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Review of Literature

2.1 CHAPTER OVERVIEW

This chapter focuses on the literature review of the role of finance in economic

development. In economic literature, it is advocated that, financial development creates

empowering conditions for growth. In this regard, a summary of the views of various

economists and the details of various earlier studies conducted, are highlighted in section

2.2. The research gap that has been explored on the literature review is stated in section

2.3 along with an account of the literature review in the table format, and a summary of it

in the form of a literature map. Section 2.4 explains the definitions and process of

financial inclusion, which plays a crucial role in measuring the access and impact of

banking services. The outline of the conceptual framework, based on the literature

review, linking financial inclusion, impact of access to finance and inclusive growth is

given in section 2.5. The constructs of the study through which the conceptual framework

is articulated are stated in the subsection 2.6. An account of the variables identified and

the operational definitions which form the basis of measuring nature, extent and the

impact of availing formal financial services are given in sections 2.7 and 2.8 respectively.

The various hypotheses put forward for the empirical verification are enumerated in

section 2.9. Section 2.10 gives the chapter summary.

2.2 ROLE OF FINANCE IN ECONOMIC DEVELOPMENT

As far as the literature on the role of finance in economic development is concerned, it is

advocated that, financial development creates pro-growth conditions in an economy,

through the supply-leading or demand-following channels. With this, we also find a

divergent view regarding the importance of the access to finance for economic growth

among the economists. As early as eighteenth century, Adam Smith (1776) had expressed

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the view about the significant and crucial contribution of high density of banks in

Scotland for the stimulating development of the Scottish economy. Walter Bagehot

(1873) and John Hicks (1969) argued that, access to finance played a determining role in

ushering industrialization in England, through mobilization of capital. Schumpeter (1912)

had the view that, well functioning banking network leads to technological innovation by

financing bankable entrepreneurs. In the year 1952, Joan Robinson opined that,

economic development creates demand for a particular type of financial arrangements

and the financial system responds in turn to this change. Later, this decisive focus on the

financial sector in economic development has been reinforced, with the historical

development of designs on the links between economic development and income

inequality. Simon Kuznets (1955, 1963) and Kaldor (1966) reasoned that, rapid growth

would need wealth concentration at the initial stages, leading to a trade-off between

growth and social justice, until the benefits of growth spread throughout the economy.

This is due to the high marginal propensity to save of the rich people than that of the

poor, and the necessity to finance large investment projects in the process of growth,

leading to wealth concentration and trade-off between growth and social justice.

Empirical evidence in this regard reveals that, enhanced access to finance is also pro-

poor, results in the reduction of poverty and income inequality, leading to inclusive

growth.

Further in literature (World Bank 2005), the modern development theory states that, the

progression of financial access, growth, and income dynamics of different generations are

closely related. Access to finance influences not only the quality of resource allocation in

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the economy but also improves the comparative economic opportunities of individuals of

poor households.

In the literature it is also argued by the social scientists that, given the capital market

imperfection, vulnerable section individuals or households who have high marginal

productivity will have little money to invest in their education and their occupational

options are limited because low initial endowments (Aghion & Bolton, 1997; Aghion,

Caroli & Garcia-Penalosa, 1999; Banerjee &Newman, 1993; Galor & Zeria1993; Rajan

& Zingales, 2003).

Banking access is an important incentive for technological innovation (King & Levine,

1993). Research in the last decade strengthens the belief that, a well developed financial

system paves the way to faster and equitable growth (Honohan, 2004). Patrick Honohan

also developed an index to measure access to finance in 160 countries and it is revealed

that, those economies with higher indices were developed/advanced economies. He had

also proved that, societies with deeper financial system had low level of absolute poverty.

There is also other indirect evidence of the link between growth and poverty alleviation.

Financial depth has been shown to be an important factor in reducing inequality among

the population belonging to the vulnerable sections (Li et al, 1997). The correlation

between child labour and poverty has been found to be influenced by the financial depth

of a country (Dehijia & Gatti, 2002 as cited in Honohan, 2004).

