Financial Inclusion and Financial Stability in Individuals

Introduction:
Despite making significant improvements in the areas relating to financial viability, profitability
and competitiveness, there are concerns that banks have not been able to include vast segment of
the population, especially the underprivileged sections of the society, into the fold of basic
banking services. Attempts have been made by the policymakers and financial institutions to
bring large sections of the rural population within the banking system having realized that
financial inclusion is the essence of sustainable economic growth and development in a country
like India. Without Financial Inclusion we cannot think of economic development because a
large chunk of total population remains outside the growth process. Though our country's
economy is growing at a one digit, still the growth is not inclusive with the economic condition
of the people in rural areas worsening further. Though there are few people who are enjoying all
kinds of services from savings to net banking, but still in our country around 40% of people lack
access to even basic financial services like savings, credit and insurance facilities.
Bringing every household within the grasp of the banking system there has been an ongoing
process started a decade ago. However, the present Indian government has packaged it in a
mission mode and made it an achievable target. In order to reduce the degree of “financial
untouchability” the new government has come up with a big bang action plan which is popularly
known as “Pradhan Mantri Jan-Dhan Yojana”. It‟s a mega financial inclusion plan with the
objective of covering all households in the country with banking facilities along with inbuilt
insurance coverage. The purpose is to accelerate growth, fight poverty effectively and to
empower the last man in the last row in Indian economy.
The policy makers in India have been focusing on financial inclusion of rural and semi-rural
areas, primarily for three most pressing needs:
1. Creating a platform for inculcating the habit to save money – The lower income category
has been living under the constant shadow of financial duress mainly because of the absence of
savings. The absence of savings makes them a vulnerable lot. Presence of banking services and
products aim at providing a critical tool to inculcate the habit to save. Capital formation in the
country is also expected to be boosted once financial inclusion measures materialize, as people
move away from traditional modes of parking their savings in land, buildings, bullion, etc.
2. Providing formal credit avenues – So far the unbanked population has been vulnerably
dependent on informal channels of credit like family, friends and moneylenders. Availability of
adequate and transparent credit from formal banking channels shall allow the entrepreneurial
spirit of the masses to increase outputs and prosperity in the countryside. A classic example of
what easy and affordable availability of credit can do for the poor is the micro-finance sector.
Literature Review:

1. “Financial inclusion and banks – issues and perspectives”- Is the text of speech delivered
by Dr K C Chakrabarty, Deputy Governor of the Reserve Bank of India, at the FICCI
(Federation of Indian Chambers of Commerce & Industry) – UNDP (The United Nations
Development Programme) Seminar on “Financial Inclusion: Partnership between Banks,
MFIs and Communities”, New Delhi, 2011. Throughout the paper the main emphasis is
on the financial inclusion initiative taken by the banks, future of financial inclusion and
how financial can improve country situation and make India as one of the global
competitors.
2. “Impact of financial inclusion on Financial stability based on income group countries”
Azka Azifah Dienillah, Lukytawati Anggraeni, Sahara, Bulletin of Monetary Economics
and Banking, Volume 20, Number 4, April 2018. This paper descriptively analyses the
impact of financial inclusion on financial stability for the different income groups and the
possible ways to reduce the adverse effect.

3. “Financial stability and Financial inclusion” Morgan and Pontines,2014, in this there was
an estimation of effect of variables such as financial stability and financial inclusion. And
evidences that shows how lending to small and medium size aids financial stability. Few
measures to increase financial inclusion and its other benefits that contribute to the
financial stability. And how the greater financial inclusion could be positive o negative
for the financial stability. They also find that the financial stability can be increased with
higher per capital (GDP).

4. “Does Financial Inclusion Induce Financial Stability” Australasian Accounting, Business

and Finance Journal, An empirical study of Md. Nur Alam Siddik and Sajal
Kabiraj,(2018) revealed to ensure that there is a positive impact of financial inclusion on
financial stability through SMEs and their causality, They also observed that positive
impact of per capita income, interest rate on financial stability, high proportion of
domestic credit granted to private sector trim downs financial stability and suggesting
few measures to improve financial stability by removing some of the constrains of access
to bank for SMEs.

