AN ANALYSIS OF ROLE OF MICROFINANCE IN PROMOTING

FINANCIAL INCLUSION IN URBAN POOR OF KOLKATA

Thesis
Submitted by
Dr. Ujala Kumari
Reg No : D11BA010
In partial fulfilment of the requirement for the degree of
DOCTOR OF PHILOSOPHY

DEPARTMENT OF MANAGEMENT STUDIES

BHARATH UNIVERSITY
CHENNAI 600 073
AUGUST 2015
 Declaration
I the undersigned, Dr.Ujala Kumari, a research scholar of Doctor of Philosophy

programme, hereby declare that the dissertation titled “An Analysis of Role of

Microfinance in promoting Financial Inclusion In the Urban Poor of Kolkata ”

is my original research work. It has been carried out under the guidance of

Dr. S. Ramachandran, Director, AMET Business - School , AMET University,

Chennai - 600116. The present research work has not been earlier submitted

elsewhere to any other university for award of any degree or diploma.

Dr. Ujala Kumari

Date : August 12 , 2015

Place : Chennai -600073

 Thesis Abstract
This Thesis defines financial Inclusion as a “ A continuum of affordable and
approachable credit services along with transaction banking, Insurance and
Investments services suitable to the occupational needs of the low income class of
population.” The most significant outcome of financial inclusion is the access and
usage of credit services and this should be on a continuous basis rather than a onetime
approach. As low income groups are often among those lacking such access,
microfinance programmes providing financial services to them have emerged as a
public policy instrument to promote financial inclusion. This thesis evaluates the
contribution of microfinance programs in promotion of financial inclusion in Urban
poor of Kolkata. An ample amount of literature on microfinance studies the Role of
Microfinance inadvertently in context of Rural poor to the extent that Microfinance
has become synonymous with rural poverty. This thesis has examined the role of
microfinance in an urban setting studying the impact on financial inclusion of the
urban poor population of Kolkata. The role of microfinance in promoting financial
inclusion has been analysed in two Dimensions. Dimension 1 calls for a Comparative
analysis of Financial Inclusion status of members of microfinance with non members
which is a Quantitative Research and Dimension 2 calls for Analysis of Role of
Microfinance in lowering barriers to financial Inclusion which is a Qualitative
research using case study method.
The thesis therefore develops a framework for analysing the role of microfinance in
promoting financial inclusion. The framework is used in developing the research
problems, analyzing the data and structuring the implications and conclusions. A
sample population of 547 constituting both members and non members from Kolkata
have been studied. The members are primarily from Microfinance Institutions( MFI)
with a few representations from Self Help Group(SHG) and Self help Bank Linkage
Programmes (SBLP). A conglomerative index of Financial Inclusion has been used to
arrive at the Financial Inclusion status of each respondent. The index has been
compared across members of microfinance and non members so as to come to a
conclusion that members of microfinance have better financial Inclusion status that
the non members. The extent of association with informal credit markets is considered
as a negative and impinging on the aim of financial exclusion which is taken into
consideration. So incidence of informal borrowing in the last three calendar years
have been studied and the comparison is done across membership categories.
Incidence of informal borrowing is also compared with respect to the Financial
Inclusion status in various categories so as to know what pattern of informal
borrowings is exhibited in different membership categories with increasing financial
Inclusion status. The influence of various socioeconomic factors like occupation, age
age, income etc on the status of financial Inclusion of respondent has also been
studies. To study Dimension two a research design based on case studies and
qualitative research methods was adopted. The lines of enquiry followed were at the
sector level, at the microfinance provider level and at the microfinance member level.
For the provider and member levels, primary data were collected in Kolkata. At the
provider level, one organization associated with each model was studied, including
interviews of senior officials and MFI field staff. At the member level, low income
women were interviewed. Sector level research is a secondary research and examines
the coverage of gaps left by the commercial banking sector and the geographical
barriers to spread of Microfinance. Microfinance provider level research examines
the extent to which MFI’s cover the Financially excluded. Member level research
seeks to know the reasons faced by low income people for rejection by Microfinance
institutions. A clear association with higher levels of FI Index and Microfinance
membership was inferred. Almost 60 per cent of the MFI members attained FI Index
of more than 30. Microfinance has been successful in addressing barriers to financial
inclusion to the extent that a skewed geographic growth of Microfinance is observed
in the study. There is a need to make underserved areas more attractive for
microfinance providers, for the microfinance sector to play a role in providing
financial inclusion, it needs to be available in all regions and not only in specific
areas. An analysis of the spread of microfinance services vis-a-vis that of banking
services revealed the extent to which microfinance programs fill gaps in banking
sector services and it was found that Microfinance has made considerable progress in
increasing access to Financial services/ Financial Inclusion in West Bengal where
banking penetration is low.
 Table of Contents

Chapter 1

Introduction .......................................................................................... 1
1.1 The current happening in the context of the research ....................................... 1
1.2 Financial Inclusion ............................................................................................. 3
1.3 Microfinance -- an alternative road to Financial Inclusion of the poor .............. 8
1.4 RBI’s policy Initiative to achieving financial Inclusion ......................................... 9
1.5 Financial Exclusion of the Urban Poor:............................................................. 11
1.6 Legislative Exclusion: A major contributory factor to financial exclusion ......... 16
Chapter 2
A Review of Literature ......................................................................... 17
2.1. Challenges in provision of micro credit ........................................................... 18
2.2 Growth of the Microfinance sector – From outreach to profitability ............... 21
2.3 Features of Microcredit ................................................................................... 22
2.4 The debates in the Microfinance Literature ..................................................... 31
2.5 Evaluating the impact of Microfinance programs ............................................ 33
2.6 The Conceptual Framework of Financial Inclusion ........................................... 36
2.7 Approaches to Measuring Financial Inclusion .................................................. 39
2.8 Nature and Causes of Financial Exclusion ........................................................ 48
2.9 Microfinance and Financial Inclusion ............................................................... 53
Chapter3
Microfinance and Urban Poverty : The case of Kolkata .............................. 57
3.1 The demographic profile of the city ................................................................. 57
3.2 Slums of Kolkata .............................................................................................. 59
3.3 The Urban poor of Kolkata ............................................................................... 61
3.4 Financial Inclusion status of Kolkata ............................................................... 64
3.5 Profile of the Respondents .............................................................................. 67
3.6 Microfinance : A tool for urban poverty alleviation ........................................ 71
 3.7 Conclusions ..................................................................................................... 74
Chapter 4
Research Framework and Methodology ................................................... 75
4.1 Framework for analyzing financial inclusion .................................................... 75
4.2 Research Questions, Objectives and Hypotheses ............................................. 78
4.3 Sampling Design and Data Collection ............................................................... 79
4.5 Need for the study ........................................................................................... 85
4.6 Gap in the Literature: ...................................................................................... 86
Chapter 5
Data Analysis and Interpretation ............................................................ 88
5.1 Status of Financial Inclusion............................................................................. 88
5.2 Measurement of Financial Inclusion at Individual level.................................... 89
5.3 Calculation of Financial Inclusion Index .......................................................... 96
5.4 Status of financial Inclusion among the urban poor of Kolkata ...................... 101
5.5 Financial Inclusion and Informal finances ...................................................... 103
5.6 Financial Inclusion Index and Membership with Microfinance ...................... 109
5.7 Socio Economic Variables and Financial Inclusion .......................................... 112
5.8 Sufficiency of Microfinance in addressing Barriers to Financial Inclusion ....... 121
Chapter 6
Summary, Findings and Conclusions .................................................... 144
6.1 Summary ....................................................................................................... 144
6.2 Significant Findings ........................................................................................ 147
6.3 Limitations of the study ................................................................................. 149
6.4 Scope of the study ......................................................................................... 149
6.5 Conclusion ..................................................................................................... 150
References

Annexure
 List of Tables
Table 1.1 A comparative list of features of new and old Financial Inclusion
Programmes............... ............................................................................. 2
Table 1.2 Indian metros and slums proportion ........................................................12
Table 2.1 Types of Financial Exclusion ................................................................... 49
Table 3.1 Difference between Rural and Urban Microfinance ............................... 72
Table 4.1 Division of Kolkata in eight regions ........................................................ 79
Table 4.2 Selected slums settlements .................................................................... 80
Table 4.3 Sample size from each region................................................................. 81
Table 4.4 Three lines of enquiry and data collection.............................................. 81
Table 5.1 Usage of Transaction Banking ................................................................ 90
Table 5.2 Knowledge level of respondents (per cent of total) ................................ 91
Table 5.3 Credit usage by households from Institutional sources of Finance ......... 93
Table 5.4 Deposits by households with Institutional sources and access to
insurance ............................................................................................... 94
Table 5.5 Financial Inclusion Index- construction and weightage distribution of
Usage Dimension ................................................................................. 100
Table 5.6 Region wise distribution of Financial Inclusion Index ........................... 100
Table 5.7 Region wise Mean Financial Inclusion Index ......................................... 102
Table 5.8 Results of One way ANOVA .................................................................. 101
Table 5.9 Financial Inclusion and Informal finances ............................................. 103
Table 5.10 Results of Chi Square Test of Significance........................................... 104
Table 5.11 Results of chi square test at Disaggregated level of membership ....... 105
Table 5.12 Membership category and Informal Finance ..................................... 107
Table 5.13 Chi square test of significance ............................................................ 107
Table 5.14 Distribution of Financial Inclusion Index according to membership
Category ............................................................................................ 109
Table 5.15 Mean Financial Inclusion Index of membership categories ................ 109
Table 5.16 Results of One way ANOVA ................................................................ 110
Table 5.17 Results of Post Hoc test ...................................................................... 110
Table 5.18 Distribution of Financial Inclusion Index of households according
to age class ........................................................................................ 112
Table 5.19 Mean Financial Inclusion Index of households according
to age class..................................................................................... 112
Table 5.20 Distribution of Financial Inclusion Index of households according to
highest education attained by any of the family members ................ 113
Table 5.21 Mean Financial Inclusion Index of households according to highest
education attained by any of the family members............................. 114
Table 5.22 Occupations categorised based on similarities ................................... 115
Table 5.23 Distribution of Financial Inclusion Index of households according to
occupation......................................................................................... 116
Table 5.24 Mean Financial Inclusion Index of households according to
occupation......................................................................................... 117
Table 5.25 Distribution of Financial Inclusion Index of households according to
expenditure (income proxy) .............................................................. 118
Table 5.26 Mean Financial Inclusion Index of households according to
expenditure ....................................................................................... 119
Table 5.27 Distribution of Financial Inclusion Index of households according to
family size .......................................................................................... 120
Table 5.28 Microfinance Penetration in India ...................................................... 126
Table 5.29 State-wise Index of Financial Inclusion ............................................... 131
Table 5.30 District-wise Financial Inclusion in West Bengal ................................. 132
Table 5.31 State wise number of branches and Average population per bank
branch as on 1st March 2013 ............................................................. 133
Table 5.32 Matrix on Availability of Microfinance and Banking Services .............. 134
Table 5.34 Field officers’ Responses: Main reasons for Individuals not being
able to join microfinance groups ....................................................... 136
Table 5.35 Results of Discussion with MFI Field officers ...................................... 137
Table 5.36 Interview Questions for Member Level Enquiry ................................. 138
Table 5.37 Results of Discussion at Member Level Enquiry .................................. 139
 List of Figures
Fig. 1.1 Five Pillars of Economic development.......................................................... 4
Fig.1.2 Voluntary and Involuntary exclusion.............................................................11
Fig 1.3 Cycle of Financial Exclusion............................................................................13
Fig 3.1 Geographical Location of Kolkata..................................................................57
Fig 3.2 Expenditure of All India Slums and Kolkata Slums....................................... 60
Fig 3.3 Growth in outreach of Scheduled commercial banks in Kolkata...................64
Fig 3.4 Pattern of Deposits and Loans of Kolkata.....................................................65
Fig 3.5 Pattern of Credit Deposit Ratio of Kolkata....................................................65
Fig 3.6 Gender and age profile of respondents ........................................................66
Fig 3.7 Education and Expenditure class of respondent............................................66
Fig 3.8 Membership Profile of the Respondents.............................................. ........67
Fig 3.9 Financial Inclusion status of the respondents................................................68
Fig 3.10 Membership category wise share of Financial Inclusion status....... ...........68
Fig 3.11 Incidence of Informal Borrowing in different categories.............................69
Fig 3.12 Incidence of Informal Borrowing according to Financial
Inclusion index..............................................................................................70
Fig 4.1 Framework for analyzing Financial Inclusion………………….… ……………….….…..75
 1. Introduction

When India’s planning commission chairman Montek Singh Ahluwalia filed an

affidavit in the Supreme Court stating that anyone who spends more than Rs. 32 a day
in urban areas cannot be defined as poor and would therefore be ineligible for state
benefits, there was a nationwide furore over this statement and Social activists -
including those like Aruna Roy who serve on the National Advisory Council that was
headed by Congress President Sonia Gandhi - were horrified by this definition of
poverty and wrote an open letter to Mr Ahluawalia , asking him to survive on Rs. 32 a
day. True that Mr.Ahluwalia who doesn’t have to fetch a glass of water himself with
Chauffeurs, servants, cooks, and officially employed attendants lives a comfortable
life and perhaps uses a roll of good quality toilet paper that costs more than Rs. 32.
When I had started my data collection as part of my research work it was theoretically
imperative to use this Rs32 guideline to choose the poor who would be the subject of
my study, as the poverty line benchmark is set by none other than planning
commission of the government of India. Going by the guidelines of poverty line I could
not find a single poor in this metro city as even the beggars and destitute I met earn
more than Rs32 a day and yet are malnourished to the extreme of horrifying human
images...homeless, stinking and barely clothed. The poor subjects of my research are
not determined by the poverty line, they are chosen based on their habitation which is
unfit for human survival, the ones who live in slums , are devoid of basic sanitation
needs and find it tough to make ends meet.

1.1 The current happening in the context of the research

Prime Minister Narendra Modi, in his maiden Independence day speech on 15th
August 2014, touched upon a major drive that the government is planning on financial
inclusion, marking a landmark leap towards propelling the economy for an all
inclusive growth. Economic theory endorses direct relationship between investment
and economic growth to saving rate. It is implied that financial exclusion of a vast
majority represents a missed opportunity of an enormous potential for economic
growth. So far financial inclusion was doing rounds among only the economists , it’s

1
for the first time that the government has taken a real and robust step towards
achieving financial inclusion. Unveiling the 'Pradhan Mantri Jan Dhan Yojana', he
said there were more mobile phones than bank accounts in the country. As part of the
scheme, access to bank accounts will be made available to the poorest of the poor and
each account holder will get a debit card (Ru-Pay card) and a Rs 1 lakh insurance
cover. While Prime Minister Narendra Modi did not share any details of the scheme,
some of this has already been put out by the Ministry of Finance on its Facebook
page. The ministry says the efforts will be more than just opening bank accounts. The
target would be individual households given that there are 7.5 crore households that
do not have a bank account. The government's financial inclusion mission is to be
done in two phases . The first phase will get over by August 14, 2015, and the second
Phase by August 14, 2018. Most activities will be done in the first phase, and
insurance and pension would be covered in Phase-II. This will help the government
transfer subsidies directly to the accounts of the beneficiaries. Here are broadly some
elements of the new architecture that the government seems to be planning on
financial inclusion:
Table 1.1 A comparative list of features of new and old Financial Inclusion
Programmes

Some elements of the New Some elements of the old financial inclusion
financial inclusion programme programme
Village-based approach for Aims to cover households in all villages
villages where population is
greater than 2,000
Only Rural Both rural and urban
Focus on opening of Basic Focus on financial literacy, opening of Basic
Savings Bank Deposit Accounts Savings Bank Deposit Account, Convergence
with other subsidy schemes and Micro
Insurance/Pension, RuPay Debit Card, Kisan
Credit Card
Monitoring by banks Monitoring Mechanism at Centre, State, District
level. Active participation of state and district
emphasized
Operation of Accounts offline; Accounts online on Core Banking Solution of
separate server banks. Provision of RuPay Card to each account
holder, giving him freedom to operate anywhere

2
Enthused by the Centre's plan to open 7.5 crore bank accounts over the next few years,
MFIs and other such financial institutions that are working in rural areas have charted
out massive expansion plans. The Microfinance Institutions Network (MFIN) with 2.5
crore rural customers in its fold is ready to support the comprehensive financial
inclusion programme. MFIs can help the programme by opening 2.5 crore bank
account for the programme. Capital First, which is into providing small loans to
entrepreneurs, has charted out a five-year plan as per which it has plans to compound
its business by 22-25 per cent per year (Since ticket size is small, here the book builds
slowly so a growth of about 22-25 per cent per year over the next five years is only
optimal). The company provides loans in the range of Rs 20,000- Rs 1 crore at an
interest rate of 13-16 per cent. Vistaar Financial Services with 100 branches located in
six states has also got ambitious growth plan. It plans to increase the number of
branches to 250 from 100 now over the next three-four years and plan to increase the
number of customers to three lakh from currently existing 40,000 during the period .
The sector is attracting finance from a variety of sources and hence is growing at a
rapid pace.

As microfinance programs in India typically cater to low income financially excluded

households, it is fast emerging as a possible means to expand access.

Provision of financial services to low income segments of the population is

particularly challenging. Microfinance specifically addresses this very segment,
making such programs very useful in promoting financial inclusion.

1.2 Financial Inclusion

Ever Since the establishment of eradication of poverty as the top goal of Millenium
Development Goals MDG, Governments across the world have been discussing
measures to alleviate poverty. There is a consensus among all Economists that
including the poor people in the mainstream financial system will improve the overall
growth of the economy which in turn will provide better opportunities for the poor to

3
earn. This Idea of including the un bankable poor population into the formal financial
system is termed as financial inclusion. Economists of the world describe that there
are at least five different types of capital or resources in a country which leads a
country towards the path of overall development. These are:

 Human Capital (Nutrition, Health, Education, Skills, Competencies)

 Natural Capital (Land, Water, Forests, Livestock, Weather)
 Physical Capital (Roads, Building, Plant And Machinery, Infrastructure)
 Social Capital (Kinship Groups, Association, Trust, Norms, Institutions)
 Monetary Capital (Money, Income, Saving, Investments

Fig. 1.1 Five Pillars of Economic development

Overall Economic Financial Inclusion

Development of a
country

Human Natural Social Physical Monetary

Capital Capital Capital Capital Capital

Stress on Health & Better utilization of Develop institutions More investment Provide outreach of
Education natural resources like Gram Panchayats, infrastructure savings and credit
etc to all sections of
society

It is under the Monetary capital that the financial inclusion plays a prominent role in.
A paralysed resource/ capital or inadequate access to any of these resources can be the
cause or the consequence of poverty and the accompanying backwardness of a
country. Every economy strives to increase the different types of resources available

4
for the welfare of it’s citizens and mankind. The Human capital of the country can be
strengthened by giving impetus on Health & Education of it’s citizens, the Natural
capital can be optimised by checking the misuse of the natural resources and at the
same time deriving the maximum benefit from it. Physical capital can be strengthened
by more investments in infrastructure and Social capital can be strengthened by
building of more socially relevant organisations like gram panchayat. Monetary
capital can be strengthened by providing outreach of credit, savings and insurance to
all sections of the society. And this is what makes financial inclusion a significant
modality of development.

Financial inclusion denotes delivery of financial services at an affordable cost to vast

sections of disadvantaged and low income groups (GOI, 2008). An inclusive financial
sector provides effective, ongoing access to all sections of the population and all
scales of enterprise. It has the potential to unleash a virtuous cycle, enabling poor
households to contribute to economic growth while drawing benefits from it.

Finance and poverty are highly interrelated terms; financial inclusion of the poor can
ultimately result in reduction of poverty instigating inclusive growth. Inclusive growth
means growth with equal opportunities which focuses on both creating opportunities
and making opportunities accessible to all. Growth is inclusive when it allows all
members of a society to participate in and contribute to the growth process on an
equal basis regardless of their individual circumstances.

Developing countries all over the world have been constantly emphasizing reduction
of poverty, one of the basic agenda of Millennium Development Goals (MDGs). The
State, formal financial system and community based organizations are incidental in
annihilating poverty while posing as the three pillars in achieving societal
transformation (Thorat, 2006). Financial system can play a role in reinforcing many of
the objectives of the MDGs involving savings, livelihood and economic infrastructure
apart from providing an efficient payments system. Financial exclusion epithets
limited accessibility of individuals to formal financial services. It is estimated that
more than three billion people are financially excluded around the world (estimates
based on ownership of accounts). India has the second world’s largest financially

5
excluded population after China. According to the estimates of Sinha and
Subrahmaniam, 2007, in India, 135 million people were financially excluded (in terms
of ownership of an account) which accounted for 66 per cent of the population. The
report provides an estimate of the potentially bankable group of people who are
termed as “the next billion consumers’ hitherto neglected by the mainstream financial
institutions. Formidably, India is estimated to have 91 million households that fit into
the profile of next billion consumers. According to the “All India debt and investment
survey”, (2003), the share of institutional debt for rural households in India in 2002
was 57 percent, declining from 64 percent in 1991, (NSSO,2005). In 2005, assuming
one savings account per person, 59 percent of the adult population in India had bank
savings accounts. The number of loan accounts, on the other hand, constituted only 14
percent of the adult population (Thorat, 2007).

Financial inclusion policies of most countries typically focus on encouraging banks to

open affordable savings accounts for the financially excluded. The assumption is that
once this is achieved, access to other financial services becomes easier. This is
because Bank accounts facilitate better savings and money management in addition to
facilitating protection from inflation, access transaction/transmission facilities like
remittances. Savings and insurance help reduce risk and vulnerability and prevent a
slide into stressful coping strategies such as sale of livestock or other assets (Arora
and Leach, 2005). Access to loans and savings ensure much greater choice in
managing liquidity and risks, thereby enhancing capacity to invest in emerging
opportunities. However in the Indian context, it is observed that such accounts, even
when opened are not widely used and substantive financial inclusion therefore
remains limited. Low income, lack of education and complicated documentation acts
as a significant barrier to financial inclusion. Most of the poor people feel intimidated
with the glass walled banks and refrain from approaching them whereas the traditional
moneylenders are well conversant with their needs and easily approachable. This
gives an edge to the informal financing .Effective access to formal resources by a
majority of the population can have positive influence on the informal sector due to
competition, hence benefiting those who were otherwise excluded from it. However
institutional financing in India is risk averse; concentrating on returns on investment,
6
leaving out low profile clients whose credit worthiness is unknown. Diligence of the
financing institutions has resulted in financial exclusion of the poor, with limited
physical and financial assets to fall back upon. Financial illiteracy and lack of
knowledge of financial products have grappled the poor that they do not even dare to
approach any financial institution. In provision of credit to rural poor, there is still
dominant hold by informal agencies who charge exorbitant rates of interest. This
points to the fact that inspite of significant achievements in spreading bank branches
over the country, services that reach poor and marginalised segments of the
community are less. Banks remain unapproachable and credit terms are often not
suitable to poor borrowers. Even those who have gained access, owing to recent
developments in financial services for the low income people are underserved. Access
to affordable financial services, especially savings, credit and insurance opens up
livelihood opportunities by empowering the poor. In fact such empowerment aids
social and political stability (Thorat, 2007). One common measure of Financial
Inclusion, the percentage of adult population having bank accounts estimates that 59
per cent of the adult population is financially included, in other words, 41 per cent of
the population is unbanked. In rural areas, the coverage is 39 per cent against 60 per
cent in urban areas. North Eastern and Eastern Regions of the country are far behind
other regions.

Various studies indicate that low income acts as a significant barrier to financial
inclusion, both from the demand and the supply side. The supply side factors include
non availability of suitable products, physical barriers and non-eligibility on account
of documentation issues. On the demand side, financial literacy and financial
capability are regarded as important factors by the task force. While financial literacy
refers to the basic understanding of financial concepts, financial capability refers to
the ability and motivation to plan financials, seek out information and advice and
apply these to personal circumstances. Low and irregular income is often the primary
reason that contributes to financial exclusion on both supply and demand sides. The
reasoning is that it leads to lack of availability of suitable financial products, as well as
lack of motivation to open accounts due to inability of the individuals to save. Studies

7
in the UK context have also found that the lowest income group is twice as likely to
not be accessing financial services (Kempson, 2006).

1.3 Microfinance -- an alternative road to Financial Inclusion of the poor

The news of robust expansion plans of various microfinance institutions in the next
five years comes following the Prime Minister Narender Modi’s Financial Inclusion
drive testifying the relationship Microfinance has with Financial Inclusion. As Rhyne
(2010) puts it “financial inclusion is like a jigsaw puzzle, for which microfinance has
many of the pieces”

Microfinance refers to the provision of a broad range of financial services such as

deposits, loans, money transfers, and insurance to poor and low income households
and their microenterprises. Provision of microcredit, namely loans for the poor, has
however dominated the microfinance sector globally. The growth of microfinance has
been described as a revolution (Robinson, 2001). Yunus (1998) has described it,
perhaps somewhat exaggeratedly, as a “revolutionary way to reduce poverty”. The
first Microcredit Summit held in Washington D.C., in 1997, brought together over
three thousand people from 137 countries. It was organized by RESULTS Educational
Fund. The Summit launched a nine year campaign to reach over 100 million of the
world‟s poorest families. The year 2005 was designated by the United Nations (UN)
as the “International year of microcredit”. In 2006, the Nobel Peace Prize was
awarded to Muhammad Yunus, the founder of Grameen Bank, one of the earliest and
perhaps the best known microfinance institution (MFI). These milestone events have
drawn international attention to the microfinance sector.

One of the most important potential contributions of microfinance is financial

inclusion, namely enabling access of financial services to underserviced individuals
.As stated earlier low income acts as a significant barrier to financial inclusion, both
from the demand and the supply side. This makes provision of financial services to
low income segments of the population particularly challenging. Microfinance
specifically addresses this very segment, making such programs very useful in
promoting financial inclusion.

8
The key to the process of drawing majority of the economically marginalised
population into economic mainstream aka Financial Inclusion is providing the
unbanked population with access to financial services – especially capability to
conduct transactions. As Amartya Sen has pointed out, availability and access to
finance can be a crucial influence on economic entitlements of economic agents. Good
financial services require “products that suit the poor’s capacity to save and their
needs for lump sums so that they can save (or repay) in small sums of varied value, as
frequently as possible; access the lump sums (through withdrawals or through loans)
when they need them; in the short-term for consumption and emergency needs, in the
medium term for investment opportunities and recurrent life cycle needs, and in the
longer term for other life cycle and insurance needs like marriage, health care,
education and old age” (Rutherford, 2000).

1.4 RBI’s policy Initiative to achieving financial Inclusion

Supporting business models of Microfinance Institutions

Financial inclusion has been on the policy agenda since financial year 2004-2005,
after being highlighted in the annual policy review of the country’s central bank, the
Reserve Bank of India (RBI). And even before PM’s financial inclusion drive pitched
in, Government had already taken some major steps towards achieving it, Some of this
evident from the policy statements made by the RBI in the past couple of years - from
recognising Non-Banking Financial Companies - Micro Finance Institutions (NBFC-
MFIs) as a separate category; letting NBFC-MFIs to become banking correspondents;
giving Bandhan a banking license, making it the first MFI to get this; allowing Ru-Pay
enabled debit system; encouraging banks and mobile phone companies to form
alliances; coming out with draft regulations for payment banks; and seeking industry
views on its new policy on creating small banks.
The Reserve Bank’s broad approach to financial inclusion aims at ‘connecting
people’ with the banking system and not just credit dispensation; giving people access
to payments system and portray financial inclusion as a viable business model and
opportunity. In consonance with the above approach, during 2007-08, the Reserve
Bank emphasised the need for promoting greater financial inclusion and financial

9
literacy. In this direction, a number of initiatives were taken during 2007-08 which
included revision of guidelines on lending to the priority sectors with emphasis on
enhanced flow of credit to those sectors of the economy which impact large segments
of the population and are employment intensive;strengthening of the rural
cooperatives; and restructuring of regional rural banks, which cater predominantly to
the rural areas. The Reserve Bank also continued with its policy of encouraging
multiple channels of lending such as self help groups (SHGs), micro-finance
institutions (MFIs), adoption of business facilitator (BF)/ business correspondent (BC)
model; and emphasising the simplification of the procedures and processes for lending
to the agriculture and micro, small and medium enterprises (MSME) sectors(GOI,
2008).

RBI initiatives to build inclusive financial growth include introduction of ‘no frills
account’ with nil or minimum balances in 2005. This target is normally achievable by
the banks while the impetus should lie in applying realistic norms for financial
inclusion like availability of adequate credit to all (GOI, 2008). In spite of the
commendable expansion of branch network and progressive policy initiatives, large
number of rural population continue to remain outside the formal banking system for a
variety of demand and supply side reasons and constraints. A new paradigm that
essentially promotes poor out of the vicious circle of indebtedness is required. The
financial products should be moulded such that they contribute to reduce the risk and
vulnerability arising from the existing livelihoods. It should essentially create security
nets for the poor and ensure them to pursue diversified and migratory livelihoods.
Also there should be varied interest in re-inclusion of those who are excluded out of
the financial arena after being included for a short while. Sustainability of inclusion is
yet another concern; that they remain included within the existing fragile livelihoods
(Arunachalam, 2008).

From the experiences gained from the success of the SHG-Bank linkage programme
and other micro finance initiatives in India and abroad, it has been established that
interfacing NGOs/CSOs and other socially conscious organizations/ persons between
the banks and the ultimate customers would prove rewarding in the philosophy of

10
"Financial Inclusion"(RBI, 2005). In 2004, the RBI appointed an internal group to
examine ways of increasing financial inclusion and came out with a report in July
2005 (Khan Committee Report). Pursuant to its recommendations, the RBI issued a
circular in January 2006 providing for the use of specified agencies including MFIs, as
intermediaries in the provision of banking and financial services. The intermediaries
were to be of two kinds, Business Facilitators and Business Correspondents. The
above development has led to private sector banks increasing their exposure to this
sector, using business correspondents (Arunachalam, 2008).

