Financial Inclusion

 A

PROJECT REPORT ON “FINANCIAL INCLUSION ”

IN PARTIAL FULFILLMENT OF THE  REQUIREMENT OF THE AWARD FOR THE DEGREE OF  MASTER OF BUSINESS ASMINISTRATION 

M.B.A  – SEMESTER III

National Institute of Co Operative Management- MBA

Submitted to Prof. URVI AMIN

Submitted By:Sumit Kumar (B-04) Asha Patel (A-25)

PREFACE

Using a new pattern based on proper integration of formal teaching and actual practice the M.B.A. program of National Institute Of Co Operative Management has it course of of practical exposure exposure and understandi understanding ng during the study, so as the students could begin to have the feeling of business environment right in the beginning. Practical Study & implications constitutes an integral part of management studies. The practical knowledge is an important important suffix to the theoretical knowledge. One cannot rely merely upon theoretical knowledge. Is has to be coupled with practical for it to be fruitful. A few years ago, the rural market in India was an unknown territory and many companies were not interested in entering the rural markets of India, But these things are the story of the past and now Everyone is looking at the rural markets as the next growth driver in Indian market and with banking sector now even RBI has made compulsion of expanding nationalized banks in rural areas. We consider ourselves lucky to get this type of exposure by preparing a report on Financial Inclusion. It really helped us to get a practical insight into the actual business & Market environment of banking and provide us an opportunity to make our Financial Service Management concepts more clear in this sector. The advantages of this sort of integration are:

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To bridge the gap between theory and practice.

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To help students identify their strong & weak points in the following & appreciating activities

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To acquaint students with true understanding and knowledge, that will endeavour their future even in the Industry.

EXECUTIVE SUMMARY Financial services actively contribute to the humane & economic development of the society. These lead to social safety net & protect the people from economic shocks. Hence, each & every individual should be provided with affordable institutional financial products/services popularly called “Financial Inclusion‖. Despite witnessing substantial progress in financial sector reforms in India, it is disheartening to note that nearly half of the rural households even today do not have any access to any source of funds- institutional or otherwise. Hardly one-fourth of the rural households are assisted by banks. Hence the major task before banks is to bring most of those excluded, i.e. 75% of the rural households, under banking fold. There is a need for the formal financial system to look at increasing financial literacy and financial counseling to focus on financial inclusion and distress amongst farmers. Indian banks and financial market players should actively look at promoting such programs as a part of their corporate social responsibility. Banks should conduct full day programs for their clientele including farmers for counselling small borrowers for making aware on the implications of the loan, how interest is calculated, and so on, so that they are totally aware of its features. There is a clearly a lot requires to be done in this area. This enables the customer to remit funds at low cost. The government can utilize such bank accounts for social security services like health and calamity insurance under various schemes for disadvantaged. From the bank‘s point of view, having such social security cover makes the financing of such persons less risky. Reduced risk means more flow of funds at better rates. Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities (municipality, water, electricity, telephone) can be more easily paid by using cheques or through internet banking, rather than standing in the queue in the offices of the service. A bank account also provides a passport to a range of other financial products and services such as short term credit facilities, overdraft facilities and credit card. Further, a number of  other financial products, such as insurance and pension products, necessarily require the access to a bank account. Employment Guarantee Scheme of the Government which is being rolled out in 200 districts in the country would bring in large number of people through their savings accounts into the banking system. It paves the way for establishment of an account relationship which helps the poor to avail a variety of savings products and loan products for housing, consumption, etc.

CONTENT

No. 1

Title INTRODUCTION 1.1 FINANCIAL EXCLUSION I. INTRODUCTION II. DEFINITION III. THE INDIAN SCENARIO

2 LITERATURE REVIEW

CAUSES OF FINANCIAL EXCLUSION I. DEMAND SIDE BARRIERS II. SUPPLY SIDE BARRIERS CONSEQUENCES OF FINANCIAL EXCLUSION POLICY DEVELOPMENTS FINANCIAL INCLUSION I. INTRODUCTION II. PRESENT STATUS OF FI

FINANCIAL INCLUSION BY DENA BANK STUDY RESULT

BIBLIOGRAPHY QUESTIONNAIRE

INTRODUCTION

“The future lies with those companies who see the poor as their customers”  ~C.K.Prahalad 

Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional rural banks in India are penetrating every corner of the country and extending a helping hand in the growth process of the rural sector in the country. Fifty-eight per cent of the rural households do not have a bank account and only 21 per cent have access to credit from a formal source. Over 70 per cent of marginal farmers have no deposit account and 87 per cent have no formal credit.

HISTORY OF BANKING IN INDIA Without a sound and effective banking system in India it cannot have a healthy economy. The banking system of India should not only be hassle free but it should be able to meet new challenges posed by the technology and any other external and internal f actors. For the past three decades India‘s banking system has several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to only metropolitans or cosmopolitans in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main reas ons of India‘s growth process. The government‘s regular policy for Indian bank since 1969 has paid rich dividends with the nationalization of 14 major private banks of India. In the past three decades, India's banking system has earned several outstanding achievements to its credit. The most striking is its extensive reach. It is no longer confined to metropolises or cities in India. In fact, Indian banking system has reached even to the remote corners of the country. This is one of the main aspects of India's growth story. The government's regulation policy for banks has paid rich dividends with t he nationalization of 14 major private banks in 1969. Banking today has become convenient and instant, with the account holder not having to wait for hours at the bank counter for getting a draft or for withdrawing money from his account. The first bank in India, though conservative, was established in 1786. From 1786 till today, the journey of Indian Banking System can be segregated into three distinct phases: • Early phase of Indian banks, from 1786 to 1969 • Nationalization of banks and the banking sector reforms, from 1969 to 1991 • New phase of Indian banking system, with the reforms after 1991.

BACKGROUND Bank of Hindustan was set up in 1870; it was the earliest Indian Bank. Later, three presidency banks under Presidency Bank's act 1876 i.e. Bank of Calcutta, Bank of Bombay and Bank of  Madras were set up, which laid foundation for modern banking in India. In 1921, all presidency banks were amalgamated to form the Imperial Bank of India. Imperial bank  carried out limited number of central banking functions prior to establishment of RBI.

It engaged in all types of commercial banking business except dealing in foreign exchange. Reserve Bank of India Act was passed in 1934 & Reserve Bank of India (RBI) was constituted as an apex body without major government ownership. Banking Regulations Act was passed in 1949. This regulation brought RBI under government control. Under the act, RBI got wide ranging powers for supervision & control of banks. The Act also vested licensing powers & the authority to conduct inspections in RBI. In 1955, RBI acquired control of the Imperial Bank of India, which was renamed as State Bank of India. In 1959, SBI took over control of eight private banks floated in the erstwhile princely states, making them as its 100% subsidiaries.

It was 1960, when RBI was empowered to force compulsory merger of weak banks with the strong ones. It significantly reduced the total number of banks from 566 in 1951 to 85 in 1969. In July 1969, government nationalized 14 banks having deposits of Rs. 50 crores & above. In 1980, government acquired 6 more banks with deposits of more than Rs.200 crores. Nationalization of banks was to make them play the role of catalytic agents for economic growth.

The Narasimha Committee report suggested wide ranging reforms for the banking sector in 1992 to introduce internationally accepted banking practices. The amendment of Banking Regulation Act in 1993 saw the entry of new private sector banks.

Banking industry is the back bone for growth of any economy. The journey of Indian Banking Industry has faced many waves of economic crisis. Recently, we have seen the economic crisis of US in 2008-09 and now the European crisis. The general scenario of the world economy is very critical.

It is the banking rules and regulation framework of India which has prevented it from the world economic crisis. In order to understand the challenges and opportunities of Indian Banking Industry, first of all, we need to understand the general scenario and structure of  Indian Banking Industry.

Financial Inclusion The prophecy of Millennium Development goals of U.N. i.e. ―growth with equity‖ clearly envisages that the growth spree of the globe in the 21st century has left some people behind the time. Handful of the global populace are still languishing in the vicious circle of poverty & are cast aside by those who are economically stronger & swifter in the sway of  globalization & liberalization. For sustenance/better growth of the world, the deprived sections should be dragged into the mainstream of growth. This is because of the fact that poverty any where is a grave threat to prosperity everywhere. Financial services actively contribute to the humane & economic development of the society. These lead to social safety net & protect the people from economic shocks. Hence, each & every individual should be provided with affordable institutional financial products/services popularly called “Financial Inclusion‖.

Definition: Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.