In a study of Grameen Bank and MFI in Bangladesh, Pitt and Khandker (1998) proved a

significant and positive effect of the use of credit on household expenditures; assets,

labour supply, and the possibility of children attending schools. Coleman (1999), in his

study on micro credit borrowers in northeast Thailand proved that, there was no

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significant impact of credit on physical assets, savings, expenditure on health care,

education etc.

Gine and Townsend (2004), in their study by drawing on data from Thai households

between 1976 and 1996 showed that, flexibility in financial access and the consequent

increase in access to credit services explains the quick growth in per capita GDP in the

Thai economy during that period.

Burgess and Pande (2005), in one of the experiment involving the policy of the Indian

government on bank branch expansion , between 1977 and 1990 found that, as a result of

branching regulations and the new bank branches opened, there was a fast growth in

non-agricultural output and decline in poverty, compared with before and after this period

of regulation.

A study across the countries on the relationship between financial access and income

inequality by Li, Squire and Zou (1998) and Li, Xu, and Zou (2000) found a negative

correlation between access to finance and the income inequality using Gini coefficient.

Further this was confirmed by Clarke, Xu, and Zhou (2006).

A comparison between the Index of Financial Inclusion (IFI) and the ranks of UNDP

human Development Index (HDI) indicates that, there is a positive correlation between

them. In the literature it has been highlighted that, countries with high income inequality

have less formal financial access (Kempson, 2006). A study by Karlan and Zinman

(2006), in South Africa, between the groups of borrowers with the control group of

rejected applicants found that, after loan application, borrowers were more likely to retain

wage employment, less likely to experience hunger in the household.

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Demirguc Kunt and Levine (2007) argued that, reducing financial market frictions create

positive incentive effects which results in the expansion of individual opportunities.

Therefore, financial inclusion as a priority in the development agenda serves to equalize

opportunities, eradicate income inequality and poverty which is beneficial for the poor

sections of the society.

World Bank research report on access to finance (2008), states that, financial access can

have direct and indirect benefits on small firms and poor households, makes them more

capable to take advantage of investment opportunities and insures them against risks.

Studies by using cross-sectional data on households in Peru revealed that, after availing

formal finance there were positive changes in household consumption expenditure,

income prospects, and the number of children attending school. Studies for Guatemala,

India, and Tanzania also point out this. They also show a positive effect of the use of

credit on upward class movement, allowing them to start new business ventures.

Therefore, without an inclusive financial system, poor individuals and small enterprises

have to rely on their own limited savings and earnings to invest in their economic and

educational activities and to take the advantage of growth opportunities. Michael Thiel

(2001) opined that, while there is a firm consensus that, a well-functioning financial

sector is a precondition for the efficient allocation of resources and the exploitation of an

economy's growth potential, the economic literature is less consensual on how and to

what extent finance affects economic growth. This study is an attempt in this direction.

2.3 RESEARCH GAP

By reviewing the literature, it can be reasoned that, access to formal finance and availing

formal financial services could play a significant role in the efforts of poverty

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Review of Literature

eradication. Poor households belonging to the vulnerable sections can benefit from

credit, savings, payment and insurance services and money transfer facilities. The large

amount of empirical proof available in the literature indicates a significant and strong

relationship between financial access and growth through which financial development

influences economic growth. Based on this, the research gap that has been explored can

be summarized as follows:

(i) Even though there is a empirical proof to strengthen the fact that, a well-functioning

financial sector plays a crucial role in the efficient allocation of resources and the

exploitation of an economy's development potential, the economic literature is less

consensual on the fact that to what extent finance affects economic growth. This

study is an attempt in this direction to consolidate the empirical proof of data.

(ii) Even after initiatives towards financial inclusion in Indian economy, macro level

empirical proof reveals that, a vast segment of households belonging to the marginal

sections do not have access to any formal banking services and there is wide

disparity throughout the economy across the regions and social groups in financial

inclusion. There may be studies to look into this at the macro level in India, but there

may be disparities across the revenue divisions within states, among the households

which belong to the vulnerable sections, requires further investigation.

Based on the summary of arguments, views and dimensions (Table 2.1) earlier studies

and their outcomes (Table 2.2) on access to finance and economic development, research

gap is stated in the form of a schematic literature map (Figure 2.1).