5. “Financial inclusion and financial stability” H R Khan, 2011, citied several ways through
which financial inclusion can bring negative impact to the financial stability, such as
greater extent to expand the no. of borrowers may results in reducing the quality of
lending and somehow create a risk for the banks. There is also a different aspect in which
banks could increase their reputational risk if they outsource various banking functions to
reach small borrowers in rural areas such as credit assessment. Greater financial
inclusion contributes to better monetary policy and it ultimately leads to greater financial
stability.
6. H Kaur, KN Singh (2015) Financial inclusion broadens the resources base of the financial
system by developing a culture of a savings among huge number of rural population and
plays its own role in the process of economic development . Money related consideration
widens the asset base of the monetary framework by building up a culture of investment
funds among substantial portion of country populace and assumes its very own job during
the time spent financial improvement. Further, by bringing low pay bunches inside the
edge of formal financial area; money related incorporation ensures their monetary riches
and other assets in critical conditions. Money related incorporation likewise mitigates the
abuse of defenseless segments by the usurious cash loan specialists by encouraging
simple access to formal credit. To moderate such sufferings, the Pradhan Mantri Jan
frameworks, in this learning period with current banking.

7. “FINANCIAL INCLUSION IN INDIA” Dr. Gomathy Thyagarajan, Prof. Jyoti

Nair,2016. In this study, an empirical analysis done to point out the problems of financial
inclusion impacting the overall financial inclusion in India, what is the role of Reserve
Bank of India in financial inclusion and the ways to remove the barriers such as
simplification of processing, providing information.

8. “GROWTH THROUGH FINANCIAL INCLUSION IN INDIA” Suresh Chandra Bihari,

2011, Through the study it is tries to explain different dimensions of financial inclusion,
A detailed analysis on financial inclusion, what could be possible impact on different
sectors of economy in presence of banking services provided under financial inclusion.
And what is the importance of financial inclusion. Further, the contribution of financial
inclusion toward economic growth and the relationship between the financial inclusion
and development.

9. “Can Financial Inclusion and Financial Stability Go Hand in Hand” María José Roa
García,2016, through this paper the degree to which the growing importance of
financial institution and the instruments that promotes financial inclusion could be
considered a threat to the financial stability of developing countries, the risk may arise
due to rapid growth of credit to ne financial inclusion institution and instruments and
preference to enhance the financial inclusion through eradiating the market imperfection
which would lead to better financial stability in economy.
10. Mehrotra and Yetman (2015) discuss the possible impacts of financial inclusion on both
the effectiveness of monetary policy and financial stability, and the implications for
central banks. Regarding monetary policy, the authors suggest that increasing financial
inclusion facilities smooth consumption, as households have easier access to saving and
borrowing products. As a result, output volatility is no longer as costly. This may
facilitate a central bank's efforts to maintain price stability. Further, growingfinancial
inclusion is likely to increase the relevance of interest rates in monetary transmission, as
a result of an increase in the proportion of economic activity that depends on interest
rates. This tends to improve the effectiveness of monetary policy.

11. Hannig and Jansen (2010) argue that low-income groups are relatively immune to
economic cycles, so that including them in the financial sector will tend to raise the
stability of the deposit and loan bases. They note anecdotal evidence that suggests that
financial institutions catering to the lower end tend to weather macro-crises well and help
sustain local economic activity. Prasad (2010) also observes that lack of adequate access
to credit for small and medium-size enterprises and small-scale entrepreneurs has adverse
effects on overall employment growth since these enterprises tend to be much more labor
intensive in their operations.

12. Ardic et al (2013) explore the relation between financial access and financial stability
through correlations between the two that use commonly accepted indicators. The study
indicates that, although the literature on links between stability and inclusion establishes
a positive relationship between the two phenomena, the empirical evidence still does not
seem to confirm such a relationship. Statistically speaking, when measured in terms of
the deposit account penetration, financial inclusion has neither a positive nor
negative correlation with the FAS and the GFDD. The authors suggest that the lack of
positive correlation may be due in part to a lack of solid data, but it may also mean that
the relationship between financial inclusion and financial stability is not straightforward

13. “Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment” By
ROBIN BURGESS AND ROHINI PANDE, 2005. This paper states whether state-led
expansion of credit and saving facilities can reduce poverty has long been of interest to
economist and policy maker. Further it also measures the change in the reduction of
poverty with the help of expansion of credit facilities in different state level.

14. Cihák et al (forthcoming) measure the linear interdependence between stability and
inclusion at different levels of aggregation, using a non-parametric approach. They
characterise the financial inclusion indicators by both type of agent and type of financial
services. The financial stability measures focus on resilience, volatility and banking
crises. They use the Spearman's rank correlation as a normalised and robust measure of
covariance. The data for financial inclusion used are the GFDD, the Global Findex, and
the FAS. The data cover 158 countries over 2009-2014.
 15. “Finance for All” A World Bank Policy Research Report,2008, this report states about
the access of finance and development and how crucial role of access to finance. The
determinates and implications of access to finance. Furthermore its states about the
poverty alleviation and risk Mitigation with the help of financial access. In addition, the
role of government in facilitating the financial access, access to finance supply and
demand constraints.

Problem Statement:

1. Lack of knowledge:
In India most of the people are not having a sufficient knowledge about financial inclusion and
the financial stability so they are still rigid on traditional approach of their savings an all.

2. Demographic factors:
In most of the rural areas of India people are not aware about modern approach of financial
inclusion pattern due to illiteracy, orthodox thinking, and lack of inaccessibility of basic
infrastructure like internet facility, electricity or ignorance of government, regulartybodies in
rural areas of India. They are not creating awareness regarding financial inclusion and financial
stabliltiy.

3. Unaware of future goals:

We found that most of the people are not aware about the future goals .The foremost priority of
financial inclusion pattern is define your future goal which helps people to avail the financial
services under one umbrella and to make them finically stable.

4. Income:
In India there is a majority population of middle or lower middle class people, so they find
difficulty while they are planning for investment due to low income or inflation so they are not
able to save a sufficient amount for investment.

5. Systematic Risk:
There is also a lot risk involved in modern approach Financial stability like any fluctuation in
economy will also affect on return on investment ,risks are deflation, low productivity in
agriculture sector due to unfavorable climatic conditions, government policy, fluctuations in
developed economies for e.g. Economy crises in US 2008 which also affect the Indian markets .

Objectives:
 a. To examine the progress of financial inclusion and financial stability among individuals
of Jalandhar.
b. To study the changing trends in financial inclusion with special reference to PMJDY.
c. Find out the Relationship between Financial inclusion and financial stability.

References:

Burgess, R., & Pande, R. (2005). Do rural banks matter? Evidence from the Indian social
banking experiment. American Economic Review, 95(3), 780-795.

Bihari, S. C. (2011). Growth through financial inclusion in India. Journal of International

Business Ethics, 4(1).

Čihák, M., & Hesse, H. (2010). Islamic banks and financial stability: An empirical
analysis. Journal of Financial Services Research, 38(2-3), 95-113.

Chakrabarty, K. C. (2011). Financial inclusion and banks: Issues and perspectives. RBI Bulletin,
November.

Demirgüç-Kunt, A., Beck, T., & Honohan, P. (2008). Finance for all?: Policies and pitfalls in
expanding access. Washington, DC: World bank

Dienillah, A. A., & Anggraeni, L. (2018). Impact of Financial Inclusion on Financial Stability
Based on Income Group Countries. Bulletin of Monetary Economics and Banking, 20(4), 1-14.

García, M. J. R., & José, M. (2016). Can financial inclusion and financial stability go hand in
hand?. Economic Issues, 21(2), 81-103.

Hannig, A., & Jansen, S. (2010). Financial inclusion and financial stability: Current policy
issues.

Kaur, H., & Singh, K. N. (2015). Pradhan Mantri Jan Dhan Yojana (PMJDY): a leap towards
financial inclusion in India. International Journal of Emerging Research in Management
&Technology, 4(1), 25-29.

Khan, H. R. (2011). Financial inclusion and financial stability: are they two sides of the same
coin? Address by Shri HR Khan, Deputy Governor of the Reserve Bank of India, at BANCON
2011, organized by the Indian Bankers Association and Indian Overseas Bank, Chennai, 4
November 2011

Mehrotra, A. N., & Yetman, J. (2015). Financial inclusion-issues for central banks. BIS
Quarterly Review March.

Morgan, P., & Pontines, V. (2014). Financial stability and financial inclusion
Thyagarajan, G., & Nair, J. (2016). Financial Inclusion In India–A Review. International
Journal of Science Technology and Management, 5(8).

Siddik, M., Alam, N., & Kabiraj, S. (2018). Does Financial Inclusion Induce Financial Stability?
Evidence from Cross-country Analysis. Australasian Accounting, Business and Finance
Journal, 12(1), 34-46.