Financial products & services are identified as basic banking services like deposits accounts, institutional loans, access to payment, remittance facilities & also life & non life insurance services. The following are the denotation & connotation of financial inclusion in India. 1. Affordable credit 2. Savings bank account 3. Payments & Remittance 4. Financial advice 5. Credit/debit cards 6. Insurance facility 7. Empowering SHGs (self help groups) An inclusive financial system facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. An all-inclusive financial system enhances efficiency and welfare by providing avenues for secure and safe saving practices and by

facilitating a whole range of efficient financial services like easy day to- day management of  finances, safe money transfer etc. The govt. of India as well as the banking industry has recognized this imperative and has undergone certain fundamental changes over the last two decades. In fact, in order to address the issues of financial inclusion, the Government of India constituted a ―Committee on Financial Inclusion‖ under the Chairmanship of Dr. C. Rangarajan. Not only in India, but financial inclusion has become an issue of worldwide concern, relevant equally in economies of the underdeveloped, developing and developed nations. Building an inclusive financial sector has gained growing global r ecognition bringing to the fore the need for development strategies that touch all lives instead of a select few.

Chapter 2 LITERATURE REVIEW In India, government-owned banks channel about 70 per cent of the net savings of the economy into government- and state-owned enterprises, and finance a huge budget deficit of  about 9 per cent of GDP. Reducing the government‘s dependence on these funds wou ld require a change in the way the banking sector thinks and looks at itself, moving towards participating more formally in financial inclusion. Currently, local banks have a long way to go in bringing the unbanked areas within the banking fold. As competitive intensity hots up and ripples from international competition touch the Indian shores in search of ‗virgin‘ markets, banks will have to revisit their cost models. Some estimates indicate that the lack of  financial inclusion from the banking system reduces potential GDP by nearly 1.5 per cent. financial inclusion is one of the viable routes through which banks can maintain their development and also survive the current financial crisis. But in order to do that there should be extensive efforts both from the government‘s side as well as the banks themselves. According to the Boston Consulting Group‘s 2007 report, The Next Billion Banking Customers  —  the most effective marketing campaigns will have to include equal parts of  education and sales pitch. To include their next customers, bank will have to access them, and be accessible. (The entire information on this particular section has been extracted from  Businessworld Issue 18-24 Nov 2008)

In recent times financial inclusion has appeared as a major global agendum. At aggregate level, the common measure of financial inclusion are the number of bank account per adult, geographic branch penetration, demographic branch penetration, geographic ATM penetration, demographic ATM penetration, demographic deposit penetration, demographic credit penetration, deposit income ratio, credit income ratio and cash deposit ratio (Beck, et al. 2006, Peachy, et al., 2006 Conrad, et al., 2008 cited in Chattopadhyay (2011). However, these studies did not develop any composite index of financial inclusion. Sarma, (2007) first computed the financial inclusion indices of 45 countries for the year 2004. She has constructed the index considering the indicators - the number of bank accounts per hundred populations, the number of bank branches per thousand population and the ratio of savings and credit to GDP of the country. Considering the almost similar indicators Chattopadhyay (2011) has developed the financial inclusion index for the major states in India and for all the

districts in West Bengal. Karmakar, et al. (2011) have constructed the financial inclusion for rural areas of the major twenty states in India. They have considered number of rural outlets, number of accounts per outlet, per outlet deposit amount, per outlet credit amount and per account deposit amount as indicator of financial inclusion. In order to assess the performance of the public sector banks the Finance Minister of India has introduced Financial Inclusion Index based on two criteria, namely, the number of additional branches covered and the number of new no-frill account opened (Government of India, 2011). All the studies have followed the similar methodology used for computation of Human Development Index and considered the dimensions equally important. But each dimension may not be equally important to determine financial inclusion. So to develop a comprehensive index of financial inclusion first, researchers should derive the relative importance (weight) of the indicators then compute the weighted average of the dimensional indices. Besides, the indicators used by the studies are not adequate for gauging all possible dimensions of financial inclusion. There may be other indicators such as participation in SHG, per capita loan outstanding etc. Varman P (2005) has found that the SHGs in Tamil Nadu have inculcated the banking habits in the rural people. Several empirical studies (Adhikary and Bagli, 2010, 2011,) conducted in West Bengal have shown that SHGs create a smooth path of financial inclusion for the rural poor. The number of total deposit accounts has increased to 734.8 million and credit account to 118.6 million in 2010 for all banks and the number of no-frill accounts in all public and private banks has increased to 33 million in 2009 from seven million in 2006 (RBI, 2010). Besides, KCC scheme has brought 95 million farmers under the purview of the banking system in 2010 as against 84.6 million farmers in 2009 and the SHG bank linkage programme has helped seven million rural people to have access to formal savings and formal credit (Government of India, 2011). Against this backdrop, this study has set the objectives as follows.

dex of financial inclusion for each state in India.

inclusion .

RIJEB Volume 1, Issue 8(Aug. 2012) ISSN: 2277 – 1018. Journal of Radix International Educational and Research Consortium www.rierc.org .

The experience gained so far suggests that the "One District

One Bank" Model has

not been able to achieve the objective of financial inclusion. Allocation of villages a mongst banks under the Financial Inclusion Plan (FIP), i.e. Roadmap for providing ba nking services to villages with population above 2000, has been generally on the basis

of

the

Service

Area

Approach.

This

has

led

to

a

situation

where

in the designated bank for EBT and FIP in the same village differed. This issue has been raised in various fora by the State Governments and banks. For clearer conceptu al understanding and based on detailed consultative meetings and interface with stake holders, "Operational guidelines on implementation of Electronic Benefit Transfer and its convergence with Financial Inclusion Plan" has been formulated. These guidelines are expected to give a fillip to financial inclusion efforts and lead to a scalable and sustainable financial inclusion model. -

RBI/2011‐12/153 , April.

Chapter-3 FINANCIAL EXCLUSION

Financial Exclusion is the process by which a certain section of the population or a certain group of individuals is denied the access to basic financial services. The term came to  prominence in the early 1990‘s in Europe where the geographers found that a certain pockets or regions of a particular country were behind the others in utilizing financial services. It was also found that these pockets or regions were poorer compared to regions which utilized more of financial services.

DEFINITION

The definition of financial exclusion will range upon several dimensions, but the most important dimension are the breadth & focus of financial exclusion and the concept of  relativity or degree i.e. Financial Exclusion is defined in relation to some predefined standard(i.e. inclusion). Breadth means the scope of definition; the broadest definitions of financial exclusion recognize that there are many factors interacting between financial exclusion and social exclusion and disadvantage. The type of such a broad definition is found in the seminal work  of Leyshon and Thrift, who define financial exclusion as ―processes that prevent poor and disadvantaged social groups from gaining access to the financial s ystem‖. The other end of extreme definitions are narrowed its scope, for example, while Rogaly has a broad view of social exclusion, his working definition of financial exclusion is narrow which he stated as “Exclusion from particular sources of credit and other financial services (including  insurance, bill- payment services, and accessible and appropriate deposit accounts)” 

Extreme definition may be seen as a somewhat sweeping definition, with its apparent reference to access to the financial system as a whole, rather than access to specific financial services or products and access to specific channels of distribution. The other extreme of  definitions of financial exclusion are those that take a very narrow perspective based on a lack of ownership of, or access to, particular types of financial services or products, including forms of credit and insurance. A person transacting regularly with his saving fund bank account and availing very basic of  services i.e. payment and remittances or for saving some of part of his income to meet future contingencies/future requirement is said to be financially included despite the fact that he is not availing all/majority of other financial services such as Insurance, investment schemes etc. In other words, an individual having access to mainstream-necessary financially services is considered to be financially included as opposed to the first extreme definition stated above.

The focus here refers to the group of people (communities) to household, a region to the specific type of business; this is more often implicitly rather than explicitly acknowledged in the literature Further study of literature suggest that the operational definitions have also evolved from the underlying public policy concerns that many people, particularly those living on low income, cannot access mainstream financial products such as bank accounts and low cost loans, which, in turn, imposes real costs on them -often the most vulnerable people.

Operational definitions are context-specific, originating from country-specific problems of  financial exclusion and socio-economic conditions. Thus, the contexts specific dimensions of  financial exclusion assume importance from the public policy perspective. In recent development definitions have witnessed a shift in emphasis from the earlier ones, which defined financial inclusion and exclusion largely in terms of physical access, to a wider definition covering access to and use and understanding of products and services. This also underscores the role of financial institutions or service providers involved in the process. Finally, definitions of financial exclusion vary considerably according to the dimensions such as the concept of relativity, i.e., financial exclusion defined relative to some standard (i.e., inclusion). This line of thinking defines the problem of financial exclusion as that emanating from increased inclusion, leaving a minority of individuals and households behind.