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Table 2.1: Role of Financial Services in Economic Development

Authors (Year) Arguments, Views and Dimensions

Adam Smith (1776) High density of banks as stimulation of development in Scotland.

Walter Bagehot (1873) and John Hicks Access to finance ushering industrialization by mobilization of
(1969) capital.

Schumpeter (1912) Well functioning banking network leads technological innovation


by financing bankable entrepreneurs.

Robinson (1952) Economic development creates demand for financial services and
financial system responds in turn.

Simon Kuznets (1955, 1963) Rapid growth leads to wealth concentration in early stages, later
Kaldor(1966) improved access to finance results in pro-poor growth reducing
income inequality and poverty.

Banerjee and Newman (1993) Poor people with high marginal productivity of investment
cannot invest in education or occupational choices due to less
Aghion and Bolton (1997)
initial endowments given the capital market imperfection or low
Aghion, Caroli and Garcia-Penalosa access to finance.
(1999), Rajan and Zingales (2003).

Galor and Zeria (1993) It is because of financial market frictions that poor people cannot
invest in their education, despite their high marginal productivity
of investment.

King and Levine ( 1993) Access to finance is an incentive for new technologies and ideas.

Michael Thiel (2001) There is a firm consensus that, a well-functioning financial sector
is a precondition for the efficient allocation of resources and the
exploitation of an economy's growth potential and the economic
literature is less consensual on how and to what extent finance
affects economic growth.

Honohan ( 2004) Research in the last decade leads us to believe that a well
functioning financial system is linked to faster and equitable
growth.

Beck, Demirguc Kunt and Levine Reducing financial market imperfections to expand individual
(2007) opportunities creates positive incentive effects.

World Bank ( 2008) The extensive empirical evidence suggests a significant and
robust relationship between financial depth and growth.

Source: Literature Review

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Table 2.2: Role of Financial Services in Economic Development


Authors ( Year) Studies and Outcomes
Li et al (1997) Developed empirical proof to prove that financial depth is an important
factor for lowering inequality and increasing the income of the bottom
80 per cent of the population.
Pitt and Khandker (1998) In the study of Grameen Bank and two MFIs in Bangladesh, found
significant and positive effects of the use of credit on household
expenditure, household assets, labour supply, and the likelihood that
children attend schools.
Coleman (1999) Studied micro credit borrowers in northeast Thailand, found no
significant impact of credit on physical assets, savings, production
sales, productive expenses, labour, expenditure on health care and
education.
Dehijia & Gatti, (2002) Found that, child labour, which is positively correlated to poverty, has
been influenced by the financial depth of a country
Honohan ( 2004) Developed an index to measure access to finance in 160 countries:
1. Economies having higher indices are usually those, which we term
as developed/advanced economies.
2. Among societies with the same average income, those with deeper
financial system have lower absolute poverty.
Gine and Townsend (2004) Financial liberalization and the consequent increase in access to credit
services can explain the fast Gross Domestic Product (GDP) per capita
growth in the study of Thai economy.
Burgess and Pande (2005) Found that, as a result of branching regulations and the new bank
branches opened, non-agricultural output grew faster, and poverty
declined faster, compared with before and after this period of
regulation in India.
Li, Squire, and Zou (1998) Found a negative relationship between finance and the level of income
Li, Xu, and Zou (2000) inequality in a cross country study and finding confirmed by Clarke,
Clarke, Xu (2006 ) Xu, and Zhou (2006).
Kemp son ( 2006) A comparison of the Index of financial inclusion (IFI) with the ranks of
United Nations Development Programme Human Development Index
(HDI) for various countries indicates that, they seem to move in the
similar direction.
Karlan and Zinman (2006) Found that, six to twelve months after the loan application, borrowers
were significantly more likely to retain wage employment, less likely
to experience hunger in their household, and less likely to be
impoverished, in South Africa.
Cotler Woodruff (2007) They found a positive and significant effect of the micro lending
program on sales and profits only for the small retailers, but a negative
effect on larger retailers sales and profits.
World Bank research (2008) Reported, financial depth can have direct and indirect effects on small
firms and poor households, which will make them better able to take
advantage of investment opportunities, smoothen their consumption,
and insure themselves.
Rangarajan Committee Report Reported disparity in financial inclusion across the regions in India.
in India (2008)
Honohan,( 2004) Developed an index to measure access to finance in 160 countries and
found that, higher indices with developed/advanced economies.
Fernando (2008) Like the rich, poor households can benefit from credit, savings,
payment and insurance services and money transfer facilities (ADB
Special Study of Asian Countries)
Source: Literature Review

