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Role of Financial Inclusion for Inclusive Growth in India
- Issues & Challenges
by
Dr. Vighneswara Swamy and Dr. Vijayalakshmi
I. INTRODUCTION
Amartya Sen (2000) convincingly argued that poverty is not merely
insufficient income, but rather the absence of wide range of capabilities, including
security and ability to participate in economic and political systems. Today the term
‘bottom of the pyramid’ refers to the global poor most of whom live in the developing
countries. These large numbers of poor are required to be provided with much
needed financial assistance in order to sail them out of their conditions of poverty.
Accordingly, there is felt a need for policy support in channeling the financial
resources towards the economic upliftment of resource poor in any developing
economy. This paper is an attempt to comprehend and distinguish the significance
of Financial Inclusion in the context of a developing country like India wherein a
large population is deprived of the financial services which are very much essential
for overall economic growth of a country.
The consensus is that finance promotes economic growth but the magnitude
of impact differs. Financial inclusion is intended to connect people to banks with
consequential benefits. Ensuring that the financial system plays its due role in
promoting inclusive growth is one of the biggest challenges facing the emerging
economies. We therefore advocate that financial development creates enabling
conditions for growth when access to safe, easy and affordable credit and other
financial services by the poor and vulnerable groups, disadvantaged areas and
lagging sectors is recognised as a pre-condition for accelerating growth and
reducing income disparities and poverty. Access to a well-functioning financial
system, by creating equal opportunities, enables economically and socially
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
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excluded people to integrate better into the economy and actively contribute to
development and protects themselves against economic shocks.
Global Experiences
While in developed countries, the formal financial sector comprising mainly
the banking system serves most of the population, in developing countries, a large
segment of the society, mainly the low-income group, has little access to financial
services, either formal or semi formal. As a result, many people have to necessarily
depend either on their own sources or informal sources of finance, which are
generally at high cost. Most of the population in developed countries (99 per cent in
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
3
Denmark, 96 per cent in Germany, 91 per cent in the USA and 96 per cent in
France) has bank accounts (Peachy and Roe, 2004). However, formal financial
sectors in most developing countries serve relatively a small segment, often no
more than 20-30 per cent of the population, the vast majority of whom are low
income households in rural areas (ADB, 2007).
The importance of this study lies in the fact that India being a socialist,
democratic republic, it is imperative on the policies of the government to ensure
equitable growth of all sections of the economy. With only 34% of population
engaged in formal banking, India has, 135 million financially excluded households,
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
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the second highest number after China. Further, the real rate of financial inclusion
in India is also very low and about 40% of the bank account holders use their
accounts not even once a month. It is universally opined that the resource poor
need financial assistance at reasonable costs and that too with uninterrupted pace.
However, the economic liberalization policies have always tempted the financial
institutions to look for more and more greener pastures of business ignoring the
weaker sections of the society. In India, the financially excluded sections comprise
largely rural masses comprising marginal farmers, landless labourers, oral lessees,
self-employed and unorganized sector enterprises, urban slum dwellers, migrants,
ethnic minorities and socially excluded groups, senior citizens and women. Some of
the features of financial exclusion in India are captured in Figure-1 (Annexure-5).
Some of the important causes of relatively low extension of institutional credit in the
rural areas are risk perception, cost of its assessment and management, lack of
rural infrastructure, and vast geographical spread of the rural areas with more than
half a million villages, some sparsely populated (Mohan, 2006).
It is essential for any economy to aim at inclusive growth involving each and
every citizen in the economic development progression. It is in this context that
financial inclusion should be aimed at inclusive growth in the Indian context. Select
macro-economic and financial indicators of Indian economy are presented here
below in Table-4 (Annexure-4).
India currently faces several issues and challenges in the area of Financial
Inclusion for Inclusive growth. Salient among them are stated here below;
1. Spatial Distribution of Banking Services: Even though after often
emphasized policy intervention by the government and the concerted efforts
of Reserve Bank of India and the public sector banks there has been a
significant increase in the number of bank offices in the rural areas; but it is
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
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not in tune with the large population living in the rural areas. For a population
of 70% only 45% of bank offices provide the financial services.
