to the credit requirements of the rural poor, were put on restructuring. Nationalization of Banks and Spread of Banking The Indian banking system underwent major structural transformation after the nationalization in 1969. To address the issue of urban orientation, specific emphasis was laid on making banking facilities available in the then unbanked areas. This was executed through two definite steps, viz., by designing a specific branch license policy and by initiating specific schemes like the Lead Bank Scheme (LBS). The LBS, launched by the Reserve Bank with a view to mobilizing deposits on a massive scale throughout the country and also for stepping up lending to weaker sections of the economy, became the principal instrument for