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Role of Financial Services in Economic Development Arguments, Views and Dimensions

Adam Smith (1776) Walter Bagehot (1873) Schumpeter (1912) Robinson (1952)

Simon Kuznets (1955) 1963) Kaldor (1966) John Hicks (1969) Banerjee & Newman
(1993)

Galor, & Zeria (1993) King, Levine (1993) Aghion &, Bolton (1997) Aghion, Caroli & Garcia
Penalosa, (1999)

Michael Thiel (2001) Rajan &, Zingales (2003) Beck, Demirguc Kunt
Honohan, (2004)
(2007)

Role of Financial Services in Economic Development Studies and Outcomes

Li et al (1997) Pitt and Khandker Coleman (1999) Li, Squire & Zou
(1998) (1998)

Honohan (2004) Gine &Townsend (2004) Li, Xu, and Zou (2000)
Dehijia & Gatti, (2002)

Honohan, (2004) Burgess & Pande Clarke Xu (2006) Kemp son (2006)
(2005)
& Pande

Karlan & Zinman (2006) Cotler & Woodruff (2007) Fernando (2008)

World Bank Research RBI, NABARD Report


(2008) (2008)

Research Gap

Impact of Financial Inclusion policy- Socio-Economic status of Rural Urban Households

Nature of FI Extent of FI Socio-Economic Status


(Construct 1) (Construct 1) after FI (Construct 2)

Inclusive Growth (Construct 3)

Source: Literature Review


Figure 2.1: Literature Review Map

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Review of Literature

2.4 FINANCIAL INCLUSION

Defining financial inclusion is crucial in order to develop a conceptual framework and to

identify the underlying factors of financial exclusion. This will play a deciding role in

conditioning the empirical evidence which measures access to financial services and its

impact that links to development outcomes. In the economic literature it is suggested that,

there is no universally accepted definition of financial inclusion. Most of the operational

definitions of financial inclusion/exclusion are context-specific, originating from the

problems of financial exclusion and socio-economic condition of a particular economy.

Due to this, there is less ground reality known about financial inclusion around the world.

Along with this, the literature on financial inclusion lacks a comprehensive measure

which can be used to measure the nature and extent of financial inclusion. Though

indicators of the extent of access to banking system, capital markets, and insurance sector

are widely available, less information is known about the degree of financial inclusion. In

developing countries, there is little systematic information on access to formal financial

sector, the type of financial institutions or services effective in supporting access by poor

households and the practical and policy barriers which may be hindering the financial

accessibility.

Broadly, financial inclusion means providing formal financial services with improved

range, quality and availability of financial services to the vulnerable sections which are

financially excluded. This process covers variety of formal financial institutions. On the

one hand, there are banks or formal financial institutions, which provide variety of

financial services to their customers, like, deposits, loans, payment services, remittance

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facility and insurance products to the poor and low-income households and their small

business entities.

In the literature on financial inclusion by UNO, (2006), financial inclusion is defined as

timely delivery of financial services, like, credit, savings, insurance and remittance

facilities at an affordable cost to the vast sections of the disadvantaged and low-income

groups. This is an attempt to lift the poor from the vicious circle of poverty. This can be

achieved through state driven intervention or through voluntary effort by the banking

community to bring within its fold the large section of the society which is bankable.

Demirg-Kunt, Beck, and Honohan (2008) define financial inclusion as the use of

financial services by individuals and firms. Financial inclusion allows individuals and

firms to take advantage of business opportunities, invest in education, save for retirement,

and insure against risks. In the Indian context, financial inclusion, according to the

Finance Ministers 2006-07 budget speech is defined as the process of ensuring access to

timely and adequate credit and financial services by vulnerable groups at an affordable

cost.

Raghuram Rajan Committee, GOI (2007), defines Financial Inclusion as the universal

access to a wide range of financial services at a reasonable cost. This includes not only

banking products, but also other financial services, such as, insurance and equity

products.

