VARIOUS FACTORS AFFECTING ACCESS

TO FINANCIAL SERVICES
SCHOOL OF MANAGEMENT AND COMMERCE
MADE BY
SONAM SONI : 1702570014
(2018 -2019)

SUBMITTED TO

MRS. RASHMI JAIN

K.R. Mangalam University

(School of Management & Commerce)

Sohna Road, Gurgaon

 Financial Inclusion

Ques 1: What is meant by financial inclusion, its importance, indicators, status of

financial inclusion in India and internationally?

Ques 2: What are various factors affecting access to financial services?

Ques 3: Reason cause and consequences of financial exclusion?

Ques 4: What is the relationship between financial inclusion and development

indicators?

Ques 5: Genesis evaluation of micro finances?

SOURCES:

 Worldbank.org
 NABARD.org
 RBI.org
 Incusion.in
 ACCESS TO FINANCIAL SERVICES
By – Worldbank.org

Financial inclusion - providing access to financial services for all, has gained
prominence in the past few years as a policy objective for national policymakers,
multilateral institutions, and others in the development field. The United Nations
designated 2005 the International Year of Microcredit, adopting the goal of
building inclusive financial systems.
To assist policymakers in designing effective policies and tracking global progress
in financial inclusion, the World Bank has collected the first set of indicators of
financial access in countries around the world in 2005 and updated these indicators
for selected countries in 2008. Building on this work, Financial Access 2009
introduces new data from a survey of financial regulators in 139 countries. It
presents indicators of access to savings, credit, and payment services in banks and
in regulated nonbank financial institutions—reviewing some policy initiatives that
support financial inclusion. As the first in an annual series documenting access to
financial services around the world, it is intended for a broad audience of
policymakers, researchers, practitioners, and multilateral and bilateral investors.

BY- nabard.org

NABARD, through its’ Micro Credit Innovations Department has continued its
role as the facilitator and mentor of microfinance initiatives in the country. The
overall vision of the department is to facilitate sustained access to financial
services for the unreached poor in rural areas through various microfinance
innovations in a cost effective and sustainable manner.
NABARD has been continuously focusing on bringing in various stakeholders on a
common platform and building their capacities to take the initiatives forward.

Genesis

The key objective of the Micro Credit Innovations Department has

been to facilitate sustained access to financial services for the unreached segments
of the population viz. the poor in rural hinterlands, through various products and
delivery channels in a cost effective and sustainable manner. The department came
into being in the year 1998 with the mainstreaming of the microfinance innovation
viz. SHG-Bank linkage programme to a nation-wide scale.

With the vision to facilitate sustained access to financial services for the unreached
poor in rural areas through various microfinance innovations in a cost effective and
sustainable manner, NABARD, through the department of ‘Micro Credit
Innovations’, has continued its role as the facilitator and mentor of microfinance
initiatives in the country.

Core Functions of the Department

1. Promotion of Self Help Group – Bank Linkage Programme (SHG-BLP) in the
country
2. Promotion of Joint Liability Groups (JLGs) and their financing by banks
3. NABARD Financial Services Ltd. (NABFINS)

Conceptual Framework Determining the Factors that Drives

Financial Inclusion
By- Arabian Journal of Business and Management Review, Published date May 05, 2016

1. Demand side factors of financial inclusion

 Irregular income:
Very low income and inconsistent flow of cash for the poor people are considered
as a demand driven factors of financial inclusion. It was stated that financial
capability is an important factor in a view of increasing complexity of financial
products & analyzed that variability of income is an important factor for the self-
exclusion of people from the rural areas. Irregular income of the poor people is a
main cause for financial exclusion. Poor people from the most vulnerable groups in
the society not only have low income but also they get an irregular income and
various uncertainties in cash flows.

 Lack of trust:
It was revealed that negative experiences or negative perception of financial
institutions makes the rural people to get mistrust of banks and which in turn leads
to self-exclusion from the formal financial institutions. Lack of trust by the
unbanked rural people on the formal financial institution is the main barrier of
financial inclusion. Disparities in financial inclusion has caused due to the lack of
trust among the rural people in the banking systems. Improper supervisory
mechanism in financial institutions led to the loss of customer trust.