Thus, there exists duality of hyper inclusion with some having access to a range of financial products and at the same time a minority lacking even the basic banking services. This phenomenon is observed mostly in developed countries with high degree of financial development.

THE INDIAN SCENARIO :-

In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. There could be multiple levels of  financial inclusion and exclusion. At one extreme, it is possible to identify the ‗super included‘, i.e., those customer s who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products. At the other extreme, we may have the financially excluded, who are denied access to even the most basic of financial products. In between are those who use the banking services only for deposits and withdrawals of  money. But these persons may have only restricted access to the financial system, and may not enjoy the flexibility of access offered to more affluent customers. Further, Financial exclusion may not definitely mean a social exclusion in India as it does in the developed countries, but it is a problem that needs to be addressed. The large presence of  informal credit, could avoid social exclusion but the legal validity of such financial services pose an obstacle for creating a modern globalizing economy. Causes of Financial exclusion . Some of the important factors responsible for financial exclusion are given as under: 1. Terms & conditions. Different types of terms & conditions imposed by the bankers often deter people with low income & rural areas from opening bank account. In Canada, USA, France & India strict regulation is imposed on Opening balance & Minimum balance required for an account. This often goes beyond the budget of the low income people. Another area of obstacle is the conditions relating to the use of accounts. In Belgium for instance, accounts have been closed by banks because customers either use them too little or withdraw money too often. 2. Identity Requirements. Primary requisite of opening bank account is identity proof & witness. People mostly from rural areas don‘t have driving license or passport. In many cases, wrong information are given in their ration cards & voter I-cards, which make them illegible as proof. This problem is rife with the refugees & slum dwellers. 3. Psychological & cultural barriers. Rural people & low income people think transacting through banks is a cumbersome affair & banks charge highly. Sometimes they think that services offered by the banks are not meant for them. Such type of ―Self exclusion‖ is far more important than direct exclusion by banks refusing to opening accounts. In England the Pakistani & Bangladeshi communities face religious barriers to banking, because, accounts overdrawn (even if inadvertently) is harmful under Islamic law. 4. Bankers’ approach. Bankers‘ attitude towards the rural folk & the marginalized mass is also not conducive. Sometimes these people are distracted by difficult financial terms used by the bankers &

sometime by the apathetic attitude of the bankers. Absence of banks in the vicinity of rural area is also one of the causes of exclusion.  Effects of financial exclusion: Living without financial service & products is disadvantageous when the contemporary world is moving on cashless system depending on credit cards, debit cards, ATMs &Core Banking Solution (CBS systems). Exclusion imposes real cost on the excluded lot. The implication of  the financial exclusion is much greater when the excluded mass is entrapped in the hydra headed cycles of poverty. This causes further social exclusion which is very much detrimental for the equitable growth of the world community. The following points describe disadvantages to the financially excluded mass: a. They pay higher charges in the absence of financial transactions like money transfer & cheque cashing etc. b. They take credit from non- institutional creditors at exorbitantly higher rate which exacerbate the harm already caused due to poverty. FINANCIAL EXCLUSION  NO SAVINGS NO ASSETS  NO BANK ACCOUNT  NO ACCESS TO MONEY ADVICE  NO INSURANCE, NO AFFORDABLE CREDIT c. Lack of security in holding & storing money. d. The small business may suffer due to loss of access to middle class and higher-income consumers, higher cash handling costs and delays in remittances of money. e. Saving potential remains unexploited & unproductive from social point of  view. f. General decline in investments. g. Increase in unemployment.

Who are the excluded? The financially excluded sections largely comprise of:  Marginal farmers  Landless labourers  Self employed and unorganized sector enterprises  Urban slum dwellers  Migrants  Ethnic minorities and socially excluded groups  Senior citizens and women, etc.  Large pockets of population in North East, Eastern, and central regions of India.

THE NEED FOR FINANCIAL INCLUSION

Despite witnessing substantial progress in financial sector reforms in India, it is disheartening to note that nearly half of the rural households even today do not have any access to any source of funds- institutional or otherwise. Hardly one-fourth of the rural households are assisted by banks. Hence the major task before banks is to bring most of those excluded, i.e. 75% of the rural households, under banking fold. But the task is not so easy since they are illiterate, poor and unorganized. They are also spread far and wide. What is needed is to improve their living standards by initiating new/increased economic activities with the help of banks, NGO‘s and local developmental agencies. To start with, it is necessary to develop a fair understanding of their profile. In addition, their perception about the bank and its services needs to be understood. So there is a need for the formal financial system to look at increasing financial literacy and financial counselling to focus on financial inclusion and distress amongst farmers. Indian banks and financial market players should actively look at promoting such programs as a part of their corporate social responsibility. Banks should conduct full day programs for their clientele including farmers for counselling small borrowers for making aware on the implications of the loan, how interest is calculated, and so on, so that they are totally aware of  its features. There is a clearly a lot requires to be done in this area. BENEFITS OF FINANCIAL INCLUSION . Financial inclusion has many benefits. Following are some of the benefits summed up as;   



 

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It paves the way for establishment of an account relationship which helps the poor to avail a variety of savings products and loan products for housing, consumption, etc. An inclusive financial system facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. This also enables the customer to remit funds at low cost. The government can utilize such bank accounts for social security services like health and calamity insurance under various schemes for disadvantaged. From the  bank‘s point of view, having such social security cover makes the financing of such persons less risky. Reduced risk  means more flow of funds at better rates. Access to appropriate financial services can significantly improve the day-today management of finances. For example, bills for daily utilities (municipality, water, electricity, telephone) can be more easily paid by using cheques or through internet banking, rather than standing in the queue in the offices of the service. Transfer of money can be done more safely and easily by using the cheque, demand draft or through internet banking. A bank account also provides a passport to a range of other financial products and services such as short term credit facilities, overdraft facilities and credit card. Further, a number of other financial products, such as insurance and pension products, necessarily require the access to a bank account. Lastly, the Employment Guarantee Scheme of the Government which is being rolled out in200 districts in the country would bring in large number of people through their savings accounts into the banking system.

TOOLS OF FINANCIAL INCLUSION AND THE METHODS TO ACHIEVE THEM To address the issue of financial exclusion in a holistic manner, it is essential to ensure that a range of financial services is available to every individual. These services are:

a) A no-frills banking account for making and receiving payments, b) A savings product suited to the pattern of cash flows of a poor household, c) Money transfer facilities, d) Small loans and overdrafts for productive, personal and other purposes, & e) Micro-insurance (life and non-life) Without a formal and a legally recognized financial system in which all sections of the population are a part of, it would be impossible even for the most efficient of the governments to reach out to all sections of the people. A stable and healthy financial service sector creates trust among the people about the economy and only with this trust (which has legal validity) could a strong, stable and an inclusive economy be created. Financial exclusion could be looked at in two ways: Lack of access to financial services mainly payment system, which could be due to several reasons such as:   





Lack of sources of financial services in our rural areas, which are popular for the ubiquitous moneylenders but do not have (safe) saving deposit and insurance services. High information barriers and low awareness especially in women and in rural areas. Inadequate access to formal financial institutions that exist to the extent that the banks could not extend their outreach to the poor due to various reasons like high cost of  operations, less volume and more number of clients, etc. among many others. Poor functioning and financial history of some beleaguered financial institutions such as financial cooperatives in many states, which limit the effectiveness of their outreach figures. Primary Agricultural Cooperative Societies (PACS), which number around one lakh are also often exclusionary, as their membership is restricted to persons with land ownership. Even to their members, not many PACS offer saving services.

Lack of access to formal financial services in of both rural and urban areas, but is a larger issue in cities and small towns. The distinction between access to formal and informal services is crucial to understand, as informal financial markets suffer from several imperfections, which the poor pay for in many ways. Some attributes of informal financial services, due to which there is exclusion are: A. High risks to saving: loss of savings is an easily discernible phenomenon in low-income neighborhoods in urban areas. B. High cost of credit and exploitative terms: credit against collateral such as gold is even more expensive than the effective interest rates, similarly, rates paid by hawkers and vendors who repay on daily basis are very high. C. High cost and leakages in money transfers: the delays in sending money home through all informal channels add to these. D. Near absence of insurance and pension services: life, asset, and health insurance needs. Another key aspect of financial exclusion is the lack of ―financial education and advice‖. In India, as the basic literacy rate is low supporting basic financial capability is indeed not just necessary, but also equally difficult. Financial exclusion is often related to more complex social exclusion issues, which makes financial literacy and access to basic financial services even more complex.