In a similar vein, the Rangarajan Committee, GOI (2008), defines financial inclusion as

the process of ensuring access to financial services and timely, adequate credit where

needed, to vulnerable groups such as weaker sections and low income groups, at an

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affordable cost. This can also be stated in the form of a schematic representation (Figure

2.2).

Savings

Bank Accounts Insurance

Financial Inclusion

Payments
Financial Advice Remittance

Affordable Credit

Source: Rangarajan Committee Report on Financial Inclusion 2008

Figure 2.2: Components of Financial Inclusion

By considering the various definitions on financial inclusion, it can be summarized that,

there is no single inclusive measure to estimate the extent of financial inclusion across

economies. Since there is no universally accepted comprehensive definition of financial

inclusion available, measuring financial inclusion is perceived to be difficult, which has

also generally been defined in terms of financial exclusion. An account on various

definitions of financial inclusion/exclusion is given in Table 2.3.

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Table 2.3: Summary of Selected Definitions and Indicators of Financial Inclusion/


Exclusion
Institution/Author Definition Indicators
(Year)
ADB (2000) Provision of a broad range of financial services Deposits, loans, payment services,
such as deposits, loans, payment services, money transfer and insurance
money transfers and insurance to poor and low-
income households and their micro-enterprises.
Stephen P. Sinclair Financial exclusion means the inability to Basic banking services for money
(2001) access necessary financial services in an transmission, credit, insurance, debt
appropriate form. Exclusion can come about as and debt assistance, long-term
a result of problems with access, conditions, savings and financial literacy
prices, marketing or self-exclusion in response
to negative experiences or perceptions.
Chant Link and Financial exclusion is lack of access by certain Deposit accounts, direct
Associates, Australia consumers to appropriate low cost, fair and investments, home loans, credit
(2004) safe financial products and services from cards, personal loans, building
mainstream providers. Financial exclusion insurance and home insurance.
becomes a concern in the community when it
applies to lower income consumers and/or
those in financial hardship.
Treasury Committee, Ability of individuals to access appropriate Affordable credit and savings for all
House of Commons, UK financial products and services. and access to financial advice.
(2004)
Scottish Access for individuals to appropriate financial Access to products and services,
Government(2005) products and services. This includes having the and/or capacity, skills, knowledge
capacity, skills, knowledge and understanding and understanding.
to make the best use of those products and
services. Financial exclusion by contrast, is the
converse of this.
United Nations (2006 ) A financial sector that provides access to Access to credit, insurance, savings,
credit for all bankable people and firms, to payment services
insurance for all insurable people and firms and
to savings and payments services for everyone.
Inclusive finance does not require that
everyone is eligible to use each of the services,
but they should be able to choose to use them if
desired.
Report of the Committee The process of ensuring access to financial Access to financial services and
on financial inclusion in services and timely and adequate credit where timely and adequate credit.
India (C.Rangarajan, needed by vulnerable groups such as weaker
2008 ) sections and low income groups at an
affordable cost.

World Bank (2008) Broad access to financial services implies an Access to financial services such as
absence of price and non-price barriers in the deposit, credit, payments, insurance.
use of financial services; it is difficult to define
and measure because access has many
dimensions.
Source: Report of Currency and Finance RBI, GOI.

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As quoted by Rangarajan Committee on financial inclusion in India, in the process of

financial inclusion formal banking products and services are provided to the excluded

population through the institutional banking structure for ensuring financial access, which

is depicted in Figure 2.3.

Insurance Companies Financial Advice Commercial/Coopera


tive Banks/Credit
Unions

Insurance Loan/Credit
Accounts

Financial Inclusion; Access to


financial products/services from the Savings
formal financial system Accounts

Payment and
Small value loans/credit Remittance
Services

Remittances Postal Savings Accounts

MFCs/NGOs

Post Offices

Source: Report of Currency and Finance RBI, GOI.

Figure 2.3: Financial Products and Services and the Institutional Structure

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2.5 THE CONCEPTUAL FRAMEWORK

Based on the literature review and in consistence with the previous research on inclusive

growth, financial inclusion and economic development, the study proposes a conceptual

framework linking financial inclusion, impact of availing financial services and inclusive

growth of the economy (Figure 2.4).