1.5 Financial Exclusion of the Urban Poor:

Lack of education and health among the urban poor is compounded by a lack of
access to finance, which is a pre-requisite for employment, poverty reduction, and in
the long-run sustained economic growth. However, the formal financial sector serves
only a minority, with most households lacking even basic financial services. Of these
financially excluded households, Some of the households have chosen to be
financially excluded. This is termed as Voluntary exclusion. The figure below depicts
the two forms of financial exclusion. People who voluntarily exclude are the ones who
do not feel the need to avail financial services. This feeling of lack of need to reach to
a bank or post office can be present independent of factors like level of income,
awareness of services and propensity to save. There are many who save but instead of
parking the money in a bank , they buy jewelleries from a local jeweller on instalment
basis. A few Members of Islamic community refrain due to religious reason.
Fig.1.2 Voluntary and Involuntary exclusion

11
 1.No need for
financial services
Voluntary exclusion
(self exclusion)
2.Cultutal, Religious
reasons
Non user of formal
financial services
3.Insufficient
income,High risk

Involuntary
exclusion 4.Discrimination,lack of
information,product
features,price barriers
due to market
imperfections.

Poverty in India has been a part of the policy debate right from the First Plan Period
with the primary focus being on agriculture and rural development. Urban
development was tackled through a focus on industry, urban poverty was not
recognized as a concern in the initial plan periods. In the past, the focus on the
development of rural India was justified because of the large proportion of the
population living in rural areas There has, in recent years, been a marked shift in the
country’s economic structure, from a predominantly agrarian economy to a
manufacturing and services sector-oriented economy. Today, urban population growth
areas and the accompanying challenges demand concerted policy attention.

The staggering scale of urban poverty

12

Proportion of slum
City
households (%)
A clear indicator Greater Mumbai 41.3 of rapid
urbanization and the parallel growth
Kolkata 29.6
of the urban poor is the growth in
slums in each Chennai 28.5 city.India’s slum
population more Delhi 14.6 than doubled, from
43 million in 2001 Bangalore 8.5 to 93 million in
2011 in ten years and it is projected
to grow at 5% per year, adding nearly two million every year, according to official
Government data. Across urban India about twelve million more will be added in the
slums by 2017.Nearly one in every six urban Indian residents lives in a slum, newly
released Census data shows. The new numbers are significantly lower than the slum
growth that had been projected for India. Roughly 1.37 crore households, or 17.4% of
urban Indian households lived in a slum in 2011, data released by the registrar general
and census commissioner's office showed.
Table 1.2 Indian metros and slums proportion

Over a third of India's slum population lives in its 46 million-plus cities. Of the
metros, Mumbai has the highest proportion of slum-dwelling households (41.3% of its
population). Kolkata is next at nearly 30% with Chennai not far behind. Delhi has
14.6% of its households living in slums while Bangalore is the best off of the five
metros at less than 10%.

13
A great majority of the urban poor earn less than Rs 80 a day, With such low levels of
income their only means to meet the contingent needs is borrowing from money
lenders falling prey to the vicious cycle of Financial exclusion which only worsens
their financial state

Fig 1.3 Cycle of Financial Exclusion

Financial
Exclusion

Increased debt
Enhanced
with reduced
dependence on
capacity to
money lenders
repay

Capital

Microfinance

Failure of Excluded low

livelihoods due income
to structural and population
other factors

Worse still, a majority of them have no hope of ever getting out of this trap. Since
they are either homeless or reside in unregistered slums, they don't have identity
proofs like voter's ID or ration card. As most of them have never voted, they don't
form a vote bank to interest political parties. The marginalization becomes absolute as
they cannot avail of poverty alleviation schemes. Microfinance can help break this
vicious cycle by infusing capital at a stage where it supports their livelihood and
makes it sustainable. Once Livelihood gets the support of credit it moves up in scale
and income generating capacity. The better the income, the less the dependence on
moneylenders and better the opportunities to save and invest. The need to save and
invest leads towards the path of financial Inclusion.

14
Specific focus on financial inclusion commenced in 2005 when the RBI advised banks
to make available a basic banking ‘no-frills’ account with low/nil minimal balance and
simplified know-your-customer (KYC) norms. For the urban poor, in 2004, in
response to Paragraph No. 84 of the Governor’s Statement on Mid-Term Review of
the Annual Policy for the year 2004-05 dated 26th October 2004, the RBI issued a
circular advising banks to advance loans to the distressed urban poor to repay their
debt to non-institutional lenders against appropriate collateral or group security.
Additionally, banks have also been asked to consider the introduction of a General-
purpose Credit Card (GCC) facility up to Rs. 25,000.00 for their rural and semi-urban
branches. This facility is in the nature of a revolving credit, which entitles the holder
to withdraw up to the limit sanctioned. The RBI has permitted 50 per cent of GCC
loans to be treated as priority sector lending. In addition, the RBI has made provision
for a credit guarantee scheme through Small Industries Development Bank of India
(SIDBI) for loans to MSME as well as permitting the utilization of services of
NGOs/SHGs, MFIs and other civil society institutions as intermediaries in providing
banking and financial services through the use of business facilitators (BF) and
business correspondent (BC) models .

Three concerns emerge in the provision of banking and financial services to the urban
poor.

1. First, in urban areas, with better banking infrastructure than in rural areas, simple
existence of branches is not a guarantee of access to services to the urban poor. The
RBI, itself, has expressed concern regarding the concentration of banking branches in
metropolitan cities.

2. Second, access of small and micro-enterprises to finance has decreased in the recent
past. Data available from the RBI and compiled by NCEUS shows that the percentage
flow of net bank credit from commercial banks to small-scale industry has fallen from
15.2 per cent in 1994-95 to just 6.6 per cent in 2007-08. Similarly, the flow of net
bank credit from scheduled commercial banks to micro-enterprises show a decrease of
from 2.2 per cent in 2002-03 to 1.2 per cent in 2007-08. However, this decrease has
not been calculated separately for urban areas.

15
3. Third and most important, in the absence of national-level figures regarding the
access of the urban poor to banking and financial services in India as well as the
access of the urban poor to the initiatives of the RBI (described above) it is difficult to
arrive at a comprehensive analysis of the access of the urban poor to finance in India.

One of the key reasons why large-scale conventional financial institutions are not
significant players in low-end financial markets is because their business model does
not cater to the urban poor segment. There is limited access to information on
potential clients. This translates into a higher cost associated with serving low-income
clients, which, if tackled, often results in the costs being transferred to the client
(urban poor) in the form of a higher interest rate. Products designed, may have
features that are not in line with the socioeconomic characteristics of clients. For
example, stringent repayment schedules may not be suitable for the urban poor
household with a cash-flow problem. In many cases complexity of transactions and
transaction costs associated with formal financial transactions, especially the
paperwork, can intimidate the urban poor, who already have their own informal
methods of savings. In a study on how the poor live below the poverty line Collins,
et.al. (2009) surveyed households in India, South Africa and Bangladesh. They found
that in India, serious injury or illness (42 per cent) is the most frequent event causing
financial emergency, followed by the loss of crop/livestock (38 per cent) and loss of a
regular job (10 per cent). Assets of the urban poor include savings with a money
guard, home savings, remittances to the village, and cash in hand and loans. Liabilities
include private loans, wage advances, shopkeeper credit, and rent arrears. In many
cases, this may also include micro-finance loans. There is, therefore, a clear mismatch
between the ways in which the urban poor manage their finances, and the formal
financial products on offer.

1.6 Legislative Exclusion: A major contributory factor to financial

exclusion

Lack of a supportive legislative framework encompassing the needs of the urban poor
has also lead to their exclusion from the mainstream financial system. This is the key

16
area where the urban poor are particularly vulnerable. A legislative framework to
empower the urban poor is very much essential if we really want to aim for an
inclusive growth. This involves giving legislative strength to policy initiatives such as
inclusive urban planning, financial empowerment of the poor, enabling livelihood
options, and overall, granting property rights to the urban poor. One area where the
urban poor are particularly vulnerable, due to legislative exclusion, is security of
tenure which is a prerequisite for access to formal financial institution access, access
to basic services and security from evictions. The formalization of security of tenure
finds expression in the formal registration of the property of the urban poor granting
them the right to their dwelling space. Additionally, city- level legislations and
planning instruments are exclusionary of the livelihoods of the urban poor. Cities are
conceived and planned on the basis of the built environment without due consideration
to the urban poor’s lives and work. ULBs exert control over public space and the
powers to evict people from public property. They can also re-define the use of a
public area and institute a scheme that may result in displacement of home and/or
workplace. ULBs also exert control over licensing of public areas for commercial
purposes. Obtaining these licenses for livelihoods can be time consuming and
expensive. Urban planning instruments rely heavily on height and FSI restrictions;
these restrict the availability of real estate and inflate residential and commercial rents,
excluding people and businesses from the ‘formal’ property market.

2. A Review of Literature

The research topic calls for a detailed understanding of the two broad subjects
Microfinance and Financial Inclusion and the interplay between them. For
convenience the review of Literature is broadly organised into two sections
covering various sub topics.

17
 Section A – Literature on Microfinance

 Section 2.1 -- Describes the early development of microfinance and challenges

faced in providing microcredit and the methods that have been used to address
them.

 Section 2.2 -- Describes the growth of the sector from an outreach model to a
profit focussed model

 Section 2.3 -- Describes the typical features of microcredit including group

lending, dynamic incentives, frequent repayment of instalments, targeting
women, reaching the appropriate customer base and high administrative costs.

 Section 2.4 -- Debates the “Profit versus Social objective” and evaluates the
sustainable objectives of Microfinance Institutions.

 Section 2.5 -- Reviews the impact assessment of Microfinance.

Section B – Literature on Financial Inclusion

 Section 2.6 -- Discusses the Conceptual Framework of Financial

Inclusion/Exclusion and describes the early definitions and context of financial
Inclusion

 Section 2.7 -- Describes the different approaches to Measuring Financial

Inclusion

 Section 2.8 — Discusses the Nature and Causes of Financial Inclusion including
constraints to access, physical and social infrastructure, understanding and
knowledge, and newer technology.

 Section 2.9 -- Microfinance and Financial Inclusion in urban poor.

2.1. Challenges in provision of micro credit

There have been many socially desirable public policy initiatives in many
countries such as supplementary feeding, employment generation programs and
investment in primary health and education but they have not enabled the poor to
acquire tangible capital assets. The motivation for these interventions was to help

18
the poor break out of the “vicious cycle of poverty”. The poor have no retained
profits or sufficient current income, so credit happens to the only means for them
to acquire assets. Provision of credit encourages investment in assets, which results
in an increase in the individual’s income.

Aghion and Morduch (2005) say that enterprises of the poor should attract more
capital because when capitalized they are able to generate higher returns
compared to enterprises that are already adequately capitalized. But on comparison
of an enterprises promoted by the poor with other enterprises, a number of factors
such as lack of education and technology often work against the poor. This reduces
their rates of return and so in practice the poor do not attract capital.

De Soto (2000) has shown that factors like , land tenure and land tilling
deficiencies often prevent the poor from collateralizing these assets, even if the
poor have been able to build some tangible assets. The banks willing to fund the
poor face the problem of asymmetric information when dealing with the market
due to lack of credit histories, collateral and insurance. Akerlof(1970); Rothschild
and Stiglitz (1976) say that this asymmetry in information results in covering up or
homogenising the credit quality of borrowers, which in turn affects market
efficiency The high interest rates called for could cause low risk borrowers to drop
out of the applicant pool causing an adverse selection problem for banks.

Stiglitz and Weiss, (1981 ) say that lenders do not increase the interest rate as a
reaction to excess demand, so an equilibrium in the credit market is maintained
which is consistent with credit rationing. This is attributed to the adverse selection
effect. Bester (1985) argues that credit rationing is an outcome of restrictions on
the instruments available to lenders to screen loan applicants, such as collateral.
Moreover, in the absence of collateral, repayment cannot be smoothened and loan
contracts cannot be enforced. The lenders cannot observe, without incurring
considerable costs, either the effort made by the borrower or the realization of
project returns. These are respectively referred to as ex-ante and ex-post moral
hazard (Aghion and Morduch, 2005).

19
Hoff and Stiglitz (1990) identified direct and indirect mechanisms to address
market failure in credit markets. In Direct mechanisms lenders expend resources to
service applicants and enforce loans, an example being development financial
institutions. Whereas in Indirect mechanisms contracts are designed with
borrowers so as to influence behavior in credit markets, a good example being
micro finance institutions.

Adams and Von Piscke (1992) of Ohio school argued that informal financial
sources such as money lenders, traders, relatives and friends were likely to be
more cost efficient than Developmental Financial Institutions. Moreover, they
argued that DFIs are likely to write-off loans of powerful borrowers due to
political pressures.

Hulme and Mosley (1996) refute the Ohio school’s argument about the claim that
informal sources of credit offer a cheaper and more efficient service than DFIs on
the basis that it lacks statistical evidence. Moreover they questioned the Ohio
School’s underlying assumptions that in developing countries informal financial
markets are characterized by perfect competition and that producers able to use
credit productively are able to reap the advantages of such competition.

Mutua et al. (1996) in his study talks about a paradigm shift in viewing the poor as
customers of financial institutions rather than beneficiaries of subsidies, He studied
three of these new kinds of institutions, BancoSol in Bolivia, the Kenya Rural
Enterprise Program in Kenya and Thailand’s Bank for Agriculture and
Agricultural Cooperatives. These institutions represented a paradigm shift in
viewing the poor not as beneficiaries of subsidies, but as customers of financial
institutions designed to address their demands for various financial products,
particularly for credit. And for the first time the focus was shifted in rural credit
from agriculture to non-farm enterprises such as making handicrafts, raising
livestock and running small stores.

These institutions were run by not-for-profit entities with a mission to dispense

small loan funds to low income groups who did not have collateral. The small loan

20
size made it easier for the users to service the loans and was also prudent from a
risk management view point. The term “microcredit” was used because the loan
sizes offered by these institutions were relatively small . It also helped restrict
access to only poor borrowers. A broader term of “microfinance” came to be used
interchangeably with microcredit. The recent literature however, explicitly
recognizes that the latter denotes provision of only credit while the former denotes
provision of a wider range of financial services including savings and insurance
(Aghion and Morduch, (2005)

2.2 Growth of the Microfinance sector – From outreach to profitability

The earliest and the most popular model of microfinance was that of Bangladesh’s
Grameen Bank. It was the brainchild of Muhammad Yunus. The group lending
model was developed in the mid 1970s through field experiments. Once these
experiments proved successful, he got funds from the Bangladesh Bank (central
bank), to expand outreach. Further non-commercial funding from the International
Fund for Agriculture and Development (IFAD), the Ford Foundation and the
governments of Bangladesh, Sweden, Norway and the Netherlands encouraged
rapid expansion, resulting in Grameen Bank’s nationwide presence in Bangladesh.

FINCA (Foundation for International Community Assistance), developed another

early microfinance model the “village bank” model .This was a United States
based not-for-profit microfinance organization which was set up in 1984. The
implementation of the model id done by its affiliates present across the world,
including Latin America, Africa, Eastern Europe and Central Asia. These
developments, representing the first wave in microfinance growth, may be
described as “outreach focused” growth.

Robinson (1995) termed a “paradigm shift‟ from government and donor-funded

subsidized credit to sustainable financial intermediation. A frequently cited
example is that of Bank Rakyat Indonesia (BRI), a state owned rural bank in
Indonesia, which moved away from providing subsidized credit and converted its
micro-banking unit into a commercially sustainable unit offering credit and

21
savings services. The underlying reasoning for this was that the large demand for
institutionalized microcredit could not be met by subsidized funding. A sustainable
model on the other hand could cater to more number of customers over a longer
time period and could be replicated even in situations where there was no
subsidized funding available. Within two years of commercial operations, the BRI
unit broke even (Robinson, 1995). BRI developed its own unique individual
lending model using voluntary savings mobilization as a source of funds and a
transparent set of incentives for savers, borrowers and staff.

Many of these developments which occurred in the 1990s, may be termed the
second wave of growth in microfinance, which saw both downscaling of some
formal institutions and up-scaling of some informal institutions. This wave may be
characterized as “sustainability focused” growth.

Gonzalez (2007) found that microfinance portfolios show high degree of resilience
to economic shocks, suggesting that microfinance investments were also attractive
from a viewpoint of diversification of portfolio risk. This third wave of
microfinance development maybe referred to as “profit focused” growth. Finally,
the third wave of growth in microfinance became evident after when the listing of
equity shares of a well known microfinance institution, resulted in supernormal
profits for its investors. This is the case of Compartamos, a Mexican MFI, the
event drew attention to microfinance as an “asset class” and lead to the entry of
commercially oriented funds, further fueling the sectors growth..

Sriram (2010), Identifies the “three waves of action” which broadly correspond to
the three waves in microfinance discussed above. In the first wave came the
discovery of the Grameen Bank model. In the second wave the first wave
organizations achieved scale and transformed themselves into for-profit entities.
Finally in the third wave, mainstream financial institutions commenced
microfinance activity.

2.3 Features of Microcredit

22
Lending of microcredit model involves a number of innovations in designing
contracts so as to circumvent some of the typical problems faced in lending to the
poor. These innovations are briefly discussed below:

Group Lending

Group lending is an arrangement by which individuals without collateral are

encouraged to form groups, the aim is to provide loans on group responsibility
(sometimes called joint liability) basis.

Morduch, (1999) describes group lending as microcredit’s most “celebrated

innovation” . Group lending is credited with results of high repayment rates
(upwards of 98 percent) on microcredit in spite of the loans being collateral free.

Aghion and Morduch, (2005) say that while economies of scale initially motivated
Grameen Bank to make use of groups, the bank later realized that requesting
borrowers to organize themselves into groups also had the advantage of reducing
costs of screening, monitoring and enforcement Often information on other
borrowers can be obtained from group members. For first time users of financial
services, the group also offers the comfort of companionship. Moreover, the use of
the group model in the Bangladesh context, enabled promotion of social messages
through repetition of verbal oaths (called sixteen decisions) regarding matters such
as education of girl children and abstention from dowry practices60. However, in
2002, the bank did away with joint liability when it introduced changes to its
lending methodology called “Graameen II”. The objective of Grameen II was to
make the model more flexible, primarily to enable restructuring of loans of
borrowers who found it hard to repay. After the 1998 flood in Bangladesh,
Grameen Bank had provided additional loans to borrowers to rebuild their houses,
which resulted in many of them having unsustainable levels of debt61. Even
though the joint liability mechanism was discontinued, Grameen Bank continued
its regimen of group meetings.The group sizes vary from one MFI to the other. In
the case of Grameen Bank, each group has five members, while in the case of
BancoSol, it has three members. In the case of groups promoted by Foundation for

23
International Community Assistance (FINCA), it has 15-30 members. The optimal
size of groups in terms of number of members has been studied both through
theoretical models and empirical studies.

Ghatak and Guinnane (1999) attempted to relate the theory on joint liability
lending to practice. They pointed out that theoretically, a larger group size can
have two countervailing effects. On one hand, if project returns of members are
not correlated, larger group size can help repayment. On the other hand, larger
group sizes also limit the extent to which members are able to screen and monitor
each other. However their review of empirical studies suggests that large groups
typically experience coordination and at times free rider problems. They suggested
that Grameen Bank‟s group size of five, which was arrived at on the basis of trial
and error, may be a good balance between the two opposite effects that larger
group sizes may have. However, research by Buckley (1996) in Malawi found that
groups as large as 10 or more also work effectively.

Groups are usually formed by self-selection. The potential borrowers use relevant
information to form groups with individuals who have similar risk characteristics.
This also ensures that safe borrowers do not have to cross-subsidize risky ones.
Ghatak (1999) shows analytically that risky borrowers cannot adequately
compensate safe ones to induce safe ones to join mixed groups. This does not
however mean that risky groups always default; risky borrowers can potentially
generate higher return than safe ones due to the positive relationship between risk
and return. Hence they can cross-subsidize their unlucky risky partners, unless all
of them are unlucky at the same time (Aghion and Morduch, 2005).

To reinforce the group responsibility concept, Grameen Bank had a system of

2:2:1 staggered disbursement whereby two members of each five member group
received disbursement at first. If all installments were paid on time, four to six
weeks later another two members received disbursement and finally the group
leader got the disbursement.

24
Groups meet regularly, most commonly on a weekly basis. A loan officer from the
MFI conducts the meeting. All loan disbursement and repayments are made at the
group meetings, making these processes transparent and public. This has
advantages for the lender as it heightens the impact of social stigma in case of
default by borrowers. It also reduces opportunities for fraud by MFI officials,
making it easier to enforce internal controls. Group meetings are also sometimes
used by MFIs to communicate social messages.

Group meetings are held in the borrowers‟ neighborhood making it convenient for
the borrower. Minor problems such as missing documents or a cash shortfall are
addressed on the spot due to proximity from borrower residences.

Different aspects of group lending have been studied both analytically and in
different contexts, mainly to isolate the determinants of repayment in group
contracts.

Stiglitz (1990) was one of the earliest researchers to show analytically that a group
lending contract induces borrowers to monitor each others‟ choice of projects and
to penalize those who choose highly risky projects. This addresses “ex-ante” moral
hazard.

Besley and Coate (1995), show that the possibility of imposing social sanctions
improves repayment. Aghion and Morduch (2005) show that “ex-post” moral
hazard, namely the concern that even when returns are earned, repayments are not
made, is also addressed by the model.

Abbink, Irlensbusch and Renner (2002), in a lab setting show that groups of
strangers do as well as friends, a result similar to that obtained by Wydick, (1999)
based on a field study in Gautemala. The importance of social ties among group
members in determining repayment of group loans has been studied by various
researchers and there is wide variation in the results obtained. The latter finds that
social cohesion (as proxied by living in the same neighborhood or knowing each
other prior to joining the microfinance group) helps repayment, though friendship
creates tensions.

25
Karlan (2003) uses a situation in FINCA, Peru where groups of 30 were formed on
a random basis, to study the relationship between social capital and repayment.
The FINCA program involved broadcasting the intent to create village banks and
then signing up borrowers as they join. Each time the list reaches 30, a group is
formed. Karlan defines social capital as the links between customers that are
foundations of trust and cooperation. He proxies social capital by considering
cultural similarity as indicated by language, hair and attire (kind of dress and hat
worn), as well as considering geographical proximity. He finds that greater social
capital aids repayment. Moreover, he finds that while default usually leads to
dropping out of members from the program, this effect is less so when there is high
social capital. This implies that when default is due to circumstances beyond
control, the borrower is not forced to drop-out when social ties are strong. The
study however is unable to pinpoint if the results are because of greater trust or
simply due to greater ease in monitoring.

Wenner (1995) and Gomez and Santor (2003) through studies in Cost Rica and
Canada respectively arrive at similar results. Ahlin and Townsend (2002) find
from a study in Thailand that strong social ties help repayment in the poorer
regions but are associated with weaker repayment in wealthier regions.

Sadoulet and Carpenter (2001) point out that if diversity in groups translates into
less correlated incomes, it could improve repayment, as shown by a study in the
Guatemala context.

While there are contradictory results, it is possible that though social capital may
lead to better repayment, in some cases too much social capital could translate into
collusion. A number of studies have found that alternative options for borrowing
are an important influence on repayment (Ahlin and Townsend, 2002, Wenner
1995, Sharma and Zeller, 1996).

Khandker, Khalily and Khan (1995) however found that both drop-outs and
repayments were higher in wealthier villages, which had better business
opportunities as well as more options for borrowing. It is apparent from the above

26
that the success of group lending depends on various factors, many of which are
contextual so simple generalizations are unwarranted.

Incentives to repay

Ghosh and Ray, (1997) in their study claim that One of the main incentives for
MFI borrowers to repay is the threat that the MFI will deny access to further loans,
to those who do not repay on time. On the other hand, if repayments are made
promptly, borrowers are offered a larger loan in the next “loan cycle” (a loan cycle
extends from loan disbursement to repayment of the final instalment). This acts as
an important dynamic incentive prompting on-time repayment of groups. It also
enables the lender to conservatively increase exposure to the customer so as to
screen out the worst performers before expanding scale.

Bond and Rai, (2002) say that In cases where there are rumors of failures of MFIs,
these dynamic incentives no longer work and could lead to a spurt of defaults.
Dynamic incentives can also weaken when alternative lenders enter the market, if
the borrower has the option to borrow from them instead. This problem can be
addressed by putting in place a mechanism by which microfinance providers share
information on defaulters, either informally through industry associations or by
means of a credit bureau.

Frequent Repayment of Instalments

According to Churchill, (1999) regular frequent (usually weekly) group meetings

to collect instalments are an important feature of microfinance. The weekly
repayment in fact, usually starts a week or two after disbursement. This seems to
imply that there is no gestational period for the investment to start generating
returns. This may be true in the case of some projects, such as purchase of
livestock. More often, it is assumed that repayment of the early instalments comes
from other sources of household income MFIs benefit from the frequency of
repayments as they act as an early warning system in case of defaults.

27
Rutherford, (2001) claim that, the weekly meetings ensure that loan officers are in
close touch with borrowers, ensuring better monitoring. Second, it helps borrowers
who have difficulty in holding on to their income on account of multiple demands
on it. These include demands from relatives, spouses and others. In fact, this aspect
motivates some customers who do not have access to safe saving avenues, to use
microcredit as a means of converting small amounts of money available during the
year into a lump sum at the start. But this comes at a cost, as interest charges have
to be paid on microcredit.

Studies of Gonzalez Vega et al., (1997) and Silwal, (2003) have shown that
delinquencies tend to rise when frequency of instalments is reduced . The
experience of BRAC, a leading MFI in Bangladesh, also indicates similar results
(Aghion and Morduch, 2005).

However, Field and Pande (2008) used randomized assignment and found no
significant difference in delinquency and default between customers assigned
weekly and monthly repayment schedules in India.

While it is generally believed that regular frequent instalments help reduces default
risk in microfinance, in view of the absence of collateral, it also dramatically
increases MFI transaction costs. Moreover weekly instalments are unviable in low
population density areas. This is the reason why PRODEM, a rural lender in
Bolivia, uses monthly instalments (Gonzalez Vega et.al., 1997).

In cases of monthly as well as weekly repayments, the installment amounts tend to

be uniform making it hard for borrowers involved in highly seasonal occupations,
such as agriculture to repay. The system evolved by Grameen Bank in 2002
(Grameen II) tries to partially address this problem by permitting loan officers to
vary the size of weekly installments according to the season.

Targeting Women

Most microfinance institutions primarily serve women, for a number of reasons.

28
First, according to Khandker, Khalily and Khan, (1995); Kevane and Wydick,
(2001). women are less mobile and more likely to be susceptible to peer pressure,
making them more conservative in their investments and consequently less risky
borrowers. This fact is particularly important as loans are collateral free. A number
of studies have shown that women are better borrowers than men

Second, and as according to Blumberg, (1989) from the societal viewpoint,

providing resources to women is expected to have better developmental impacts.
Women tend to expend more resources on children’s health and education as
compared to men . Further, in a number of developing countries women are often
oppressed even within the household due to prevailing social norms and lower
literacy levels. Microfinance is often viewed as a means of female empowerment.
Browning and Chiappori (1998) develop a model in which a woman’s intra-
household bargaining power is determined by her ability to credibly threaten to
leave the household. Access to microfinance can enhance this ability.

Goetz and Gupta (1996) found in a study in Bangladesh that 39 percent of the
women had little or no control over their loans. However, even though 71 percent
of microfinance customers are women, there are concerns regarding “pipelining”
of loans to male family members.

Todd (1996) carried out an ethnographic study of 64 women borrowers of the

Grameen Bank who were members for 8 to 10 years and found various positive
impacts on borrowers. She however found that a quarter of them were pipelining
their loans and found that these were the most marginalized women in her sample.
However other studies (quoted in Goetz and Gupta, 1996) indicate that even if
women pipeline the loan, they are better off with microfinance than without.
Similarly, studies have arrived at varying conclusions on the relative returns of
micro enterprises promoted by men and women (Goldberg, 2005).

Hulme and Mosley (1996) analytically differentiate between the core poor, who
have not yet crossed the economic threshold and others who have crossed it. “The
poor” are not however a homogenous group. While the core poor need financial

29
services such as micro savings and contingency loans that are protection focused;
others may have a need for promotional credit.

Based on field experience, Robinson (2000) found that the above definition of the
core poor includes a very large segment of the population in developing countries.
She instead differentiates between the economically active poor and the extremely
poor. While the former have some form of employment, the latter tend to be
severely food-deficient or destitute. She argues that credit is particularly useful for
the economically active poor, who are not severely food-deficient or destitute. The
extremely poor on the other hand need more importantly, tools such as food,
shelter, medicines, skills training and employment. However the extremely poor
may indirectly benefit through microfinance through the labor market, to the extent
that there is employment generation through microenterprises (Robinson, 2000).

Based on a study, Hulme and Mosley (1996) too found that microfinance has a
greater effect on the less poor due to their higher risk taking capacity. This
indicates that there is a limit beyond which it is impossible to reduce poverty and
increase impact simultaneously. Hulme and Mosley call this the “impact
possibility frontier”. MFIs can aim to be at particular points on the impact
possibility frontier by choosing the proportion of poor to non poor they would like
to serve. Reducing operating costs is an important way to push the frontier
outward. Improving the risk management mechanisms available to the poor
through provision of insurance products would serve to change the nature of the
relationship over time; so that it becomes possible to decrease poverty and increase
impact simultaneously.

Christen et al. (1995) studied 11 successful microfinance programs in three

continents and concluded that the trade-off is not inevitable. Gibbons and Meehan
(1999) show with the help of three case studies that the key to serving the poorest
sustainably is to increase cost effectiveness so that interest rate charged to
borrowers can be minimized.

30
Reaching the poorest of the poor has therefore continued to be viewed as a goal of
microfinance. The Microcredit Summit Campaign (a not-for-profit group of those
involved with microfinance activities around the world), was launched in 1997
with the objective of reaching at least 100 million of the poorest people in the
world. This objective was reported to have been met by 2007 and a new goal of
reaching 175 million poorest families and lifting 100 million families above the
threshold of US$ 1 a day, by 2015 has been adopted (Daley-Harris, 2009).