Chapter -4 CAUSES OF FINANCIAL EXCLUSION:-

Financial Exclusion may also have resulted from a variety of structural factors such as unavailability of products suiting their requirements, stringent documentation and collateral requirements and increased competition in financial services. The Causes of financial exclusion can be identifying broadly in two categories, first the demand side and the second supply side.

A. DEMAND SIDE BARRIERS :-

The people who have the requirement\need but still not demanding\availing the financial services\products which can be due to the following reasons: i. Low Income:

A higher share of population below the poverty line results in lower demand for financial services as the poor may not have savings to place as deposit in savings banks; hence the market lacks incentives in providing financial service/products. Most the people belonging to financially excluded group are having irregular/seasonal income. Hence opening of a bank account and operating it i.e. deposit and withdrawal in very small denominations with high frequency will increase the cost of transaction, adding to that they also anticipate that bank will refuse if they transact with so small amount. Further provided that, as they have low earning they cannot maintain minimum balance requirements of a normal saving bank account which ranges from Rs. 500 to Rs 5000(Rs. 500 in case of PSB and Rs. 5000 for Pvt. Sector Banks) and various annual maintenance charges(AMC) levied by banks. ii. Transaction cost:

Vast number of rural population resides in small villages which are often located in remote areas devoid of financial services. Consequently, the overall transaction cost to the customer in terms of both time and money proves to be a major deterrent for visiting financial institutions. The excluded section of the society find informal sector more reachable due to proximity and ease of transaction. iii. Financial Services Being Very Complex In Nature: excluded sections of the society find dealing with organized financial sector cumbersome.

iv. Easy access to alternative credit: For a good amount of low income people, the alternative credit provided by the money lenders and pawn shop owners are far more attractive and hassle free compared to getting a loan from a commercial bank. Some of the poor that do not have property find it impossible to get credit without the collateral. The uneducated poor would rather put their trust in moneylenders who provide easy non-collateral credit than on the well established commercial banks. There might also be cultural reasons for trusting a moneylender rather than a bank. Distance from bank branch, branch timings, cumbersome documentation/procedures, unsuitable products, language, staff attitude are common reasons – Higher transaction cost. v. Low literacy level: The lack of financial awareness about the benefits of the banking and also illiteracy act as stumbling blocks to financial inclusion. The lack of financial awareness maybe the single most risk in financial inclusion as those who are newly included in the financial sector have to maintained within the formal financial sector. vi. Legal identity: Lack of legal identities like identity cards, birth certificates or written records often exclude women, ethnic minorities, economic and political refugees and migrant workers from accessing financial services. vii. Sophisticated Financial Terminologies: Bankers often use complex financial terminologies, which the masses are unable to comprehend and hence do not approach for financial services voluntarily. viii. Terms and conditions: Terms and conditions attached to products such as minimum balance requirements and conditions relating to the use of accounts as in the case of saving bank account often dissuade people from using such products/services Further, term and conditions and its framework is generally so tedious and detailed that understanding it is not possible for those who cannot even write their name or are l ess literate and do not understand English or Hindi(in case of some regional rural areas). ix. Psychological and cultural barriers: The feeling that banks are not interested to look  into their cause has led to self-exclusion for many of the low income groups. However, cultural and religious barriers to banking have also been observed in some of the countries. x. Disincentives for the consumer: The cost of maintaining an account (non-zero balance accounts) and procedural problems in accessing formal credit act as disincentives for consumers with weaker financial background.

The bank would rather give smaller number of large credits to middle and upper class individuals and institutions, due to the lower cost involved in banking with them. The banks and other financial service firms have fewer financial products which are attractive to the poor and the socially disadvantaged. All these act against the interest of a consumer from a poor background.

B. Supply side barriers

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 i. Perception among banks about rural population:

Generally, there exists a perception among banks that large number of rural population is un-bankable as their capacity to save is limited. Therefore, they do not look favorably at small loans often required by marginalized section. Such loans are considered to be non-productive. ii. Miniscule margin in handling small transactions:

As the majority of rural population resides in small villages that too in remote areas, banks find small transactions cost ineffective. iii. KYC requirements:

The KYC 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. iv. Unsuitable products:

One of the most important reasons for the majority of rural population not approaching the formal sector for financial services is the unsuitability of  products and services being offered to them. For example, most of their credit needs are in form of small lump sums and banks are reluctant to give small amounts of loan at frequent intervals. Consequently, they have to resort to borrowing money from moneylenders at uxorious rates. v. Staff attitude:

As public sector banks (PSBs) cater to more than 70% of banked population and about 90% of rural banked population, a majority of staffs in these PSBs remain insensitive to needs of customer and shirk away from duty. The situation is even worst in rural branches where they behave with rural poor in a condescending manner. vi. Poor market linkage:

It is often argued that we may have been growing second fastest in the world, but still our 40-55% of people living in rural and semi-urban areas do not have access to basic necessities of life. 75% of villages in rural areas have no electricity arrangement, so it can be imagined that how much penetration market would be having especially when it comes to providing financial services/products, this may be that they are reluctant or there is no institutional as well as physical. Therefore there is no institutional infrastructure available in the rural area.

vii. Lack of interest from Commercial Banks:

There is a lot of criticism on the commercial banks because of their inherent tendency to think that poor people are not worthy of being banked on. Banks are in business to make profit and would like to only indulge in activities that give them profit. Due to high transaction costs on smaller transactions and the speculated high risk in lending credit to the lower strata of the society, they see banking with poor as unviable. Even if banks are concerned at the poor, they do it in a manner of corporate social responsibility or social service and treat them differently instead of trying to bring them into the mainstream. Unless banks see any incentive in banking with the weaker sections of the society, they would not be willing to do so. xi. Poor credit record:

Areas with poor credit record, bad past experience, socially unstable and poor recovery of previous loan/credit given are observed to be highly financially excluded, as banks blacklist such areas as the part of their risk management strategy.

Important Milestones on Road to Financial Inclusion in India: 1904

Setting up of Rural Cooperatives

1969

Nationalization of 14 major Commercial Banks

1975

Setting up of Regional Rural Banks

1990s

Self Help Group

2005

RBI advised banks to open no frill accounts

2006

RBI allowed BC/BF to act as agents of banks

Sept. 2010

RBI allowed for - profit companies (excluding NBFC) to act as Business Correspondent

2011

National Payment Corporation of India (NPCI) launched Interbank Mobile Payment System (IMPS)

Chapter -5 CONSEQUENCES OF FINANCIAL EXCLUSION :-

There are three dimensions of consequences that financial exclusion has on the people affected: financial exclusion can generate financial consequences by affecting directly or indirectly the way in which the individuals can raise, allocate, and use their monetary resources. A wider dimension of financial exclusion can be identified as socio-economical consequences i.e. groups which are socially excluded are mostly also found financially excluded. A last dimension can be identified as the social consequences generated by financial exclusion. These are the consequences affecting the various links that are binding the individuals: link to corresponding to self esteem, links binding to the society and links binding to community and/or relationships with other individual or groups. Access to a bank account, credit and insurance are now widely regarded as essential supports for personal financial management and for undertaking transactions in modern societies (Speak and Graham, 1999). According to the Treasury Committee, UK (2006), financial exclusion can impose significant costs on individuals, families and society as a whole. These include: 

Barriers to employment as employers may require wages to be paid into a bank  account;



Opportunities to save and borrow can be difficult to access;



Owning or obtaining assets can be difficult;



Difficulty in smoothening income to cope with shocks; and



Exclusion from mainstream society.

In terms of cost to the individuals, financial exclusion leads to higher charges for basic financial transactions like money transfer and expensive credit, besides all round impediments in basic/ minimum transactions involved in earning livelihood and day to day living. It could also lead to denial of access to better products or services that may require a bank account. It exposes the individual to the inherent risk in holding and storing money  –  operating solely on a cash basis increases vulnerability to loss or theft. Individuals/families could get sucked into a cycle of poverty and exclusion and turn to high cost credit from moneylenders, resulting in greater financial strain and unmanageable debt.