(Construct 1) (Construct 2) (Construct 3)

Impact of Availing
Demand for Households Financial Services on INCLUSIVE
Financial Services Socio-Economic Status GROWTH

Supply of Financial Services

Formal
Financial Informal
Financial
Network
Network Relationship not investigated in research

Mutually dependent components

Directly related components


Source: Literature Review

Figure 2.4: Conceptual Framework to Investigate Nature, Extent and Impact of

Financial Inclusion

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Accordingly, the nature of financial inclusion has been studied by looking at the type and

number of formal financial institutions accessed and services availed by the households.

The extent of financial inclusion has been examined by looking at the outreach of

financial services on the various income and asset levels and the number of years of

availing formal financial services.

The impact of availing formal financial services has been quantified by exploring the

pathways in which the members of the household experienced change after availing

formal financial services. The pathways through which the impact of financial inclusion

has been explored are material changes, cognitive changes, perceptional and relational

changes which have been taken place in the household after availing formal financial

services.

Through the pathways of changes, the economic impact of financial inclusion on

households has been studied by analyzing the changes in the pattern of household

income, employment, household assets, housing conditions, and consumption

expenditure, changes in control over economic resources of the household etc.

The social impact of financial inclusion on households has been analyzed by assessing

the changes in human and social capital of the households viz., changes in literacy level,

the number of children attending school and availing of higher education facility,

additional skills earned by the household members, awareness on economic environment

and the society, changes in self esteem, self confidence and the mobility of the members,

enhanced role of women, bargaining power of the members of the household etc.,

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2.6 CONSTRUCTS AND METHOD OF AGGREGATING CONSTRUCTS

To articulate the conceptual framework by capturing the data on the nature, extent and

impact of financial inclusion, in the present study, three constructs were designed.

Construct 1:

a) Nature of financial inclusion + Extent of financial inclusion = Financial

inclusion.

Construct 2:

a) Cognitive changes + Perceptional changes + Relational changes = Social

impact of availing financial services.

b) Material changes = Economic impact of availing financial services.

c) Social impact of availing financial services + Economic impact of availing

financial services = Impact of availing financial services.

Construct 3:

a) Financial Inclusion + Impact of availing financial services = Inclusive growth.

2.7 VARIABLES OF THE STUDY

In the study, while measuring the components of financial inclusion and its impact on the

socio-economic status of the BPL households, the primary components of the constructs

viz., nature of financial inclusion, extent of financial inclusion and financial

inclusion, cognitive changes, perceptional changes, relational changes and

material changes after availing formal financial services were considered as

independent components and the variables underscoring them as independent variables.

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The final outcome component of inclusive growth was considered as dependent

component. With this background, the identified variables are summarized in Table 2.4.

Table 2.4: Variables of the Study

Independent Variables Dependent Variable


(a) Number of formal financial institutions accessed
(b) Number of formal financial services availed
(c) Awareness of no-frill accounts
(d) Availing of Human Development Programmes
(e) Availing of Productivity Enhancement Packages
(f) Availing of Employment Guarantee Schemes
(g) Availing of Poverty Reduction Schemes
(h) Monthly income of the household
(i) Asset value of the household Inclusive growth
(j) The number of years of availing formal financial services
(k) Material changes after availing formal financial services
(l) Perceptional changes after availing formal financial services
(m) Cognitive changes after availing formal financial services
(n) Relational changes after availing formal financial services
Source: Research Data

2.8 OPERATIONAL DEFINITIONS

Following are the operational definitions of the study in relation to the various concepts,

in order to come to a logical conclusion to the research problem which has been

identified.

(i) Inclusive Growth: Growth or the positive changes taken place in the socio-

economic status of the rural and urban households after availing formal financial

services, measured on the combined scores of the components of financial

inclusion and the impact of availing formal financial services.

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(ii) Financial Inclusion: Process of providing access to and availing of formal

financial services by the households, measured on the scores of the components of

nature and extent of availing formal financial services.

(iii) Impact of Availing Formal Financial Services: Perceptional, cognitive,

relational and material changes that have been taken place in the households after

availing formal financial services, measuring the socio-economic status of the

households.