 Literacy level:
Financial isolation of the rural people often results in lack of understanding, which
in turn makes them to distance themselves from the formal financial institutions.
Even though banks have some suitable financial products for the poor people, due
to their lack of knowledge and literacy level makes them an incorrect
understanding of the products and hence opposed to use them. Financial literacy is
said to be one of the demand side factor which is a precondition for the first time
users to access financial services. When financial Literacy was successfully
delivered it creates a demand for financial services from the formal financial
institutions which led to financial inclusion. Lower the level of financial inclusion
is highly associated with lower the level of financial literacy.

 High cost:
An obstacles of financial inclusion from the demand driven factors are high
transportation and opportunity cost for the rural people to bank with formal
financial institutions. It was analyzed that people who lives in underdeveloped
areas find it very difficult to reach nearest bank due to transportation cost and they
lost their one day wages to reach the bank. Transaction cost is the barrier for the
low income group household since they are more resource constrained. Low
income group households either spends more time in travelling to the bank or
spend high transaction cost for accessing financial services from the banks.

 Technology:
It was stated that the as the banking and payment space become increasing
everywhere, the biggest challenge is to maintain the quality of security at the
highest level in the financial sectors. Therefore the banks need to work on this
regard in order to protect customers against fraudulences.
Hence it was revealed that banks can diverse services to customers with less man
power through the introduction of IT related products in internet banking,
electronic payments, security investments and information exchanges. In order to
improve the access to financial services for the households in rural areas and
promote greater financial inclusion an appropriate framework and business
environment should support a greater interaction between ICT and financial sector
for addressing the challenges posed by mobile banking such as security concerns
and compliance with Anti Money laundering rules. It was narrated that the
financial inclusion through ICT faces security challenges such as SMS spoofing
attack, where the attacker send messages on network manipulating sender’s
number. Virus attack software like Trojan Horses and Zeus are used to steal mobile
transaction authentication number and password.

2. Supply side factors of financial inclusion

 Distance
Distance of the bank branch to reach the rural people is a common barrier of the
supply driven factors . The greatest barrier of financial inclusion to reach rural
areas is the distance from the bank. Distance continues to be a major issue since
Business Correspondent provides doorstep financial services to the outreach areas.
A reasonable distance from the bank branch should be 3-4 kilometers. For opening
a bank account to the rural people distance and travelling from the bank branch to
the remote areas is considered as a greatest challenge for the financial institutions.

 Policy regulations
It was again analyzed that inability to provide documentation such as identity
proof required by formal financial institutions is another frequently faced barrier.
Banks are required by regulators to conduct sufficient identity checks before
opening accounts. These regulations sometimes result in lack of access of genuine
customers. Poor regulatory frameworks that reduces the quantity and quality of
financial products and services that are accessible by the poor . Banks need to
follow certain which was advised by Reserve Bank of India (RBI). This is again a
barrier for the bank to target rural people for issuing checkbook, debit card for
maintaining zero balance in their account. Current regulations advices Business
Correspondent to settle the cash in the bank branches within 24 hours of
transactions but, this may not be possible due to the huge distance from the bank.

 Inappropriate products
Lack of inappropriate products is an important supply side barrier. Certain terms
and conditions of financial products like maintain minimum balance in the account
and accounts closed by banks due to infrequency in use does not suit for the low
income group people. It was illustrated that inappropriate products and processes
are said to be a supply side constraints of financial inclusion. Banks and other
financial services play an important role from supply side by providing access to
basic financial services to the poor and disadvantage social group. Access to
financial products are constrained by certain factors like lack of awareness about
the products, the financial products are not convenient, flexible and low quality.
The main reason for the financial exclusion from the supply side is documentation
procedures and unsuitable financial products .

 Risk
The banks bears risk due to the improper identification of customers and they use
retail agents for money laundering or channel funding to terrorists . Anti-Money
Laundering issues are regulated under the prevention of Money Laundering Act
2002. The law is applicable to both banks and financial institutions. For Banks,
RBI has issued Know Your Customer (KYC) guidelines to categorize the customer
into low, medium and high risk customers in order to adjust the identification
requirements based on the risk category.
According to the guidelines of RBI Business Correspondent Model acts as
intermediaries that bridges the gap between service seekers and service providers
but, Banks and Business Correspondent are exposed to huge risk of cash
management. This was the issue surfaced by both the regulators and the partner
banks. Out sourcing account opening and processing of retail transaction to
inexperienced retail agents makes the banks difficult to observe and report doubtful
transactions.