At the wider level of the society and the nation, financial exclusion leads to social exclusion, poverty as well as all the other associated economic and social problems. Thus, financial exclusion is often a symptom as well as a cause of poverty. Financial exclusion is not evenly distributed throughout society; it is concentrated among the most disadvantaged groups and communities and, as a result, contributes to a much wider problem of social exclusion. A significant portion of demand for credit by rural households arises in order to ease the financial burden of crop failures, illness or death, and health care. In the case of  microenterprises, credit may be needed to achieve a reasonable and viable scale of activities. The rising entrepreneurship spanning rural, semi-urban and urban areas, particularly in the unorganized and informal sectors may give rise to large potential demand for credit. The evidence on the demand for credit in India suggests that medical and financial emergencies are the major reasons for household borrowings. Medical emergencies were particularly high for the lowest income quartile (IIMS, 2007). Thus, the difficulty in obtaining finance from formal sources has major social implications. Another cost of financial exclusion is the loss of business opportunity for banks, particularly in the medium-term. Banks often avoid extending their services to lower income groups because of initial cost of expanding the coverage may sometimes exceed the revenue generated from such operations. These business related concerns of banks were, however, meaningful when technology development was at a nascent stage and expanding the coverage of financial services required substantial initial investment. The strides in technology have now reduced the required initial investment in a significant manner. What is required is to explore the appropriate technology which is suitable to socio-economic conditions of the region under consideration. Moreover, availability and usage of financial services by the otherwise excluded population groups would lead to increase in their income levels and savings. This, in turn, would have the potential to increase savings deposits as well as credit demand, implying profitable business for banks in the medium-term.

Two other factors have often been cited as the consequences of financial exclusion. First, it complicates day-to-day cash flow management - being financially excluded means households, and micro and small enterprises deal entirely in cash and are susceptible to irregular cash flows. Second, lack of financial planning and security in the absence of access to bank accounts and other saving opportunities for people in the unorganized sector limits their options to make provisions for their old age. From the macroeconomic standpoint, absence of formal savings can be problematic in two respects. First, people who save by informal means rarely benefit from the interest rate and tax advantages that people using

formal methods of savings enjoy. Second, informal saving channels are much less secure than formal saving facilities. The resultant lack of savings and saving avenues means recourse to non-formal lenders such as moneylenders. This, in turn, could lead to two adverse consequences – 

a. Exposure to higher interest rates charged by informal lenders; and b. The inability of customers to service the loans or to repay them As loans from non-formal lenders are often secured against the borrower‘s property, this raises the problem of inter-linkage between two apparently separate markets. Judged in this specific context, financial exclusion is a serious concern among low-income households, mainly located in rural areas. To sum up, the nature and forms of exclusion and the factors responsible for it are varied and, thus, no single factor could explain the phenomenon. The principal barriers in the expansion of financial services are often identified as physical access, high charges and penalties, conditions attached to products which make them inappropriate or complicated and perceptions of financial service institutions which are thought to be unwelcoming to low income people. There has also been particular emphasis on socio-cultural factors that matter for an individual to access financial services. The most conspicuous dimension of exclusion is that a majority of the low-income population do not have access to the very basic financial services. Even amongst those who have access to finance, most of them are underserved in terms of quality and quantity of products and services. The critical dimensions of financial exclusion include access exclusion, condition exclusion (conditions attached to financial products), price exclusion, and self exclusion because of the fear of refusal to access by the service providers. The financial exclusion process becomes self-reinforcing and can often be an important factor in social exclusion, especially for communities with limited access to financial products, particularly in rural areas. Apart from the above mentioned supply side factors, demand side factors may also significantly affect the extent of financial inclusion. For instance, low level of income and hence low savings would result in lower deposits. Similarly, at low level of income, the ability to borrow is affected because of low repayment capacity and inability to provide collateral. In the Indian context, both demand and supply side factors have an important bearing on the usage of  financial/banking services.

POLICY DEVELOPMENT

We have seen in the previous chapter that in our country the financial services has been\being used by a very limited group of people\individuals. To enlarge the area and service sector, certain policy measures have been taken by government. Policy development in India for financial inclusion can be seen in three stages

• Nationalisation of  banks • presecription of  priority • sector targets • lead bank scheme

Annual Policy 2005 - 2006 • No Fril bank account • simple KYC norms • NGOs, SHGs, MFIs etc were allowed • easier credit facilities

1969 - 1991

I.

• determining new model for effective reach • leveraging on technology based solutions • improvements in Credit absorption capcaility • exisiting formal credit delivery system

Rangrajan committee Report

FIRST PHASE DEVELOPMENTS (1969-1981)

In 1969, the banks were nationalized in order to spread bank‘s branch network in order to develop strong banking system which can mobilize resources/deposits and channel them into productive/needy sections of society and also government wanted to use it as an important agent of change. So, the planning strategy recognized the critical role of the availability of  credit and financial services to the public at large in the holistic development of the country with the benefits of economic growth being distributed in a democratic manner. In recognition of this role, the authorities modified the policy framework from time to time to ensure that the financial services needs of various segments of the society were met satisfactorily Before 1990, several initiatives were undertaken for enhancing the use of the banking system for sustainable and equitable growth. These included;

I. Nationalization of private sector banks,

II. Introduction of priority sector lending norms, III. The Lead Bank Scheme, IV. Branch licensing norms with focus on rural/semi-urban branches, V. Interest rate ceilings for credit to the weaker sections and VI. Creation of specialized financial institutions to cater to the requirement of the agriculture and the rural sectors having bulk of the poor population. SOCIAL NETWORKING APPROACH

The announcement of the policy of social control over banks was made in December 1967 with a view to securing a better alignment of the banking system with the needs of economic policy. The National Credit Council was set up in February 1968 mainly to assess periodically the demand for bank credit from various sectors of the economy and to determine the priorities for grant of loans and advances. Social control of banking policy was soon followed by the nationalization of major Indian banks in 1969. The immediate tasks set for the nationalised banks were mobilization of deposits on a massive scale and lending of  funds for all productive activities. A special emphasis was laid on providing credit facilities to the weaker sections of the economy. THE PRIORITY SECTOR APPROACH

The administrative framework for rural lending in India was provided by the Lead Bank  Scheme introduced in 1969, which was an important step towards implementation of the twofold objectives of deposit mobilization on an extensive scale and stepping up of lending to weaker sections of the economy. Realizing that the flow of credit to employment oriented sectors was inadequate; the priority sector guidelines were issued to the banks by the Reserve Bank in the late 1960s to step up the flow of bank credit to agriculture, small-scale industry, self-employed, small business and the weaker sections within these sectors. The target for priority sector lending was gradually increased to 40 per cent of advances in the case of domestic banks (32 per cent, inclusive of export credit, in the case of foreign banks) for specified priority sectors. Sub targets under the priority sector, along with other guidelines including those relating to Government sponsored programmed, were used to encourage the flow of credit to the identified vulnerable sections of the population such as scheduled castes, religious minorities and scheduled tribes. The Differential Rate of Interest (DRI) Scheme was instituted in 1972 to provide credit at concessional rate to low income groups in the country. LEAD BANK SCHEME APPROACH

But all these measure were focused towards inclusion of a sector, regional areas etc., there was a very less or no emphasis was on financial inclusion of Individual/household level. The promotional aspects of banking policy have come into greater prominence. The major emphasis of the branch licensing policy during the 1970s and the 1980s was on expansion of  commercial bank branches in rural areas, resulting in a significant expansion of bank  branches and decline in population per branch.

The branch expansion policy was designed, inter alia, as a tool for reducing inter-regional disparities in banking development, deployment of credit and urban-rural pattern of credit distribution. In order to encourage commercial banks and other institutions to grant loans to various categories of small borrowers, the Reserve Bank promoted the establishment of the Credit Guarantee Corporation of India in 1971 for providing guarantees against the risk of  default in repayment. The scheme, however, was subsequently discontinued. II.

SECOND PHASE – ANNUAL POLICY (2005-2006)

As the central bank of the country, the Reserve bank of India has taken steps to ensure financial inclusion in the country. It has tried to make banking more attractive to citizens by allowing for easier transactions with banks. In 2004 RBI appointed an internal group to look  into ways to improve Financial Inclusion in the country. With a view to enhancing the financial inclusion, as a proactive measure, the RBI in its Annual Policy Statement for the year 2005-06, while recognizing the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population, urged banks to review their existing practices to align them with the objective of financial inclusion. In the Mid Term Review of the Policy (2005-06), It is observed that there were legitimate concerns in regard to the banking practices that tended to exclude rather than attract vast sections of population, in particular pensioners, selfemployed and those employed in the unorganized sector. It also indicated that the Reserve Bank would 1. Implement policies to encourage banks which provide extensive services, while disincentivising those which were not responsive to the banking needs of the community, including the underprivileged; 2. The nature, scope and cost of services would be monitored to assess whether there was an y denial, implicit or explicit, of basic banking services to the common person; and 3. Banks urged to review their existing practices to align them with the objective of financial inclusion. RBI exhorted the banks, with a view to achieving greater financial inclusion, to make available a basic banking ‗no frills‘ account either with nil or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population. The nature and number of transactions in such accounts would be restricted and made known to customers in advance in a transparent manner. All banks are urged to give wide publicity to the facility of such no frills account so as to ensure greater financial inclusion. RBI came out with a report in 2005 (Khan Committee) and subsequently RBI issued a circular in 2006 allowing the use of intermediaries for providing banking and financial services. Through such policies the RBI has tried to improve Financial Inclusion. Financial Inclusion offers immense potential not only for banks but for other businesses. Through an integrated approach the businesses, the NGOs, the government agencies as well as the banks can be partners in growth.