(iv) Nature of Financial Inclusion: The component, which measures the type and

category of formal financial institutions accessed and financial services availed,

measured on the combined scores of the number of formal financial institutions

accessed and services availed, awareness of no-frill accounts, status of availing of

Human Development Programmes (HDP), Productivity Enhancement Packages

(PEP), Employment Guarantee Schemes (EGS), and Poverty Reduction Schemes

(PRS) by the households.

(v) Extent of Financial Inclusion: The component of the outreach of the formal

financial services at different income levels, asset levels, and the years of availing

financial services, measured on the combined scores of the approximate monthly

income of the household, approximate asset value of the household, and the number

of years of availing financial services.

(vi) Material Changes: The component, which gives the measure of the changes in

households income, assets, housing conditions and source of employment, number

of crops cultivated and consumption expenditure, after availing formal financial

services.

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(vii) Cognitive Changes: The component, which gives the measure of the changes in

the literacy level, number of children attending primary and higher education,

awareness and exposure of the members of households to economic and social

opportunities and benefits, after availing formal financial services.

(viii) Perceptional Changes: The component, which gives the measure of the changes

in household members perception of own individuality, self respect, self

confidence, participation, after availing formal financial services.

(ix) Relational Changes: The component, which gives the measure of the changes in

the mobility, bargaining power and decision making of the members of the

household, after availing formal financial services.

(x) Household: A group of persons living together and take their meals from a

common kitchen, unless the exigencies of work prevent them doing so. Members

in a household may be related or not, or both. However, if a group of persons who

are not related live in a house, without taking their meals from the common

kitchen, then, they are not the constituents of a household. The link in finding out

whether it is a household is, common kitchen.

(xi) Revenue Division: The administrative divisions in Karnataka state, which are

administered by the Divisional Commissioner. In Karnataka, there are four

revenue divisions: Bangalore, Belgaum, Gulburga and Mysore.

(xii) Financial Services or Banking Services: A range of formal financial services

viz., savings products, affordable credit, insurance, payment and remittances,

financial advice etc., provided by the formal financial network.

(xiii) Formal Financial Network (Institutional Financial Network): A group of

financial institutions licensed by the Central Bank to provide financial services,

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based on legal infrastructure, which provides recourse to the lenders and protection

to the depositors.

(xiv) Socio-Economic Status: Combined measure of households economic and social

position, based on material changes, cognitive changes, perceptional and relational

changes taken place among the members of the households after availing formal

financial services.

2.9 RESEARCH HYPOTHESES

Based on the conceptual framework, review of the literature, pilot study and the valuable

input by the experts in the field, following hypotheses were framed:

Null Hypothesis H10: There is no disparity in financial inclusion among the rural and

urban households belonging to the vulnerable sections across the revenue divisions.

Alternative Hypothesis H11: There is disparity in financial inclusion among the rural

and urban households belonging to the vulnerable section across the revenue divisions.

Null Hypothesis H20: Financial inclusion and the social status of the households

belonging to the vulnerable sections are not positively correlated.

Alternative Hypothesis H21: Financial inclusion and the social status of the households

belonging to the vulnerable sections are positively correlated.

Null Hypothesis H30: Financial inclusion and the economic status of the households

belonging to the vulnerable sections are not positively correlated.

Alternative Hypothesis H31: Financial inclusion and the economic status of the

households belonging to the vulnerable sections are positively correlated.

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Review of Literature

Null Hypothesis H40: The impact of availing formal financial services on the socio-

economic status of the households belonging to the vulnerable sections is not

heterogeneous.

Alternative Hypothesis H41: The impact of availing formal financial services on the

socio-economic status of the households belonging to the vulnerable sections is

heterogeneous.

2.10 CHAPTER SUMMARY

Access to finance plays crucial role in the process of inclusive growth. Literature and

empirical evidence support this. In this direction, this chapter is an attempt to provide a

theoretical background of the study. Based on this, a conceptual framework has been

designed and constructs of the study have been arrived at to articulate the conceptual

framework. The logic of the quantification of the identified variables rests on this. This

has provided the grounding to put forward hypotheses, which were tested to arrive at a

logical conclusion to the research problem.

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