However, there are studies that suggest that microfinance does not often reach the
poorest of the poor Amin et al.,(2001) and Akula, (2004). This may be due to an
inability to understand and cater to their needs and preferences (Arun and Hulme,
2008) or due to the higher costs involved in doing so.

In practice, MFIs try to restrict access to the poor through small loan size (that may
not interest the elite) and loan conditions that the rich are not likely to agree to
(such as compulsory attendance at group meetings). Moreover, as the interest rates
charged are market related, there is no incentive for local elites to attempt to garner
the loans. Individual MFIs decide on the sub-group they choose to target and do so
by evolving appropriate eligibility criteria. Appraisal of potential borrowers is
based on MFI specific eligibility criteria, through personal interviews, neighbour
references as well as visits to the borrowers’ residence.

To summarize, the literature indicates that there are diverse views regarding the
segment within the poor that MFIs should target. There is also lack of clarity
regarding the segment it actually serves, as data on this aspect is not recorded.

2.4 The debates in the Microfinance Literature

As described earlier, Microfinance is viewed as a tool to alleviate poverty.

However with it’s growth, it first embraced the “sustainability” objective and later,
at least to some extent, the “profitability” objective. As may be expected, these
developments have lead to questions concerning potential conflicts with the
original poverty focus. A corollary of this debate is on how interest rates in
microfinance should be set. Both debates are reviewed below.

31
The “Sustainability versus Poverty Impact” debate and the “Profit versus
Social Objective” debate

The latter half of the 1990s was marked by a debate between two approaches to
microfinance, the “financial systems” approach and the “poverty lending”
approach (Robinson,2001). While the former emphasized institutional
sustainability, the latter emphasized poverty reduction. Rhyne (1998) described
poverty and sustainability as the “yin and yang” of microfinance, implying that
they are two sides of a whole, each incomplete without the other. She pointed out
that ultimately members of both camps had the same objective, namely that of
increasing outreach. The former viewed sustainability with its attendant benefit of
access to private funds as a means to the goal.

Schicks (2007) studied the cases of BancoSol and Grameen Bank as exemplifying
the “sustainable” and “charitable” goals respectively and concludes that there is a
case for coexistence of both organizations. While the former enables greater
breadth of outreach, the latter enables greater depth of outreach as it able to reach
poorer individuals. She does however point out that the two could potentially harm
each other. The former may prevent the latter from using cross-subsidizing
strategies by catering to the more well off customers; the latter could price their
products at less than sustainable levels, forcing the former out of the market.

Arun and Hulme (2008) suggest that the trend of downscaling of some large banks
and up-scaling of some small MFIs since the 1990s, has led to the resolution of the
debate in favor of the “financial systems” approach.

Even earlier, Gibbons and Meehan (1999) pointed out that while the need for
sustainability has been by and large accepted, there is less clarity on how to
approach it without losing sight of the poverty reduction goal. This issue was
brought into sharper focus when post-2007, MFIs began to raise equity from
commercial sources. This is the third wave of microfinance development.

Yunus (2007) advocates that MFIs follow a “social business” model by which he
means that the business should either be owned by low income individuals or else

32
the investors in the business should be prepared to only receive the amount
invested from the business and not other benefits such as dividends. However such
a model may not be able to generate much funding as not many social investors
may be ready to entirely forego returns on their investment.

Schmidt (2010) argues for a “consciously cautious approach” by MFIs wanting to

take advantage of lower cost funds from the capital market without compromising
on their social agenda. He advocates that MFIs should not approach capital
markets in a naïve manner but put in place in advance, a binding commitment on
the orientation of their MFI after infusion of funds from the market. For example,
they could decide on their profit level or interest rate levels. Schmidt further
suggests that MFIs sell non voting rights in order to retain their original
distribution of voting rights and maintain the binding commitment entered into as
above.

2.5 Evaluating the impact of Microfinance programs

Adams and Raymond, (2008) argue that while anecdotal evidence on the benefits
of microfinance are many, the number of careful impact studies by independent
researchers is far fewer. This has led to scepticism on whether the enthusiasm for
microfinance has been misplaced.

Rigorous evaluations need to address the issue of what would have happened if the
microfinance program had not existed. In the context of microfinance, this aspect
is complicated by the fact that microfinance is expected to have multiple impacts
on a household. While an obvious expectation is an “income effect” in terms of
increase in household income due to the activity financed, there may also be a
“substitution effect” due to the greater amount of time spent on that activity
(Aghion and Morduch, 2005). For example, at times some activities pursued
earlier may need to be discontinued. In addition, as microfinance targets women,
intangible impacts on the influence that women have in household decision-
making are also expected. MFIs which combine social initiatives such as in the

33
areas of health and education, along with credit, are expected to have impacts in
these areas as well.

Ledgerwood, (1999) focused on measuring the causal impact of microfinance on

borrower income. Due to issues, ascertaining the precise impact of the loan amount
is often a challenge, referred to as the “attribution dilemma” Researchers therefore
attempt to measure the impact of the loan on overall household income and
consumption. This too poses a number of challenges.

The first issue is that MFI membership being voluntary, unobservable

characteristics may differentiate MFI members from non-members, making them
non-comparable even prior to availing microfinance. Studies show that, those who
select themselves into MFI programs are on average wealthier (Coleman, 2002;
Alexander, 2001) and displayed different attitudes (Hashemi, 1997) from non-
members. It is also likely that they may differ on non-measureable factors such as
entrepreneurial ability.

McKernan (2002) shows that, not controlling for selection bias can overestimate
the impact of participation by nearly 100 per cent. Hence a direct comparison
between increases in income of members and non-members in a time period is not
sufficient to measure impact.

Therefore, there is a need for a comparable control group so that differences in

income prior to availing microfinance, and at a point in time subsequent to availing
it, can be compared (difference-in-difference approach). However care should be
taken in not having control and treatment groups located adjacent to each other as
there may be spillover effects from the treatment to the control group. For
example, there may be impacts through general increases in economic activity or
specific impacts through the labor market if MFI members generate employment
among non-members.

Control groups are usually therefore selected from areas which do not at present
have access to microfinance. This again needs to be done carefully as it could lead
to biases in certain kinds of MFIs where program placement is non random. For

34
example, if MFI programs first initiate in more needy areas, there could be a bias.
Another possible problem with control groups in microfinance is that sometimes
there is considerable attrition bias if an MFI commences operations in the area
during the period of the study. This problem arose in the case of an impact study
by BRAC (quoted in Goldberg,2005).

If a village identical to the one selected for treatment is found, except that it lacks a
microfinance program, it can be used. Three methods of comparison are possible
(Aghion and Morduch, 2005).

The first is to compare the average income in the treatment village, to the average
income in the control group. This however yields an estimate of the effect of
microfinance access not use.

Second, the actual microfinance participants in the treatment village can be

compared with those who signed up for a microfinance program but did not avail
of it (used by Coleman, 1999). Finding such a situation where borrowers are
identified but disbursement not carried out is difficult.

Third, the actual microfinance participants in the treatment village can be

compared to those who sign up when a program is introduced in the control
village. In other words, older members can be compared with new members. The
problem with this approach is non-random attrition of participants. It may be
expected that certain kinds of participants systematically drop out. For example, in
some cases, it could be richer ones while in others it may be those who have
problems in repayment. An older pool of borrowers, who have experienced
attrition and a new set yet to do so, may not therefore be comparable. This aspect
was a drawback of the USAID “Assessing the Impact of Microenterprise Services
(AIMS)” project which carried out studies of a number of MFIs.

Karlan (2001) recommends tracing drop-outs and including them in the sample.
This may however be a costly exercise. Another option is to build predictive
models using past data on drop outs and apply them to the new group (Aghion and
Morduch,2005)

35
 Section-- B

2.6 The Conceptual Framework of Financial Inclusion

Financial exclusion has been a point of discussion for the planners and policy
makers most recently; the emphasis being shifted to ‘inclusive growth’
incorporating those who have missed the ‘bus of development’ and are still abode
on the realms of poverty, even after the massive planned economic development
along more than six decades of independence. The definitions of financial
inclusion or exclusion vary across the geographic regions decided by the
concomitant economic development. This study focuses on financial inclusion
with respect to the poorest of the poor and emphasizing a wider connotation of the
term ‘financial services’ than defining it in a narrow perspective of owning a
savings account with a bank. The definition of several aspects of the term
propounded by several authors and committees and commissions is reviewed here
to arrive at an acceptable working definition.

Report of RBI (2009) Quotes the earliest references to “financial exclusion” seem
to date from the early to mid 1990s. The vast majority of published works
examining financial exclusion, either as the central focus or as a part focus,
emanate from the United Kingdom. Definitions of financial inclusion in literature
tend to vary on dimensions such as ‘breadth’, ‘focus’ and ‘degree’ of exclusion.
The breadth dimension is the broadest of all definitions which defines financial
inclusion as a consequence of social inclusion which prevents the poor and the
disadvantaged from gaining access to the mainstream financial system. The
prominence of the term financial exclusion in the late 1990s parallels the rising
prominence of the concept of social exclusion in social policy; the notion of
“exclusion” is common to both (Chart Link and Associates, 2004). Some of the
definitions of financial inclusion reiterating this view are as follows. Financial
Exclusion refer to situation in which people encounter difficulties accessing and/or
using financial services and products in the mainstream market that are appropriate
to their needs (European Commission, 2008).

36
Leyshon and Thrift (1995) define financial exclusion as “those processes that serve
to prevent certain social groups and individuals from gaining access to the
financial system”.

According to Sinclair (2001), financial exclusion means the inability to access

necessary financial services in an appropriate form. Financial exclusion can be
seen as a consequence of social exclusion. Exclusion can come about as a result of
problems with access, conditions, prices, marketing or self exclusion in response to
negative experiences or perceptions.

Committee on Financial Inclusion defines financial inclusion as delivery of

financial services at an affordable cost to vast sections of disadvantaged and low-
income groups. (GOI, 2008).

Unrestrained access to public goods and services is the sine qua non of an open
and efficient society. This view is reiterated in the definition “the process of
ensuring access to timely and adequate credit and financial services to vulnerable
groups at an affordable cost (Kamath, 2007).

Leeladhar, (2005) says that a s 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 the public policy. In
India the focus of financial inclusion at present is confined to ensuring a bare
minimum access to a savings bank account. The international definitions of
financial inclusion have been viewed in much wider perspective.

According to Sharma, (2008), the ‘focus’ dimension links the other dimensions of
exclusion. This dimension essentially takes care of the potential difficulties faced
by some segments of the population, viz, individuals, households or communities
in accessing mainstream financial services. It is a process that ensures ease of
access, availability and usage of formal financial system for all members of an
economy . These definitions emphasize several dimensions of financial inclusion,
viz., accessibility, suitability, availability and usage of the financial system. These
dimensions together build an inclusive financial system. Another issue that needs

37
to be taken care of is whether to measure access or usage; because in transaction
banking and insurance we can find that people do not use it even if they are having
access to it. Access dimension implies mere access to services while usage
dimension is a broader term requiring examination of aspects like access,
suitability, availability and actual usage.

World Bank , (2005) also distinguishes between those who are ‘formally served’
that is those who have access to financial services from a bank and / or other
formal providers and those who are ‘financially served’ who also include people
who use informal providers. In contrast to the other work described above, the
term ‘financially excluded’ is only used to describe those who have no access at
all. This study considers only the formal sector which includes all legally endorsed
financial service providers for the purpose of measuring financial inclusion. Hence
“financial inclusion” also infers accessibility and usage of financial services from
formal service providers.

The United Nations(UN, 2006) define financially included as the financial sector
that provides ‘access’ to credit for all ‘bankable’ people and firms, to insurance for
all insurable people and firms and to savings and payments services for everyone.
Inclusive finance does not require that everyone who is eligible use each of the
services, but they should be able to choose to use them if desired. The ‘degree’
dimension is the narrowest of all and defines financial exclusion as exclusion from
usage of particular sources of credit and other financial services including
insurance, bill payment services and accessible and appropriate deposit accounts.

World Bank (2005) describes exclusion as a phenomenon where access to key

areas such as transaction banking, savings, credit and insurance. For the purpose of
the study this definition has been accepted as the bench mark. Though all services
including credit, savings and insurance offered by the banks and other financial
institutions are taken as the benchmark, more weightage is given to credit segment.

According to Mor and Ananth, (2007) Financial inclusion may be interpreted as

the ability of every individual to access basic financial services which include

38
savings, loans and insurance in a manner that is reasonably convenient and flexible
in terms of access and design and reliable in the sense that savings are safe and that
insurance claim will be paid with certainty. In India, the focus of the financial
inclusion at present is more or less confined to ensuring a bare minimum access to
a savings bank account without frills to all. However, having a current
account/savings account on its own, cannot be regarded as an accurate indicator of
financial inclusion. [Vallabh and Chathrath, 2006].

Arunachalam R.S, (2008) says that financial inclusion is characterized primarily as

either general access to loans or access to savings accounts. Very few risk
management and vulnerability reducing products are available to small holder
producers. Financial inclusion cannot be restricted merely to opening savings
accounts and/or providing credit for consumption/consumer spending but should
also encompass delivering financial products tailor-made to cope with the
fluctuating earning pattern of the poor.

Rogaly,(1999) defines financial exclusion in the perspective of exclusion from

particular sources of credit and other financial services including insurance, bill
payment services, and accessible and appropriate deposit accounts.

The review of literature suggests that most of the definitions are context specific,
originating from country specific problems related to financial exclusion with
regard to the respective socio economic dimensions which assumes importance in
the public policy perspective.

2.7 Approaches to Measuring Financial Inclusion

The literature on financial inclusion lacks a comprehensive measure that can be

used to indicate the extent of financial inclusion across countries because of
diversity in possible quantifiable indicators and factors inducing inclusion/
exclusion. The degree of financial inclusiveness has been less thought about,
though indicators of depth of banking system, capital markets, and insurance
sector are widely available. Individual indicators such as number of bank accounts
and branches can provide only a partial picture. Macro and micro assessment of

39
financial inclusion indicators provides different angles. While the macro indicators
help policy makers in assessment of status and depth of financial inclusion, the
micro view throws light into the outreach and constraints associated with financial
inclusion. Some of the prevalent approaches of measuring financial inclusion are
reviewed below.

Macro Assessments

Macro indicators of financial inclusion are built up on available financial

monitoring indicators such as number of bank accounts, coverage of population by
bank branches, per capita credit, deposit etc. Alternatively this does not suffice an
indicator explaining access to financial services. Access is not easy to measure,
and empirical evidence linking access to development outcomes has been quite
limited because of lack of data. Existing evidence on the causal relations between
financial development, growth, and poverty is consistent with theory. However,
most of the evidence comes either from highly aggregated indicators that use
financial depth measures instead of access or from micro studies that use financial
or real wealth as proxy for credit constraints (World Bank, 2008). Economic
approach to measuring financial inclusion/exclusion depicts it based on simple
economic concepts using ‘exclusion curve’, which plots the proportion of the
population in a particular income band that consumes a particular financial service
A steep rise in the exclusion curve around a particular income band suggests the
likelihood that there is an income threshold for acquisition of the service, below
which most consumers will be completely unable to afford the service, or below
which the product is inappropriate is termed as income exclusion. Price exclusion
depicts a relatively even rise in ownership of a given service across income bands
which suggest that consumers are able to purchase a service based on their
perception of its value and their willingness to pay, which is only partly influenced
by their income level (Chant and Link Associates, 2004).

The approach to financial inclusion in India encompasses concentrating on vast

majority who are excluded (Thorat, 2007, Sharma, 2008, Subbarao, 2009, RBI,
2009). Financial Inclusion can be monitored in two ways, one; exclusion from

40
payments system, ie not having access to a bank account. The second type of
exclusion is from formal credit markets, requiring the excluded to approach
informal and exploitative markets. Through nationalisation of banks in 1969, it
was envisaged to extend coverage of banks in unbanked areas, thus increasing the
scope of covering larger population. Recently the focus has been concentrated on
providing affordable basic banking services. The macro indicators- encompassing
aggregate data sets have severe limitations. The number of accounts of the
population does not imply access, further there can be multiple accounts for a
single person. Therefore the individual survey data can provide better picture of
the situation amenable for policy decisions. However the macro view of supply
and demand side indicators of financial inclusion/ exclusion is inevitable in
framing policies and implementation of plans to support the development process.

Sarma (2008) proposes an index of financial inclusion (IFI) which takes into
account three dimensions. These are the banking penetration (measured by the
number of bank accounts as a proportion of the total population); availability of
banking services (measured by number of bank branches per 1,000 persons) and
the usage of the banking system, (measured by the volume of credit and deposit as
a proportion of the country’s GDP.

Honohan (2008) uses aggregated data obtained from respective country regulators
and survey data (in cases where available), to build a model. More precisely, using
data on accounts in various financial institutions as a proportion of the population,
and an average account size as a proportion of GDP per capita as regressors, he
estimates a non-linear relationship between these variables and the actual share of
households with a financial account obtained from the survey data. This regression
is then used to generate predicted values where survey data is not available. Based
on this, Honohan (2008) has developed a composite data set to measure financial
services access for 160 countries which is a “synthetic headline indicator” of
access, measuring the percentage of adult population with access to an account
with a financial intermediary. The results show a wide variation in financial access

41
across countries, ranging from 100 percent in Netherlands to five percent in
Tanzania and Nigeria. The measure for India is 48 percent.

Micro Assessments

As indicated earlier, the core/headline indicators of financial inclusion can be

arrived from individual survey data that would help in eliminating data
insufficiency barriers of measurement. While the micro level assessment can
provide a detailed picture; the argument of whether to contend with ‘individual’ or
‘household’ level of exclusion has to be framed out. A study on financial services
provision and prevention of financial exclusion carried out in Europe under the
auspicious of European Commission (EC, 2008) discussed on whether to assess
financial exclusion at individual, family/household level. If the assessment is made
at the individual level, people appear to be financially excluded even though their
partner may make extensive use of financial services. In most countries there is a
legal age limit below which credit facilities cannot be granted. As a consequence
many studies have looked at adults aged 18 or over, although others cover people
from the age of 16 or 15. On the other hand, by assessing access at the family level
(that is the head of household and their partner if they have one) a clearer idea of
the proportion of the population with no ready access is available, even through a
partner, but underestimate the proportion of people at risk of being financially
excluded if they experienced the breakup of their family. It also underestimates the
number of people who are affected. For this reason the United Kingdom
Government, in its monitoring, estimates the number of adults living in family
units without access to banking. Assessing access at the household level (that is
considering all adults living in a household) compounds these problems still
further as there is much less stability of households than of family units. Moreover,
household level analysis does not provide estimates of the financial exclusion
faced by young adults still living at home.

Suran and Narayana,(2009) used the financial diary approach with a view to
understand and map the financial flows of poor families in fishing hamlets. This
approach verifies income sources of selected families with a view to understand

42
income and expenditure pattern for a period of 50 days during trawl ban period
(monsoon resource conservation measure enacted in the coastal waters of Kerala
usually for a period of 45 days during June to August) and consequent incidence of
debt, demand pattern and evaluation of sources of finance.

Collins et al. (2009) study more than 250 financial diaries of low income
individuals in Bangladesh, India and South Africa. Their findings show that each
household uses at least four types of informal financial instruments (such as
interest free loans and informal savings clubs) in a year, with the average being
just under ten. The cash turnover through these instruments (i.e. the gross amounts
routed through them) was large (77 percent to 300 percent), relative to the net
income of the households. This suggests that low income individuals do need
access to financial services, and the existence of barriers that prevent their use of
formal sector services .

Kempson,(2006) opines that Low and irregular income is often the primary reason
that contributes to financial exclusion on both supply and demand sides. The
reasoning is that it leads to lack of availability of suitable financial products, as
well as lack of motivation to open accounts due to inability of the individuals to
save. Studies in the UK context have also found that the lowest income group is
twice as likely to not be accessing financial services

Financial Service Supply Assessments

The financial inclusion studies can be classified in a mixed perspective of macro

and micro studies, viewing from the angle of supply and demand of institutional
finance. The institutional supply of credit to poor has been researched both at
macro and micro levels. The macroeconomic perspective analyses country level
experiences in routing finances to poor while the micro angle scrutinises institution
level performance in credit delivery. Macro economic variables to capture
geographic and demographic pattern of banking system includes number of
branches and ATMs relative to population and area and actual use of deposit and

43
credit services (number of loan/deposit accounts relative to population and average
loan and deposit size relative to GDP per capita) etc.

Beck et al, (2005), In the analysis of cross country outreach variations in 99

countries using correlation and regression found that larger economies enjoy larger
levels of outreach due to scale economies in banking service provision and the
availability of better communication and transportation facilities Better governance
and a more effective system of credit information sharing are positively correlated
with outreach. Cross-country evidence suggests a positive relationship between
financial intermediary development and poverty alleviation.

Arora and Leach, (2005) present a comparative analysis of Indian and South
African financial scenario, being countries which have pursued different political
paths. Where India’s stateled planning heavily emphasised reaching out to the rural
poor and other marginalised sections of the population, South Africa excluded
blacks from economic, political and social participation. The South African case
emphasizes the market-led approach in financial inclusion of the unbanked. The
country’s achievement in this sector is commendable with 167 per cent of
domestic credit (as a percentage of GDP) in 2001, as against 55 per cent by India,
while that of low and middle-income countries as a whole stood at 69 per cent and
for high income countries, at 173 per cent. However, almost half of the 44.8
million population remains on the periphery of the economy and is disconnected
from financial services. Of the 9.4 million who are unbanked, 88 per cent are
black, 9 per cent coloured, 1 per cent Asians and one per cent white. A major
obstacle in accessing financial services is the cost of providing them on a small
scale. In addition to banking costs, for many clients, there is an additional cost of
transport to a point of access and the opportunity costs associated with travel time.
So cost reduction exercise would need to include an increase in points of
interaction with the banking system (including branches, points of sale, or through
use of alternative technology such as cell phones).

Anjanikumar et al, (2007), analysed the performance of rural credit and factors
affecting the choice of credit sources. The study was based on the Debt and

44
Investment Survey of NSSO, conducted in 48th round and 59th round. They found
that performance of rural credit delivery has improved since the indicator of
dependence of non institutional sources of finance showed considerable reduction.
The share of non institutional sources of rural credit has declined from 91 per cent
in 1951 to 44 per cent in 1991-92 and a dramatic achievement was noticed in the
increase of share of institutional sources of rural credit from less than 9% in 1951
to 56% in 1991-92. Later on this trend seemed to stagnate and the role of
exploitative sources persisted. The share of institutional financing fell in the states
like Bihar, Chandigarh, Tamil Nadu and most of the North Eastern States. Rural
households continued to depend upon informal sources such as money lenders,
traders, landlords etc. The study found that interest charged by informal
moneylenders was exploitative and therefore stable, reliable and reasonable credit
delivery system is a necessity to prevent the exploitation of rural households by
informal moneylenders.

The micro angle of supply side financing looks into the institutional perspectives,
particularly the problems related to financing and the underlying factors. Financial
services inclusion research (supply side) carried out by SEEDA (South East
England Development Agency) to assess the nature and extent of Community
Development Finance Institutions (CDFI) including Credit Unions in the region
and sustainability of finances assessed gaps and sustainability of CDFI’s. The
study made use of extensive secondary information in addition to primary
information from stakeholders. The findings of the study emphasized that Credit
Unions and CDFIs in the South East have potential for financial inclusion in the
region lest their scale of challenges and issues are resolved (SEEDA, 2004).

Vallabh and Chathrath (2006) in their study say that the rural population in India is
subjected to great deal of indebtedness and is prone to exploitation in the credit
market. Rural households need credit for investing in agriculture and smoothening
out seasonal fluctuations in earnings. Since cash flows and savings in rural areas
are not sizeable to fit into the consumption needs like education, clothing and
household necessities including non-food expenses, they need to rely upon credit .

45
According to Thorat (2007) The financially excluded sections in India largely
comprise marginal farmers, landless labourers, oral lessees, self employed and
unorganised sector enterprises, urban slum dwellers, migrants, ethnic minorities
and socially excluded groups, senior citizens and women. While there are pockets
of large excluded population in all parts of the country, the North East, Eastern and
Central regions contain most of the financially excluded population .

Arunachalam et al,( 2008) in his study conducted by the Microfinance Consulting

Group in the auspicious of FAO and the UNTRS to analyse provision of financial
services to low-income fisherfolk, observed that a combination of variability in
catch, technology upgrades, over capitalisation, rising costs, aggressive fishing,
over crowding, etc. have made economics of fishing and fishing related
occupations uncertain. The investment and operational costs have gone up
considerably without any drastic increase in output. This has resulted in fishermen
getting increasingly dependent on loans to finance their expenditures and also
using loans as coping mechanisms. Expenditures take the form of capital
expenditures: which include purchase of boats, launches, nets and engines etc.

According to the rural credit survey committee report (2004) Credit to rural area,
particularly, the agricultural sector has always been debatable topic, in terms of
issues including lesser accessibility to institutional credit by farmers, mounting
non performing assets to the lender on account of non repayment of the debt
owing to different reasons including failure of crop. Some major milestones in
rural credit are the acceptance of Rural Credit Survey Committee Report (1954),
nationalisation of commercial banks, establishment of RRBs and establishment of
NABARD. Several simultaneous measures like establishment of the lead bank
scheme, direct lending for the priority sectors, differential rate of interest scheme,
the service area approach, the SHG bank linkage scheme, the most recent Kissan
credit card scheme.

Anjanikumar et al( 2007) probes into the underlying patterns in rural credit by
using the NSSO debt and investment estimates. The study found that the access
and distribution of rural credit is skewed in favour of better and endowed regions

46
and within the same region is in favour of better off households. The persistence of
moneylenders remained a matter of concern because of exploitative interest rates
and their undesirable financial deepening. Almost similar finding was reported by
Sharma(2006). Using the NSSO estimates he established that cultivation was the
major source of more than one half of the indebted farmer households and that
more than 70% of them were marginal farmers.

A research paper by Aravind, (2007), outlined and examined the hypothesis that
decline in the ratio of investment to production credit over time will lead to
reduction in output per unit of crop loan, so that there is positive association
between the two. Its verification and confirmation has provided significant policy
implications in the sense that it had theoretically and empirically demonstrated the
weakness of the current piecemeal approach for improving it by determining the
optimal range within which crop to term loan of scheduled commercial banks
should vary. The ideal range estimated is that investment credit should be around
two third to three fourth of the production credit.

Anbarasan and Fernandez, (1986) conducted a study of 4 fishing villages in

tamilnadu and found that Fisherfolk of these villages described credit as their most
urgent need. The men needed credit for buying nets; the women for fish marketing.
Consequently the project organized loans from a nationalised bank in
Adirampattinam for both fisherwomen and fishermen. In addition, loans for
fisherwomen were also organised by the Fisherwomen Extension Service of the
Tamil Nadu Department of Fisheries, through a cooperative society. Later in 1982,
two studies were carried out on the impact of the loans given to the fishermen and
the fisherwomen. It was found that around 67% of the debts normally incurred by
fishermen are for purchase of nets. The bank provided loans of Rs. 1000 each to
100 fishermen who belonged to nine groups, to be repaid in two years at 4%
interest. Only 25% of the borrowers increased their fish catches and earnings; 55%
secured a marginal increase while 25% recorded no increase at all. The group
approach to credit did influence loan repayment. After 16 months of the stipulated
24-month repayment period, 48% of the repayments due had been made.

47
2.8 Nature and Causes of Financial Exclusion

According to Subbarao, (2009), The reasons for financial inclusion are many. This
is promoted by a confluence of multiple barriers including constraints to access,
physical and social infrastructure, understanding and knowledge, newer
technology, support and confidence among others These barriers seem to be not
constructed deliberately but have been the result of structure of financial service
providers and socio economic milieu of those being excluded poor.

Fernando, (2007) says that a significant proportion of people excluded from the
formal financial system across countries find access to informal markets driven by
a host of factors such as the stage of financial sector development, perceptions of
dominant financial institutions regarding the business case for providing financial
services for the excluded, financial policy and regulatory system and the
institutional composition of the financial system .

A study on financial inclusion in Great Britain (www.financialinclusion

taskforce.org.uk, 2008) identified that the elements of financial exclusion relate to
lack of ownership, or lack of full transactional use of a bank account. This can be
divided into two groups of interest: the unbanked (those without any form of
transactional bank account) and the under banked (those who have a bank account
but do not use it regularly to manage their money), these two groups in
combination may be termed as marginally banked. Other factors having a bearing
on financial inclusion includes proximity and access to services, user fee of ATMs,
banking habits among the population, payment options to marginally banked
households, security concerns, access to advice, credit/borrowings and savings.

Elderly People European commission,( 2008) found that supply side factors that
demote financial inclusion include refusal from banks to open bank accounts for
certain groups of people with poor credit history and unstable patterns of
employment who fail in the credit scoring. On demand side people are deterred
from accessing and using transaction banking for a range of psychological and
cultural reasons like ‘cash only generation’.

48
Fernando (2007) identified that the root cause of supply-side constraints is the
conventional view of potential market consisting of poor and low-income people.
Two interrelated ideas dominate the conventional view. First is that given low
income levels and lagging social development, there is little profit potential in the
low end of the financial markets; hence, the conclusion that market-based solutions
cannot lead to improved financial services for low-income people and that the
private sector has no significant role in this market segment. Second is that
because this market consists of low-income people, it must be served through
government programs and programs of charitable institutions including social
mission-oriented nongovernment organizations. The incompatibility of services
offered by the suppliers with the product service requirements of the poor has
aggravated the accessed problem.

Financial exclusion is an issue in the developed countries as well, although the

proportion of population excluded is much smaller. A comprehensive study by the
Financial Services Authority (FSA), UK found that 7 per cent of the households
lack access to any financial products at all [FSA 2000]. A further 20 per cent are
on the margins of financial services. In addition to exclusion caused by physical
distance, five other forms of exclusion were identified by this study, viz, access
exclusion, condition exclusion, price exclusion, marketing exclusion and self
exclusion.There are a variety of factors imposing financial exclusion. For example
in remote, hilly and sparsely populated areas with poor infrastructure, physical
access itself acts as a deterrent. From the demand side, lack of awareness, low
incomes/assets, social exclusion, illiteracy act as barriers.

Table 2.1 Types of Financial Exclusion

Form of Source of Access Restriction

Exclusion
Access Process of risk assessment
exclusion

49
 Condition Conditions attached to financial
exclusion products which are inappropriate for the
needs of some people
Price exclusion Pricing of financial products that make
them unaffordable to some

Marketing Targeted marketing and sales

exclusion

Self-exclusion Anticipation by some of refusal of

application
Source: FSA (2000).

According to the report of RBI (2005) From the demand side, there are number of
reasons for the rural poor remaining excluded from the formal banking sector, such
as: (a) high transaction costs at the client level due to expenses such as travel costs,
wage losses, incidental expenses, (b) documentation, (c) lack of awareness, (d)
lack of social capital, (e) non availability of ideal products, (f) very small volumes
/ size of transactions which are not encouraged by formal banking institutions, (g)
hassles related to documentation and procedures in the formal system, (h) easy
availability of timely and doorstep services from money lenders/informal sources
and (i) prior experience of rejection by/indifference of the formal banking system.

Chaudhari, P C, 2007 analysed type of financial inclusion existing within the poor
and gave insights into the underlying roots causing exclusion. Financial inclusion
exists in many ways like gender exclusion, geographical exclusion, exclusion of
the landless etc. While exclusion has many reasons of its existence, a rural resident
is subjected to exclusion depending on the possession of land and not personal
exclusion.

Anjanikumar et al,(2007), in their study applied the multinomial logit model to

identify the factors which determine the choice of credit outlet using the data from
NSSO, Debt and Investment Survey, 48th round and 59th round. The effect of age
on probability of borrowing was significant and positive from institutional sources
and negative from non institutional sources. It was expected because with age,
people mature and hence avoid going for borrowing from non-institutional

50
sources. The effect of gender though was positive for both cases, it was more so
for getting loans from institutional sources. The male headed households depicted
higher possibilities of getting loans from the institutional sources. Larger farm size
enhances the probability of getting the loan from a formal source with an added
possibility of repayment of credit. It was also revealed that the people who
belonged to the weaker section were found to be having lesser probability of
access to institutional credit compared to the general castes. Educational level also
had positive correlation with access to institutional sources of credit.

Thorat (2007) discusses supply side factors responsible for financial exclusion
saying that from the supply side, distance from branch, branch timings,
cumbersome documentation and procedures, unsuitable products, language, staff
attitudes are common reasons for exclusion. All these result in higher transaction
cost apart from procedural hassles. On the other hand, the ease of availability of
informal credit sources makes it popular even when it is costlier. The requirements
of independent documentary proof of identity and address can be a very important
barrier in having a bank account especially for migrants and slum dwellers.

The report of RBI (2005), Khan Committee identifies several reasons for the
exclusion of large numbers of the rural population from the formal banking sector
(a) persons are unbankable in the evaluation/perception of bankers, (b) the loan
amount is too small to invite attention of the bankers, (c) the person is bankable on
a credit appraisal approach but distances are too long for servicing and supporting
the accounts and expanding branch network is not feasible and viable, (d) high
transaction costs particularly in dealing with a large number of small accounts, (e)
lack of collateral security, (f) inability to evaluate and monitor cash flow cycles
and repayment capacities due to information asymmetry, lack of data base and
absence of credit history of people with small means, (g) human resources related
constraints both in terms of inadequacy of manpower and lack of proper
orientation/expertise, (h) adverse security situation prevailing in some parts of
rural India, (i) lack of banking habits and credit culture, (j) information-shadow

51
geographical areas, and (k) inadequacy of extension services which is crucial to
improve the production efficiency of the farmers leading to better loan repayments.

Arunachalam et al,( 2008) says Sector specific imbalances are common in

institutional financing and often agriculture bears the grunt in terms of
uncertainness associated with earning pattern. The case of fishery is much more
pathetic, being perceived as an extremely risky sector among
bankers/suppliers/insurance companies. There is lack of sufficient specialized staff
with requisite fisheries background in these suppliers and this makes the task of
investment even more difficult .

Chaudhari and Gupta, (1996) argue that the policy of providing cheap credit
through the formal sector can generate adverse ‘composition effects' which worsen
the terms of credit and the availability of loans in the informal sector. Reportedly
an informal nexus already exists between the formal and informal credit suppliers.
The market for informal credit is created by the delay in disbursement of formal
credit. The delay is controlled by the official of the formal credit agency, and he is
bribed by the farmer to reduce the delay. The official and the moneylender play a
non-cooperative game in choosing the bribing rate and the informal interest rate,
respectively. The informal sector interest rate and the effective formal sector
interest rate (incorporating the bribe) are equal in equilibrium.

Crosson, (1975), Bell, (1990) and Garg and Pandey,( 2009) discuss the need for an
innovative redesign of financial system that legitimately works for the poor. In
order to make the money work for the poor a comprehensive financial system
based on the bank moneylender linkages is required. Without a full integration of
traditional and contemporary financial innovations any attempt to expand the
formal financial system in India is likely to be of limited utility to the poor .

Andersen and Moller,(2006) studied the strategic interaction between informal and
formal lenders in undeveloped credit markets. In a model with adverse selection,
loan seniority, market power, and differences in the cost of lending, it is shown
that under general conditions a co-funding equilibrium will be a Nash outcome.

52
Authors demonstrate that a collateral requirement in connection with formal loans
always generates a new co-funding equilibrium in which both lenders earn higher
profits. It is a common observation in many developing countries that enterprises
are active borrowers in both formal and informal credit markets.

2.9 Microfinance and Financial Inclusion

Yaron,( 1994);Christen et al, (1995) say that despite the inability of the formal
financial system to provide financial services to the poor, microfinance revolution
has helped poor to unfold the “under served” status, contributing to economic and
social empowerment of poor particularly women .

According to Dasgupta, (2005) Micro finance represents something more than

micro credit. It is a financial service of small quantity provided by financial
institutions to the poor. These financial services may include savings, credit,
insurance, leasing, money transfer, equity transaction etc that is any type of
financial service provided to customers to meet their normal financial needs, life
cycle and economic opportunity and emergency with the only qualification that (i)
the transaction value is small (ii) the customers are poor. Micro credit thus
becomes distinct from other regular credit where not only the credit amount is
small and the clientele is poor, but also the credit is provide with collateral
substitute instead of traditional collateral and non financial services for increasing
the productivity of credit.

RBI, 2005 (Khan Committee) suggested that micro finance is expected to be

substantially beneficial to both the demand and supply sides. The rural customers
shall benefit by increased access to composite financial services in a relatively
hassle free manner, inclusion of those in remote and resource scarce regions/ areas
into formal system, significant reduction in borrower level transaction costs in
view of doorstep/near doorstep availability of services, and better understanding of
their needs by empathetic functionaries of outreach entities engaged by banks. The
banks shall benefit by a substantially increased client base in rural areas large
numbers of which are upwardly mobile. The increased outreach will also help

53
banks to include a large number of excluded farmers and others in the unorganised
sector into the banking fold. Better identification of clients and the possible
diversification of activities shall spread risks. These benefits can be achieved at
much lower costs than that is feasible under the conventional systems and
procedures. The arrangements will also provide an opportunity for a large number
of socially proactive organizations and individuals to work in tandem with
resource rich financial sector. This is likely to lead to a financial inclusion oriented
growth model that aims at achieving socioeconomic empowerment of the less
advantaged sections which will also provide an ideal platform for the microfinance
institutions to grow at a faster pace.

Kapoor( 2007) debates whether the poor can save or not has become obsolete. In
the new micro-financial service area, the large scale success of self help group
(SHG) methodology has proved the ability of poor to save. Accordingly there are
significant opportunities to broaden and deepen the range of financial services
(credit, savings, insurance and money transfer.

Rutherford (2000) conceptualizes the importance of financial services, he says

savings allow rural people to reallocate expenditure across time using three
different approaches namely ‘saving up’, saving down’ and ‘saving through’.
Tripathi and Sharma, (2007) evaluated the impact of micro credit through SHG
Bank Linkage on the financial behaviour of the rural poor in Raibareli district of
Uttarpradesh. The study showed that there is improvement in saving and credit
usage by SHG members. A gradual shift was observed with respect usage of loans,
ie shift from consumption to production loans. Interest burden of the borrowers
were considerably reduced with a notable increase in the income and asset base of
SHG members.

Rangappa et.al, (2008) conducted a study among 240 respondents in four villages
in Davangere district of Karnataka State to assess the relative impact of SHG bank
linkage programme on financial inclusion. The samples included respondents from
landless labourers, marginal farmers, small, medium and large farmers.
Households having association with SHG and ones without any association were

54
assessed simultaneously for serving as a comparative platform. Financial inclusion
index, which measures the degree of financial inclusion, was calculated by giving
appropriate weights to the selected financial services. Results of this study clearly
show that the SHG-Bank linkage programme has increased the flow of
institutional credit to landless and marginal farm households and discouraged non-
institutional borrowing through thrift creation. Based on the index value,
households were classified into the households with low, medium and high degree
of financial inclusion. Percentage of household which reached the medium and
high degree of financial inclusion, increased with the size of the land holding. The
percentage of households, which reached the higher degree of financial inclusion,
is relatively more among SHG member households compared to non-member
households. The chi-square (χ2) results lead to the conclusion that the SHG-Bank
linkage programme increased the degree of financial inclusion among landless,
marginal and small farm size category. SHG bank linkage promotes financial
inclusion and resultant lesser dependence on the moneylenders. This has been
promoted by the banks since their priority sector targets would be served by less
riskier loans (as the SHG linked loans are considered more risk free due to
borrower’s prompt repayment).

Rangarajan, (1996) says the main advantage to the banks of their links with the
SHGs is the externalisation of a part of the work items of the credit cycle, viz,
assessment of credit needs, appraisal, disbursal supervision and repayment,
reduction in the formal paper work involved and a consequent reduction in the
transaction costs .

Nagayya and Rao, (2009) suggest that Banks need to think in terms of designing
products in such a manner that they are able to cater to the needs of the bottom of
the pyramid customers by introducing flexibility in working hours, documentation,
mode of interaction and transactions. They need to explore ways to utilize local
knowledge and information for effective loan monitoring and risk mitigation.

Narayanaswamy etal, (2007), in a study among SGSY beneficiaries revealed that

the groups were adviced to establish link with the local banks which benefits them

55
to have access to the formal banking system, to safe keep savings and to assure
credit support in long run.

Vallabh and Chathrath, (2006) opined that appointing MFIs as ‘banking

correspondents’ could help in reducing the costs, that it is possible to delegate
some of the routine function of the bank’s to MFIs. The Self Help Groups-bank
linkage has several benefits like lower transaction costs, negligible NPA’s and
generation of goodwill among the rural populace.

Das and Nanda, (2008) say that Credit programs that target poor women are likely
to produce substantial improvements in women's social and economic status.

Banerjee, (2009) in a study assessing the economic impact of SHG in the district
of North 24 Parganas of West Bengal observed that income generated through
group activities has improved the average income of group members than that of
non members.

Amin et al, (1998) examined the hypothesis that participation in credit related
activities by NGO credit members leads to greater empowerment of credit
members compared to non members. The study found that NGO credit members
had significantly higher scores on all three indices of female empowerment: inter-
spouse consultation, autonomy, and authority. This was reiterated in the
observations of Nirmala et al, (2004) in their study of poverty alleviation in
Pondicherry through SHG who found that SHGs benefited the participants with
increased social participation and organized action .

Basu and Srivasthava, (2004) examined the efficacy of SHG Bank linkage,
facilitated by linkage with commercial banks, NGO’s and informal local groups,
found that its remarkable growth in effectively targeting poorer segments to reduce
vulnerability is attributed to the good policy and skillful and committed leadership
in conjunction with a facilitating government policy and legal framework. Authors
strongly recommended microfinance as an alternate strategy for scaling up of
access to finance to poor ensuring sustainability. Amin et al, (2003) found that

56
 while microcredit is successful at reaching the poor, it is less successful at reaching
the group most prone to destitution, the vulnerable poor.

Coleman, (2006), evaluated the outreach and impact of two microfinance programs
in Thailand, controlling for endogenous self-selection and program placement.
Results indicate that the wealthier villagers are significantly more likely to
participate than the poor and they often become program committee members and
borrow substantially more than rank-and-file members. But it has also been
observed that the focus has been on delivering credit with least importance to other
financial services sub serving the term micro finance to narrower micro credit .

3. Microfinance and Urban Poverty : The case of Kolkata

3.1 The demographic profile of the city

57
Kolkata is in the capital of the state West Bengal, which is situated in the eastern part
of the country. West Bengal is the 4th most populous state of India with population of
9.13 crores, occupying an area of 89000 sqkm.

Fig 3.1 Geographical Location of Kolkata

The state had decadal population growth of 14%, with rural population growing 7.7%
and urban population growing at 30%. The population density is 1028, much higher
when compared to national average of 382.The state sex ratio stands at 950:1000.
Literacy rate of state is 76%, marginally above national average of 74%. Most of West
Bengal districts are economically backward, with bulk of secondary and tertiary
activities in Kolkata and adjoining districts. As per the report published by the Census
of India on March 31, 2011, the state of West Bengal has got a total population of
91,347,736, and it’s approximately 7.55 % of the country's total population. In the city

58
the density is higher. Around 8000 persons live within a square kilometre in the
Kolkata Metropolitan Area.

Entire Kolkata city is urban with population of 44.97 lakhs. Sex ratio is 908:1000, and
Literacy is 86%. The population has seen a decline of 1.67% during the decade. The
decline needs to be seen in conjunction with urban population explosion in adjoining
districts of Howrah and South 24 Pargana. Howrah urban population has witnessed
decadal growth of 43%, and South 24 Pargana urban population has witnessed decadal
growth of 92%. (Kolkata Municipal Council )

3.2 Slums of Kolkata

The population pressure in the state inevitably puts more pressure on its basic
infrastructure. The extremely high population density obviously affects per capita
resource availability. The slums are one of the first places to get the feel of lack of
facilities. Pressure of population and high price rise make the lives of people in the
slums of Kolkata very difficult. There are approximately 7,000 notified and un-
notified slums in and around Kolkata.

The slums can be divided into 2 board groups, given below: -

1. The pre-independence (1690-1947) unplanned development of settlements to

provide accommodation to the migrant labor force which arrived from different parts
of West Bengal and India to serve the new class of rich people (traders turned
Zamindars) or, to work in the new industries.

2. The planned and unplanned settlements to provide place to post independence

(1947- ) forced migration of people towards Kolkata, for various reasons: refugees
from caste and gender based oppression, communal riots, India-Pakistan partition, war
in neighbouring countries , and lack of planned growth in other parts of West Bengal,
eastern India and, in the neighbouring countries

Accrding to Census 2011, the households of Urban Kolkata

59
  There are 9.64 lakh households in Kolkata. Out of which 66% is good, 31% is
livable and 3% is dilapidated.

 56% households live in their own homes, 40% households live in rented homes
and rest 4% live in other forms of home.

 72% have water source in their homes, 22% have water source in nearby area
and rest 6% of the household have to travel far off for water source.

 85% of household have access to treated tap water, 3.2% tap water from
untreated source, 4.2% hand pump, 5.7% tubewell and rest 1.9% use other
sources of water.

 96% of households have electricity. Other sources of lighting used are 1.7%
kerosene, 1.5% is solar energy.

 94.9% households have latrine facility within their homes. Out of which 43.3%
of household have piped latrine facility within their homes, 45% use septic
tank, and 11.7% have other forms of latrine facility within their house
premises. 5.1% households have no latrine within their household. Out of
which 4.4% use public latrine and 7% openly defecate.

 84% of households use banking services

 85% have television, 14% have computer with internet, 83% of the houses have
mobile phones.

Fig 3.2 Expenditure of All India Slums and Kolkata Slums

60
 60

50

40

30

20
All India Slums
10
Kolkata Slums
0

The urban slum dwellers of Kolkata spend around 52.81%on food items, significantly
higher than All India average of 46.77% of urban slums. On education Kolkata slums
spend slightly higher than All India average of 6.12%. Spending on electricity charges
is very high for Kolkata slums at 7.02% as against All India average of 4.45%.
Kolkata slums do not spend on household requisites other than fulfilling their
minimum basic requirements. Rest other expenses are in same proportion than the All
India average.

3.3 The Urban poor of Kolkata

Who can be called as Urban poor in Kolkata? This is an important question because
the government defined Below Poverty List (BPL) doesn’t accord with the poor in
reality. There is no consensus on the definition of urban poverty. The slum population
has been around 30% of the total population in Kolkata even by modest official
figures (GOWB, 2004) while their concentration is evident in central areas. In one
estimate about 1.7 million people out of the total of 3.3 million were found living in
338,000 slum rooms within Kolkata Municipal Corporation (KMC) area (Kundu,
2004). Most of the urban poor in Kolkata live in margin both statistically and
metaphorically. Overall, about half of the population lived in very poor quality homes
with very low levels of or, no urban services. Statistically, most of the slum dwellers

61
live in spaces less than 200 ft2 whereas non- slum dwellers enjoy spaces over 500 ft2
with 2-3 bedrooms of living space (Dutt & Halder, 2007). In the study it was found
that two broad criteria tend to define urban poor

1. The urban poor are the people who have no property in the city: first generation of
migrant laborers / internally displaced people / refugees from other places or
countries.

2. The urban poor are the people, who earn in-and-around Rs. 1,000 per month

The income earned by a majority of the urban poor by the evening is just enough to
buy a meal for the whole family, no wonder they live with the philosophy of earning
for day and living for a day. In many cases all the members of the family are engaged
in earning for the family; if the children are at home and not earning for the family
then they are looking after their smaller siblings so that both the parents can go out of
the house to earn for the family. Because of this philosophy of earn a day and live for
a day the tendency to save is very rare as whatever could have been saved is either
spent by the men of the house on alcohol or on betting.

3.3.1 Urbanization, Poverty and deprivation

The National Commission on Urbanisation

"If job opportunities are productive and lead to gainful employment,

urbanization becomes a catalyst for economic development. If, however,
urbanization is merely a process of transfer of rural poverty to an urban
environment, it results in [the] concentration of misery".

Urbanization is a global phenomenon and with the trend towards increasing

urbanization, India's major metros are expanding and growing in boundaries. No
doubt Indian metro cities are the most crowded places to live in the world. These large
cities also contain some of the most congested slums and under-resourced squatter
colonies in the world, with abysmal living conditions. At the same time, it is certainly
the case that urbanization in the Indian context has been driven by economic growth

62
and the attraction of year-round income earning opportunities, in contrast with the
more variable, seasonal cash flows typical of agricultural areas.

Kolkata's urban context cannot be explained without mentioning the extreme poverty
that besieges the city. West Bengal shares 8.2% of the national poverty while its
population share is 7.8% and much of the poverty is concentrated in Kolkata. The city
enjoyed the geopolitical significance throughout early 20th Century as the capital of
India and British colonial headquarter in the pre war era.

Since the country's independence in 1947, Kolkata's importance as an international

port city started declining and its economy became more internally focused. During
partition, it lost part of its hinterland on which its trade had depended and received a
huge number of Hindu refugees both in 1947 and subsequently in 1971, when modern
day Bangladesh was born. In 1981, the Government of West Bengal estimated the
total number of persons displaced from East Bengal to the state to be around eight
million or one-sixth of the total population of the state (Chatterjee, 1990).

Moreover, Kolkata being the only urban centre in the Eastern India, rural migrants
from Orissa, Bihar continued to move to Kolkata to escape from their insecure rural
livelihoods. The onslaught of migration continued despite attempts to disperse
industrialization to other parts of the state and radically pro-poor land reform policies
in the state. The rise in urban poverty thus became the hallmark of the city fuelled by
continuous rise in population and failure in the part of city and the public agencies to
match the huge demand for housing and infrastructure. Over the years people attracted
by jobs lived in slums, shanties and bustees, their livelihood supported by the city's
unregulated informal economic sector .

The level of housing poverty not only impacts the labour power or work capacity but
also affects their health, earning potential and host of other life conditions including
the level of political participation. Serious inequities in housing consumption coupled
with unequal urban services provision have further accentuated urban poverty in
Kolkata to a scale that appears beyond redemption. Many neighbourhoods and bustees
in central Kolkata have a density of 78,355 persons/km2 and are characterized by

63
severe infrastructure pressure and shortage of clean drinking water supply. Though the
dominant principle of the KMDA is higher supply volumes to areas with higher
population densities and sewerage facilities, in reality, water supply in bustees, slums
and shanty areas is only 50-100 per capita per day (lpcd) while the Bureau of Indian
Standards norm is 180 lpcd for Kolkata Municipal Corporation (KMC) areas (Basu &
Main, 2001). Lower provision of water supply is also an indication of lower hygiene
and sanitary conditions affecting general wellbeing of the citizens. Many urban
dwellers not only lack access to clean water, but they also experience poor or no
systems of sanitation or sewage. More than 90% of these people do not have access to
their own toilet and where available, more than 38 persons share the same toilet and
88 people use the single tap (Bandyopadhyay, 2001).

The country continues to experience rising Gini coefficient, a measure of income

inequality. Nationally in 2002, the income gain of the richest 10% of the population
was four times higher than the gain of the poorest 10%.The city follows the national
trend of a growing income gap. Over 80% people in Kolkata earn under INR5000
(US$107) comprising LIG and EWS. The city's economic poverty is concentrated in
poor neighbourhoods where most of the population work in the informal sector which
is unregulated and characterized by low wages, exploitation and overall uncertainties.
Further, the informal sector due to lack of official recognition is excluded from any
form of formal finance under the deregulated finance regime.

3.4 Financial Inclusion status of Kolkata

Banking penetration and availability of banking services are the most important
indicators of financial inclusion of a state. Ideally, inclusive financial system is such
that reaches widely amongst its users. The size of the banked population, i.e, number
of adult population having a bank account is a measure of the banking penetration of
the system. Availability of services can be indicated by the number of bank outlets
(per 1000 population) and/or by the number of ATM per 1000 people, or the number
of bank employees per customer. In line with the trend as set at the national and
international level, West Bengal is also not laggard in its banking outreach activity.

64
The number of accounts per branch in the state has increased from 5,046 in 1980-81 to
9,866 in 2009-10 .

Fig 3.3 Growth in outreach of Scheduled commercial banks in Kolkata

12,000

10,000
10,252 10,348
10,064

8,000
NAPB
7,163
6,000
NAP100P

4,000 3,168 3,289 3,345 NPPB

3,098

2,000
226 312 334 301

0
1980-81 1990-91 2000-01 2009-2010

NAPB – No. of accounts per branch

NAP100P – No. of Accounts per 100 Adult person

NPPB -- No. of Adult Population per branch

However, out of 18 districts in the State only 5 districts are above the average and
Kolkata is one of them in which the number of accounts have increased from 7163 to
10,064.The number of accounts per 100 adult persons has also increased from 40 to 77
in the state of west Bengal whereas it has increased from 226 to 301 for Kolkata
during the period. Here also only 5 districts are above the average.

65
 Fig 3.4 Pattern of Deposits and Loans of KOLKATA

3,50,000

3,00,000

2,50,000

2,00,000
Per Capita Deposit
1,50,000 Per Capita Credit
1,00,000

50,000

0
1980-81 1990-91 2000-01 2009-2010

Fig 3.5 Pattern of Credit Deposit Ratio of KOLKATA

Credit/Deposit Ratio
100

80

60

40 C/D Ratio

20

0
1980-81 1990-91 2000-01 2009-2010

On the other hand, although per capita deposit and credit have increased during the
three decades period, CD ratio remained very low in almost all the districts except
Kolkata. As per the directives of the Government and Reserve Bank of India (RBI),
several steps have been taken in the State in order to increase financial inclusion. The
State has already identified all the districts for 100 per cent financial inclusion, which
means every household should have got at least one bank account. Some of the
important initiatives taken so far in the State are introduction of “no frills account”,
introduction of Kisan Credit Card (KCC) Scheme, introduction of General Credit Card
(GCC) Scheme, introduction of SHG-Bank Linkage Programme, introduction of
Business Facilitator (BF) and Business Correspondent (BC) model, etc.

66
3.5 Profile of the Respondents

Microfinance Institutions prefer to target women as their customers as they are good
at saving money and they do not indulge in any kind of intoxicants . Women are also
more responsibly motivated to earn and save for the welfare of their children. They
are pro active in forming self help groups and adhere to the requirements sincerely.
The study conducted is based on data of a household but majority of the respondents
were female in the most productive age group of 30 -45 years.(Fig 3.6)

Fig 3.6 Gender and age profile of respondents

Gender Profile Age Profile

11%
18%
Below 30
28% 30-45
Male 31%
46-60
Female
72% 40% Above 60

Fig 3.7 Education and Expenditure class of respondents

Illiterate
Expenditure class Educational status
1%
Primary
16% 18% 9%
Below 2000 Below
27%
13% Secondary
2001- 3500
Secondary
25% 3501- 5000

41% Above 5000 Above

50% Secondary

Instead of estimating monthly income (which is unpredictable due to seasonality of

income) of households, monthly expenditure for household consumption and
67
necessities were used as proxy variable. About 41 percent belonged to the Rs 2000 to
3500 category. The educational status of the respondents was found to be very poor
with 27 percent illiterate and only 9 percent completing secondary education (Fig 3.7)

As the Objective of the study necessitates an enquiry of both members of

microfinance and non members for a comparative analysis, the sample study
constituted a mix of both. The Non members are those who have never been
associated with any self help group or have never availed any microfinance loan. The
Microfinance members belong to the three models of microfinance namely
Microfinance Institutions, SBLP and SHG models and are at least in their second year
of membership.

Fig 3.8 Membership Profile of the Respondents

34% Non Members

SHG
54% SBLP
MFI
5%
7%

A large number of respondents 54 percent are members of MFI because in urban areas
MFI’s are much popular than the other two models of microfinance namely the self
help groups SHG’s and the SHG with bank linkage i.e the SBLP .The customers of
MFI are popularly referred to as members(Fig 3.8)

68
Fig 3.9 Financial Inclusion status of the respondents

11% Financially excluded

17%

Low Financial inclusion

45%
27% Medium Financial Inclusion

High Financial Inclusion

Seventeen percent of the population was found to be financially excluded. About 45

percent of the population had medium level of financial inclusion with Financial
Inclusion Index score of 30-60.(Fig 3.9) Those in High level of Financial Inclusion
have an index of above 60.

Fig 3.10 Membership category wise share of Financial Inclusion status

4.8 17.7 0 0
100%
90%
20.9 25
80%
70% 53.9 High Financial Inclusion
60.8
60% 32.1
47.1 Medium Financial
50%
40% Inclusion
25.6
30% Low Financial Inclusion
42.9
20%
27.2 13.7 20.5
10%
7.8 Financially excluded
0%

69
It was observed that the MFI members had the highest share of inclusion with medium
level of financial inclusion in 60 percent of the members. Only 7 percent of the
members were financially excluded and another 13 percent were in the low financial
inclusion category. The non members had 27 percent exclusion while SHG had 43
percent exclusion (Fig 3.10).

Previous studies have time and again re emphasised the importance of credit as an
indicator of Financial Inclusion. This is because holding of a bank account was not
found to be a fool proof indicator of Financial Inclusion as there were many dormant
accounts which were never used but just got opened under the no frills account
scheme.

Fig 3.11 Incidence of Informal Borrowing in different categories of

Membership

90
80
70
60
50 No informal Borrowing
40
30 Borrowed from
informal sources
20
10
0
Non SHG SBLP MFI
Members

It is only when credit is extended that a person can be said to be in the realms of the
formal financial system. So the study focussed in detail about the borrowing pattern of
the households. Access to credit by the household in the last three calendar years was
studied, categorizing the sources of finance into formal and informal sources. It was
found that Informal borrowings was accessed more by non members as compared to
the members (Fig 3.11). Although there were a few cases where access to
microfinance has also led to more of informal borrowing as the loan borrowed at a

70
lower rate was used to service the high rate of loan from money lenders (informal
finances).

Fig 3.12 Incidence of Informal Borrowing according to Financial Inclusion index

80

70

60

50
No informal
40
Borrowings
30 Borrowed from
informal sources
20

10

0
Financially Low Medium High
excluded Inclusion Inclusion Inclusion

The study also found that respondents with lower financial inclusion index accessed
more of informal borrowing (Fig 3.12). Informal borrowings decreased from 68 per
cent among the excluded to 54 per cent among those having the highest level of index
(above 60). It can be observed that there is clear trend of decreasing share of informal
borrowings with increase in index with an exception towards the end i.e of FI index
higher than 61 where again the informal borrowing graph soars high. The reason
behind this exception hike is that people belonging to the FI index of 61 and above are
much well to do financially than the rest .They typically exhaust all their formal
borrowings and then resort to informal borrowings.

3.6 Microfinance : A tool for urban poverty alleviation

Microfinance

The Reserve Bank of India's definition of microfinance:

"The provision of thrift, credit and other financial services and products of very

small amounts to the poor in rural, semi-urban and urban areas for enabling them

to raise their income levels and improve their living standards".

71
The Ninth Five year Plan (1998-2002) marked a paradigm shift stating that urban
poverty is a manifestation of marginal and low income employment in the informal
sector. It thereby proposed enhancing the capacity of the informal sector by
supporting self-employment, group based employment, improving access to credit and
technology, and improving the overall legal and physical environment for the poor.

This was followed by the Tenth Plan (2002-2007), which further acknowledged urban
poverty, noting that it is often more complex than rural poverty and that microfinance
might be an important poverty alleviation mechanism in urban settings. The plan
suggested the provision of alternate finance channels for increasing outreach to
address poverty. An important step in the right direction is that the three waves of
urban interventions are presently not mutually exclusive, and have also become more
holistic with time.