Brief glimpses of main initiative are followings:-

a) No-Frill Accounts:

It is a basic saving fund account having all the features of a normal saving fund account which it differs in the following aspects 1. The holder is not required to maintain any minimum balance requirement and also nothing is charged for opening this type of account 2. KYC norms have been simplified so that everyone can have this account 3. Transaction are limited to 5-10 free transactions per month 4. ATM facility is provided free of cost 5. There is no account maintenance cost Similar types of accounts, though with different names, have also been extended by banks in various other countries with a view to make financial services accessible to the common man either at the behest of banks themselves or the respective Governments.

b) Overdraft in Saving Bank Accounts:

Bank were advised to give credit in form of overdraft on saving bank account to its customer so that in case of small credit need like medical bill, any accidental charges etc. can be met in.

c) KYC norms:

The Know Your Customer (KYC) norms were revised in order to make it easy for people to avail financial services on February 18, 2008. These guidelines include 1. In case of close relatives who find it difficult to furnish documents relating to place of  residence while opening accounts, banks can obtain an identity document and a utilit y bill of the relative with whom the prospective customer is living, along with a declaration from the relative that the said person (prospective customer) wanting to open an account is a relative and is staying with him/her. Banks can also use any supplementary evidence such as a letter received through post for further verification of the address; 2. banks have been advised to keep in mind the spirit of the instructions and avoid undue hardships to individuals who are otherwise classified as low risk customers; 3. Banks should review the risk categorization of customers at a periodicity of not less than once in six months.

4. Further, in order to ensure that persons belonging to low income group both in urban and rural areas do not face difficulty in opening the bank accounts due to the procedural hassles, the KYC procedure for opening accounts has been simplified for those persons who intend to keep balances not exceeding rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed rupees one lakh (Rs.1,00,000/-) in a year.

d) SHG Model:

A Self Help Group (SHG) is a group of about 15 to 20 people from a homogenous class who join together to address common issues. They involve voluntary thrift activities on a regular basis, and use of the pooled resource to make interest-bearing loans to the members of the group. In the course of this process, they imbibe the essentials of  financial intermediation and also the basics of account keeping. The members also learn to handle resources of size, much beyond their individual capacities. They begin to appreciate the fact that the resources are limited and have a cost. Once the group is stabilized, and shows mature financial behavior, which generally takes up to six months to 1 year, it is considered for linking to banks. Banks are encouraged to provide loans to SHGs in certain multiples of the accumulated savings of  the SHGs. Loans are given without any collateral and at interest rates as decided by banks. Banks find it comfortable to lend money to the groups as the members have already achieved some financial discipline through their thrift and internal lending activities. The groups decide the terms and conditions of loan to their own members. The peer pressure in the group ensures timely repayment and becomes social collateral for the bank loans. Generally, the SHGs need self-help promoting institutions (SHPIs) to promote and nurture them. These SHPIs include various NGOs, banks, farmers‘ clubs, government agencies, self-employed individuals and federations of SHGs. However, some SHGs have also been formed without any assistance from such SHPIs. There are three different models that have emerged under the linkage programI. Model I: This involves lending intervention/facilitation by any NGO.

by

banks

directly

to

SHGs

without

II. Model II: This envisages lending by banks directly to SHGs with facilitation by NGOs and other agencies. III. Model III: This involves lending, with an NGO acting as a facilitator and f inancing agency. Model II accounted for around 74 per cent of the total linkage at end-March 2007, while Models I and III accounted for around 20 per cent and 6 per cent, respectively.

e)

KCC / GCC Guidelines :

GCC Scheme

With a view to providing credit card like facilities in the rural areas, with limited pointof-sale (POS) and limited ATM facilities, the Reserve Bank advised all scheduled commercial banks, including RRBs, in December 2005 to introduce a General Credit Card (GCC) Scheme for issuing GCC to their constituents in rural and semi-urban areas, based on the assessment of income and cash flow of the household similar to that prevailing under a normal credit card. The Reserve Bank also advised banks to classify fifty per cent of the credit outstanding under loans for general purposes under General Credit Cards (GCC), a s indirect finance to agriculture under priority sector. The Reserve Bank further advised banks in May 2008 to classify 100 per cent of the credit outstanding under GCCs as indirect finance to agriculture sector under the priority sector with immediate effect.

KCC Scheme   

        

Eligible farmer will be provided a Kishan Credit Card and a Pass Book or a Cardcum-Passbook. Revolving cash credit facility allowing any number of withdrawals and repayments within the limit. Entire production credit needs for full year plus ancillary activities related to crop production to be considered while fixing limit. In due course, allied activities and non- farm short term credit needs may also be covered. Limit to be fixed on the basis of operational land holding, cropping pattern and scales of finance. Seasonal sub limits may be fixed at the discretion of banks. Limit of valid for 3 years subject to annual review. Conversion /re- scheduling of loans also permissible in case of damage to crops due to natural calamities. As incentive for good performance, credit limits could be enhanced to take cares of  increase in costs, changing in cropping pattern etc. Security, margin and rate of interest as per RBI norms. Operations may be through issuing branch / PACS or through other designated branches at the discretion of bank. Withdrawals through slips /cheques accompanies by card and passbook. Personal Accident Insurance of Rs. 50,000 for death and permanent disability and Rs. 25,000/- for partial disability available to Kisan Credit Card holder at an annual premia of Rs. 15/- per annum

f) Financial Literacy Program:

Recognizing that lack of awareness is a major factor for financial exclusion, the Reserve Bank has taken a number of measures towards imparting financial literacy and promotion of credit counseling services. The Reserve Bank has undertaken a project titled ―Project Financial Literacy‖.

The objective of the project is to disseminate information regarding the central bank  and general banking concepts to various target groups, including, school and college going children, women, rural and urban poor, defense personnel and senior citizens. The banking information would be disseminated to the target audience with the help of, among others, banks, local government machinery, schools/colleges using pamphlets,  brochures, films, as also, the Reserve Bank‘s website. Various initiatives taken by the Reserve Bank in order to promulgate Financial Literacy: 

A multilingual website in 13 Indian languages on all matters concerning banking and the common person has been launched by the Reserve Bank on J une 18, 2007.



Comic type books introducing banking to schoolchildren have already been put on the website. Similar books will be prepared for different target groups such as rural households, urban poor, defense personnel, women and small entrepreneurs. Financial literacy programs are being launched in each state with the active involvement of the state government and the SLBC. Each SLBC convener has been asked to set up a credit counseling centre in one district as a pilot project and extend it to all other districts in due course. The ‗Financial Inclusion and Financial Literacy Cell‘ has been established the college of Agricultural Banking, which would act as a resource centre in this field.





III.

THIRD PHASE - RANGRAJAN COMMITEE

The Government of India (Chairman Dr. C. Rangarajan) constituted the Committee on Financial Inclusion on June 26, 2006 to prepare a strategy of financial inclusion. The Committee submitted its final Report on January 4, 2008. The Report viewed financial inclusion as a comprehensive and holistic process of ensuring access to financial services and timely and adequate credit, particularly by vulnerable groups such as weaker sections and low-income groups at an affordable cost9. Financial inclusion, therefore, according to the Committee, should include access to mainstream financial products such as bank accounts, credit, remittances and payment services, financial advisory services and insurance facilities. The Report observed that in India 51.4 per cent of farmer households are financially excluded from both formal/informal sources and 73 per cent of farmer households do not access formal sources of credit. Exclusion is most acute in Central, Eastern and North -eastern regions with 64 per cent of all financially excluded farmer households. According to the Report, the overall strategy for building an inclusive financial sector should be based on Effecting improvements within the existing formal credit delivery mechanism; Suggesting measures for improving credit absorption capacity especially amongst marginal and sub-marginal farmers and poor non-cultivator households; Evolving new models for effective outreach; and Leveraging on technology-based solutions. Keeping in view the enormity of the task involved, the Committee recommended the setting up of a mission mode National Rural Financial Inclusion Plan (NRFIP) with a target of  providing access to comprehensive financial services to at least 50 per cent (55.77 million) of  the excluded rural households by 2012 and the remaining by 2015.