3. Innovative delivery channels for financial inclusion

 Business correspondent model

In 2006 RBI has adopted the technology based bank agent bank model as an
alternative banking structure for providing banking services for the rural people.
The significant role of the model is to provide doorstep delivery of banking service
for the people from underdeveloped sections in the society. This model is aided
with the technology tools like biometric devices and point of sale hand held
devices to facilitate financial services for the rural people in a transparent manner .
Business Correspondent is the authorized agent to take transactions on behalf of
the bank. BCs can bridge a gap between the service providers that is banks and
service seekers (Rural Clients). It was stated that the features of the model is to
identify the borrowers, collection and verification of the various loan applications,
creating awareness about the various financial products and services available for
the poor people, post – sanction monitoring and collection of small value loans &
deposits. The RBI guidelines strictly instructed banks to ensure that BCs cannot
charge any fees to the customer for the services on behalf of the bank.

 Self help group – bank linkage program

Self Help group is a group formed by 15- 20 members for covering various
development programmes. This group helps for alleviation of poverty and women
empowerment. Self Help Group Bank Linkage Programme was started in 1992 on
the basis of the recommendation of S.K Kalia Committee in order to expand a
credit flow of financial services for the rural people with an affordable transaction
cost.
Self Help Group is a registered or unregistered group of micro entrepreneurs and
the members of the group agree to save small amounts regularly to enhance their
saving into a common fund and to meet their emergency needs based on the mutual
help basis. The Self-Help Group (SHG)-Bank linkage model is said to be an
innovative channel in which the banks can directly lend to SHGs. Louis Manohar
reveals that the main advantage of Self- Help Group (SHG)-Bank linkage program
is to improve the economic condition by making them to access financial services
without any collateral security. The repayment of the loan amount is a critical
factor that has a greater impact of Self-Help Group (SHG)-Bank linkage
programme. The sustainability and success of Self-Help Group (SHG)-Bank
linkage programme is highly influenced by the loan amount, frequency of
availability, affordability and the repayment capacity of SHGs.

 Microfinance institutions
It was examined that Microfinance Institutions has reduced many barriers and
constraints of financial inclusion. Penetration of microfinance institution has taken
some areas which were neglected by the banking sectors and they suggested policy
incentives to encourage expansion to those neglected areas. The Women’s Self
Help Group movement is bringing a transformation in rural areas of India.
Microfinance Institutions (MFIs) play a significant role in facilitating inclusion, as
they are uniquely positioned in reaching out to the rural poor. Microfinance cannot
be considered as a development some microfinance institutions are profit oriented
and problematic therefore it must be regulated and subsidized for financial
inclusion to actively pursue the rural poor. The post-microfinance large number of
the member households is not only accessing the credit services, but also they are
competent enough to access the savings, micro-insurance and other non-financial
services.
  Implication of the conceptual model
From the model it is clear that there are certain demand and supply side factors that
decrease the effectiveness of financial inclusion. The barriers of these factors were
diminished by the innovative delivery channels like Business Correspondence
Models, Self-Help Group Bank Linkage Programs and Microfinance Institution to
elevate the financial inclusion in a transparent manner. As per the RBI guidelines
banks directly approach Self Help Groups and Microfinance Institutions to lend
money to the rural customers by engaging the Business Correspondents/Business
Facilitators as intermediaries which is helpful for bridging the gap between the
service providers (Banks) and service seekers (Rural Customers). This Innovative
delivery channel helps the banks as well as the rural people to access financial
services in a very low transaction cost and obtain adequate cash flow in a timely
manner.

FACTORS AFFECTING ACCESS TO FINANCIAL

SERVICES
CASE STUDY

NORTH EAST INDIA

National Seminar on “Financial Inclusion for Economic Development in North East India- Issues and
Challenges” under the DRS-II (SAP) Programme sponsored by UGC on March 7, 2013

