Financial inclusion or inclusive financing is the delivery of financial services, at affordable costs, to sections of disadvantaged and low income segments of society.Financial inclusion refers to the strategy adopted to make banking activities and its benefits reach the unbanked areas. It is a drive to bring the unprivileged people at par with the mainstream. It is argued that as banking services are in the nature of public good; the availability of banking and payment services to the entire population without discrimination is the prime objective of this public policy. The term "financial inclusion" has gained importance since the early 2000s, and is a result of findings about financial exclusion and its direct correlation to poverty. Financial inclusion is now a common objective for many central banks among the developing nations.
Need for Financial Inclusion
The Indian economy is the second fastest growing economy in the world. Majority of the population in India resides in rural areas. Thus development of rural India is a key step towards economic development for a country like ours.Credit is one of the very important inputs of economic development. The timely availability of credit at an affordable cost has a big role to play in contributing to the well being of the weaker sections of the society. Proper access to finance by the rural people is a key requisite to employment, economic growth and poverty reduction which are primary tools of economic development.
India has a huge network of institutional credit. Institutional credit refers to credit offered by financial institutions like banks. The Indian financial system is considered to be one of the finest systems in the world. It is only because of the strong grip of the financial system that even the global financial crisis could not affect India that severely.In spite of having such a strong financial system it has been evident that financial awareness has not been able to penetrate into the rural sections of the society. Non institutional credit givers in the form of money lenders still continue to grasp the poor in their clutches. This is a matter of concern and proper action needs to be taken for the same.
Credit can be penetrated into rural India through appropriate banking channels. The Indian banking industry has shown tremendous growth in the last few decades. But despite such growth, the banks have been unable to reach a vast segment of the Indian population causing financial exclusion. This void ultimately led to the emergence of policy for financial inclusion.
People residing in rural areas where banking facilities have not yet touched foot are unaware of the benefits of financial services. Finance is an integral part of every life. Managing the hard earned money so that it grows to yield more money is very important. But people who are financially unaware often fall prey in the hands of greedy money lenders. These money lenders take undue advantage of the ignorant people and they fall in debt trap that lasts for not only their life but for generations to come.
- It is now widely acknowledged that financial exclusion leads to non accessibility, non-affordability and non-availability of financial products. Limited access to funds in an underdeveloped financial system restricts the availability of their own funds to individuals and also leads to high cost credit from informal sources such as moneylenders.
- Due to lack of access to a bank account and remittance facilities, the individual pays higher charges for basic financial transactions.
- Absence of bank account also leads to security threat and loss of interest by holding cash. All these impose real costs on individuals.
- Prolonged and persistent deprivation of banking services to a large segment of the population leads to a decline in investment and has the potential to fuel social tensions causing social exclusion.
Extent of Financial Exclusion in India
In India, almost half the country is unbanked.Only 55 per cent of the population has deposit accounts and 9 per cent have credit accounts with banks. India has the highest number of households (145 million) excluded from Banking. There was only one bank branch per 14,000 people.In 6 lakh villages in India, rural branches of Schedule Commercial Banks including Regional Rural Banks number 33,495 only.Only a little less than 20% of the population has any kind of life insurance and 9.6% of the population has non‐life insurance coverage.Just 18 per cent had debit cards and less than 2 per cent has credit cards.
Reasons for Financial Exclusion
(i) Geographical Location
- remoteness of residence,hilly & sparsely populated areas with poor infrastructure & difficult physical access.
- distance from bank branch
- branch timings
- low income
- low assets
- ease of availability of informal credit
- culture
- Gender
- illiteracy
- lack of awareness
- Cumbersome
- KYC – documentary proof of identity/ address
- high cost of operations
- less volume & more number of clients
- unsuitable products
- language
- staff attitude
- poor functioning and financial health of some financial institutions (such as financial cooperatives) which limit the effectiveness of their outreach figures.
- Primary Agricultural Cooperative Societies (PACS), which restrict their membership to persons with land ownership are also not effective in offering savings services.
Consequences of Financial Exclusion
- Affects individuals and economy alike
- The households, micro and small enterprises dealing entirely in cash are susceptible to irregular cash flows would be affected
- Limits options for providing for old age security
- Recourse to informal lenders
- Exposed to higher interest rates charged by informal lender
- Highest risk as loans are often secured against the borrower’s property
- Banking with informal sources does not provide interest benefit and tax advantages and are far less secure
Benefits of Financial Inclusion
Financial inclusion does not restrict itself to credit. It includes financial awareness, knowledge about banks and banking channels, facilities provided by banks and the advantages of using the banking route. It involves educating people financially; making them financially literate.
Inclusive financial system allows poor households to save and manage their money in a secure manner, decreases their exposure to economic shocks in the form of drought, floods or any calamity of the kind which affects people dependant on agricultural activities.
An important measure of financial inclusion is to check the number of people who own a bank account. A person holding a bank account is considered to have elementary banking knowledge. Thus a count of the number of bank accounts gives an idea of the percentage of people who are aware of banking and what percentage still needs to be included. However financial inclusion does not end with opening of bank accounts. It has to be a continuous effort.
Steps taken so far to eliminate financial exclusion
- Focus on Inclusive Growth
- Improving Banking Technology
- The Indian Way- Multi Agency Approach
- Financial Stability and Development Council (FSDC) mandated to focus on Financial Inclusion and Financial Literacy
- Financial Sector Regulators including the Reserve Bank committed to FI Mission
- Financial services through mainstream financial institutions to 6 lakh villages
- Banking Correspondent Model
By using the Information Technology the banking services in the rural areas are being improved
What has been done so far?
- ICT based Business Correspondent (BC) Model for low cost door step banking services in remote villages .
- RBI Board approved Financial Inclusion Plans (FIPs) of banks for 3 years, starting April 2010.Roadmap to cover villages of above 2000 population by march 2012
- Availability of minimum four banking products through ICT model has been ensured
- Mandatory opening of 25 % of new branches in unbanked rural centers.
- KYC documentation requirements significantly simplified for small account
- Guidelines for convergence between Electronic Benefit Transfer and FIP have been issued.
- Pricing for banks totally freed . Interest rates on advances totally deregulated.
- Achieving planned, sustained and structured Financial inclusion.
- Technology-To be fixed first
- All Bank branches must be on Core Banking Solution (CBS). All Regional Rural Banks (RRBs) to be on CBS by September 2011.
- Multi-channel approach (Handheld devices, mobiles, cards, Micro-ATMs, Branches, Kiosks, etc.)
- Front-end devices transactions must be seamlessly integrated with the banks’ CBS.
- Coverage- Ensuring Transparency
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