This would require semi-urban and rural branches of commercial banks and RRBs to cover a minimum of 250 new cultivator and non-cultivator households per branch per annum. The Report of the Committee on Financial Inclusion Committee has also recommended that the Government should constitute a National Mission on Financial Inclusion (NaMFI) comprising representatives of all stakeholders for suggesting the overall policy changes required, and supporting stakeholders in the domain of public, private and NGO sectors in undertaking promotional initiatives. The major recommendations relating to commercial banks included target for providing access to credit to at least 250 excluded rural households per annum in each rural/semi urban branches; targeted branch expansion in identified districts in the next three years; provision of  customized savings, credit and insurance products; incentivizing human resources for providing inclusive financial services and simplification of procedures for agricultural loans. The major recommendations relating to RRBs are extending their services to unbanked areas and increasing their credit-deposit ratios; no further merger of RRBs; widening of network  and expanding coverage in a time bound manner; separate credit plans for excluded regions to be drawn up by RRBs and strengthening of their boards. In the case of co-operative banks, the major recommendations were early implementation of  Vaidyanathan Committee Revival Package; use of PACS and other primary co-operatives as BCs and co-operatives to adopt group approach for financing excluded groups. Other important recommendations of the Committee are encouraging SHGs in excluded regions; legal status for SHGs; measures for urban micro-finance and separate category of MFIs. CREATION OF SPECIAL FUNDS

The ―Committee on Financial Inclusion‖ set up by the Government of India (Chairman: Dr. C. Rangarajan) in its Interim Report recommended the establishment of two Funds, namely the ―Financial Inclusion Promotion and Development Fund‖ for meeting the cost of  developmental and promotional interventions for ensuring financial inclusion, and the ―Financial Inclusion Technology Fund (FITF)‖ to meet the cost of technology adoption. The Union Finance Minister, in his Budget Speech for 2007-08 announced the constitution of  the Financial Inclusion Fund (FIF) and the FITF, with an overall corpus of Rs.500 Crore each at NABARD. The Government advised that for the year 2007-08 it was decided to initially contribute Rs.25 Crore each in the two funds by the Central Government, RBI and NABARD in the ratio 40:40:20. The final report of the Committee has been submitted to the Government in January 2008.

Chapter - 6 HOW GOVERNMENT AND RBI CAN BUILD ON EXISTING BANKING STRUCTURE TO PROVIDE FINANCIAL SERVICES TO ALL

Banking system is like a team, which constitutes from various entities which are different in nature, form, structure and its working but together they makes system in which they efficiently work for a common motive. SHG BANK LINKAGE PROGRAM

The SHG-Bank Linkage program can be regarded as the most powerful initiative since independence for providing financial services to the poor in a sustainable manner. The  program has been growing rapidly YOY basis. Currently, 10 million SHG‘s are working across the country with a credit base of Rs. 100000 Crore. But this is not enough to reach the entire mass. This number needs to be increased substantially. However, the spread of the SHG- Bank linkage program in different regions has been uneven with southern states accounting for the major chunk of credit linkage. Many states with high incidence of poverty have shown poor performance under the program. NABARD has identified 13 states with large population of the poor, but exhibiting low performance in implementation of the program. The ongoing efforts of NABARD to upscale the program need to be given a fresh impetus. NGOs have played a commendable role in promoting SHGs and linking them with banks. As of now, SHGs are operating as thrift and credit groups. They may evolve to a higher level of commercial enterprise in future. Hence, it becomes critical to examine the prospect of  providing a simplified legal status to the SHG. MICRO FINANCE INSTITUTIONS (MFIs)

From the late 1980s, the emergence of the Grameen Bank in Bangladesh drew attention to the role of micro- credit as a source of finance for micro-entrepreneurs. Lack of access to credit was seen as a binding constraint on the economic activities of the poor. Microfinance Institutions (MFIs) are those, which provide thrift, credit, and other financial services and products of very small amounts mainly to the poor in rural, semi-urban or urban areas for enabling them to raise their income level and improve living standards. Lately, the potential of MFIs as promising institutions to meet the demands of the poor has been realized. The closer proximity with the people at grassroots level and the mix of offering right products at right price based on the actual needs of the masses makes their role very important in deepening financial inclusion. However, there is exigency to upscale their outreach. In India, out of some 400 million poor workers, less than 20 per cent have been linked with financial services provided by MFIs. Steps needed to promote MFIs 

One of the ways of expanding the successful operation of microfinance institutions in the informal sector is through strengthened linkages with their formal sector counterparts.





Efforts are needed to make MFIs an integral part of mainstream banking and to bring down the rates of interest on microcredit to ensure the micro finance movement gets further impetus A mutual beneficial partnership should be established between MFIs and Banks contingent on comparative strength of each sector. For example, informal sector microfinance institutions have comparative advantage in terms of small transaction cost achieved through adaptability and flexibility of operations.

COOPERATIVE CREDIT INSTITUTIONS

Rural credit cooperatives in India were originally envisaged as a mechanism for pooling the resources of people with small means and providing them with access to different financial services. It has served as an effective institution for increasing productivity, providing food security, generating employment opportunities in rural areas and ensuring social and economic justice to the poor and vulnerable sections. Despite the phenomenal outreach and volume of operations, the health of a very large proportion of these credit cooperatives has deteriorated significantly. Various problems faced by these institutions are:  Low resource base 

High dependence on external source of funding



Excessive government control



Huge accumulated losses and imbalances



Poor business diversification

Taking all these facts in mind, there is an urgent need to address the structural deficiencies of  these institutions in order to make them play an effective role in meeting the financial inclusion goal. RRBs

RRBs, post-merger, represent a powerful instrument for financial inclusion. RRBs account for 37% of total rural offices of all scheduled commercial banks and 91% of their workforce is posted in rural and semi-urban areas. They account for 31% of deposit accounts and 37% of loan accounts in rural areas. RRBs have a large presence in regions marked by financial exclusion of high order. RRBs are, thus, the best suited vehicles to widen and deepen the process of financial inclusion. However, they need to be oriented suitably to serve the rural population with a specific mandate to achieve financial inclusion. THE BUSINESS CORRESPONDENT MODEL

In January 2006, the Reserve bank permitted banks to utilize the services of non-government organizations (NGOs/SHGs), micro-finance institutions and other rural organizations as intermediaries in providing financial and banking services through the use of business facilitator (BF) and business correspondent models (BC). The BC model allows banks to do ‗cash in cash out‘ transactions at a location much closer to the rural population, thus addressing the last mile problem.

Banks are also entering into agreement with Indian Postal Authority for using the enormous network of post offices as business correspondents for increasing their outreach and leveraging the postman‘s intimate knowledge of the local population and trust reposed in him. The intention behind the model is to promote the business of banking with low capital cost by enabling outsourcing of rural business to agents on a commission basis. Recent guidelines issued by RBI to ensure adequate supervision over operations of BCs: 

Every BC to be attached to a certain bank to be designated as the base branch



The distance between the area of operation of a BC and the base branch should not exceed 30 km in rural, semi-urban and urban areas.

Initiatives needed to be undertaken to promote BC model   

Allow more entry to private well governed small finance banks. The intent is to bring local knowledge to financial products that are needed locally. Facilitate the use of existing networks like cell phone kiosks or kirana shops as business correspondents to deliver products of large financial institutions. Liberalize the business correspondent regulation so that a wide range of local agents can serve to extend financial services.

Chapter- 7 PRESENT STATUS OF FINANCIAL INCLUSION IN THE COUNTRY:-

Axis Bank to cover 12,000 villages under new financial inclusion plan. Axis Bank, India‘s third-largest private bank has begun implementing its rural expansion plans and intends to cover 5,500 villages for financial inclusion by March 2011 and scale it up to 12,000 villages in five years‘ time. Speaking to media, Mr. SK Chakrabarti, executive director Axis bank‘s retail banking division said that the bank is looking at several low cost delivery models such as the use of smart card, mobile banking and point of transaction devices. Axis Bank has also set up separate financial inclusion team to implement its financial inclusion roadmap. It may be recalled that Reserve Bank of India had asked all private and public sector banks to chart a road map on financial inclusion. The plan was expected to cover issues like the number of branches that banks would plan to open in rural India, the number of no-frill accounts they plan and the number of business correspondents they would appoint to achieve their financial inclusion target.