By-CHANINI LOKHO & MANAV SAURAV,IIT BOMBAY

Financial inclusion is where individuals and businesses have access to useful and
affordable financial products and services that meet their needs that are delivered
in a responsible and sustainable way. Financial inclusion is defined as the
availability and equality of opportunities to access financial service. Those that
promote financial inclusion argue that financial services can be viewed as having
significant positive externalities when more people and firms participate. One of its
aims is to get the unbanked and underbanked to have better access to financial
services. The availability of financial services that meet the specific needs of users
without discrimination is a key objective of financial inclusion. For example, In the
United States this condition represents a third of the Hispanic community born in
America and half the foreign Hispanic community living in the United States
remain unbanked. For this example, give financial services is key in order to
growth as a society.
It has been estimated in 2013 that 2 billion working-age adults globally have no
access to the types of formal financial services delivered by regulated financial
institutions. For example, in Sub-Saharan Africa, % of adults has a bank account
even though Africa's formal financial sector has grown in recent years. There is
some skepticism from some experts about the effectiveness of financial inclusion
initiatives. Research on microfinance initiatives indicates that wide availability of
credit for micro-entrepreneurs can produce informal intermediation, an unintended
form of entrepreneurship.
The concept of causal pluralism indicates that there exist multiple factors which
lead to particular phenomena (Weber). This applies to our case under study too.
That is to say, there are multiple factors which have affected the access to financial
services in north east. We broadly classify these factors into geographical factors,
economics factors, policy issues, law and order and the socio-cultural factors.
All these factors can again be encapsulated into three broad group :
Demand side constraints, supply side constraints and broad ecosystem within
which the demand and supply act.

Geographical and Infrastructure Factors

North-Eastern States are connected to Indian mainland through the 'chicken neck'
formally known as Siliguri Corridor which is 22km in length. The road density,
railway density and telecommunication density clearly reflects the lag between the
North East states and status at All India level. This limited connectivity to
mainland leads to other factors of under development like limited market, delay in
installing infrastructures and others. This limited connectivity to mainland leads to
other factors of under development like limited market, delay in installing
infrastructures and others (Barua Committee, 2001). In fact many studies have
shown linkage between transportation and economic growth (Gauthier 1970).
Economic growth further improves other macro-economic indicators. Saving rates
and investment rates are directly impacted by the economic growth and are
important in bringing population into the formal financial system. Overall the
combined status of infrastructure which mainly includes transportation,
telecommunication, power sector and irrigation and water supply needs constant
improvement in order for the economy to be on track of rapid growth. North East
and other remote and neglected parts of our country have not even received some
of this infrastructure setup.
To deal with the infrastructural challenges government of India had constituted
Cabinet Committee on infrastructure in 2009 by replacing Committee on
Infrastructure to give further impetus to the development of Infrastructure.
Improvement on this front will definitely help in the improvement on the financial
inclusion front.

Economics factors

Agriculture is the predominant economic activity in North East. More that 50% of
the population is engaged in agriculture in all the states of north east. Contribution
by agriculture to GSDP of the North East states hovers above 20%. But agriculture
in North East has remained a subsistence activity. Productivity has remained below
the agricultural potential of the region. There are many factors like acidity of land,
employment of primitive practices of agriculture (Jhoom tradition), natural hazard
and even the community ownership and tenurial ownership has impacted the
agricultural productivity of the region.
On the industrial front, Industries are underdeveloped and hardly there are any
large industries. Entrepreneurship is yet to be adequately developed among the
people of the region. Despite the various subsidies granted in the separate
industrial policy for the region, the investment from outside entrepreneurs has not
attracted investment due to infrastructure problems. During the period 2004-05 to
2009-10 the annual average growth rate for the NE region as a whole was just 3.94
% while All India industrial growth rate was 10.42 %1. The combined effect of
such economics scenario is unemployment, underemployment, subsistence
activities which results in low disposable income leading to low saving rates.
The major macro economics data which has impact on financial inclusion are the
saving rates and the investment rate. Low saving rates and investment rates do not
create demand for financial products thus become factors for demand side
constraint to financial inclusion. Besides the Credit deposit ratio (CD ratio) has
impact too on the financial inclusion progress. CD ratio is an elementary indicator
of how efficiently the deposits are mobilized and is utilized to carry out investment
and capital formation activities. A high CD ratio is usually associated with higher
investment and growth. Though a very high CD ratio refers to the pressure on the
resources of the bank and raises stability issues. Therefore need to have a balanced
approach.
Policy Issues