Interventions, such as Valmiki Ambedkar Awas Yojana (VAMBAY), focus on

providing housing to all urban slum dwellers that are below the poverty line, and other
interventions, such as The Swarna Jayanti Shahari Rojgar Yojana (SJSRY), cater to
the employment and credit needs of the poor in urban areas. The Jawaharlal Nehru
National Urban Renewal Mission (JNNURM) and the State Urban Services
Programme in West Bengal and Andhra Pradesh are others that provide relief to
infrastructure and service provision to the underserved in urban areas.

While the earlier development programmes of the Government was acutely focused
on the rural poor, in recent years there has been increased recognition of the need to
address urban poverty in a holistic fashion, not merely as an outgrowth of rural
poverty. Within this increased recognition has been some early acknowledgement that
microfinance may have an important role to play in urban poverty alleviation.

The Potential for Urban Microfinance

Microfinance is a global phenomenon; although, it has developed in different ways
across the globe. Urban Microfinance is a common place in Latin America, Africa,
and Eastern Europe, while Asian microfinance has been predominantly rural.

72
Table 3.1 Difference between Rural and Urban Microfinance

First generation Microfinance Second generation Microfinance

(Predominantly rural) (Predominantly Urban)

Leadership
• NGO Leaders, mostly with a social motive • Successful Mainstream Finance, including
• NABARD, as part of its focus on rural Commercial banks
areas • Successful Rural Entrepreneurs, wanting to
address poverty holistically
• Ex-employees of Rural MFI, wanting to
become entrepreneurs
Motivations
• Developmental Strategy with a historic • Quicker Sustainability, making business
focus on rural areas sense
• Poverty Alleviation in the rural areas •Market Driven, focusing on the delivery of
Financial Services
• Growing inequality between the rich and the
poor
Methodology
• Self Help Groups • Diverse methodologies, including Joint
• Grameen Groups Liability Groups, Self Help Groups, and
• Joint Liability Groups Individual Lending

On –lending Finance
Public Sector Banks, as stipulated by policy Overwhelmingly Private Banks, making more
• Private Banks, as stipulated by policy business sense

The worldwide microfinance experience suggests that urban and suburban areas offer
equally attractive, if not more attractive, markets for microfinance products and
services. Table 3.1 lists the differences between the urban and rural microfinance.
Behind the success of urban microfinance in countries, the belief that urban markets
are a lower cost to serve has been dominant. The extreme density of India's major
cities is a good breeding ground as it seems likely that greater efficiencies, than what
are seen in rural areas, can be achieved by MFIs serving urban customers. Rural
microfinance has been the story of the first generation in India. Drawing inspiration
and reason from history, the pioneers and mainstream support, the microfinance sector
has embarked upon the second generation of change. These changes include a new
policy framework, migration from providing only microcredit to a diversified product
set within microfinance, and a new interest in urban markets.

73
3.7 Conclusions

While our country claims to be riding high tide with a double digit growth rate,
majority of the people are left out of the growth process. This is neither a sustainable
growth nor a desirable one. Needless to say, the most important driving forces of
growth is institutional finance. So unless and until all the people of the society are
brought under the ambit of institutional finance, the benefit of high growth will not
percolate down and by that process majority of the population will be deprived of the
benefits of high growth. Therefore financial inclusion turns out to be not only socio-
political imperative but also an economic one. It is also observed that the level of
financial inclusion in West Bengal is very low as against the rest of the major states of
the country. In fact, no significant achievement has taken place in financial inclusion
in the State since 2005-06 (period of commencement of the initiatives in the country)
The survey has reinforced the fact that even today moneylenders are still a dominant
source of urban finance despite wide presence of banks in urban areas. In a nutshell, it
can be said that although various measures have been undertaken for financial
inclusion, the success is not found to be noteworthy. However both supply side and
demand side factors are responsible for the financial exclusion. Now is the high time
to solve both these problems with the help of appropriate policies. Banks need to
change their outlook towards financial Inclusion by viewing it both as Business
opportunity and as a social responsibility in the larger good. Apart from formal
banking institutions the role of the self-help group movement and microfinance
institutions (MFIs) is critical in promoting financial inclusion. Banking correspondent
(BC) model has to be made more effective, by involving more local people. A good
customer friendly viable BC model can solve issues of supply and demand factors to a
greater extent. In fact, providing the banking service is not sufficient. Above all, a
whole-hearted effort is called for from all the stake holders of the society, viz., banks,
beneficiaries and regulators in order to make financial inclusion more meaningful and
effective.

74
 4. Research Framework and Methodology

4.1 Framework for analyzing financial inclusion

This thesis defines Financial Inclusion as

“ A continuum of affordable and approachable credit services along with

transaction banking, Insurance and Investments services suitable to the
occupational needs of the low income class of population.”

Affordability here means the cost of the credit should be within the capacity of the
borrower to repay, cost should not act as a barrier to inclusion. Approachability here
indicates that bank officials should encourage and show support to the poor for
opening an account or tending credit. Many a times it has been reported that rude and
insulting behaviour of staff has deterred the poor from approaching bank. One size fits
all does not work with the poor as they are in varied kind of low income occupations
and each one has its own limitations. Credit products need to be designed keeping in
mind the seasonality of earning and other limitations. The most significant outcome of
financial inclusion is the access and usage of credit services and this should be on a
continuous basis rather than a onetime approach.

The role of microfinance in promoting financial inclusion has been analysed at two
Dimensions:
Dimension 1: Comparative analysis of Financial Inclusion status of members of
microfinance with non members. (Quantitative Research)

Dimension 2: Analysis of Role of Microfinance in lowering barriers to financial

Inclusion.(Qualitative Research using case study method)

The thesis therefore develops a framework for analysing the role of microfinance in
promoting financial inclusion as shown in the figure 4.1. The framework is used in
developing the research problems, analyzing the data and structuring the implications
and conclusions

75
 Figure 4.1 Framework for analyzing Financial Inclusion

Role of Microfinance

Financial Inclusion Lowering barriers to

status Financial Inclusion

Microfinance
Access & usage Access & usage Sector level Member level
provider level
Transaction banking Credit services

1. Coverage of Gaps left by Extent of

banking sector coverage of Reasons for
Non Members Members of 2.Uniform availability Financially rejection by MFI
MFI through geographies excluded
Microcredit

Informal
borrowing Structural support
to occupation
Debt Trap

No informal Higher Income

borrowing
Financial
Exclusion

Financial More savings and

Inclusion opportunities for
investments

76
.

The extent of association with informal credit markets is considered as a negative and
impinging on the aim of financial exclusion which is taken into consideration. (Thorat,
2007; Samantharay, 2008).

Financial Inclusion has been monitored in the study in two ways

a) Exclusion from payments system, ie. not having access to a formal financial
service.

b) Exclusion from formal credit markets, requiring the excluded to approach informal
and exploitative markets.

Efficacy of microfinance in facilitating financial inclusion and keeping away from

informal financing has been examined. The first focus of the thesis which calls for
quantitative research is the comparative analysis between non members and members
of microfinance with respect to their status of financial inclusion and borrowing
pattern. A sample population of 547 constituting both members and non members
from Kolkata have been studied. The members are primarily from Microfinance
Institutions( MFI) with a few representations from Self Help Group(SHG) and Self
help Bank Linkage Programmes (SBLP).

The second focus of the study addresses how far microfinance has been successful in
lowering barriers to financial inclusion. A research design based on case studies and
qualitative research methods was adopted. The lines of enquiry followed were at the
sector level, at the microfinance provider level and at the microfinance member level.
For the provider and member levels, primary data were collected in Kolkata. At the
provider level, one organization associated with each model was studied, including
interviews with senior officials and thirty MFI field staff. At the member level, thirty
low income women were interviewed. Sector level research is a secondary research
and examines the coverage of gaps left by the commercial banking sector and the
geographical barriers to spread of Microfinance. Microfinance provider level
research examines the extent to which MFI’s cover the Financially excluded. Member

77
level research seeks to know the reasons faced by low income people for rejection by
Microfinance institutions.

4.2 Research Questions, Objectives and Hypotheses

The study attempts to probe into the following specific research questions

Research Questions

1. What is the status of Financial inclusion of the urban poor living in Kolkata?

2. How does membership with Microfinance Institutions (MFI), Self help

groups(SHG) and Self help group bank linkage model (SBLP) influence the level of
financial Inclusion of a household?

3. What effect does level of Financial Inclusion of a household have on it’s mode of
borrowing?

4. What Socio economic factors determine the level of financial exclusion/inclusion

and is there any significant influence of microfinance models?

5. How far Microfinance has succeeded in addressing the barriers to Financial

Inclusion?

To answer the afore said questions, the study was taken up with the following
objectives

Research Objectives

1. To estimate the status of Financial Inclusion in the urban poor population of

Kolkata
2. To evaluate the impact of microfinance on the state of financial inclusion of a
household
3. To examine the Incidence of informal borrowing of sample households
4. To study the socio economic factors determining level of financial
exclusion/inclusion with a view to understand the role of microfinance

78
5. To elicit views and opinions of various stakeholders of microfinance on it’s role in
adequately addressing the barriers to Financial inclusion.

Hypothesis

1. There is no variation in status of Financial Inclusion among different zones of

Kolkata City

2. Borrowing pattern exhibits decreasing level of informal borrowing with increasing

status of financial inclusion

3. Lesser informal borrowings is resorted to by member households compared to non-

members

4. Financial Inclusion status is higher in households with membership in

microfinance.

4.3 Sampling Design and Data Collection

The study requires samples for studying two dimensions (refer the research
framework given in Fig 4.1)

A. For studying the financial Inclusion status

B. For studying the barriers to financial Inclusion

Sampling for Dimension A.

Multistage sampling was done to select the samples. Sampling has been done in two
stages as described below:

Stage 1: The first stage of sampling consists of selection of highly populated regions
of the city for conducting the study. A region with a high population will also have a
high population of poor. More so over the urban poor who thrive out of menial jobs
and occupations tend to flock near densely populated areas to have more employment
opportunities. So to ensure that a true representative sample has been taken, regions
with highest population were selected in decreasing order. The city is divided into
eight geographic regions each of which constitute characteristic population density.

79
Out of the eight regions five were selected based on decreasing order of population
density(Table 4.1). Five regions namely Esplanade, North Kolkata, South Kolkata
,Northern fringes and southern fringes were selected These five regions also are the
ones with large slums dwellings according to the report of Kolkata slums census 2011.

Table 4.1 Division of Kolkata in eight regions

Geographic
Regions Description
Esplanade The colonial district is the central business and administrative
area and is considered the heart of Kolkata
North Kolkata The older area of the city, a fascinating district dominated by
narrow little lanes and hundreds of century-old buildings, Also
situated here are the Sealdah station, one of the largest train hubs
in India, and the newly built Kolkata station
Northern fringes The large industrial area to the north of the city, where there are a
number of factories, including jute, paper, cotton, ordnance and
chemicals
Maidan The area consisting of the huge park, called the lungs of Kolkata.
Has the Eden garden stadium and various sports club.
South Kolkata The posh part of the city which has upscale neighbourhoods
Southern The rapidly mushrooming localities to the south of the city. There
Fringes are a number of educational institutes in this area. This is a
relatively newer part of the city where a lot of expansion is going
on
East Kolkata Rapidly developing, especially IT sector and home to several
malls. Many five star hotels, theme parks, posh housing estates
and techno parks are being built in this area
West Kolkata Houses the headquarters of the Eastern Command of the Indian
Army, its premises are under the jurisdiction of the army.

Stage 2: Each of these five selected regions have a number of dense and overcrowded
colonies of poor people. So from each of the five regions two largest colony (indicated
by the size and age of the market place in that area i.e the larger and the older the
market, the larger the population of the poor in that area) were selected (table 4.2) So
the following areas with high level of commercial activity were selected. It was found
that most of the population of urban poor consists of people who have migrated from
other districts, states, country ( Bangladesh) in search of livelihood and are engaged in
petty jobs with minimal wages and therefore they tend to throng near old commercial
centres as their skills match with the requirement of conventional businesses.

80
The area around the following commercial centres were selected from each of the five
selected regions. These areas also are known for their Bastis or slums settlements.

Table 4.2 Selected slums settlements

Popular Basti area/
Regions
Slums settlements
Esplanade Chandnichowk, Burra Bazaar
South Kolkata Alipore, Khiddirpore
Southern fringes Behala, Garia
North Kolkata Shyam Bazaar, Baag Bazaar
Northern fringes Baarackpore, Madhyamgram

An effort was made to select equal number of samples from each area.

Stage 3: The study requires data from both the members and the non members. In the
pilot study it was observed that the probability of finding a microfinance member at
random in a colony of urban poor a.k.a slums was low. So the members of
microfinance were fetched through an organised effort in collaboration with the
Microfinance Institutions. Microfinance Institutions with their customers
(conventionally referred as members) in these areas were approached. The media
representatives were contacted through email and phone number given on their
website, an appointment to discuss the requirements of the research was fixed with the
representative officer. After convincing the officer that it is a research meant for
academic institutions and a written declaration protecting misuse of any information,
appointment with Field Officers was fixed who the ultimate touch points with the
customers are. The field officers/ Agents helped to reach the members in each of the
locality during their weekly group meetings. Non members were selected from the
same locality and from the neighbourhood of the member. This ensured that they
belong to the same socio economic class for a level comparison between members and
non members. A total of 547 sample households were interviewed.(Table 4.3)

81
 Table 4.3 Sample size from each region
Non
Regions members Members Total
Esplanade 33 72 105
North Kolkata 43 65 108
South Kolkata 39 76 115
Northern Fringes 40 65 105
Southern Fringes 32 82 114
Total 187 360 547

Sampling for Dimension B

The second focus of the study which probes into the success of microfinance in
addressing the barriers to financial inclusion calls for a case study approach where
three levels of enquiries are sought. The database used for this is as mentioned in the
Table 4.4.
Table 4.4 Three lines of enquiry and data collection

Level of Data Source Method of Data Collection

Enquiry
Microfinance India State of the Sector
Sector Published secondary Reports (published by Sage Publications),
data RBI reports, Bharat Quick Microfinance
Reports (published by Sa-dhan, the
industry association of community
development financial institutions in
India).
Brochures& From administrative office of MFI
Microfinance documents In-depth interviews of 5 senior executives
Provider Senior executives Short structured interviews of 30 field
Field Officers officers

Microfinance Members and non In-depth interviews of 30 low income

Member members, Drop-outs, individuals who are a mix of financially
and individual unable excluded members and non members.
to access
microfinance.

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Why case study method is selected?

This research questions necessitate in-depth coverage of aspects relating to the

evaluation of the role of MFPs in promoting financial inclusion, an aspect that is not
readily observable. As this necessarily involves complexity, qualitative research suits
the research objectives of the thesis.

Creswell (2007) advocates use of qualitative methods “when we need a complex,

detailed understanding of the issue”. According to Creswell (2007), the use of
multiple sources of data is an important characteristic of qualitative research. In
particular for case studies, he mentions that data collection is typically extensive
drawing on multiple sources of information. So data collection was done at three
levels namely

Denzin and Lincoln (2005) define qualitative research as consisting of a set of

interpretive, material practices that make the world visible. Qualitative researchers
study phenomena in their natural settings, attempting to make sense of, or interpret
them, in terms of the meanings people bring to them. These aspects make qualitative
research suitable for answering this research question. Creswell (2007) mentions that
there is no agreed upon structure for a qualitative study but has identified five
qualitative approaches.

1) Narrative research usually involves focusing on studying one or two individuals

and gathering data primarily through their spoken or written text, giving an account of
an event (or action) or a series of events (or actions) chronologically connected.

2) Phenomenological research on the other hand, describes the meaning for several
individuals of their lived experiences of a particular concept or a phenomenon, with a
view to reducing individual experiences to a universal essence.

3) Grounded theory research tries to move beyond description and generate or

discover a theory, an abstract analytical schema of a process.

83
4) Ethnographic research describes and interprets the shared and learned patterns of
values, behaviors, beliefs and language of a culture sharing group.

5) Case study research involves the study of an issue explored through one or more
cases within a bounded system (Creswell, 2007). Rossman and Rallis (2003) state that
case studies seek to understand a larger phenomenon through intensive examination of
one specific instance.

Of the five approaches described above, the case study method fits most closely the
required objective. Narrative or phenomenological research is not appropriate as the
research questions do not focus on particular individuals or events. Grounded theory
and ethnography too are not suitable as the intention is not to develop theory or focus
on particular cultural groups. The objective is however to study an issue or
phenomenon (microfinance) by examining specific cases (microfinance programs and
their members) which suggest that the case study method is appropriate. A case study
involves in-depth data collection from multiple sources of information relating to a
single case or multiple cases. It is therefore proposed to conduct three levels of
enquiry as will be described in the following section. The research methodology used
in addressing this research objective is as presented in National University of
Singapore Shankar S(2011).

First, for the in-depth interviews with senior MFI executives, data analysis involved
transcription of interviews, thematic analysis and presentation in the form of a
discussion . As the interviews were only Five in number, data reduction was not
required. A matrix display showing areas of agreement and disagreement in views of
senior executives in both helped conclusion drawing.

Second, for the field officer interviews, the detailed comments of each field officer
were transcribed on individual copies of the question format. As these were 30 in
number, numeric codes were assigned to expected responses for each question at the
time of framing the questionnaire. When new categories of responses emerged,
additional numeric codes were assigned by the researcher. Each questionnaire with the
associated codes for each question, was then entered into a Microsoft excel sheet.

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Using the pivot table function the frequency of each code was counted for each
question and the responses were organized into tables. The pivot tables were then
summarized and are presented.

Third, for the in-depth interviews with 30 low income women, data analysis involved
transcription of the interviews and thematic analysis. Patterns of behavior were
identified across cases which enabled identification of distinct “categories” of
members in each model resulting in data reduction. The results are presented in
through data displays in the form of boxes (which highlight particular individual
cases) and tables (which provide comparisons across cases).

4.5 Need for the study

Negligence of the Urban Poor:

In India Poverty is synonymous with villages or Rural areas whereas the fact is that
the Poor live in cities too. Beyond the glitz of new street lights and glass walled
shopping malls of a city there lies a world of abject poverty where people live amidst
the urban squalor and filth in inhuman conditions and barely manage to eek out a
living .They are the urban Poor.

The Government including the various state governments have also shown apathy
towards this ever mushrooming class of urban poor, evident from the extreme
inhuman conditions under which they survive; the lack of basic amenities,
infrastructure, health and hygiene. The larger the city, the larger the slums ,for
example in Mumbai alone out of the population of 15 million people, almost 60
percent live in slums or in over 2000 “slum pockets” across the city. The popularity of
Danny Boyle’s film, Slumdog Millionaire led to a surge of media interest in the
Mumbai slum of Dharavi which is partially depicted in the film. But there are slums
akin to dharavi in Kolkata and in almost every metropolitan which are awaiting media
and corporate attention for their welfare.

There is a general belief that Rural areas are the places where the Poor live, so Most
of the Microfinance activities are based in villages or rural areas. MFIs pay more

85
attention to rural areas and largely neglect the urban poor. Out of more than 800 MFIs
across India, only six are currently focusing their attention on the urban poor.
However, the population of the urban poor is quite large, amounting to more than 100
million. With increasing urbanization, this number is expected to rise rapidly in the
coming years. Being poor also implies being financially excluded as one begets the
other and the relationship is cyclical with reinforcement from the debt trap created by
moneylenders. In this situation, MFIs can play an important role by infusing the
power of credit at the right place in the cycle of financial exclusion and play a game
changing role from exclusion towards financial inclusion.

Fig 4.2 Cycle of Financial Exclusion

Financial Exclusion

Enhanced Increased debt

dependence on with reduced
money lenders capacity to repay

Credit

Microfinance

Failure of
Excluded low
livelihoods due to
income
structural and
population
other factors

4.6 Gap in the Literature:

The Gap: Financial Inclusion of the Urban Poor

Since the inception of research in microfinance in the early 1960’s after the success of
ACCION International in Venezuela and Yunus’s Grameen Bank in Bangladesh ,
there has been an extensive literature discussing the role of microfinance in alleviating
poverty. The literature on microfinance spanning across decades discuss from how

86
microcredit has become something of a cause celebre for its potential to help the
developing world, to some serious and credible criticisms of its success. Others insist
that microfinance is not a complete solution, charging that those who have benefited
from the industry overstate its value in order to keep the model going. Institutions like
the World Bank and the International Monetary Fund have also come under fire for
funnelling into microcredit institutions money that could have gone to funding for
education, health or other basic social infrastructure needs. There is a plethora of
literature on role of microfinance in alleviating poverty in landless labourers, farmers
and women, but all these are in context of rural settings, Microfinance has become
synonymous to Rural poverty. Of late there have been a few researches discussing the
role of microfinance in promoting financial inclusion but that too is in the context of
rural poor. An important gap in the literature available on microfinance is that of it’s
role in promoting financial inclusion in the urban poor. Studies by Conroy (2006) and
Jayasheela et al. (2010) suggest that microfinance can be a useful means of increasing
financial inclusion in the context of the Pacific Islands and India respectively, but not
on the basis of detailed studies. Further, while there is considerable literature on
financial development and economic growth at the macro level, Fewer study examines
if outcomes expected of financial inclusion are provided by microfinance at the
individual level. Savita Shankar (2011) analyzes whether group membership
subsequently enables graduation of microfinance members to financial services on an
individual basis, her study is in the context of rural poor of Tamilnadu. Sangeetha
Prathap (2011) has done a similar study on financial Inclusion of fisher households of
Kerala. Based on the available literature, This thesis follows closely on the heels of
the above mentioned studies and makes an attempt to fill the literature gap concerning
financial inclusion of the urban poor. The thesis attempts to evaluate the contribution
of microfinance programs to financial inclusion in urban poor population of Kolkata.

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 5. Data Analysis and Interpretation

5.1 Status of Financial Inclusion

Pradhan Mantri Jan dhan Yojana – Financial Inclusion for all

The Data collection for this thesis has been done much before the financial inclusion
drive of the central government pitched in. While the thesis was getting written it was
being noticed that many households were coming under the folds of financial
inclusion by means of the central Government’s policy Pradhan Mantri Jan-Dhan
Yojana (PMJDY) which irrespective of the socio economic factors influencing the
status of financial inclusion, was financially including each and every household.
Pradhan Mantri Jan-Dhan Yojana (PMJDY) is a nationwide scheme launched by
Indian government in August 2014. In this scheme financial inclusion of every
individual who does not have a bank account is to be achieved. The scheme will
ensure financial access to everyone who was not able to get benefits of many other
finance related government schemes. These financial services include Banking/
Savings & Deposit Accounts, Remittance, Credit, Insurance, Pension which will be
made available to all the citizens in easy and affordable mode. According to the data
issued by finance ministry, till September 2014 around 40 million (4 crores) bank
accounts have been opened under the Pradhan Mantri Jan Dhan Yojana since the
scheme launched. Under the Jan Dhan Yojna anyone who is India citizen above age of
10 years and does not have a bank account, can open the account with zero balance.
Account can be opened in any bank branch or Business Correspondent (Bank Mitr)
outlet, specially designed for the purpose of opening the accounts under this scheme.
The scheme also provides facility of accidental insurance cover up to rupees one lac
without any charge for the account holder.

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CRISIL Inclusix – Measures Financial Inclusion upto district level.

CRISIL Inclusix1 is a comprehensive index for measuring the progress of financial

inclusion in the country, down to the district-level. With its ability to objectively
analyse and measure inclusion, CRISIL Inclusix will be a key enabler in taking
financial services to the bottom of the pyramid.

CRISIL Inclusix, whose methodology is similar to other global indices, such as

UNDP's Human Development Index, 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.

5.2 Measurement of Financial Inclusion at Individual level

Determining the status of financial inclusion is very important from both the point of
view of policy makers and economist. There have been various attempts to establish a
financial inclusion index which would give a comparative status of financial inclusion
. There have been various studies to estimate financial inclusion index as an indicator
for assessing the level of financial inclusion by authors including Sharma, 2008,
Swiston, 2008, Arora, 2010,Kendall et al, 2010. Fewer studies have attempted to
measure the level of access to finance from the formal sources and other financial
services using primary data sources , notable studies are that of Rangappa et.al, 2008
and Delvin, 2009. Sangeetha, 2011 has calculated Financial Inclusion index at
individual level in fishing households of kerala. The primary level assessment calls for
the individual household level estimation of access to finance. For this purpose
households’ access to formal financial service providers has been quantified using
usage dimension variables representing transaction banking, credit services, deposit
services and access to insurance.

1
www.crisil.com

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Financial Access Dimensions

5.2.1 Transaction Banking

There is a wide presumption among the urban poor that financial institutions are
agencies solely catering to credit needs. It has been observed that indicators of
transaction banking like usage of cheque / DD for financial transactions, granting
social security payments through banks, usage of ATMs for withdrawal of money or
using it as debit card for payments purposes are not popular among the urban poor.
Although there is an ease and availability of Banks which is accessible to everyone
living in a city , unlike the rural areas where the primary reason for not accessing
financial services is the distant location of banks and their fewer number of branches,
The urban poor still refrain from using transaction banking due to lack of awareness
and hesitancy to make operations via bank because it involves reading and writing
skills. Need for using cheque/DD can be attributed to their payment of the goods and
for young generations’ needs of education and other requirements. Otherwise it was
seen that the urban poor veer away from banks except for accessing credit supply. The
low income limits the propensity to save. Another factor that limits savings is
perpetual indebtedness, where income is often used for high cost debt servicing 8
percent of the households used cheque while Only 7 percent of the sample could use
ATM services due to lack of awareness about products. Financial illiteracy
underscores ignorance of procedures of banking. Financial transactions through banks
are less preferred due to inability to understand financial procedures and hesitation to
enter a bank. Cash remains the preferred mode of payment and Financial institutions
are still perceived as glass houses where common man restricts his passage.

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 Table 5.1 Usage of Transaction Banking

Indicators Status Frequency Percent

Usage of Users 44 8
Cheques/DD Non Users 503 92
Total 547 100
Social security Users 18 3.3
payment through Non users 529 96.7
bank account
Total 547 100
ATM usage Users 38 7
Non Users 509 93
Total 547 100
Source: Survey

Awareness and Usage of Financial Services

There are various parameters encompassing Financial Inclusion. Apart from deposits
and credits which are the most basic one, there are investment options too. And Other
than Banks, Post offices in India also play a role in providing financial services .
Alternative investment options other than bank deposits including post office savings
account/recurring deposit account, Kissan Vikaas patra (KVP) 2 and Sukanya
samriddhi account3, insurance, share investments and mutual fund investments.
Awareness and usage level of respondents about Financial services is presented in
Table 5.2. 28 percent of the households were found to be conversant with ordinary
financial services like remittance and savings facilities with banks. Awareness of
Insurance was markedly high at 67 percent. Insurance was used by 12 percent of the
population owing to awareness created by LIC (Life Insurance Corporation) and
it’s deep reach. The LIC Agents are often one among them and their reach within
deepest pockets of slums is commendable. No other insurance is either known or used.

2
Kisan Vikas Patra is a saving scheme that doubles the money invested in eight years and seven months. The
Directorate of Small Savings Government of India, sells these saving bonds through all Post Offices in the
CountryThe “kisan” in Kisan Vikas Patra does not mean that only farmers can buy these saving certificates but
means that the revenue mobilized by this scheme will be used by the Government of India in welfare schemes
for farmers. .
3
Postal small saving scheme for girl child .

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Preference for usage of new financial services was extremely low. New financial
services like credit card, payment of bills through banks, e-banking, m-banking and
new instruments of investment like shares, mutual funds etc were not at all preferred
by the households due to lack of knowledge of such products coupled with
apprehensions of using technology enabled devices for financial transactions.

High usage of Postal saving schemes

Post office savings scheme was used by a strikingly high percent of population 38
percent. This high percentage was attributed to the background of the urban poor. A
majority of them are migrants from surrounding states and districts and they often
visit post offices for sending letters and money orders to their hometown. Their
repeated interaction with post office makes them aware of different schemes and
because postal saving schemes are also easy to transact requiring them to write
minimal and the simplicity of scheme to understand attracts them.

Table 5.2 Knowledge level of respondents (per cent of total)

Financial Services Don’t Know but Know and
Know don’t need used
Remittance and saving
15.54 55.75 28.7
facilities with banks
Insurance 19.92 67.32 12.8
Post Office
33.27 27.78 38.93
Credit card
91.95 8.04 0
Payment of bills through
banks 97.98 2.02 0

E-banking and M-banking

98.72 1.27 0
New instruments of
investments 99.45 0.005 0

Source: survey

Voluntary and involuntary exclusion

There was a marked display of voluntary and involuntary exclusion among the
respondents. There were some respondents who were aware of the services but could

92
not use it due to varied reasons. In case of insurance and remittances a majority of the
respondents are aware of the services but are not using it due to varied reasons. In
other cases Majority are unaware of the services. Low financial literacy level also
affects their awareness and knowledge about other financial products Financial
literacy drives have enabled the respondents to know about different services,
however the accessibility have been restricted. Such situations facilitate both
voluntary and involuntary financial exclusion. Voluntary exclusion arises out of the
attitude of the respondents, restricting access to financial transactions from service
providers. Involuntary exclusion arises out of the reasons including lack of proximity
of service providers, fear for approaching the glass house of the banks etc. Further, a
category of respondents revert from usage of financial services due to lack of financial
literacy. This category of respondents neither uses the services nor knows about it.

5.2.2 Access to credit

It is observed that holding a savings account with a bank is not an actual indicator of
financial inclusion .There are many households which have bank accounts but they
have never been operated due to various reasons. It is the access to credit that is the
most important indicators of financial inclusion. When Government had started the
provision of NO FRILLS Account, in order to achieve Financial Inclusion, there were
many accounts opened under it but the accounts remain dormant due to variety of
inconveniences. But when one has access to formal credit it becomes a certificate to
financial inclusion.

Income expenditure mis-match afflicts the urban poor rather than lack of regular
income which is characteristic of the rural poor and this breeds the propensity to
borrow among the urban poor. The urban poor do borrow for better earning
opportunities but Family contingencies like hospitalization, marriage and death are the
major factors contributing towards borrowing. There are borrowings from both formal
and informal sources. Table 5.3 presents credit usage by households from formal
financial institutions which include banks, business correspondents and microfinance
providers. Micro finance has been treated as a semiformal source (Basu, 2006). Here
Microfinance providers have been included into the Formal financial Lenders. Impact

93
assessment of microfinance done by SIDBI reiterated the view that microfinance in
general contributed to overall improvement in access of loans and not other services
(SIDBI, 2008).

Table 5.3 Credit usage by households from Institutional sources of Finance

Indicator status Frequency Percent
Credit from Formal Non users 483 88.3
Financial Institutions
in the year 2011 Users 64 11.70
Total 547 100

Credit from Formal Non users 416 76.05

Financial Institutions
in the year 2012 Users 131 23.95
Total 547 100

Credit from Formal Non users 352 64.35

Financial Institutions
in the year 2013 Users 195 35.65
Total 547 100

Source : Survey
Access to credit has been noted for the last three calendar years. Only 11.7 percent of
the population could access formal credit in the year 2011.This number has gone up in
the subsequent years to 23 and 35 percent respectively. This finding of the survey is
also reiterated by the fact that Microfinance was facing crisis in the year 2011 and the
lendings were very low. With microfinance reach becoming wider and popular more
and more people could afford to take loans from them in the subsequent years.

5.2.3 Access to Deposit and Insurance

Consumerism has entailed every city in India and more profoundly in the metro cities.
Every class of consumers is affected by the glamorization created around spending
more and more. And urban poors are no exception to this. There seemed a very less
motivation to save among the urban poor. Consumerism at it’s peak along with
alcohol consumption among the men of the house is so rampant that hardly any
household shows the habit of thrift. They do not shy away in spending out of

94
proportion in festivals and marriages to the extent that they borrow money to spend in
their biggest festivity which is Durga Pooja which comes twice in a year.
Savings/thrift is dependent on people’s attitude rather than accessibility to formal fold
of financial institutions. This attitude can be defined as an interest to save for the lean
seasons/ emergencies when there is sufficient disposable. Hence deposit exclusion can
be more or less treated as voluntary, emerging out of lack of savings habit among the
urban poor. 32 percent of the population (and which is the highest as compared to
usage of other parameters of deposits and insurance) had savings bank account with
different cooperative, commercial banks and post offices. While usage of deposit
services like Fixed Deposit or Recurring Deposit remained low among the
respondents (16 per cent) as they voluntarily opted out of such services. .

Voluntary exclusion can be induced by drivers of financial illiteracy. However, a lone

exception may be observed among SHG members where credit facilities are always
linked to savings corpus requiring compulsory savings (Table 5.4). This is applicable
in case of SHG bank linkage also where the bank allows credit to the group on the
basis of savings corpus deposited in the bank. Deposit access usually occurs
complementarily with access to credit.
Table 5.4 Deposits by households with Institutional sources and access to
insurance
Indicators Status Frequency Percent
Savings Bank and/or Non users 372 68
Current Deposits with users 175 32
Commercial Total 547 100
banks/cooperatives/RRBs
Fixed Deposits and/or Non users 459 83.91
Recurring Deposits with users 88 16.09
Commercial
Total 547 100
banks/cooperatives/RRBs
Deposits with SHG Non users 480 87.75
groups with or without users 67 4.57
bank linkage Total 547 100
Life/General Insurance Non users 477 87.72
with any of insurance users 70 12.76
service providers Total 547 100

Source: Survey

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Micro savings and Financial inclusion

It is observed that although many households have a basic saving account opened as
“no frills account” (NFA), there was not much propensity to save. Instead of saving
cash many prefer investment in gold which often serves as collateral for borrowing
money for essentials. But members of Microfinance had to compulsorily save in order
repay the loan. All the MFI members had to make savings a habit because of peer
pressure and the pressure created by the field staff. Default by one person often
creates trouble for the others in the group. So the group leader makes sure that
everyone in the group is saving. The purview of microfinance covers broader aspects
than micro credit including micro savings which benefits the population with a regular
pattern of saving. SHG’s also play a crucial role in developing the habit of saving by
providing Thrift facility that calls for compulsory savings. The savings by groups
were usually Rs. 10 per week which is not a burden for the members. The reasons for
preference of such savings scheme include maintaining an account at their doorsteps,
small regular savings which is not possible in any formal institution and creation of
emergency fund to protect against the odds. The urban poor with their meagre income
can only save little by little so the travelling cost to and fro to bank to deposits the
savings regularly costs them high both monetarily and time wise. They prefer to have
their savings deposited at their doorsteps as early as possible to avoid spending it in
force majeure. Banks need to come up with innovative products to address this issue
which hinders with financial inclusion at the grass root level.

5.3 Calculation of Financial Inclusion Index

The access to financial services has been measured in this study by means of
constructing an index called as Financial Inclusion Index. A single composite
(consisting of a conglomerative index) is used. The conglomerative index measures
the overall well being of the society which has been adopted by the UNDP in
calculating the Human Development Index (HDI) (Salzman, 2003). The methodology
of arriving at an index of financial inclusion developed in Sangeetha (2011) is used to
find out the status of financial inclusion of the urban poor of Kolkata Building of FI
Index (Financial Inclusion Index) also can be categorized as a conglomerative index
96
as this attempts to measure the well being of the population in terms of access to
financial services. Financial service usage dimension has been employed to build
Financial Inclusion Index. The types of financial services that have been used by the
respondents during the time of survey i.e between March 2013 to October 2013 have
been used in the index. Access to following services provided by formal financial
service providers has been evaluated in the study.

1.Transaction Banking

An efficient payment mechanism is integral to Financial Inclusion. Financial inclusion

essentially promotes efficient payment mechanism which strengthens the resource
base of the economy(Chakrabarty, 2009).

This study looks into the usage of three important modes of transaction by the
respondents namely

a.Usage of Cheque/DD

b. Social security pension payment through banks/cooperatives

c. Usage of ATM

2. Access to Credit

Credit is an indicator which gives a picture of sustained financial inclusion. An

inclusive financial system implies availability of a sustainaible or continued financial
services for all income groups. Financial inclusion policies have generally focussed on
encouraging banks to open affordable savings accounts for the financially excluded.
The assumption is that once this is achieved, access to other financial services
becomes easier. However It is observed that such accounts, even when opened are not
widely used and substantive financial inclusion therefore remains limited. Therefore
access to credit becomes the most important dimension of financial inclusion. The
Committee on Financial Inclusion, (GoI, 2008) observes in the working definition that
financial inclusion entails access to timely and adequate credit at an affordable cost to
weaker sections and low income groups in particular. Hence credit accessed by

97
household to any formal sources of finances including SHG bank linkage in three
preceding years have been accounted in the study by recall method. Access to credit
from formal institutions have been evaluated in the study

a.Banks/Co-operative

b.MFI, SHG/ Linkage through Bank

3.Deposits

There are various challenges in using the formal financial system for deposits by the
urban poor. First ,An inability to access financial services leads financially excluded
entities to deal mostly in cash, with its attendant problems of safe-keeping. Second,
the lack of access to safe and formal saving avenues reduces their incentives to save.
When saving occurs, safety and interest rate benefits may not be adequate to the
extent available in the formal system. Inadequate savings leads households to depend
on external sources of funds, in times of need. And most of the times these informal
sources of financing have exorbitant high interest rates and exploitative in nature.

So deposits form a very important dimension of financial Inclusion. Financial

Inclusion promotes thrift and develops the culture of savings among the
poor(Chakrabarty, 2009), This has been the thrust area in the Financial Inclusion
programme of the RBI since 2005, with the

initiative of starting ‘No Frills Savings Bank account’.This study looks into various
types of deposits by the households namely

a. Savings account with institutional sources (commercial

bank,cooperative bank or post office or SHG bank linkage

b. Fixed Deposit or Recurring Deposit account with

institutional agencies

c. Informal savings in an SHG

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4. Insurance

Tough competition in the insurance sector has made the insurance companies
penetrate into the lower transect of the society. With very low premiums access to
insurance is more limited to awareness and attractiveness of the products. Most of the
households are capable enough to invest in insurance but knowledge and awareness
becomes a limiting factor. Apart from covering risks insurance also offers an
investment option. Usage of any type of insurance is evaluated in this study

a. Any type of insurance

Calculation of the index

Variables selected were put to response in the survey. Index was calculated by
aggregating responses in each variable calculation of index has been based on the
mathematical concept of weighted average index numbers. The variables were
selected based on extensive literature available on the subject and were assigned
appropriate weights. An acceptable weightage distribution was arrived by
incorporating different weighing schemes using arithmetic average. Standardisation of
the variables was not required as they were rated on the same scale. The values
assigned to each variable are either 1 or 0. Value ‘one’ implies respondent having
association with the source of finance and value ‘zero’ implies having no association
with the specified source of finance.

The index is calculated as follows

Σ X = Σ(a1*5)(b*5)(c*5)(d*30)(e*10)(f*10)(g*10)(h*10)(i*5)(j*10)
1-n

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Table 5.5 Financial Inclusion Index- construction and weightage distribution of
Usage Dimension

Indicator Sub components (Source of finance) Weight Sub total

Inclusion Indicators
a Usage of Cheque/DD 5
Transaction b Social security pension payments 5 15
banking through banks/cooperatives
c Usage of ATM 5
d From institutional sources or 30
Formal through SHG bank linkage during
Credit 2012
50
e From institutional sources or 10
through SHG bank linkage during
2011
f From institutional sources or 10
through SHG bank linkage during
2010

Deposits g Savings account with institutional 10

sources (commercial bank,
cooperative bank or post office or 25
SHG bank linkage)

h Fixed Deposit or Recurring 10

Deposit account with institutional
agencies
i Informal savings in an SHG 5
Insurance j Any source/type of insurance 10 10

Total 100 100

The weightage assigned to each of the indicators and their meaning is presented in
table 5.5. The index varies between ‘0 and 100’. Value ‘100’ implies full Financial
Inclusion and value ‘0’ implies complete Financial Exclusion. Value of ‘1-29’ implies
low financial inclusion, value of ‘30-60’ implies medium financial inclusion and 61
and above implies high level Financial inclusion .

100
5.4 Status of financial Inclusion among the urban poor of Kolkata

A total of 17.1 percent of the population is completely financially excluded for the
past three years. 27 percent of the population has low level of financial inclusion
While Majority (45 percent) are financially included at medium level i.e between an
index of 30 to 60.Financial inclusion also varied with different selected zones within
the city. Financial Exclusion was highest in South Kolkata covering the areas of Garia
and Behala where 34 percent of the respondents were totally financially excluded in
stark contrast with only 3.5 percent of the respondents of Southern Fringes. Southern
fringes also had the lowest percent i.e 1.7 percent of high level financial inclusion and
Majority of the respondents had medium level of financial inclusion.

Table 5.6 Region wise distribution of Financial Inclusion Index

Financially 61 &
Slums 1-29 30-60 Total
Regions Excluded above
settlements
No % No % No % No % No %
Chandnichowk
Esplanade 23 21.9 30 28.5 41 39 11 10.4 105 100
Burra Bazar
North Alipore
17 15.7 28 25.9 39 36.1 24 22.2 108 100
Kolkata Khiddirpore
South Behala
39 34 24 20.8 47 40.8 5 4.3 115 100
Kolkata Garia
Northern Shyam Bazaar
11 10.4 17 16.1 58 55.2 19 18 105 100
Fringes Baag Bazaar
Southern Baarackpore
4 3.5 48 42.1 60 52.6 2 1.7 114 100
Fringes Madhyamgram
Total 94 17.1 147 26.8 245 44.7 61 11.1 547 100

Source: Survey

The mean Financial Inclusion Index was calculated for each of the five regions .It is
presented in Table 5.7 along with the standard deviation for each of the five regions.
The mean was found to be highest for North Kolkata which just crosses the mark for
low financial Inclusion. South Kolkata showed the lowest mean at 24.94 and the only
one lagging much behind in the low financial Inclusion bracket.

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 Table 5.7 Region wise Mean Financial Inclusion Index
Region Mean N Standard Deviation

Esplanade 29.20 105 23.309

North Kolkata 30.25 108 25.637
South Kolkata 24.94 115 19.186
Northern Fringes 32.87 105 27.354
Southern fringes 28.83 114 24.865
Total 29.14 547 22.40

To test the hypothesis that there is no difference in financial inclusion index among
the different zones of Kolkata, one way ANOVA was employed. Table 5.8.presents
the results of one way ANOVA.

Hypothesis test for difference of means (one way ANOVA)

[Hypothesis 1]

H0: There is no variation in FI Index among different regions of Kolkata

H1: There is significant variation in FI Index among different regions of Kolkata

Table 5.8 Results of One way ANOVA

df F Sig

Between groups 4 1.5558 0.1847

Within groups 542

Total 546

There were no statistically significant differences between FI of respondents in

different regions as determined by one-way ANOVA (F(4,542) = 1.5558, p = .1847).
Although Kolkata has different pockets of development and respondents were chosen

102
from the most developed new areas to the oldest crowded areas, the results show that
irrespective of the locality of the urban poor of Kolkata their Financial Inclusion level
remains similar.

5.5 Financial Inclusion and Informal finances

The urban poor inspite of having banks in the neighbourhood have little access to
formal financial services. They typically live and work in the informal economy – not
by choice, but by necessity. To create income-generating opportunities for
themselves, manage risks, and smooth expenditures they have to rely on the age-old
informal mechanisms such as borrowing from families and friends or the money
lender, saving under-the-mattress or through rotating savings schemes. These informal
mechanisms can be very expensive and unreliable. Global and national policymakers
have made it a priority to advance financial inclusion so people can access and use the
appropriate financial services that help them improve their lives.

MFI ‘s have to an extent showed that once poor are provided with easy and cheaper
credit, they tend to move away from informal finances. This has been established by
analyzing levels of financial inclusion and incidence of informal financing. The Table
5.9 below depicts the different classes of FI index and incidence of borrowings from
informal agencies. Informal borrowings decreased from 68 per cent among the
excluded to 54 per cent among those having the highest level of index (above 60). It
can be observed that there is clear trend of decreasing share of informal borrowings
with increase in index with an exception towards the end i.e of FI index higher than 61
where again the informal borrowing graph soars high. This can be attributed to
alternative agencies that support the poor to borrow. The reason behind this exception
hike is that people belonging to the FI index of 61 and above are much well to do
financially than the rest .They typically exhaust all their formal borrowings and then
resort to informal borrowings. In the present study, all of the households have been
associated with informal borrowing at some point within a time frame of three years.
But the data has been categorised according to the larger part of the borrowing of the
households. If the larger part belongs to informal borrowing, it is categorised into
informal borrowing and if larger part of the loan is formal then it is categorized into
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formal borrowing. 61 percent have had no informal borrowings which means that
they have taken small loans from MFI’s or Bank Linkage SHG, While 38 percent
have resorted to only informal borrowings or a combination of formal and informal
with larger part belonging to the informal category.

Table 5.9 Financial Inclusion and Informal finances

Borrowed
Status Of No
from
Financial informal % % Total
informal
Inclusion Borrowings
sources
Financially
30 31.9 64 68.0 94
excluded
1-29 102 69.3 45 30.6 147
31-60 176 71.8 69 28.1 245
61 & above 28 45.9 33 54.0 61
Total 336 61.4 211 38.5 547
Source: Survey

To test the hypothesis that there is no difference among different classes of FI index
with respect to incidence of informal borrowings chi square test of significance was
done.

[Hypothesis 2]

H0: There is no difference among different classes of FI index wrt incidence of

informal borrowing

H1: Informal borrowing reduces with increasing status of Financial Inclusion.

Chi Square Test

Incidence of informal borrowings was measured as a categorical variable taking two

values; ‘0’ for no borrowings and ‘1’ for incidence of borrowings. Hence chi square
test, which can also be used as a non parametric test was used to make inference
(Table 5.10).

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 Table 5.10 Results of Chi Square Test of Significance
Value Df Asymptomatic Sig

Pearson Chi square 55.894 3 .000

Likelihood ratio 55.207 3 .000

Linear by linear
11.097 1 .001
association
N of valid cases 547

The chi square test X2 (3, N = 547) = 55.894, p < 0.001 was found to be significant at
1per cent level of significance rejecting the null hypothesis. Instead, alternative
hypothesis can be accepted which observes decrease in informal borrowings
associated with higher level of financial inclusion.

Financial Inclusion and Incidence of Informal finances – At Disaggregated Level

It is interesting to understand how incidence of borrowing is also influenced by the

membership category with increasing levels of Financial Inclusion. To test this Chi
square test was conducted at Disaggregated level.

Chi Square Test

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 Table 5.11 Results of chi square test at Disaggregated level of membership
Membership Asymp
Value df
Category Sig
Non members Pearson Chi-Square 61.983 3 0.000
Likelihood Ratio 69.647 3 0.000
Linear-by-Linear
53.75 1 0.000
Association
N of Valid Cases 187
MFI members Pearson Chi-Square 10.446 3 0.005
Likelihood Ratio 10.408 3 0.003

Linear-by-Linear
10.028 1 0.001
Association
N of Valid Cases 293
SBLP Pearson Chi-Square .573 2 .751
Likelihood Ratio .560 2 .756

Linear-by-Linear
.000 1 1.000
Association
N of Valid Cases 39
SHG Pearson Chi-Square 2.512 2 .285
Likelihood Ratio 2.778 2 .249

Linear-by-Linear
2.058 1 .151
Association

N of Valid Cases 28

There were two important findings as below

1. The chi square test in the case of non members X2 (3, N = 187) = 61.98, p <
0.001 and MFI members X2 (3, N = 293) = 10.446, p = 0.005 is significant at 1
percent level, indicating a significant relationship between increasing Financial
Inclusion levels and decreasing incidence of informal borrowing. Thus It can

106
 be concluded that Non members and MFI members borrow less from informal
sources as their Financial Inclusion Index increases.

2. The chi square test for SHG X2 (2, N = 28) = 2.512, p = 0.285 and the SBLP
members X2 (2, N = 39) = 0.573, p = 0.751 revealed no significant
relationship between Financial Inclusion levels and informal borrowing, thus it
fails to reject the null hypothesis. Thus it can be concluded that irrespective of
the level of Financial Inclusion, SHG and SBLP members accessed informal
borrowing. This somewhere points towards the insufficiency of these two
microfinance models.

Membership category and Informal Finances

It is essential to understand if Membership with microfinance influences the incidence

of informal borrowing. Evidence from the existing empirical literature on the effect of
access to microfinance on informal lending among the poor, and near poor, is mixed.
As noted by Besley et al. (2012), and also emphasised by Motta and Mookherjee
(2013), the presence of the MFI can provide an outside option for poor borrowers that
effectively reduces the level of ‘exploitation’ by informal lenders. Khandker (2000)
finds that being a member of an MFI reduces the incidence of borrowing from an
informal source. On the other hand, Sinha and Matin (1998) find that microfinance
member households do not reduce borrowing from informal credit sources, Instead it
increases informal borrowing as the easy access is used to service the formal
microcredit

In the study, It was observed that Incidence of informal borrowings reduced with
membership in Microfinance with 62 percent of non members accessing informal
borrowing to only 19 percent of MFI members accessing informal borrowing. The
percentage of non members accessing informal finance was highest at 62 percent,
followed by SHG ‘s 60 percent, followed by 51 percent of SBLP members and the
lowest share among the MFI members at 19 percent. So It was hypothesized that
informal borrowings reduced with membership in Microfinance. To test this
hypothesis, chi square test was done. Only a marginal reduction in informal borrowing

107
was observed for the SHG members as compared to non members, this can be
attributed to the inflexibility of SHGs in responding to emergency needs. SHGs
operate revolving credit which is extended to the members on the basis of turns.
Repeat loan is not sanctioned unless the current loan is repaid. Emergency needs of
finance cannot be serviced in such situations. This entails the households to borrow
from the informal sources for coping with the emergency hopeful to service the debt
once his/ her turn for loan in the SHG has arisen.

[Hypothesis 3]

H0: Informal borrowings is the same for Microfinance member households and
non member households

H1: Lesser informal borrowings is resorted to by member households compared

to non-members

Table 5.12 Membership category and Informal Finance

No
Borrowed
Borrowing %share %share
Membership from
from within within Total
Category Informal
informal category category
Sources
sources
Non
70 37.4 117 62.6 187
Members
SHG 11 39.3 17 60.7 28
SBLP 19 48.7 20 51.3 39
MFI 236 80.5 57 19.5 293
Total 336 61.4 211 38.5 547

(Source : Survey)

Table 5.13 Chi square test of significance

Value df Asymp Sig

Pearson Chi Square 20.532 3 0.000
Likelihood ratio 20.231 3 0.000
Linear by Linear 19.432 1 0.000
association

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Result of Chi square test X2 (3, N = 547) = 20.532, p < 0.01 was found to be
significant at 1 per cent level of significance (Table 5.13). Hence the hypothesis that
there is no difference between members and non members in informal borrowings is
rejected. Alternative hypothesis which assumes lesser informal borrowings for
Microfinance members compared to non members holds good.

5.6 Financial Inclusion Index and Membership with Microfinance

It is important to analyse if membership with Microfinance helps in achieving better

Financial Inclusion status. This would require knowing the Financial Inclusion level
of the household before and three years after joining Microfinance. But since this is an
exhaustive topic of research which is beyond the scope of the study, the presence of a
possible interaction between Financial Inclusion status and Membership Category is
studied. Variation of FI index along with the household characteristic of membership
in MFI’s, SBLP and SHG have been depicted in Table No. 5.14

It is inferred that there is a clear association with higher levels of FI Index and
Microfinance membership. Almost 60 per cent of the MFI members attained FI Index
of more than 30 . Total exclusion was observed in case of 27 per cent of non members
and 47 per cent of them could attain low level of financial inclusion. It was also
observed that being an SHG member with or without Bank linkage could promote
medium level of financial inclusion. This is a clear depiction that being a member of
SHG could improve levels of financial inclusion than a non member. This activity is
further extended to linking with a microfinance provider, usually an external agency
or a bank that would provide subsidised credit to the group for initiating an earnings
option to support their livelihoods.

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Table 5.14 Distribution of Financial Inclusion Index according to membership
Category
Financial
Non
Inclusion % MFI % SBLP % SHG % Total %
members
index
Financially
51 27.2 23 7.8 8 20.5 12 42.9 94 17.2
excluded
1-29
88 47.1 40 13.7 10 25.6 9 32.1 147 26.9
(Low)
30-60
39 20.9 178 60.8 21 53.9 7 25 245 44.8
(Medium)
61 & above
9 4.8 52 17.7 0 0 0 0 61 11.1
(High)
Total 187 100 293 100 39 100 28 100 547 100
Source: Survey
To find out the influence of Microfinance membership on Financial Inclusion,
difference between groups with regard to level of ascertained financial inclusion index
was assessed in Table. 5.15. The mean financial inclusion index of different categories
showed that the non members had the lowest financial inclusion index, with the index
gradually increasing with the level of microcredit i.e SHG, SBLP and the MFI with
highest index.

Table 5.15 Mean Financial Inclusion Index of membership categories

Standard
Category of Household Mean N
Deviation
Non member 13.57 187 16.054
MFI member 38.62 293 18.783
SBLP 32.64 39 13.360
SHG 29.13 28 15.265
Total 29.14 547 22.562

In order to confirm that there is difference in levels of financial inclusion among the
SHG, SBLP, MFI and non members, one way ANOVA was conducted (Table 5.16).

110
Hypothesis test for difference of means (one way ANOVA)

[Hypothesis 4]

H0: Categories of members do not differ in level of financial Inclusion

H1: Financial Inclusion index increases if the household has membership.

One way ANOVA was conducted to test this hypothesis .The result was found
significant at 1 per cent level. Hence the null hypothesis that members of MFI,
SHG,SBLP and non members do not differ in level of financial inclusion can be
rejected. Alternative hypothesis is accepted that financial inclusion index increases if
the household has membership with Microfinance.

Table 5.16 Results of One way ANOVA

Df F Sig
Between groups 3 79.636 0.000
Within groups 543
Total 546

The different membership categories differed significantly in their level of Financial

Inclusion with ANOVA (F(3,543) = 79.636, p = 0.000 , the analysis was taken up
further to understand the interaction between the four groups to know which means
differed. Once it has been determined that differences exist among the means, post
hoc tests can determine which means differ. To find whether the non members
differed from MFI, SBLP and SHG , post hoc test was employed. Tukey’s test was
done as shown in Table 5.17

Table 5.17 Results of Post Hoc test

Tukey HSD Post Hoc Test
Non members vs MFI p=0.0000
Non members vs SBLP p=0.0000
Non members vs SHG p=0.0001
MFI vs SBLP p=0.1822
MFI vs SHG p=0.0302
SBLP vs SHG p=0.8472

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Post-hoc Tukey's HSD tests showed that members of microfinance significantly had
higher Financial Inclusion levels than the non members. Membership, be it with MFI,
SHG or SBLP has influence on the financial Inclusion of the household. It was also
noticed that members of MFI had the highest FI levels , followed by SBLP , SHG and
then non members. This shows that there is difference in effectiveness of each model
of microfinance, however studying this is not the focus of this research.
5.7 Socio Economic Variables and Financial Inclusion

Financial exclusion and social exclusion co exist, thus it is important to understand

what socioeconomic factors sustain financial exclusion in a population. As inferred
from the literature and observation, there is a clear relation between poverty, social
exclusion and financial exclusion. It is hence necessary to relate the level of financial
inclusion/exclusion to the socio economic factors that would have caused it.
Economic, socio-cultural and demographic trends cause financial exclusion per se.
These include the group of individuals left behind in the economic growth cycle,
increasingly referred to as the ‘underclass’ the income distribution inequality creating
low income mobility among the lowest income groups (Delvin, 2009). Delvin, 2009
has also attempted to work out the relation between total financial exclusion and the
underlying factors in United Kingdom including gender, social class, age, marital
status, household income, ethnicity, region, educational attainment, employment
status, housing tenure and number of members in households .The relation of financial
inclusion index with socio economic variables has been discussed below.

Age of head of household and Financial Inclusion

Age is often associated with experience in one’s occupation and better Experience
also implies better earning and financial inclusion level. So experience in the main
occupation has been taken into account by considering a proxy variable, namely the
age of main income earner of the family. A study by Hogarthand O’ Donnel, 1997,
2000 identified age as a decisive variable in determining the level of financial
inclusion. Distribution of financial inclusion index according to age class of
respondents of sample households showed that there is no significant association
between the two.
112
Table 5.18 Distribution of Financial Inclusion Index of households according to
age class
Age class Financially 1-29 30-60 61 & above Total
Excluded
(Low) (Medium) (High)
No. % No. % No. % No. % No. %
Below 30 26 26.5 63 64.2 9 9.3 0 0 98 100
30-45 37 16.8 40 18.3 123 56.2 19 8.7 219 100
46-60 11 6.4 13 7.6 105 61.4 42 24.6 171 100
Above 60 20 33.8 31 52.5 8 13.6 0 0 59 100
Total 94 17.2 147 26.9 245 44.8 61 11.1 547 100
P value = .790 Source: Survey
Chi square test: not significant
Exclusion was much higher among the less experienced compared to those having
more experience (Table. 4.19). Majority of the respondents from the age group 30-45
and 46-60 fell in medium inclusion while majority of below 30 and above 60
respondents fell in the low inclusion class. This could be due to higher productivity
and experience of the 30 to 60 classes as compared to the below 30 and above 60 age
group.

Table 5.19 Mean Financial Inclusion Index of households according to age class
Mean Financial Standard
Age group N
Inclusion deviation
Below 30 24.95 98 23.49
30-45 30.01 219 20.86
46-60 33.45 171 22.96
Above 60 20.38 59 22.14
Total 29.14 547 22.01
The mean financial inclusion index according to age class revealed that there was
increase in the mean index along with increase in the age class of respondents (Table
5.19). However, the index decreased among those above the age of 60.

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Educational Status

Lack of Financial Literacy is one of the biggest roadblocks to Financial inclusion.

Financial literacy is obviously an outcome of education. Hence the survey has
analysed the possibility of highest education attained by member of households to be
an influential factor affecting access to financial services.

An increasing levels of financial inclusion was observed with achievement of higher

education of member of households (Table 5.20). In the financially excluded class 52
percent are illiterate in stark contrast with zero percent in the high inclusion category.
In the medium inclusion category 75 percent have primary education whereas in the
high inclusion category a total of 89 percent have secondary and above secondary
education

Table 5.20 Distribution of Financial Inclusion Index of households according to

highest education attained by any of the family members
Financially 1-29 30-61 Above 61
Educational excluded (Low) (Medium) (High) Total
Status
No. % No. % No. % No. % No. %
Illiterate 52 55 85 58.5 12 4.9 0 0 149 27.4
Primary 31 36 50 34 185 75.5 6 9.8 272 50.3
Below
3 0 4 2.7 36 14.7 28 46 71 12.4
Secondary
Secondary 8 8.5 7 4.8 9 3.7 26 43 50 9.1
Above
0 0 1 0 3 1.2 1 1.6 5 0.73
Secondary
Total 94 100 147 100 245 100 61 100 547 100
P value= 0.003 Source: Survey
Chi Square test = Significant
Association between education and FI Index was found significant by Chi square test
of association. This could be made explicit from analysis of mean FI Indices of
households belonging to different levels of education (Table 5.21).

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Table 5.21 Mean Financial Inclusion Index of households according to highest
education attained by any of the family members

Standard deviation
Educational status Mean N
Illiterate 17.13 149 20.621
Primary 31.89 272 23.813
Below Secondary 34.52 71 22.021
Secondary 41.69 50 22.639
Above secondary 42.01 5 19.436
Total 29.14 547 21.983
Very clearly mean indices of households observed increase with highest level of
education obtained by any member of the household. The illiterate class possessed the
least index 17.13 while households with members having education above higher
secondary level had highest mean index of 42.01.

Occupational Category and Financial Inclusion

A wide variety of occupations were observed in the Urban Poor. A majority being
self employed in menial occupations and others in petty jobs and daily wage earners.
Street vendors, Hawkers, peddler, pheri wala sell articles of daily utility and general
merchandise such as vegetables, sweets, cloth, utensils and toys, on footpaths or by
going from door to door. They Purchase goods from wholesale market according to
their needs and capital available. And sell them either at their fixed space on
pavements/market area or on cycles, pushcart or walking. There are some who
prepare and sell their own products and many others operate means of conveyance.
Majority are self employed, others work on salary or commission basis or both. Since
it is not possible to list all of the occupations, similar occupations have been
categorised for convenience.

115
 Table 5.22 Occupations categorised based on similarities
Category of
Vendors/Occupatio
ns Description

Chai wala, samosa, idli dosa, Chinese food, biscuits, roti daal,
Food/ snacks golgappa,paavbhaji, ice cream,hawamithai, burgers, sweets,
bhunja wala, jhaal mudi

Women and Men clothings, jewelleries, chappals, bags,makeup

Fashion
items, glass bangles,readymades, Babies fashion

Toys All kinds of Chinese toys plastic and fluffed up

Fruits/Vegetables/ On pavements, market areas and on cycles.

Meat/Fish
Mobile phone accessories, household use hardware items, plastic
containers, decoration items ,day to day utility items, sunglasses
Utility/Accessories and watches, sox and gents hankerchief, combs, stationaries,
kitchen utilities

Pickles, pappad, snacks, tiffin suppliers, sarees, artificial

Home based business jewellery, laundry services, tailoring, fishery, carpentry, making
bidi, incense sticks, sari making, petty shops

Embroiders,sculptors,carpenters,handloomitems,handicrafts,electr
Skilled ician,potters, garage technician, barber ,tailors, electronic
repair,imitation jewellery makers,

House Painters,plumbers,cobbler,cleaner,sweeper,
Semiskilled/Unskille
guards,maisons,dyers, maids, helpers, coolies, garbage collectors,
d
scrap buyers n sellers, rags business,

Auto rikshaw drivers, taxi drivers,pushcart owners,rickshaw

Drivers/ Pullers
pullers,bus drivers

Source: Survey

116
Table 5.23 Distribution of Financial Inclusion Index of households according to
occupation
Financially 1-29 30-60 61 &
Excluded (Medium) Above
Category of (Low) (High) Total
Occupations
No. % No. % No. % No. % No. %
Food/ snacks 12 10.9 25 22.7 52 47 21 19.1 110 100
Fashion 9 15.2 13 22 34 58 3 5 59 100
Toys 2 4.7 15 34.9 22 51 4 9.3 43 100
Fruits / vegetables 3 2.9 21 20.7 51 51 26 25.7 101 100
Utility/accessories 5 7.1 17 24.2 43 61 5 7.1 70 100
Home based 12 42.9 8 28.6 6 21 2 7.1 28 100
business
Skilled 8 13.3 28 46.7 24 40 0 0 60 100
Semiskilled 5 26.3 1 5.3 13 68 0 0 19 100
Drivers & Pullers 38 66.7 19 33.3 0 0 0 0 57 100
Total 94 17.2 147 26.9 245 45 61 11.2 547 100
P Value = .000 Source:Survey
Chi square test: significant at 1per cent level
The chi square test found that the association between financial inclusion index and
occupational category is significant, implying that there is significant variability in
financial inclusion index according to occupational category. Financial exclusion was
highest in the drivers/pullers category at 66.7 percent followed by home based
business at 42.9 percent. People with remarkably high Financial Inclusion were the
fruits and vegetables sellers whose 25.7 percent belonged to high financial Inclusion
class. A majority of Utilities sellers, fruits/vegetables, toys, fashion item sellers and
semiskilled people belonged to the medium Financial Inclusion level. Kolkata is a city
known for its availability of cheap skilled labours because of migration from
surrounding cities. It is the reason why these people show poor levels of inclusion
inspite of being highly skilled. Highly skilled jobs like traditional Kantha, zardozi and
beads work of embroidery are very labour intensive and debilitating to the eyes and

117
fingers. While an average saree of Kantha work would sell at around Rs 4000 owing
to the embroidery, the labour gets only a meagre of Rs 75 per saree.

Table 5.24 Mean Financial Inclusion Index of households according to

occupation
Mean
Category of Standard
Financial
Vendors/Occupations N Deviation
Inclusion

Food/ snacks 32.3 110 23.56

Fashion 28.7 59 18.73
Toys 26.4 43 22.98
Fruits / vegetables 33.7 101 22.47
Utility/accessories 25.6 70 23.04
Home based business 22.8 28 19.49
Skilled 31.7 60 23.63
Semiskilled 33.4 19 22.19
Drivers/ Pullers 20.83 57 20.91
Total 29.14 547 21.82

The mean financial inclusion index of occupational groups (Table 5.24) shows the
variation of financial inclusion index. Drivers/Pullers category was found to be having
the least level of financial inclusion index 20.83, followed by home based business
22.8. The highest index was for the Fruits/Vegetables vendors at 33.7.

Expenditure Class

Financial exclusion or marginalization is invariably experienced by poorer members

of society. Studying Income pattern of Urban poor is of significance to know what
makes them vulnerable to the black economy. However estimating income of the
urban poor is little difficult because of uncertainty in earning pattern. Many are

118
seasonal earners, they earn only when that particular job is in demand and rest of the
year they are jobless and penny less.

Occupations like Painters, Vegetable/Fruit vendors, snacks sellers and all kinds of
sellers on pavements get badly hit by rains with their income coming down to zero in
this season. Similarly skilled artisans like sculptors are unemployed in the off season
with culmination of Durga pooja and Saraswati pooja. In such cases estimation of a
monthly income becomes unpredictable. So In lieu of estimating monthly income of
households, monthly expenditure for household consumption and necessities were
used as proxy variable.The distribution of households in various expenditure classes
according to financial inclusion index reveals that higher financial inclusion is
associated with higher expenditure (Table 5.25). The explanation for this phenomenon
can be the requirement of finances to meet the expenditure of household when
earnings does not match the expenditure pattern coupled with a host of other factors
including unexpected emergencies. The chi square test of association revealed the
association between expenditure of households and financial inclusion index is
significant at 5 per cent level of significance.
Table 5.25 Distribution of Financial Inclusion Index of households according to
expenditure (income proxy)
Expenditure Financially 1-29 30-61 61& above
class excluded
(Low) (Medium) (High) Total
In Rs.
No. % No. % No. % No. % No. %
Below 2000 56 55.4 33 32.7 12 11.9 0 0 101 100
2001- 3500 18 7.8 71 31.4 117 51.8 20 8.8 226 100
3501- 5000 12 9.0 27 20.1 78 58.2 17 12.7 134 100
Above 5000 8 9.3 16 18.6 38 44.2 24 28.0 86 100
Total 94 17.2 147 26.9 245 44.8 61 11.2 547 100
P Value =0.002 Source:Survey

Chi square significant at 5 per cent level

119
In order to find the explicit relation between expenditure of households and financial
inclusion mean financial inclusion index of households was analysed. This revealed
that level of financial inclusion increased with increasing expenditure class. The index
increased from 19 for expenditure class below Rs. 1500 to 42.2 for expenditure class
above Rs.4501(Table. 5.26). The results corroborated the findings of Dayson and
Dawson (2004) and Carbo et al, 2010 that families with lower incomes are most likely
to be financially excluded.

Table 5.26 Mean Financial Inclusion Index of households according to

expenditure
Income class Standard
Mean N
In Rs. Deviation

Below 1500 19.0 101 20.014

1501- 3000 22.7 226 18.569
3001-4500 39.3 134 23.476
Above 4501 42.2 86 20.916
Total 29.14 547 21.733

Family size

Family size was invariably associated with the financial Inclusion status of the
household. Poor people generally tend to have a large number of children because of
the mindset that more hands to work will bring in more money. Poverty is thus more
often than not associated with large number of family members. Models have
recognized the importance of family size in determining the financial inclusion status
of households. Larger families tend to have higher expenditure and lack of
proportionate income induces dependence on sources of finance including formal
sources of finance and thus boosting up level of financial inclusion (Table 4.28). It
was observed that only 9.3 percent of households with large no. Of family members
were financially excluded in contrast with 28 percent of households having small
families. High level of financial Inclusion was also observed in large size families at

120
17 percent whereas only 7.8 percent of small families were in the bracket of high
financial Inclusion. Low Financial Inclusion was observed in 28 percent of small
family size households while 25 percent of households with large family size were at
low level of financial Inclusion.

Table 5.27 Distribution of Financial Inclusion Index of households according to

family size
61 &
Financially 1-29 30-61
above Total
Excluded (Low) (Medium)
Family Size (High)
No. % No. % No. % No. % No. %

5 & Below 5
73 22.8 91 28 133 41.6 25 7.8 320 100
members

Above 5
21 9.3 56 25 112 49.3 38 17 227 100
members

Total 94 17.2 147 27 245 44.8 61 11 547 100

Source: Survey

P Value=.078
Chi Square test not significant
The relationship between family size and the level of financial inclusion was not
found to be significant. Analysis of distribution of households according to family size
could not establish any particular pattern to explain the classification of levels of
financial inclusion. The Chi square test also was not significant reiterating that there
was no significant association between family size and level of financial inclusion.

5.8 Sufficiency of Microfinance in addressing Barriers to Financial

Inclusion

The objective is to find How far Microfinance has succeeded in addressing the

barriers to financial Inclusion.

121
Research Methodology

Why case study method is selected?

This research questions necessitate in-depth coverage of aspects relating to the

evaluation of the role of MFPs in promoting financial inclusion, an aspect that is not
readily observable. As this necessarily involves complexity, qualitative research suits
the research objectives of the thesis. Creswell (2007) advocates use of qualitative
methods “when we need a complex, detailed understanding of the issue”. Denzin and
Lincoln (2005) define qualitative research as consisting of a set of interpretive,
material practices that make the world visible. Qualitative researchers study
phenomena in their natural settings, attempting to make sense of, or interpret them, in
terms of the meanings people bring to them. These aspects make qualitative research
suitable for answering this research question. Creswell (2007) mentions that there is
no agreed upon structure for a qualitative study but has identified five qualitative
approaches.

1) Narrative research usually involves focusing on studying one or two individuals

and gathering data primarily through their spoken or written text, giving an account of
an event (or action) or a series of events (or actions) chronologically connected.

2) Phenomenological research on the other hand, describes the meaning for several
individuals of their lived experiences of a particular concept or a phenomenon, with a
view to reducing individual experiences to a universal essence.

3) Grounded theory research tries to move beyond description and generate or

discover a theory, an abstract analytical schema of a process.

4) Ethnographic research describes and interprets the shared and learned patterns of
values, behaviors, beliefs and language of a culture sharing group.

5) Case study research involves the study of an issue explored through one or more
cases within a bounded system (Creswell, 2007). Rossman and Rallis (2003) state that
case studies seek to understand a larger phenomenon through intensive examination of
one specific instance.

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Of the five approaches described above, the case study method fits most closely the
required objective. Narrative or phenomenological research is not appropriate as the
research questions do not focus on particular individuals or events. Grounded theory
and ethnography too are not suitable as the intention is not to develop theory or focus
on particular cultural groups. The objective is however to study an issue or
phenomenon (microfinance) by examining specific cases (microfinance programs and
their members) which suggest that the case study method is appropriate. A case study
involves in-depth data collection from multiple sources of information relating to a
single case or multiple cases. It is therefore proposed to conduct three levels of
enquiry as will be described in the following section. The research methodology used
in addressing this research objective is as presented in National University of
Singapore Shankar S(2011).

Data sources and Collection

According to Creswell (2007), the use of multiple sources of data is an important

characteristic of qualitative research. In particular for case studies, he mentions that
data collection is typically extensive drawing on multiple sources of information. Yin
(2002 argues that “the use of multiple sources of evidence in case studies allows an
investigator to address a broader range of historical, attitudinal, and behavioral issues.
So three lines of enquiry were followed, which are described below.

1) Sector level enquiry

The first is at the broader microfinance sector level, drawing on secondary sources of
data. As this is the context in which the MFPs as well as MFP members operate,
trends at the macro level reflect trends at the meso and micro levels.

The question regarding the barriers to financial inclusion was addressed by examining
two aspects: “Are microfinance services uniformly available in all regions of India?”
and “Do microfinance programs focus on geographic areas that are not adequately
served by the banking sector?” The first question is important to understand if there
are physical barriers to microfinance access. The second question enables us to
analyze the spread of microfinance services vis-a-vis that of banking services. The

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relationship will reveal the extent to which microfinance program fill in gaps in
banking sector services. The analysis draws on published data sources such as annual
“State of the Sector” reports and reports regarding trend and progress of banking
available from the RBI web site

2) Microfinance Provider level inquiry

The second level of enquiry is at the MFP level. Five Microfinance Institutions were
selected ,their Executives and field officers were interviewed. In-depth semi-
structured interviews were conducted with 5 senior MFI executives and short
structured interviews were conducted of 30 field staff. Field officers of an MFI are the
contact points between the MFI and its members. They perform the critical roles of
group formation, training and monitoring, and as such are likely to be well aware of
the ground-level realities. In order to tap into this valuable resource, field staff was
surveyed.

3) Member Level enquiry

The third level of enquiry is at the microfinance member level. In addition to

questions directly addressing the three research sub-questions, the interviews aimed at
understanding the history of important financial decisions by the members since
commencement of MFP membership. The objective was to use this history as
additional evidence to analyze some of the research questions. Thirty Low income
women who are at least in the third year of membership were selected for the purpose
of the interview.

Data Analysis

Data analysis in qualitative research consists of preparing and organizing the data for
analysis, then reducing the data into themes through a process of coding and
condensing the codes, and finally representing the data in figures, tables or a
discussion (Creswell, 2007). The process of data analysis typically includes data
management (into files), reading (generating memos), describing, classifying and

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interpreting (developing codes and categories) and finally representing and visualizing
(into text, tables or figures).

First, for the in-depth interviews with senior MFI executives, data analysis involved
transcription of interviews, thematic analysis and presentation in the form of a
discussion . As the interviews were only Five in number, data reduction was not
required. A matrix display showing areas of agreement and disagreement in views of
senior executives in both helped conclusion drawing.

Second, for the field officer interviews, the detailed comments of each field officer
were transcribed on individual copies of the question format. As these were 30 in
number, numeric codes were assigned to expected responses for each question at the
time of framing the questionnaire. When new categories of responses emerged,
additional numeric codes were assigned by the researcher. Each questionnaire with the
associated codes for each question, was then entered into a Microsoft excel sheet.
Using the pivot table function the frequency of each code was counted for each
question and the responses were organized into tables. The pivot tables were then
summarized and are presented.

Third, for the in-depth interviews with 30 low income women, data analysis involved
transcription of the interviews and thematic analysis. Patterns of behavior were
identified across cases which enabled identification of distinct “categories” of
members in each model resulting in data reduction. The results are presented in
through data displays in the form of boxes (which highlight particular individual
cases) and tables (which provide comparisons across cases).

5.8.1 Sector Level Enquiry: Barriers to Financial Inclusion

Sector level data is used to shed light on whether microfinance sector has contributed
to mitigating physical barriers to financial inclusion by using data on the geographical
distribution of microfinance services. Two specific questions are sought to be
answered through this enquiry.

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Question 1 “Are microfinance services uniformly available in all regions of
India?”

Question 2 “Do microfinance programs focus on geographic areas that are not
adequately served by the banking sector?”

The first question is important because if the microfinance sector is to play a role in
providing financial inclusion, it needs to be available in all regions and not only in
specific areas. The answer to this question will enable us to understand if there are
barriers to microfinance access (like there are barriers to financial inclusion). The
second question enables an analysis of the spread of microfinance services vis-a-vis
that of banking services. The relationship could help reveal the extent to which
microfinance programs fill gaps in banking sector services.

Answer to Question 1

Question 1 “Are microfinance services uniformly available in all regions of

India?”

To answer the first question, the Microfinance Penetration Index (MPI) and the
Microfinance Poverty Penetration Index (MPPI) which have been reported in the
Microfinance India state of the sector report (Srinivasan, 2009) are studied as they
indicate the availability of microfinance in different states in the country. While the
MPI compares a state’s share in the total number of microfinance borrowers in the
country to its share of the country’s population, MPPI compares the state’s share in
the total number of microfinance borrowers to its share of the population of poor in
the country.

In order to estimate the indices, first the number of MFI borrowers and SHG members
with outstanding loans from banks are computed. Then each state’s share of
microfinance customers (including both models) in the country is estimated (MF
share). The MPI is computed by dividing the MF share by the state’s share in the
population of the country (population share).

MPI=MF Share / Population Share

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The MPPI is derived by dividing the MF share by the state’s share in the population of
poor in the country (Poverty share).

MPPI=MF Share/ Poverty Share

Since MF share is in the numerator in the case of both indices, an MPI value greater
than 1 indicates that the state’s share of microfinance borrowers exceeded its share of
the population while an MPPI value greater than 1 indicates that the state’s share of
microfinance exceeded its share of the population of poor (Srinivasan, 2009). A fall in
MPI over time implies that the growth in microfinance was lower than the national
rate of growth. An increase in MPI implies that the regional growth was higher than
the national rate.

The MPI and MPPI calculation for all the states in India, grouped region wise, is
presented below. It is important to know where other states in India are as compared
to West Bengal.

Table 5.28 : Microfinance Penetration in India

SNo. State MPI(2012) MPPI(2012) MPI(2013) MPPI(2013)
Northern Region:
1 Himachal 1.21 3.33 1.00 2.75
Pradesh
2 Rajasthan 0.70 0.88 0.36 0.46
3 Haryana 0.13 0.26 0.15 0.29
4 Punjab 0.08 0.27 0.13 0.41
5 Jammu & 0.08 0.41 0.02 0.08
Kashmir
6 New Delhi 0.04 0.08 0.08 0.16
Total (A) 0.40 0.71 0.26 0.45
North Eastern Region:
7 Assam 1.00 1.39 0.69 0.96
8 Meghalaya 0.12 0.18 0.21 0.31
9 Tripura 0.51 0.76 0.92 1.36
10 Sikkim 0.15 0.18 1.53 1.91
11 Manipur 0.29 0.46 0.30 0.49
12 Arunachal 0.10 0.16 0.77 1.22
Pradesh
13 Nagaland 0.14 0.20 0.06 0.09
14 Mizoram 0.60 1.35 0.44 1.00
Total (B) 0.78 1.12 0.63 0.91

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 Eastern Region:
15 Orissa 2.68 1.59 2.13 1.26
16 Bihar 0.30 0.20 0.25 0.16
17 Jharkhand 0.43 0.29 0.37 0.25
18 West 0.99 1.10 1.45 1.61
Bengal
Total (C) 0.94 0.71 0.98 0.74
Central Region:
19 Madhya 0.37 0.27 0.37 0.26
Pradesh
20 Chhattisgah 0.85 0.57 0.83 0.56
21 Uttar 0.37 0.31 0.18 0.15
Pradesh
22 Uttarakhand 0.69 0.48 2.46 1.71
Total (D) 0.42 0.33 0.35 0.28
Western Region:
23 Gujarat 0.35 0.57 0.16 0.27
24 Maharashtra 0.97 0.87 0.90 0.80
25 Goa 0.27 0.50 0.46 0.86
Total (E) 0.75 0.80 0.64 0.69
Southern Region:
26 Andhra 3.03 5.27 3.84 6.68
Pradesh
27 Karnataka 2.15 2.37 1.94 2.14
28 Kerala 1.29 2.36 1.16 2.13
29 Tamil Nadu 2.18 2.66 2.24 2.73
30 Puducherry 0.77 0.96 0.73 0.91

Total (F) 2.32 3.22 2.55 3.54

GRAND 1.00 1.00 1.00 1.00
TOTAL

Source: Author based on details in state of the sector report 2012,2013 and Srinivasan
2009

The indices reflect the regional dispersion of microfinance in India, with growth being
concentrated in the Southern states of Andhra Pradesh, Tamil Nadu and Karnataka.
These are the states where microfinance was first introduced, primarily due to
availability of relatively better infrastructure, support from state Governments, and the
existence of reputed NGOs. In March 2013, the share of the Southern states in client
outreach was 55 percent in the case of the SHG model; while in the MFI model, it was

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54 percent (Srinivasan, 2009). In terms of loans outstanding, the share of the Southern
states in each of the two models was 69 percent and 58 percent respectively. Even
though there has been growth in microfinance in other states, particularly in the
Eastern and Northern parts of the country, the dominance of the Southern states has
continued. In fact in 2013, the share of the Southern states marginally increased as
compared to the share in 2012.

The MPI for the Southern region is 2.32 and 2.55 for the years ended in March 2012
and 2013, indicating that its share of microfinance is more than double its share of
population. The MPPI is even higher at 3.22 and 3.54 for the same two periods. The
indices are also indicative of the higher microfinance loan sizes in the region which is
to be expected in areas where microfinance has a longer history, as borrowers access
bigger loans with increasing duration of membership. This is in itself a welcome
development, as for both borrowers and for lending institutions, larger loans are more
useful. The former benefit as they are then able to make larger investments while for
the latter, larger loan sizes improve profitability. Even within the Southern region, it is
found that that MPI and MPPI is unusually high for one particular state, Andhra
Pradesh (AP). The Southern states are followed by the Eastern, Western and North-
Eastern regions in terms of microfinance penetration. In these areas, MPI was between
0.5 and 1. In the central and northern parts of the country however, MPI was less than
0.5. MPPI also follows broadly the same trend. The Northern and Central regions
however have MPIs and MPPIs lower than 0.5 indicating that these regions are clearly
lagging in microfinance penetration.

It is clear that the conditions for microfinance activities are not perceived to be
uniformly conducive in all parts of the country. While in some states, the penetration
of microfinance is assuming exceedingly high levels leading to fears over multiple
lending; in other states vast sections of the low income households are underserviced.
The availability of better infrastructure and governance is likely to be one feature
which differentiates states that have achieved considerable outreach and those that
have not. Moreover, it appears that risk levels are usually perceived to be lower in
states in which successful NGOs and MFIs have demonstrated that conditions

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conducive to microfinance activity exist, as compared to states in which there are no
such examples. There certainly seems to be a case for policymakers to examine and
address the skewed geographic growth of microfinance in the country. There is a need
to make underserved areas more attractive for microfinance providers. There is an
equally great need to monitor microfinance growth in areas where it has already
reached near-saturation levels.

Answer to Question 2

Question 2 “Do microfinance programs focus on geographic areas that are not
adequately served by the banking sector?”

To answer this question it is proposed to examine if areas not adequately served by

microfinance are adequately served by the mainstream financial sector. So three basic
dimensions of an inclusive financial system – banking penetration (BP), availability of
the banking services (BS) and usage of the banking system (BU) are considered as
indicators marking the active presence of Mainstream Financial System ( Sadhan
Kumar Chattopadhyay 2011).

Banking penetration (Dimension 1)

This is one of the most important indicators of financial inclusion. Ideally, inclusive
financial system should penetrate widely amongst its users. The size of the banked
population, i.e., number of adult population having a bank account is a measure of the
banking penetration of the system. Thus if every adult person in an economy has a
bank account, then the value of this measure would be equal to 1. In the absence of the
data on banked population, we use number of bank accounts as a proportion of the
total population as an indicator of this dimension. However, we use both deposit
account and credit account or loan account as the indicators of banking penetration.

Availability of banking services (Dimension 2)

Under an inclusive financial system, banking services should be easily available to its
users. Availability of services can be indicated by the number of bank outlets (per
1000 population) and/or by the number of ATM per 1000 people, or the number of

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bank employees per customer. In India, there is another concept introduced in the
banking system which is known as Banking Correspondence (BC) model in order to
provide the banking services to the people of the nation. In the absence of data on the
number of ATMs and number of BCs appointed, we use the number of bank branches
per 1000 adult population and also number of branches per square km to measure the
availability dimension.

Usage (Dimension 3)

This dimension emerges from the concept of “under banked” or “marginally banked”
people, as observed by Kempson et al (2004). It observes that “in some apparently
very highly banked countries, a number of people with bank account are nonetheless
making very little use of the services on offer”. Thus merely having a bank account
does not ensure that the system is inclusive; it is also imperative that the banking
services are adequately utilised. In order to incorporate the usage dimension in our
index, we consider two basic services of the banking system – outstanding credit and
deposit. Accordingly, the volume of outstanding deposit and credit as proportion of
the Net District Domestic Product (NDDP) has been used to measure this dimension.

Using data on all three dimensions (penetration, availability and usage) for 23 states
and 18 districts for the years 2010-2013, an index of Financial Inclusion (IFI ) is
developed computing and averaging the value for four years. The index is as
developed by Sadhan Kumar Chattopdahyay (2011) in his study of financial Inclusion
in West Bengal. Depending on the values of IFI, states and districts are categorized
into three categories, viz.

(i) 0.5 < IFI ≤1 – High financial inclusion

(ii) 0.3 ≤ IFI <0.5 – Medium financial inclusion

(iii) 0 ≤ IFI <0.3 – Low financial inclusion

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 Table 5.29 State-wise Index of Financial Inclusion
State Penetration Availability Usage IFI IFI
D1 D2 D3 Rank

High Financial Inclusion 0.5-1

Kerala 10.7 0.81 0.28 0.54 1
Maharashtra 0.62 0.29 1 0.53 2
Karnataka 0.72 0.47 0.46 0.53 3
Medium Financial Inclusion (0.3-0.5)
TamilNadu 0.7 0.43 0.38 0.48 4
Punjab 0.45 0.69 0.29 0.45 5
Andhra Pradesh 0.56 0.3 0.41 0.41 6
All-India 0.27 0.22 0.55 0.33 7
Himachal Pradesh 0.42 0.4 0.18 0.33 8
Sikkim 0.28 0.33 0.34 0.32 9
Haryana 0.39 0.5 0.12 0.32 10
Low Financial Inclusion (0-0.3)
West Bengal 0.24 0.38 0.23 0.28 11
Gujarat 0.32 0.3 0.16 0.26 12
Uttar Pradesh 0.28 0.31 0.15 0.24 13
Meghalaya 0.21 0.28 0.14 0.21 14
Tripura 0.31 0.22 0.08 0.2 15
Orissa 0.26 0.23 0.11 0.2 16
Rajasthan 0.25 0.22 0.12 0.19 17
Arunachal 0.2 0.16 0.14 0.17 18
Pradesh
Mizoram 0.13 0.26 0.09 0.16 19
Madhya Pradesh 0.18 0.21 0.08 0.16 20
Bihar 0.15 0.24 0.08 0.15 21
Assam 0.17 0.17 0.07 0.13 22
Nagaland 0.03 0.04 0.07 0.05 23
Manipur 0 0.01 0.01 0.01 24
Source: Based on data in Chattopadhyay 2011
District-wise Financial Inclusion in West Bengal

Now coming to the West Bengal scenario, it is observed that in the group of 18
districts for which a 3-dimensional IFI has been computed by using data on 3
dimensions of financial inclusion, Kolkata leads with the highest value of IFI followed
by Darjeeling (Table 5.30).

However, only one district, viz., Kolkata belongs to the high IFI group with IFI values
of 1.0. All other districts have a low IFI values, hovering between 0.0 and 0.3. It is

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interesting to note that no district is falling under the medium level of financial
inclusion. Thus the IFI values clearly indicate that level of financial inclusion is
significantly low in West Bengal.

Table 5.30 District-wise Financial Inclusion in West Bengal

Districts Penetration Availability Usage IFI IFI
Rank
High Financial Inclusion (0.5-1)
Kolkata 1 1 1 1 1
Low Financial Inclusion(<0.3)
Darjeeling 0.23 0.1 0.1 0.14 2
Birbhum 0.16 0.06 0.03 0.08 3
Bardhaman 0.13 0.06 0.06 0.08 4
Haora 0.1 0.05 0.07 0.07 5
Hugli 0.1 0.04 0.04 0.06 6
Bankura 0.12 0.04 0.02 0.06 7
North24- 0.09 0.03 0.06 0.06 8
Parganas
KochBihar 0.13 0.03 0.01 0.05 9
Midnapore 0.09 0.04 0.02 0.05 10
Maldah 0.09 0.04 0.01 0.05 11
Nadia 0.08 0.01 0.02 0.04 12
Puruliya 0.06 0.03 0.02 0.04 13
Dakshin 0.07 0.02 0.01 0.03 14
Dinajpur
Jalpaiguri 0.07 0.01 0.02 0.03 15
Uttar 0.05 0 0.01 0.02 16
Dinajpur
Murshidabad 0.05 0.01 0.01 0.02 17
South 24- 0.02 0 0.01 0.01 18
Parganas
Source: Based on data in Chattopadhyay 2011
APPBB as a parameter of Banking Penetration

Another more frequently used parameter for measuring banking penetration is the
average population served per bank branch (APPBB). This is a frequently used
measure of financial inclusion with regard to banking services. This measure for all
the states in the country, grouped region-wise is displayed in Table 5.31.

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Table No 5.31. State wise number of branches and Average population per bank
branch as on 1st March 2013
Total Average Population Per Bank
State/Union Territory
Branches Branch (In Thousands)
Andaman & Nicobar Islands 37 11
Andhra Pradesh 6520 13
Arunachal Pradesh 76 16
Assam 1377 22
Bihar 3825 25
Chandigarh 258 4
Chhattisgarh 1217 20
Dadra & Nagar Haveli 24 11
Daman & Diu 18 11
Delhi 2177 8
Goa 407 4
Gujarat 4339 13
Haryana 2149 11
Himachal Pradesh 950 7
Jammu & Kashmir 973 13
Jharkhand 1705 18
Karnataka 5759 10
Kerala 4053 9
Lakshadweep 11 6
Madhya Pradesh 3958 18
Maharashtra 7551 14
Manipur 80 33
Meghalaya 201 13
Mizoram 93 11
Nagaland 86 26
Orissa 2689 15
Puducherry 124 9
Punjab 3240 8
Rajasthan 3900 17
Sikkim 71 8
Tamil Nadu 5890 11
Tripura 213 17
Uttar Pradesh 9658 20
Uttarakhand 1083 9
West Bengal 5023 18
ALL-INDIA 79735 15

Source : RBI Master Office File on commercial banks 2013

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The state-wise data on Average Population Per Bank Office (APPBO) and Average
Population per Bank Branch (APPBB) presented in theTable are worked out based on
estimated population as on 1st March 2011 received from the Office of the Registrar
General and Census Commissioner, Government of India. The results from Table 5.29
and Table 5.30 are summarized and displayed in the form of a matrix (Table 5.32)
which is obtained by cross-tabulating microfinance availability with banking access.
Microfinance availability of regions is classified into two categories; those with an
MPI in excess of “0.5” are described as “high microfinance coverage”. Regions with
MPI equal to or lower than “0.5” are considered as having “low microfinance
coverage”. As the MPI by definition should be around 1.0 for the state to be
represented in the proportion of its population, a ratio of 0.5 indicates that 50 percent
progress has been made. In the case of average population per bank branch, as “15” is
the national average, regions having higher than average figures can be considered as
having “low banking coverage” while those having lower than average figures can be
considered as having “high banking coverage”.

Table 5.32 Matrix on Availability of Microfinance and Banking Services

Low Availability of High Availability of
Microfinance Microfinance

Low Availability of Central Region North eastern Region

Banking
Eastern Region (West
Bengal)

High Availability of Northern Region Southern Region

Banking
Western region

Source: Author

The matrix in Table 5.32 leads to the following observations:

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1. In the North Eastern and Eastern regions of the country where the number of bank
branches relative to the population is low, microfinance has made considerable
progress in increasing access to financial services.

2. In the Northern region, where bank branches relative to the population is high,
microfinance access is low.

3. The Southern and Western regions of the country have higher than average number
of bank branches to their population and have also seen high access to microfinance.

4. The Central region seems to have lower access to both bank branches and
microfinance. An examination of the intra-regional figures however suggests that
within the Central region, Uttarakhand is greatly favored by both the banking and
microfinance sectors. Chhattisgrah also has substantial microfinance access as
reflected by its MPI of 0.83 though its banking coverage is low at 20,000 persons per
bank branch. Uttar Pradesh and Madhya Pradesh on the other hand have not exhibited
adequate bank branch or microfinance coverage.

5.8.2 Microfinance Provider Level Enquiry

The questions that pertain to this theme are:

Question 1. To what extent do MFIs cover financially excluded segments of the

population in their areas of operation?

Question 2. Are there any financially excluded segments of the population that you do
not cover? If so, what are the reasons?
Discussion with Senior officials of Arohan, Anjali, Jagran, Bandhan and Aashirvaad
repeatedly pointed to similar kind of answers. All of them reinstated that they are
interested in covering the financially excluded sections but all of them cannot be
covered . Following are the salient points derived out of the discussion.

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 Table 5.33 Results of Discussion with Senior Officials of MFI
Results of Discussion with Senior Officials of MFI
1. MFI chooses only those households where a good income generating promise is
expected.
2. They prefer not to go beyond their set target limits due to high risks. The focus was
on quality of loan portfolio. Moreover, once branches reached the benchmark number
of members, they focused on maintenance of portfolio by gradually increasing loan
amounts and replacing members who dropped out
3.Majority of the customers do not have bank account and are financially excluded
4.None of them use the Government of India’s list of “below poverty line” families,
Instead they find out potential families by regular exhaustive interactions through the
channels of field officers
5.MFI’s focus on new geographic coverage than geographic penetration of the area
already covered
Field Officer’s Interview

A total of 30 Field officers belonging to different MFI’s, were interviewed .The theme
was to find answers to the following questions

Question 1. Have you come across a situation where a financially excluded member
could not access microcredit? If yes, What are the main reasons?

Table 5.34 Field officers’ Responses: Main reasons for Individuals not being able
to join microfinance groups

Reasons for not being able to join Percentage of Field officer responses that
Microfinance groups referred to the reason

Loss of daily wages for wage earners 46%

Lack of address proof and other

22%
documents

Restriction from male gender at home 18%

Lack of income producing activity to

14%
engage in

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Table 5.35 Results of Discussion with MFI Field officers

Results of Discussion with MFI Field officers

1. MFI denies loan to those who cannot commit to the weekly meetings because of the
nature of their occupation which entails loss of that days earning or if the target set by
the MFI has been overachieved in a particular area
2. Since many of the potential customers are migrant labourers from neighbouring
states, they lack address proof and other documents
3. Muslim women refrain from joining any social activity because of restrictions from
the male members of their house.

4.People who are employed on wage or salaried like construction labourers, household
maids do not have any income generating activity to get engaged in. They are
interested in availing loans but have no economic activity for utilisation of loan,
instead they may use it for fulfilment of household expenditure like marriage,
hospitalisation etc. Such cases are also rejected.

5.8.3 Member Level enquiry

Twenty eight low income individuals who have membership with MFI for at least two
years and two individuals whose loan request was rejected by the MFI were
interviewed. The questions were posed in order to understand the financial position of
the household, how it has changed since microfinance membership, and if there is a
need for any financial service that is not being met at present. Answers to the
questions are sought on Before (At the time of joining Microfinance) and after (after
the membership with MFI) basis. The question pertaining to this level of enquiry are
as follows:

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Table 5.36 Interview Questions for Member Level Enquiry

Questions for Member level Enquiry Before After

1. What is your income, sources of income and if there
fluctuations in income in a year?
2. Are you saving, if yes where are you saving ie.
Jewellery/Banks/ chit funds/other and why?
2.1 What are the reasons for saving?
3. Do you think the loan you borrowed was sufficient?
3.1 After becoming a member how many times have you borrowed from
moneylenders and for what purpose?
4.Do you feel the need of a financial product which is currently not offered?

The responses under this head are organized thematically and not question wise. The
findings for the group of 30 respondents as a whole are discussed. The findings
reverberated the Field officer’s view on the concerned theme. This is a very positive
finding with respect to the MFI’s reach with their customers. Through the
appointment of field officers MFI’s have built a strong bonding with their customers
as each and every aspect of their customer, their needs and their problems are very
well known to the field officers who are in close association with them through
weekly or monthly meetings. All the interviewees uniformly mentioned that only
those unable to meet the MFI’s conditions regarding meeting attendance or weekly
repayment refrained from joining. Two remarkable stories of people rejected for
Microfinance loans, one of a rag picker and the other of Hawamithai wala is presented
here in Box no. 1

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 Table 5.37 Results of Discussion at Member Level Enquiry
Results of Discussion at Member Level

The discussion with the respondents about their financial state at the time of joining
microfinance did not fetch an accurate assessment as they were members since at least
two years and could not recollect the past data with accuracy. While the respondents
could not speak about the numbers , they subjectively felt that they are financially in a
better position post membership. 16 out of 28 felt their condition has improved.6
could not judge their position as new expenditures due to changes in family structure
arose because of which it was still “difficult” to manage. Three others said that inspite
of increase in income the loans are tolling heavy on them and they wish they had not
taken the loan at the first place. Two said they had utilized the loans for some
household expenditures not validating any reason by just saying “kharch ho gaye” and
overall they are feeling trapped by the loan. One had used the microfinance loan to
service a high interest loan taken from local moneylender. It was observed that 23 out
of 31 respondents had variability in income and they did not have any particular
mechanism or instrument for handling the variability.17 out of 23 had multiple
sources of income so that some minimum income continued throughout the year.
Some of them worked as construction labourers during periods when their regular
activity was not in season. The rest five managed with savings or borrowings from
friends and relatives. These borrowings may or may not have a minimal interest clause
depending upon the closeness of the relation.

Out of the 28 microfinance members, 22 reported that they saved regularly. The
average savings per month was about Rs 350 after giving the loan instalments. Out of
the 22 only 4 had bank accounts which they had never used and did not feel the need
to use it. The reasons cited for not visiting banks was more of a psychological
inhibition (Voluntary exclusion) than lack of access. The purpose of Savings varied
from servicing small loans, buying jewellery, children’s education, and marriage to
investments in occupations. Post Office, LIC and chit funds are the preferred saving
destinations and a few women also prefer to keep it at home in hiding from their
husbands. As the interviewees do not seem to actively use bank accounts, it seems that

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microfinance does typically reach those excluded by banks.

11 out of 28 members did not find the loans to be sufficient, while they have the
ability to service higher loans. These are the people who have effectively utilized the
loan for expansion of their occupation which led to a marginal increase in income .
They contend that if higher amount of loan was available to them (about 1.5 times of
the loan tended) they would have done better in their occupations.4 out of the 11
borrowed from informal sources to fill the gap while another 6 accessed informal
borrowing for the purpose of meeting contingencies. Whenever there is a mismatch
between the need for a loan and it’s availability, respondents have accessed to
informal borrowing for the lack of access to formal sources. An inflexibility
associated with functioning of MFI was hence observed. The method of operation of
the MFI involves the group as a whole availing a loan at a time and when repayment
period is over, once more applying for fresh round of loans. This means that loans are
available to members of a particular group at only at a certain time during the year
when one lending cycle is completed. This gap left by the inflexibility of microfinance
is bridged by borrowings from informal sources.

One important missing aspect of microfinance observed was that the poor need credit
not just to support their mode of living but also for other purposes like educational
requirement of their children. There were 3 members whose children were meritorious
and hard working and were selected for medical and engineering seats. Microfinance
do not have provision for such loans. Educational loans are longer term loans whereas
the loans extended by microfinance institutions are to be repaid over a maximum of 2
year period ( a period of 50 weeks in many cases). Often there is a regular dependence
on moneylender loans to bridge the cash flow gap till they obtain the disbursement of
the next loan.

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 BOX NO. 1

Reason for not being able to join Microfinance – Lack of economic activity

Shakuntala is a waste picker who collects plastic bottles and other plastic waste from
streets and garbage dumping ground to eek out a living. She earns Rs 30-Rs 40 a day by
selling it to kabaadi shop in the neighbourhood. She is a single woman with one 10
month old baby whom she carries along while on job and another a 3 year old. She is a
financially excluded. She lives in a slum and in a street where Microfinance activities are
high. All of her neighbourhood women have availed microfinance loans. She had
approached the Field officer for a small loan of Rs 2000 with which she wishes to start
selling tea and pakoras. But she was turned down because her present occupation is not
an economic activity with which she will be able to pay back her loan. Shakuntala is at
the bottom most rung of the scrap trade, leave alone shakuntala ,even all other points
higher up in this ladder are not eligible for loans. Typically, the scrap dealer’s shop is not
registered. He does not pay any tax. He cannot get a loan to expand his business because
dealing in scrap is not recognised as an economic activity by bankers though India has
one of the highest levels of recycling in the world. The scrap dealer cannot even
mortgage the land where his shop is located — he is a squatter. He sells his scrap to
bigger dealers who sell the plastic to remoulding factories, the old newspapers to paper
mills. If he needs a loan, he taps this network. The vicious cycle continues. A promise of
an income generating activity in future is not a criteria for extending loans as these are
high risk groups with no collaterals. Microfinance in such cases does not encourage a
financially excluded person to start a new activity to earn more. Their focus in on
extending loans only to those elite poor who have the existing capacity to pay back.
Therefore the model of Microfinance needs to come up with variety of products to suit
every class of poor along with good regulatory framework to be able to successfully
address barriers to financial Inclusion.

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 Reason for not being able to join Microfinance - A case of hawa mithaiwala

Muhammed sells hawa mithai (cotton candy) in busy areas of Kolkata’s old market known
as Hogg Market. His day begins at 4 am when he starts preparing the cotton candy, packs it
in a plastic cover and hangs it on to a lathi. He makes 50-60 hawa mithai and sets off for
the day. He commutes around 28 km by local train to reach Hogg market and then walks
throughout the day to surrounding parks and streets to start his business day. Each hawa
mithai is sold at Rs 5,so he can make a maximum of Rs 300 per day. Taking off his input
costs, travelling costs and food costs, he can earn a maximum of Rs 120 per day. But on
most of the days he is able to make a profit of Rs 70- Rs 80. He returns home by 8 pm in the
evening. With a psychiatric ill unmarried sister, a wife and 4 children he is barely able to
make ends meet. He is interested in taking a micro loan but his work timings deter him from
becoming a member. His one day absence from his work means a foodless day for his
children. He can not attend the regular meetings and regularity in attendance is a must for
any MFI membership. Field officers only accept members who reside in the street where the
meeting is held, or in the next street. Hence he cannot even consider joining groups in other
locations. This requirement of MFIs follows from experience that attendance in group
meetings tend to falter when the member lives further away. Regular attendance in group
meetings is an important pre-condition for MFI membership. This ensures payment
discipline and also reduces instances of frauds by members. However, it also means that
People like Muhammed remain financially excluded.

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 6. Summary, Findings and Conclusions

6.1 Summary

With India’s growth story there is a parallel growth story of the Urban Poor who are
growing in numbers and their inhuman settlements increasing in size. Scale of urban
poverty in India is staggering with an estimated4 100 million poor people live in urban
settlements comprising 40% of the urban poor. These numbers are expected to rise.
The prediction is that the total urban population of India will increase from 26% of
total population to over 36%-50% over the next twenty-five years. The number of
urban poor would increase to 200-300 million. Access to financial services is the
most important tool to achieve both, social development and social protection
measures for the poor. These services create an opportunity for access to low interest
credit which can be used for skill enhancement or micro enterprise growth. This also
promotes to use savings and loans as a buffer against crisis.

Financial inclusion of the urban poor is essential to bring them into the mainstream
financial services so that they can access the entire suite of financial products and
services. Microfinance plays an important role in achieving this. Conventional
wisdom has it that access to microfinance services can enable the poor to smoothen
their consumption, manage their risks better, build their assets, develop their
microenterprises, enhance their income-earning capacity and enjoy an improved
quality of life. MFIs can help in providing handholding support and markets typically
for encouraging small service enterprises and cottage and small industries. Cottage
industries have traditionally played an important role in the Indian economy. The
bustling urban enclave of Dharavi is a case in point. It generates large volume
employment and provides subsidiary services. The cottage and small industry’s need
for capital is not very large and they help in ensuring equitable income distribution.
There are several artisan based clusters in India, these are skill-based and use simple
manufacturing processes and technology. These clusters consist of unorganized sector,

4
Estimates of RBI in sep 2013

144
tiny units, with little access to market information. If credit and the entire range of
banking products and services from mainstream financial institutions is made
available, it will enable the small units to scale up and grow.

The research was conducted on the urban poor of Kolkata and the levels of financial
Inclusion parameters were compared between the members of Microfinance and Non
members. Samples were taken from each zone of the city and it consisted of both
members of Microfinance and non members. Usage dimension of transaction banking,
Credit, Deposits and Insurance was reported for each household. Each of the
dimensions was accorded a certain weightage in line with previous studies and a
composite index called Financial Inclusion Index was calculated for each household.
The calculated Financial Inclusion Index was then compared between different zones
of the city in order to know if certain areas of the city has better financial Inclusion
than others. Since the samples consist of both microfinance members and non
members, the result also shows if Microfinance activity is more intense in certain
areas than others. Almost all of the urban poor borrow, so the population was divided
between Households which largely borrow from informal sources and Households
which largely borrowed from formal sources. It is of importance to know whether
levels of FI Index have any association between borrowing behaviour of a household.
Whether higher index of financial inclusion translates into lesser informal borrowing
was studied. The association was then further compared between three types of
Microfinance members namely MFI, SHG and SBLP and non members in order to
understand if members of Microfinance displayed any better access to formal sources
of Finance or a decreased access to informal sources of finance. This would help to
know if Microfinance played a role in making access to formal sources of Finance and
thus in promoting Financial Inclusion. The analysis was further continued at the
disaggregated level. The study also found out if there is a relationship between levels
of Financial Inclusion index and membership category. A Higher level of Financial
Inclusion Index associated with members and a lower Index associated with non
members would reiterate the point that Microfinance has an important role in
achieving Financial Inclusion. Social exclusion and Financial Inclusion co exist in any
society of the world. It is rather wise to say that social exclusion is an outcome of
145
Financial exclusion. So it is of much significance to know if the socioeconomic
variables like the Occupation, Income class, age, Family size and educational status
have any bearing on the level of Financial Inclusion. Existence of association between
different socioeconomic variables and Financial Inclusion index was found out by
means of statistical tests in order to know what factors work in favour of achieving
financial inclusion. The study also probed into the sufficiency of Microfinance in
addressing barriers to Financial Inclusion. To answer this objective two sub questions
were created, first if the microfinance services were uniformly available across all
geographic areas and second if Microfinance served only those areas which are not
adequately served by the banking sector. The first question is important because if the
microfinance sector is to play a role in providing financial inclusion, it needs to be
available in all regions and not only in specific areas. The answer to this question will
enable us to understand if there are barriers to microfinance access (like there are
barriers to financial inclusion). The second question enables an analysis of the spread
of microfinance services vis-a-vis that of banking services. The relationship could
help reveal the extent to which microfinance programs fill gaps in banking sector
services. Case study method was found to be the most suitable method for answering
these two questions. So enquiry at three different levels was conducted namely Sector
level, Microfinance Provider level and Microfinance member Level. Enquiry at the
Sector level involved research on secondary data like state of the sector reports and
reports from RBI. At the provider level it was important to know first . to what extent
do MFIs cover financially excluded segments of the population in their areas of
operation and second, if there any financially excluded segments of the population
that they do not cover? If so, what is the reasons .Five Microfinance Institutions were
selected, their Senior officials and field officers were interviewed. In-depth semi-
structured interviews were conducted with five senior MFI officials and short
structured interviews were conducted of 30 field staff. Field staff/officers of an MFI
are the contact points between the MFI and its members. They perform the critical
roles of group formation, training and monitoring, and as such are likely to be well
aware of the ground-level realities. In order to tap into this valuable resource, field
staff was surveyed. At the Microfinance member level, thirty low income individuals

146
of whom two had approached for microloans from MFI and were rejected were
interviewed .The findings reverberated the Field officer’s view on the concerned
theme. All the interviewees uniformly mentioned that only those unable to meet the
MFI’s conditions regarding meeting attendance or weekly repayment refrained from
joining.

6.2 Significant Findings

The study presented the following significant research findings :

1. There were no statistically significant differences between Financial Inclusion

index of respondents in different zones of Kolkata

2. Incidence of informal borrowings decreased with higher levels of Financial

Inclusion Index.

3. Non members and MFI members with increasing levels of financial Inclusion
tend to borrow less from informal sources

4. SHG and SBLP members, irrespective of their Financial Inclusion status

access borrowing from informal sources. This somewhere points towards the
insufficiency of these two microfinance models in answering the credit needs.

5. Incidence of informal borrowing is lesser in Microfinance members as

compared to non members.

6. Majority of the productive age group respondents had medium level of

Financial inclusion, however it was found out that age had no association with
the level of Financial Inclusion of the respondents.

7. Association between education and Financial Inclusion Index was found

significant. The more the level of education, the better the Financial Inclusion
status.

8. There is a significant variability in financial inclusion index according to

occupational category. Respondents in Fruits/Vegetables, food/ snacks vending

147
 and semi skilled labourers fared much better than drivers & cart/rikshaw
pullers, the excluded most. Opportunities to earn better in one occupation over
the other could possibly be the reason behind this difference.

9. Association between expenditure of households and financial inclusion index is

found to be significant. The level of financial inclusion increased with
increasing expenditure class, in the study expenditure was used as an income
proxy. The results corroborated the findings of Dayson and Dawson (2004) and
Carbo et al, 2010 that families with lower incomes are most likely to be
financially excluded.

10. Analysis of distribution of households according to family size could not

establish any particular pattern to explain the classification of levels of
financial inclusion. This rejects the popular notion that small families save
better and have better financial status. Larger families have more hands to
work and thus earn more income. Whether expenditure of small and large
families is in proportion to their income needs to be further studied.

11. A skewed geographic growth of Microfinance is observed in the study. There is

a need to make underserved areas more attractive for microfinance providers.
There is an equally great need to monitor microfinance growth in areas where it
has already reached near-saturation levels. West Bengal has a Microfinance
Poverty penetration index MPPI of 1.6 which is a little above the other states of
Northern, Western, Eastern and Central region but much lower than Southern
states.

12. With An index of financial inclusion (IFI) 1, Kolkata scores the highest among
all other districts of West Bengal. The study shows that Microfinance has made
considerable progress in increasing access to Financial services in West Bengal
where banking penetration is low.

13. Contrary to the belief that MFI provides loans to the poor in general, MFI
chooses only the elite of the poor, rejecting those poor who do not have a
promising money making profession or who cannot commit time to the weekly

148
 group meetings. Very much like banking loans, MFI loans are also extended to
only those who have the capability to pay back .

14. Loss of daily wages, lack of an address proof & income engaging activity and
restrictions from the male gender of the house came out to be the barriers in
accessing microfinance loans.

6.3 Limitations of the study

The primary limitation of the study is that the generalizations based on the results
need to be done with caution due to the importance of contextual factors in
microfinance. Moreover, the study is limited in that it mostly draws on the
comparative status of members of microfinance and non members at a given point of
time to arrive at the concluding role of microfinance. A comparison between the
present state of a non member and his future state post membership would have given
a more concrete conclusions about the role of microfinance. Such a study cannot be
conducted by an individual alone and would require involvement from various
stakeholders.

6.4 Scope of the study

There certainly seems to be a case for policymakers to examine and address the
skewed geographic growth of microfinance in the country. There is a need to make
underserved areas more attractive for Microfinance providers. Variation in levels of
Financial Inclusion in different zones of the city need to be studied to know as to why
certain areas have better financial Inclusion levels of the urban poor than the rest. A
comparative effectiveness of the three different models of microfinance namely SHG,
SBLP and MFI need to be studied. Creation of innovative suitable microfinance
schemes/products for extremely poor like rag pickers which suits their requirements
need to be further explored.

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6.5 Conclusion

The heritage city of Kolkata is abundant with rapidly penetrating slums and an ever
growing population of the urban poor. The urban poor are not only financially
excluded but also socially and legislatively excluded which is nevertheless an
outcome of financial exclusion. Financial inclusion of these vast population will go a
long way in strengthening the economy of the city and thus in the overall well being
of the state. Microfinance aims to address the credit needs of the urban poor who are
hitherto considered unbankable. This study looked into the role of microfinance in
promoting financial Inclusion in the urban poor of the city.17 percent of the
households were found to be totally excluded while 28 percent showed minimal
inclusion. The study found out that those who availed microfinance loans showed
better levels of financial inclusion as compared to those who resorted to borrowings
from informal sources. While 62 percent of non members accessing informal
borrowing ,only 19 percent of MFI members accessed informal borrowing. Incidence
of informal borrowings was also found to decrease with increasing levels of financial
Inclusion reinforcing the positive role of microfinance in promoting financial
inclusion. Self help groups and bank linkage models though better than being not there
lag behind in promoting financial Inclusion. A clear association with higher levels of
FI Index and Microfinance membership was inferred. Almost 60 per cent of the MFI
members attained FI Index of more than 30. Microfinance has been successful in
addressing barriers to financial inclusion to the extent that a skewed geographic
growth of Microfinance is observed in the study. There is a need to make underserved
areas more attractive for microfinance providers, for the microfinance sector to play a
role in providing financial inclusion, it needs to be available in all regions and not
only in specific areas. An analysis of the spread of microfinance services vis-a-vis that
of banking services revealed the extent to which microfinance programs fill gaps in
banking sector services and it was found that Microfinance has made considerable
progress in increasing access to Financial services/ Financial Inclusion in West Bengal
where banking penetration is low.

150
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Annexure

161
 Questionnaire

Financial Inclusion of Urban Poor Household in Kolkata

Locality…………… Basti Name……………

MFI member/SHG member/SBLP Member/ Non member

A. Socio Economic Profile
1. Name of respondent: ……………………………..
2. Community……………………………………….
3. Number of members in the family: ………………………………..
4. Number of Adults: ……………….. Children: …………………

Occupation Age Sex Education Average No. of Whether

Monthly earning having
Income days/ bank a/c
month

5. Whether APL or BPL…………….

6. Consumer durables possessed ( Tick the box)

Fridge
TV
Mobile phn
cycle
Two wheeler
Cooking gas
Mixer
7. How do you assess the following basic facilities available to you?

Access to safe drinking water Adequate/Inadequate

Access to sanitation Adequate/Inadequate

Access to health services Adequate/Inadequate

Access to education Adequate/Inadequate

Access to banks Adequate/Inadequate

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8.Expenditure pattern

Expenditure Pattern (Average monthly expenses)

Food Medicine Clothes Housing Electricity Water Education Social Total

Function

9 .Emergency requirement of money during the past three years

Emergency No.of Amount Source of

occurrences per Finance
year
Hospitalization
Natural disaster
Death
Desertion/divorce
Loss of assets
Any other

10.Do you borrow from institutional sources to meet the monthly expenses during
rainy season/lean season ? Yes/No

If no, what are the reason s? (Tick from the following) (Agree/Disagree/No opinion

Reasons
Security cannot be given
I do not know the procedure
Banks do not provide such type of loans
Takes more time to apply from banks
Available finance from formal sources are
insufficient
Informal source is readily available
No need for security, no paper work
Opinion
11. What are the activities for which you borrowed in the last three years?
F-formal- commercial banks, cooperatives, RRBs etc

IF-informal-money lenders, friends and relatives, traders, commission agents-chit

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 Purpose Source Interest Security Amount
borrowed
Construction and IF
maintenance of F
house
Marriage IF
F
Education IF
F
Festival IF
F
Medical expenses IF
F
Any other IF
F

12.Do you have an account with any of the formal financial institutions

Yes/No………………If yes, answer the following

13. Type of accounts maintained (Tick the appropriate column)

Insurance loan FD RD savings current

Commercial
Bank
Cooperative
bank
SHG
Post office
Chit funds
14.If you are having a savings account, specify the type?
No frills account (zero balance) /normal a/c

15. When did you have the last transaction with the bank…………………………..

16. Other than the usual functions of the bank, are you aware of the following
facilities offered by the bank

Facilities Aware of it Used it

Cheque/DD
Social security pensions
through banks/cooperative
ATM
Credit card/debit card

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 Payment of bills (electricity
/telephone)

18. Are you aware of any other investment opportunities other than bank deposits?

Facilities Aware of it but Access but no Used it

no access usage
Insurance
Post office savings
Share market
Mutual funds
SHG

Questions for In Depth Interview

Sample Questions for Discussion with MFI Senior Personnel

Name of Respondent:

Name of Organization:

Q1. How extensively do MFPs cover financially excluded population by

microfinance providers in their areas of operation? Do you have data, aggregate
or branch wise?

Q2. Are there any financially excluded segments of the population that you do
not cover? If so, what are the reasons?

Q3. What mechanisms are required to provide access to these segments?

Q4. Are there any financial services that you feel you should offer but are not
doing so right now? If so, what are the constraints preventing the launch of these
products?

Q5. Is the financial training they receive at the time of joining sufficient to
enable them handle individual loans in future?

Q6. If a member wants to stop borrowing but would like to avail other financial
services such as insurance for example, is it possible?

165
 Sample Questionnaire for MFI Field Personnel

Name of Respondent:

Name of Organization:

Name of Branch:

Number of borrowers handled:

Q1. Have you come across a situation where a financially excluded member
could not access group microcredit ? Yes No

Q2. If yes, approximately how frequently do you come across such cases?

Everyday Once a week Once a month Once a year

Q3. What are the main reasons? Please rank

Inability to form a group

No address proof/ documents

Cannot attend meetings/ Does not want to

Does not have any economic activity

Is not able to pass test after receiving training

Q4. Are there any financial products which are currently not being offered
but which members ask that you should offer?

Q5. What are the main reasons why members drop out of groups?

166
 Sample Questions for Discussion with MFP Member (In-depth
interview)

Name of Respondent:

Name of Organization:

Name of Branch:

Demographic Information:

Age:

Education:

Number of members in family:

Occupation:

Q1. What are the sources of your family income and how much does each
source contribute? Are there any fluctuations in the income during the year?

Q2. Financial decisions

a. Savings

Where are you saving your money and why?

B.Loans

How many times have you had to borrow from the money lender in the last 3
years, when and why? What is the interest rate you paid?

Q3. At any stage did you think you needed any financial products which you
could not access? If so, details?

Q4. Do you know which other MFPs operate in this area? Do you know what
terms they offer? How many MFPs have you dealt with? Are you happy with
the services you got?

Q5.Are there any major expenses for your family in the next few years? How
List of Publications
do you plan to meet them?

Q.6.How do you plan your day to day finances? Has there been any
difference in the way you plan them after becoming an MFI member?

Q7. Have you come across a situation where a financially excluded

individual could not access group microcredit? If yes, what are the reasons? 167

Q8. What are your suggestions for the MFI?

 List of Publications

1.Published: “Financial inclusion – the challenges ahead and how to make it happen”
International journal of Functional Management , Sri Ganesh School of Business
Management at Salem, Vol (1), 41-44, ISSN NO : 2319-1406

2.Published: “MGNREGA – The Role in redefining measures to alleviate poverty from

Rural India, BTRA Scan Vol 4(1), 36-41, 2013 ISSN: 0972834

3.Published: “An analysis of skewed pattern of geographic Penetration of Microfinance with

Reference to Correlation between GDP and Microfinance Penetration Index, National
conference at Sri Sankara Arts and Science college at Kanchipuram,36-49, ISBN NO : 978-
93-80371-06-1

4.Published: “Hedging Non-Catastrophic Rainfall Risks for Agriculture - An Indian

Context”, ABHINAV ,Volume No.2, Issue No.9, National Monthly Refereed Journal Of
Research In Commerce & Management, ISSN 2277-1166

5.Published: “Challenges of retail sector in emerging economies with special reference to

banking industry” International Conference at DY Patil University on Managing Business in
Economic crisis at Pune, 111-116, ISBN NO. : 97881-920416-4-3

6.Published: “Analysis of Commodity Derivative Markets in India: An Agenda for

Research”, International Conference at Bharti Vidyapeeth University on Changing Face of
Indian Economy at Pune, 22-29, ISBN NO. 978-93-80544-00-6

7.Publication awaiting: “Microfinance and poverty alleviation: Measuring the effectiveness

of rural lending in Jorhat District of Assam, a Regression analysis”, Article approved by Sage
Publications for South Asia economic Journal ,Scopus Indexed,H-index-3.

168