2. Regional Distribution of Banking Services: The analysis by the authors
brings to the fore that there has been uneven distribution of the banking
services in terms of population coverage per bank office in the six regions
viz; Northern, North-eastern, Eastern, Central, Western and Southern
regions of the country.
3. Bank Branches are required to be increased as it has a direct impact on the
progress of financial inclusion. It is clearly established that as the bank
branches increase number of bank accounts also increase significantly.
4. Poverty levels are having direct relationship with the progress of financial
inclusion. The authors have established in their study that as the poverty
levels decrease financial inclusion also increase. As such, there should be
multi fold strategic approach in such poverty dominated areas for financial
inclusion.
5. SC/ST population: It is ascertained by the authors’ study that in the areas of
Scheduled Castes/Scheduled Tribes population the progress of Financial
Inclusion is slow which indicates that the efforts for Financial Inclusion has to
be increased significantly in such areas in order to bring in social and
economic equity in the society.
6. Overcoming Bankers’ Aversion for Financial Inclusion
Even though no banker openly expresses his aversion for the financial
inclusion process, overtly it can be noticed that they are averse to it in view
of the cost aspects involved in opening of no frill accounts.
Step 11: Exclusive Focus on the Socialyl Excluded and the Poor
It is imminent to encompass the socially excluded sections and the poor like, tenant
farmers, oral lessees and share croppers, marginal farmers with small un-
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
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economical land holdings, agricultural laborers, rural artisans and people involved in
making handicrafts and also majority of weavers in handloom Sector.
Step 19: Financial Inclusion as a Corporate Social Responsibility of all the Banks
and Financial Institutions
It should be the endeavour of all the financial institutions to adopt financial inclusion
as a corporate social responsibility and chalk out strategies in tune with the national
policy on financial inclusion.
VI. CONCLUSION
Importance of financial inclusion arises from the problem of financial
exclusion of nearly 3 billion people from the formal financial services across the
world. With only 34% of population engaged in formal banking, India has, 135
million financially excluded households, the second highest number after China.
Further, the real rate of financial inclusion in India is also very low and about 40% of
the bank account holders use their accounts not even once a month. Financial
Inclusion has far reaching consequences, which can help many people come out of
abject poverty conditions. Financial inclusion provides formal identity, access to
payments system & deposit insurance. The objective of financial inclusion is to
extend the scope of activities of the organized financial system to include within its
ambit people with low incomes. Through graduated credit, the attempt must be to lift
the poor from one level to another so that they come out of poverty. There is a need
for coordinated action between the banks, the Government and others to facilitate
access to bank accounts amongst the financially excluded.
VII. REFERENCES
Buckland, J., and B. Guenther (2005): 'There Are No Banks Here, Financial and
Insurance Exclusion in Winnipeg’ North End', Social Sciences and
Humanities Research Council of Canada (September)
Mexico and the United States', World Bank Policy research Working Paper
3835.
H.M. Treasury, (2007): “Financial Inclusion: the Way Forward”, HM Treasury, UK,
March.
Kempson, E., J. Caskey, C. Whyley and S. Collard (2000): “In or Out?” London:
Financial Services Authority
Mohan, R. (2006): 'Agricultural Credit in India: Status, Issues and Future Agenda',
Economic and Political Weekly (March), pp.1013-23.
Peachy, S. and A. Roe, (2004): “Access to Finance - What Does it Mean and How
Do Savings Bank Foster Access?”, Brussels: World Savings Bank Institute.
Sen, Amartya, (2000): ‘Development as Freedom’, Anchor Books, New York, 2000.
World Bank (2008): “Finance for All - Policies and Pitfalls in Expanding Access”,
World Bank, Washington
Annexure-1
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
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Annexure-2
Table-2: Financial Inclusion Initiatives in different countries
Country Legislation Objectives
instrument /
Policy Scheme
United Social Exclusion To reduce social exclusion of which financial inclusion is an
Kingdom Unit (SEU), 1997 integral part
Policy Action To look in an integrated way at the problems of poor
Teams (PATs) neighborhoods
Financial Inclusion 1. Access to banking, access to affordable credit
Task Force 2. Access to face-to-face money advice
Financial Inclusion 1. Access to banking services
Fund 2. Access to affordable credit
3. Access to money advice
United The Community 1. Prohibits discrimination by banks against low and moderate
States of Reinvestment Act, income neighborhoods
America 1977 2. To make mortgage loans to lower-income households
3. banks are rated every three years on their efforts in meeting
community credit needs
Matched Savings 1. Prohibits discrimination by banks against low and moderate
Scheme (MSS) income neighborhoods
1997 2. Matching money has to be spent on one of a range of
prescribed uses such as education, business or home purchase
France Banking Act, 1984 1. Any person with French nationality has the right to open an
account with any bank
Role of Financial Inclusion for Inclusive Growth in India-Issues & Challenges
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Annexure-3
Table-3: Extent of Financial Inclusion- Some Select Countries
Country Percent of population with an account
USA 91
Denmark 99
Europe 89.6
Botswana 47
Brazil 43
South Africa 31.7
Namibia 28.4
Mexico 21.3
Source: Rakesh Mohan (2006), Economic Growth,
Financial Deepening and Financial Inclusion
Annexure-4
Role of
o Financial In
nclusion for In
nclusive Grow
wth in India-Isssues & Challeenges
16
Tab
ble-4: Selectt Macro-Ecoonomic and Financial Indicators
I o Indian Ecconomy
of
Macro-eeconomic ind dicators 1992-993 2008-09
1. Population
P (in
n mn) 872 1138
2. Per
P capita inco ome*(in Rupeees) 7698 33299
3. GDP
G (constan nt prices) (in Crores)
C 7921500 4303654
5. Scheduled
S Commmercial Bannks 76 80
6. SCB
S branchess 758211 64608
7. SCB
S Rural & Semi-urban branches
b 330255 36204
8.N
No. of ATMs -NA- 43651
9. Bank
B assets (in
n Crores) 3857788 52,41,330
10. SCB Gross Advances
A (in Crores) 1519822 30,00,906
11. SCB Depositts (in Crores) 2685722 40,63,203
12. SCB Net Pro ofit (in Croress) (-)41500 52,771
13. Priority secto
or lending(in Crores) 590977 1,68,506
14. SCB Loans A/Cs
A under SB BLP(in 000s)) 0.255 2831
15. SCB Loans O/SO under SB BLP (in Croress) 0.29 16,149
16. No. of RRBss 196 86 (aft
fter amalgamaation)
17. RRBs Assetss (in Crores) 9860 145824
18. RRB Depositts (in Crores)) 6960 117984
19. RRB Advancces (in Croress) 4474 69030
20. RRBs Profit (in Crores) (-) 3111 1830
21. No. of Local Area Banks (LABs) - 4
22. LAB Assets - 786.6
23. No. of Coopeeratives 97782
24. No. of Kisan n Credit Cardss Issued
- 84.6
(Nuumbers in million)
25. Financial Assistance Sancctioned and
Disbbursed by Fin nancial Instituutions - 88,973
(in Crores)
C
26. No. of No-friill accounts - 33,024,761
Source: Reserv
ve Bank of Inddia Publicationss
Ann nexure-5
Figure
F 1: Feeatures of Financial
F Exxclusion in India
I
No
Bank
No A/C
N
No
realisabl
e assets Cre
edit
Financial
No No
acccess to Exxclusion
fin
nancial Saving
a
advice s
No
No Payment
Insur and
transfer
ance system
Source: Com
mpiled by authoors