Policies are the broad framework which provides direction and shape to society
and its initiatives. There have been various approaches to policy formulation. The
top-down approach, bottom-up approach, Optimal Approach and others. The 21st
century approach to policy formulation calls for more participative and
decentralized approach to policy formulation because in absence of such initiative
policies meant for development becomes hindrance to development.
In this reference we can analyze some of the policies which acted as a hindrance to
financial inclusion. The first and the foremost was The Banking Regulation Act
(1949) which led to redtapism in the process of opening more banks and branches.
It’s only in 2011 that an amendment was introduced which have relaxed the norms
for entry of new banks and branches. Another policy where 1000 population was
the criteria to select villages for financial inclusion initiatives. The north east
region is sparsely populated and hence most of the villages would be out in this
case. Thus there needs to have more context based policies specifically targeted for
a region or state for financial inclusion to spread equitably.
Apart from the above issues the policies targeted at financial inclusion does not
take into consideration the failures in the market because of asymmetry of
information. To tackle these, policies need to take into consideration financial
literacy initiatives, the regulatory initiative of the various micro-financial
institutions and coming up with guidelines for entry of new players into the market
which do not lead to adverse selection. In fact there is need for more academic
research on this aspect of financial inclusion because the recent upheaval in the
micro finance sector mainly concentrated in the southern states of our country has
marred the utility of micro-finance in the way towards financial inclusion.

Law and Order issues

Stable environment is necessary for any kind of development. Law and order
maintenance helps in providing stability. North East has been the witness of
multiple secessionists’ movements, minority vs. majority conflict, terrorist attack,
cross border terrorism, drug trafficking and counterfeit currency. All this has led to
constant military activity in the region and prevented the private investors to invest
in the region. Such volatile situation creates insecurity of future among in
inhabitants. They become are more inclined towards their own local facilities than
venturing into new areas. These in fact pose a challenge to the process of financial
inclusion where need is to bring people to the formal financial system. In fact any
Authoritative study on the impact of violence on financial inclusion and vice-versa
lacks, though commonsensical knowledge clearly reflect that violence definitely
impact financial inclusion in a negative way.
Another aspect of law and order issue affecting FI is the cross border issues.
Among the major cross border issues hampering the process of financial inclusion
in North East are the counterfeit currency. In case of suspicion of counterfeit
currency the formal sector does not accept the same. These threats prevent the poor
rural players to enter the formal system.

Socio-Cultural factors

Personal values and cultural system largely determines the choice of financial
services. These emanates from the deep rooted tradition practices and values of the
society.
North East India is the homeland of a large number of ethnic groups. It is also the
homeland of a large number of tribes and other non tribal communities who follow
distinct lifestyle.
Their traditional institutions are diverse, active and contribute in a meaningful way
to the social and economic life of the people. Traditional institutions, unlike the
formal sector which emphasize on written text, are informal institutions which
conduct most of its business orally and ensures active participation of its members.
It is unfortunate that all development programmes introduced in India fail to
materialize at the implementation stage. This is because most of the programmes
are implemented as a uniform model for the whole country regardless of the
diversities in socio-economic and socio- cultural conditions (Singh K M, 2008).
However, the micro-finance movement in the country has failed to take advantage
of this. One main reason is that the micro-finance movement relies mainly on Self
Help Groups (SHGs) linked to banks. Banks in the rural areas of North East are
thinly spread and more in the urban clusters. They are also understaffed and
usually the branches are unequipped to handle many SHGs which could be spread
over several kilometers. The cost of promoting SHGs becomes very high. On the
other hand, traditional institutions in comparison to SHGs do not have start-up
cost, even if they have, it is very low. They are easy to manage and the cash
collected is disbursed every cycle, the books are kept very simple. On the contrary,
a large number of books have to be maintained in a SHG. Lastly, the benefits are
clearly marked out as members are aware of the date of termination and the
amounts that they are likely to get at the end of the term (Sharma). Traditional
institutions therefore play a major role in the rural areas of north east and they are
considered to be one of the most inclusive of all the financial institutions in the
area. All these unique features and strength of the traditional institutions have not
been considered by the formal approach to financial inclusion.

Conclusion

Over the last decade finance has been recognized as an important driver of
economic growth. More recently, access to financial services has been recognized
as an important aspect of development, and more emphasis is being given to
extending financial services to low-income households. There is also evidence of
more mainstreaming of financial service provision by commercial banks as
competitive forces and technology allow them to reach lower-income segments of
the population. Examples in developing countries are ICICI bank and the SHG
Bank Linkage program in India and commercial banks in South Africa that have
made it a priority to reach out to lower-income groups. The government has taken
several steps to promote financial inclusion. The innovative delivery channel is
said to be the drivers of financial inclusion developed by the government helps in
supporting the rural people to get an access for the financial services in a timely
manner. But the rural people should be cultivated about the financial services and
products by the officials of the bank to sustain their access in the formal financial
institution.