SBI plans financial inclusion of 50,000 villages this fiscal. The bank  under financial inclusion initiative has planned to cover 50,000 unbanked villages during 2010-11 which will take total reach to 1, 50,000 villages," a senior official of SBI said. SBI to set up 600 financial inclusion centers. The move to set up FICs is aimed at powering the bank's drive to reach basic and affordable banking services to 12,421 out of the 72,315 unbanked villages (identified according to 2001 census) having a population of over 2,000 by March-end 2012. Under the financial inclusion plan, our bank is currently providing basic banking services in 1,300 villages. This number will jump to 5,300

by March-end 2011. We will complete the target of providing banking outreach in 12,421 villages by March-end 2012,‖ said Mr. M.I. Dholakia, Deputy General Manager, SBI.

IDBI Bank has a branch network of  702+ branches out of which 142 braches are in Semi-urban and 73 branches are in rural areas. Inclusion through ―No Frill Accounts‖ The account can be opened with a minimum balance of Rs.250/-. As at end-March 2010, 4, 34,512 such accounts have been opened.

ICICI Bank Ltd, India‘s largest private sector Bank and Vodafone today announced a joint initiative to drive financial inclusion in the country. Under this tie-up, both entities will offer a bouquet of financial products such as savings accounts, pre-paid instruments and credit products through a mobile phone based platform. This partnership is expected to bring the un-banked and under-banked population into the organized financial services framework and assist in furthering the electronic payments market in India. ICICI Bank will leverage the distribution strength of Vodafone, which manages over 1.5 million retail points for acquiring customers and servicing them. The Reserve Bank of India (RBI) has over the past few years come out with various measures to facilitate banks to achieve the financial inclusion agenda. RBI has allowed banks to appoint for-profit' companies as Business Correspondents (BCs). This tie-up between ICICI Bank and Vodafone is a step in that direction.

DENA BANK

Dena Bank was founded on 26th May, 1938 by the family of  Devkaran Nanjee

under the name Devkaran Nanjee Banking Company Ltd.  It

became a Public Ltd. Company in December 1939 and later the name was changed

to Dena Bank Ltd.

 In

July 1969 Dena Bank Ltd. along with 13 other major banks was nationalized and is now a Public Sector Bank constituted under the Banking Companies (Acquisition & Transfer of Undertakings) Act, 1970. Under the provisions of the Banking Regulations Act 1949, in addition to the business of banking, the Bank can undertake other business as specified in Section 6 of the Banking Regulations Act, 1949.

1.5.1 MISSION DENA BANK provides its Customers - premier financial services of great value.  Staff - positive work environment and opportunity for growth and achievement.  Shareholders - superior financial returns.  Community - economic growth. 

1.5.2 VISION DENA BANK will emerge as the most preferred Bank of customer choice in its area of 

operations, by its reputation and performance.

1.6 DENA BANK HAS BEEN THE PIONEER IN: 

Minor Savings Scheme.

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Credit card in rural India known as "DENA KRISHI SAKH PATRA" (DKSP).

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Drive-in ATM counters of Juhu, Mumbai.

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Smart card at selected branches in Mumbai.

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Customer rating system for rating the Bank Services.

Financial Inclusion The Bank has a Financial Inclusion Plan which envisages roadmap for provision of  banking services through banking outlet in770 villages allocated to it by various SLBCs under Lead Bank Scheme. The number of villages allotted to Dena Bank has now been reduced from 770 to 728 after re-allocation of the villages to other Banks keeping in view the geographical areas. As per FIP, all these villages are covered by end of March 2012.

The plan includes extension of facilities like Opening of No Frills Accounts, Inbuilt Overdraft facility in the No Frills Accounts, Entrepreneurship Credit, Remittance facilities and Micro-Insurance products. The Bank has engaged M/s Tata Consultancy Services (M/s TCS)as the Application Service Provider (ASP) for implementation of FI Plan for a period of 3 years. Bank has engaged individual Business Correspondents (BCs) in FI villages. 3.6.2 Progress in coverage of villages:

Bank has covered all 728 villages by March 2012. Brick & Mortar Branch Model: Bank has covered 41 villages by opening Brick & Mortar Branches. Ultra Small Branch Model: Bank has covered 34 villages by setting up of Ultra Small Branches. BC Model: Bank has Covered 653 villages by engaging individual Business Correspondents. 3.6.3 No Frills Accounts: Total 2.74 lakhs No Frills accounts have been opened in the

FI Villages by March 2012 against the target of2.62 lakhs accounts. However, the Bank  as a whole, the number of No Frills accounts is 12.60 lakhs as of March 2012.

3.6.4 Inbuilt OD facility in the No Frills Accounts:

All No Frills Accounts in FI villages i.e. 2.74 lakhs No Frills Accounts have been extended OD facility by March 2012, against the target of 2.62 lakhs accounts. However, the Bank as a whole, the number of inbuilt OD facility extended in the No Frills Accounts is 5.53 lakhs. Dena Kisan Credit Cards and Dena General Credit Cards are also issued under Financial Inclusion Plan.

3.6.5 Training to Individual BCs:

Training has been provided to all individual BCs. However, Bank shall provide training to BCs on continuous basis through pool of officers identified for training.

3.6.6 FIP for Regional Rural Banks (RRBs):

Dena Bank has sponsored two RRBs namely Dena Gujarat Gramin Bank (DGGB) in the State of Gujarat and Durg Rajnandgaon Gramin Bank (DRGB) in the State of  Chhattisgarh. DGGB has been allocated 245 villages and DRGB has been allocated 26 villages. In all, both the RRBs have been allocated 271villages having population above 2000.Both the RRBs have covered all the villages allotted to it by March2012.

3.6.7 FIP for the State of Gujarat:

A total of 3502 villages having population above 2000 were allotted to Banks and all have been covered by Banks by March 2012.Banks have covered 101 villages through Brick & Mortar Branch Model, 673 villages through Ultra Small Branch Model, 16 villages through Mobile Van model and 2712 villages through BC model. Dena Bank  has covered all 493 villages allotted to it in the State of Gujarat. All Banks have opened 9.99 lakhs accounts under Financial Inclusion. (Dena Bank has opened 1.67 lakhs accounts).

Inclusion Process:

Chapter-8 Resaerch Methodology

OBJECTIVE OF RESEARCH The ability of banks to offer clients access to several markets for different classes of  financial instruments has become a valuable competitive edge. With the phenomenal increase in the country's population and the increased demand for banking services; speed, service quality and customer satisfaction are going to be key differentiators for each bank's future success. Thus it is imperative for banks to get tap the rural market by including them financially, which in turn will help them take positive steps to maintain a competitive edge.

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To study the customer awareness with respect to banking services.

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To identify the gaps of financial inclusion and exclusion.

DATA COLLECTION TECHNIQUES: 

The study has been done using an exploratory research process and a structured questionnaire was developed for this purpose. For the collection of  PRIMARY DATA this was the only method used.

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The reason we used this method is because a need was felt for the free influx of  information about the products. Also this method allowed the use of skills gained in class.

4.4 SAMPLE DESIGN: 

The population considered for the purpose of the survey was people having an account in Dena Bank in the Branches of Gandhinagar District.

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The extensive research is done with customer of banks located in Por, Koba and Bhat area of Gandhinagar.

4.5 SAMPLING TECHNIQUE USED: 

Since the information required was not of a very technical nature and also looking at the scope of the project and the extent of the target segment, the sampling technique employed was Convenience Sampling. We administered the questionnaires.

4.6 SAMPLE SIZE: 

We restricted the sample size to 20 respondents per branch, who are valued customers of the bank from each branch of different age groups. This was done keeping in mind the time constraints and the fact that we felt that this number would be enough to serve the information needs required to show the trends. 

Total Sample- 60 Customers

4.7 DATA ANALYSIS 

After data collection, we were able to analyze customer‘s views, ideas and opinions related to Products & Services of the Bank, which will enable the Bank to get a clear picture about the Customer‘s perception and requirements.

4.8 DATA INTERPRETATION 

Interpretation of data is done by using statistical tools like Pie diagrams, Bar graphs, and also using quantitative techniques (by using these techniques) accurate information is obtained.

4.9 CLASSIFICATION & TABULATION OF DATA: 

The data thus collected were classified according to the categories, counting sheets & the summary tables were prepared. The resultant tables were one dimensional, two dimensional.

4.10 STATISTICAL TOOLS USED FOR ANALYSIS: