A Project Report on Financial Inclusion in the city of Thiruvananthapuram as a part of the fulfilment of Young Scholar Award given under the patronage of the Reserve Bank of India

A Project Report by: Panicker Harishanker 3rd year Integrated M.A. Student IIT Madras, Chennai

Under the guidance of: Shri V.L. George, Manager, Rural Planning and Credit Department Reserve Bank of India, Thiruvananthapuram

Submitted to: The Reserve Bank of India

Introduction........................................................................ ...2 Financial Exclusion................................... .............................4
Causes of Financial Exclusion..............................................................5

Financial Inclusion.......................................... .......................7
Institutions and Financial Inclusion......................................................8 Microfinance and Financial Inclusion..................................................10 RBI and Financial Inclusion ...............................................................11 Financial Inclusion and Kerala............................................................12

Financial Inclusion and Urban areas....................................13 The study .................................................. .........................17
The area of study...............................................................................17 Scope of Study...................................................................................18 Limitations.........................................................................................19 Findings.............................................................................................19

Suggestions.............................. ..........................................28 Conclusion.............................. ............................................33 References............................................. .............................34

The World is moving at an amazing pace. Thanks to the advances in technologies, distances have become meaningless. Globalization has enabled the rise of global trade leading to wealth generation in developed as well as developing countries. Wealth can be created in any part of the world with a single
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click of the mouse. Developing nations, like India have immensely benefited from the globalizing economy. Wealth has been pouring into the country as investments (both direct and institutional). Wealth has been also generated by Indian companies from global trade. This has directly affected the lives of many citizens in our country. For many, there has been a dramatic increase in the disposable income. The savings, consumption and investment patterns have changed in the past few years. This has meant that there has been an increase in demand for many financial services from different financial firms. The market has responded to the soaring demand with making attractive offers and services for the customers at affordable rates. The liberalization of the economy in the 1990s has brought in new players into the field. This has not only brought in some much needed fresh air to the stagnant financial sector but also competition for the same market space which was relatively unknown in the financial sector till then. Since then, there have been progressive reforms in the financial sector allowing for better and easier facilities and options to the consumer. An increasing financially aware middle class have realized the importance of financial services. Banks have streamlined and rationalized themselves to meet up with the changing demands of the people. Banks have become partners in growth for many offering them a safer and secure future. However, not all the reforms in the financial services sector have still been able to bring in the other half of India’s population who are un-banked. There are many reasons that are obvious for this kind of financial exclusion. The new surge in the economy has not yet percolated into the lower strata of the society. It is easy to blame the capitalist growth for this sort of income disparities; however, the inefficiencies and the inadequacies of the government and its policies are equally at fault for lack of reduction in poverty. Even after 60 years of Indian independence, 1/3 of our population is still illiterate (let alone financially literate) and at least 26% of the population still lives under the poverty line. There are many statistics, which goes on to prove that for even a developing nation India has a long way to go.
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Most of the un-banked or financially excluded population of India live in rural areas; nevertheless there is also a significant amount of the urban population of India who face the same situation even with easy access to banks. Many of the financially excluded in these areas are illiterates earning a meagre income just enough to sustain their daily needs. For such people, banking still remains an unknown phenomena or an elitist affair. It is easier for them to keep their money at their house or with some money lenders and easily make immediate purchases (which make up most of their expenditure) rather than to follow the cumbersome process at banks. A lot of the financially excluded populations are at the mercy of money lenders or pawn shop owners. They should be made a part of the formal banking structure so that they could also have the benefits that the others enjoy. By making them financially inclusive we are making their financial position less volatile. At the same time, we are treating them on an equal par with other members of the population so that they wouldn’t be denied of access to a basic service such as banking.

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 90s 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. The term attained a wider connotation in the late 90s when it was expanded to refer to individuals who were denied access to financial inclusion rather than geographical areas. Financial exclusion may not 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. Financial Exclusion could be a hindrance to growth. Without a formal and a legally recognized financial system in which all
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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 occurs in the society due to mainly the socio-economic standing of the individual; however, there are also other reasons for their financial exclusion.

Most of the poor are low wage earners, for them opening

an account and withdrawing money is seemingly unviable. Most of the poor do not have high spending that would require borrowing of credit from a formal agency like banks. They would rather keep their daily income at their homes rather than in a bank.

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.

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.
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The concept of

property rights are still not clearly understood in most parts of India. It was the Peruvian economist Hernando De Soto in the early 2000s that made the world aware of the concept of dead capital. In most of the developing nations, the poor and the weaker sections of the society have little or no knowledge of property rights since most are uneducated. Since they do not possess the documents necessary for the collateral such people are denied credit. Their properties which they own, but have no legal authority over come under the extralegal system and therefore remain as ‘dead capital’. This in turns helps the rise of the informal economy which gives the alternative credit. In such a situation the property which has no ‘legal’ rights over it, would not provide any meaningful credit for the owner. This was the situation in the west prior to the advances in the 19 th and the 20th century. The rapid development of property rights in these nations has meant that credit could be easily given to those who could prove that they were owners of some property. A formal acknowledgment of the property and its owner guarantees that the collateral is valid. The institutionalization of the financial services whether one likes it or not demands this sort of formal acknowledgment. Property and property rights of the individual are extremely important since the financial agencies are dealing with individuals (includes businesses and other institutions) and not the society ultimately. Only by guarantying property rights through simpler procedures for ensuring the rights can the true financial inclusion start.

There is a lot of criticism

on the commercial banks because of their inherent tendency to think that poor people and 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 of 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,
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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.

This point is closely related to the

above one. 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 backgrounds. The consumers from the lower strata are likelier to ask for smaller credit which banks have no enthusiasm to give. It 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.

Financial Inclusion

The word Financial Inclusion could be described as being the opposite of financial exclusion. However financial inclusion is more of a process rather than a phenomenon. It is a process by which mainstream financial services are made accessible to all sections of the population. It is a conscious attempt at trying to bring the un-banked people into banking. Financial Inclusion does not merely mean access to credit for the poor, but also other financial services such as Insurance. Financial Inclusion allows the state to have an easier access to its citizens. With an inclusive population, for e.g.: the government could reduce the transaction cost of payments like pensions, or unemployment benefits. It could prove to be a boon in a situation like a natural disaster, a financially included
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population means the government will have much less headaches in ensuring that all the people get the benefits. It allows for more transparency leading to curtailing corruption and bureaucratic barriers in reaching out to the poor and weaker sections. An intelligent banking population could go a long way by effectively securing themselves a safer future. More importantly Financial Inclusion is imperative for creating an inclusive economy at all fronts. This attains special importance at this stage of rising food and oil prices, without an inclusive economy the country’s development will suffer. In the recently concluded G8 meeting in Hokkaido, Japan, the World Bank chief Robert Zoellick reiterated the importance of creating an inclusive economy in an increasingly globalized World.

Financial Institutions, both large and small have an important role to play in financial inclusion. With their organized structure and effective management larger financial institutions could act as mentors for small financial services firm by ensuring a strong financial backing.

Commercial banks could act as an important part of

the process to achieve full financial inclusion. Especially with simplified savings bank accounts (including no-frills account), relaxed KYC procedures, primary sector lending and even microfinance.

The Urban and Rural cooperative banks could

cater to populations that are generally neglected by the commercial banks. Their position allows them to reach out to the people far easier than the more formal commercial banks. Since they are operated by the members of the banks themselves, there would be more involvement from the people of such cooperatives.

Through priority sector lending, KCCs and

GCCS the RRBs could ensure a steady flow of credit to the rural poor especially the marginal farmers. The RRBs like the commercial banks can
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deal with the agencies like NGOs who are interested in helping out the poor and the weaker sections.

The NBFCs could include

both large and small financial firms which provide financial services. They could offer specific financial products to the poor and low income people such as micro-insurance, micro-credit, etc. The NBFCs could create financial awareness among the people by not only offering alternative financial services but also spreading financial literacy by providing financial advices.

Micro Finance Institutions or MFIs

are created with the specific aim of extending financial services to the poor and the weaker sections of the populations. A MFI could be independent or as in most cases are promoted by NGOs, government agencies, NBFCs, commercial banks and other institutions. Micro Finance Institutions have so far been the most successful at ensuring basic financial services to the unbanked sections of the populations. Along with the SHG movement, the MFIs has enabled the wealth generation in many underdeveloped rural as well as neglected urban areas in India.

These along with their extensive network

could offer wide variety of small and micro financial services to the people. The Post Office Savings bank could utilise their staff to deliver door-to-door service to the people.

NGOs could provide

financial assistance to the poor and the weaker sections through NGO promoted MFIs or by providing financial advice. NGOs working the poor and the economically deprived can more closely analyze their spending patterns and credit requirements. Commercial banks and other large financial agencies can work closely with NGOs to ensure that the dealings

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with the poor and the weaker sections turn out to be a fruitful activity not only for the people but also for the lending agencies.

The concept of micro-finance was championed in the 70s and since then has become a global phenomenon. The concept of micro-lending existed in different forms in the past and still does exist in many parts of the World. (Chit funds in India are a form of micro lending). Microfinance is the process by which diverse financial services are made available to the poor and the low income people. MFIs include NGOs, private commercial banks, NBFCs, cooperative societies. It has had far reaching impacts in the developing world especially Latin America, South and South East Asia. It along with the SHG movement in India (for e.g.: Kudumbasree in Kerala) has ensured micro credit to women entrepreneurs. Microfinance through its innovative dealing has achieved to some extent the target of ‘helping people help themselves’. It has also successfully debunked the myth that poor people are not worthy of being banked upon because of the low defaulting by the debtors especially women. The 2006 Nobel Peace Prize being awarded to the Bangladeshi economist Muhammad Yunus shows the success and relevance of a concept like Microfinance. However, Financial Inclusion is a paradigm shift from microfinance to inclusive finance. Financial Inclusion acquires a broader definition since it is not limited to micro-finance institutions. Financial Inclusion aims at bringing into the mainstream those people who hadn’t had the chance of being financially included while at the same time looking at the comparative advantages for the banks. Although the terms Micro-finance and Financial Inclusion are closely inter-related, there is some difference between the two. Till now, through microfinance we have only allowed the people access to micro-financial services provided mostly by small agencies. Financial Inclusion aims at bringing the un-banked citizens into the financial mainstream. With initiatives the previously excluded section of the population could have access to financial facilities. They should be made aware
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of the advantages of remaining with a formal financial agency. The Financial Inclusion is therefore a step by step process involving the people as well as the respective agencies. Financial inclusion takes the process of micro-finance a step further by not just treating them as different or poor but by considering them as credit-worthy citizens and bankable consumers. Financial Inclusion aims to bring into contact the poorest of the poor with the big banks who have so far been hesitant to deal with them. The valuable experience of microfinance has shown that the doubts of poor consumers defaulting payment of credit might not be valid after all. Microfinance Institutions have been a big success because they have been able to come up with financial products that the population in the lower economic strata want. However there still remains to be seen how the transaction costs on the large number of small credit can be lowered. India has around 59% of the people who are in the financial system; the country has a poverty rate of around 26% (2000). The rest are outside the financial system due to low incomes or lack of pre-owned collaterals. There are around 40% landless and another 30% marginal land holder in India, access to financial access still remains a distant reality for many of them. Financial Inclusion may not be 100% even in many of the developed nations but the high level of access to financial services do explain the necessity of a sound and inclusive financial sector. Thus by creating a strong an inclusive financial sector the country would be better at distributing the development and help achieve equity.

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. It came out with a report in 2005 (Khan Committee) and subsequently RBI issued a circular in 2006 allowing the use of intermediaries for providing
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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. RBI has realized that a push is needed to kick start the financial inclusion process. Some of the steps taken by RBI include the directive to banks to offer No-frills account, easier KYC norms, offering GCC cards to the poor, better customer services, promoting the use of IT and intermediaries, and asking SLBCs and UTLBCs to start a campaign to promote financial inclusion on a pilot basis. So far the campaign for 100% financial inclusion has been said to be a success with many states now reaching near-total financial inclusion.

Compared to other states in India, Kerala has had a higher percentage of people with banks accounts. The high level of banking among the population comes as no surprise as the state has one of the highest literacy rates in the country showing that banking increases with literacy and education (although the link might not be direct). According to preliminary surveys done by LDMs in the state, 81.36% of the population already had access to banking facilities, meaning that around 18.6% of the population did not have access to financial services. Kerala has around 15% or 49.6 lakhs of people under poverty line, showing that the number of poor and the un-banked have a direct correlation. The innovative SHG movement in Kerala called the Kudumbasree has allowed much poor and marginal family access to micro credit. However, it was decided that an active propagation was necessary for the rest of the population to become financially inclusive. In mid-2007 Palakkad was identified as the first district to implement the campaign for 100% financial inclusion1. Canara Bank as the convener bank for the SLBC in Kerala oversaw the implementation of the programme. For the

SLBC Report, 2007, Pg. 3 12 | P a g e

implementation of the programme, the government had roped in five departments which included; the agricultural department, the Revenue departments, the Panchayats (Local Self-Governance), the D.R.D.A and the State Poverty Eradication Mission (Kudumbasree). The success of the campaign prompted the authorities to extend the campaign to other districts. It was decided to reach out to the other 18.64% of the population who had no bank accounts.2 By September 2007, the banks had covered most of the districts in Kerala. With in a short period of time, the state achieved complete financial inclusion and was declared as a 100% financially inclusive state. Kerala on September 30, 2007 became the second major state after Haryana to achieve 100% financial inclusion in all of its districts. The campaign managed to open more accounts than the number of houses, thus exceeding the aims set out for the programme which was to attain 100% financial inclusion by opening an account for each house.

The result of 100% Financial Inclusion Campaign in Kerala
No. of savings bank account opened: i) Of which No-frills account: No. of GCCs issued: No. of households covered: Average:
Source: SLBC Report 2007

12,70,331 8,70,463 48,885 11,82, 476 782 Accounts per village


Although it is true that urban areas are better off when it comes to bank connectivity and use of financial services compared to rural areas, a good share of the urban population however remain financially excluded. The difference between the rural-urban poverty rates in many of the states isn’t much. In at least 11 states the percentage of urban poverty was higher than the rural poverty. The

SLBC Report, Pg. 5

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plight of the urban poor is augmented by the high cost of living in urban areas and the lack of resources. With increasing prosperity on one side and incrementing poverty on the other the urban divide between the poor and the prosperous is widening. Agriculture which could have provided them some level of sustenance cannot be practiced in urban areas; this is the same with many of the activities. Slums have come up in all the major cities of India characterized by the low levels of sanitation and living conditions. The increasing urbanization will only deteriorate the present situation. According to the 43rd round of NSS, it was found that at least 41.8 million people were below the poverty line (the actual numbers could be much higher). Therefore an urgent plan is needed to tackle the problems in the slums. The rise of informal slums makes it hard for the authorities to plan development for the cities. In cities like Mumbai almost half of the population now live in slums. Comparison of Rural and Urban poverty rates in some states (2004-05)
Name of the state Andhra Pradesh Bihar Chhattisgarh Gujarat Haryana J&K Jharkhand Kerala Madhya Pradesh Maharashtra Orissa Rajasthan Tamil Nadu Uttar Pradesh All India Rural Poverty (%) 11.2 42.1 40.8 19.1 13.6 4.6 46.3 13.2 36.9 29.6 46.8 18.7 22.8 33.4 28.3 Urban Poverty (%) 28.0 34.6 41.2 13.0 15.1 7.9 20.2 32.43 42.1 32.2 44.3 32.9 22.2 30.6 25.7 Total (%) 15.8 41.4 40.9 16.8 14.0 5.4 40.3 15.0 38.3 30.7 46.4 22.1 22.5 32.8 27.5

Source : Government of India Press Information Bureau “Poverty Estimates for 2004-05” on March 2007(URP Consumption)

The slum dwellers have come to the cities from villages looking for better opportunities and live on meagre or no income. The unskilled and the uneducated poor have no other choice but to go for menial jobs, sometimes into crime, or remain unemployed. Most of the slum dwellers are poor and therefore are
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excluded from the financial system, and have to depend on informal credit. Reaching out to them would take more time and perseverance compared to reaching out to people in the rural areas. Most of the slum dwellers do not hold proper identification cards, legal documents, etc. which might be necessary to open an account even with the relaxed KYC norms.

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As a part of the financial inclusion in urban areas, a survey was conducted in the slum or slum-like area of Thiruvananthapuram city to know the level of financial exclusion and the progress that has been achieved by the 100% financial inclusion campaign. According to a 1995 report of the Department of Town Planning there were 37 slums in the city. However unofficial estimates say the number of slums in the city and the urban agglomeration have swelled up to 355. All the slums are on public land hindering developmental projects and town planning thus making it imperative for the government to take action for slum rehabilitation and welfare of the poor. According to a press note issued by Indian Overseas Bank, the Lead Bank for Thiruvananthapuram district, 2, 89,912 savings accounts were opened in the district since October 1, 2006. Of these 90,999 were ‘no-frills accounts as a part of the 100% Financial Inclusion Campaign. An amount of Rs.6.59 crore was given out in the form of GCCs. The survey was conducted in a random manner in the locality of Chengalchoola and Thrivikramangalam area in Thiruvananthapuram. Around 120 random houses were included in the study, of which 100 were in the Chengalchoola area and another 20 in the Thrivikramangalam area. These areas are characterized by either subsidized housing or shanty homes. The area was identified due to the nature and scope of the study. Chengalchoola is an area of about 12 acres located near Thampanoor in Thiruvananthapuram. It has around 1000 households with a total population of 5000. There are around 700 pucca houses constructed by the Kerala Housing Board (KSHB) and made free to the eligible as a part of the slum rehabilitation scheme. The houses have access to tap water and sanitation, but most are in dire need of maintenance. There are also several makeshift houses in the area.
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Being a low lying area, the area is prone to deluges and constant water logging during the Monsoon and the untreated sewage for most part of the year. Thrivikramangalam is an area close to Poojapoora, it is not a slum or a slum-like area like Chengalchoola, and but it does contain many pockets of shanty homes and sub-standard housing. The sampling of the area was done to have a wider perspective of financial inclusion. The scope of the survey is to see the level of financial inclusion and the awareness of the people about financial inclusion and the use of financial services. The questionnaire consisted total of 15 questions divided into three parts for ease. The following steps were done for obtaining the information.
• •

The survey started asked the respondents: The occupation of the respondent, the source of income for the family and whether the respondent had an account, if so the name of the bank and the type of account.

About the awareness of new measures for financial inclusion like no-frills account, GCCs, and relaxation of KYC norms for accounts

The reason for not opening the account and if aware about measures for Financial Inclusion, the reason for not opening an account.

Whether they had availed any credit (long term and short-term) from the banks, and the type of credit that was availed to them by the banks.

Whether any family member was a part of an SHG or had access to microcredits from MFIs.

The spending patterns of the respondents and what constitutes the maximum expenditure over a particular period of time.

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The credit requirements and whether they were interested in availing credit from banks and for what particular reason.

About informal agencies and whether they were dealing with an informal agency. If they had taken any credit from an informal agency, then the rate of interest was also enquired.

The use of financial services and instruments and also the frequency of them going to banks to measure financial awareness.

The awareness about the risks of dealing with informal agencies












Thrivikramangalam and therefore cannot give a complete picture of the level of financial inclusion of the city. The study is concentrated on the poor and the slum dwellers of the city, since the poor are the majority who make up the financially excluded. The study is also limited by the number of individuals, a 10% of the slum dwellings of Chengalchoola were selected randomly for the study. The respondents selected were from the working ages of 30-55 and concentrated on different occupational groups rather than religious or other cultural distinctions to differentiate the individuals. The actual number of financial inclusion in the city therefore should be the nature of a much more detailed and extensive study.

The survey found that a major share of

the respondents or the earning members of the family were either Manual Labourers or Government employees. The respondents belong to the working age from 30 to 55 and the average family size is around five. It should be noted here that Government employees includes mainly those who are working in the Municipal Corporation and the Housing Board that built the colony. 17 of the respondents were unemployed or had no family
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member employed and 22 were self-employed mainly working as auto rickshaw drivers and owning small businesses. A small percentage were either working in a private company or as farmers.




obvious and the easiest way to measure the level of Financial Inclusion is to find out the number of households with or without an account. The survey has found that a greater share of the households already have access to banking facility, even though the area has a number of slum dwellings. The survey found that 71.6% of the households in the areas had access to banking facilities. Only around 34 households had no account. It should be noted here that some of the respondents said that they had stopped using the accounts and do not know whether their accounts exist or not. A reason for the higher number of people with accounts could due to has the fact that the the slum has financial Housing board which


rehabilitation offered

services by tying up with State Bank of Travancore. However 28.4 % of the respondents are still unbanked which is significantly high for a state which has been accepted as 100% financially included since last year.

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important respect of

analysis to the bank



accounts is the average distribution of accounts among show the that different groups most groups occupational occupational

including the Unemployed are better off. The cause of concern here is with respect to the Manual Labourers. The percentage of manual labourers with account to the total number of manual labourers is around 45%. This means that more than half of the manual labourers in the survey were financially excluded. The reason for the high number of manual labourers remaining financially excluded is maybe due to the fact that they get daily wages and spend most of what they earn on household items. There is a need on part of the banks or the relevant agencies to reach out to this segment of the population. There is a need to make them aware of the uses of banking, and at the same time banking process should be made easier (like depositing) for them to use the facilities. It would not make any sense for them to do banking unless they see an incentive in dealing with banks.

It is necessary as an indicator to find

out the kind of banks in which the people bank in, but it is not directly related in the context of Financial Inclusion.

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An overwhelming 75% of the accounts were in public sector banks which were the State Bank of Travancore, the Indian Bank, the Indian Overseas Bank and the Union bank of India. Interestingly in Chengalchoola there were no households with bank accounts in private banks. private The number of banks having

branches in urban areas is high, yet they have not had a major impact among the poor in the city. All those with accounts in private banks came from the Thrivikramangalam area.

The respondents or




accounts were asked about the reason for not taking the bank accounts. 50% of those chose to reply that they do not have enough financial background needed to maintain an account. They said that they spent most of what they earn, and so keeping an account with a minimum balance was not feasible from them. Around 30% said that they didn’t feel the need for any dealing with banks as they didn’t have any specific credit needs as of now. Another 21% replied that banks were for people with higher income than them and the banks do not extend credit to them.

Of those who have accounts, around 55.5%

have taken credit from banks (mostly long term credit). Most of those who
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haven’t taken (68%) credit have told that they were interested in taking credit but do not feel the banks will give them the credit. Some had previously applied for loans but were rejected due to the lack of necessary documents. An impediment to those who want to access credit (not only for those with account but also those without accounts) is the lack of important documents. The pie-chart on the types of credit taken shows how much of different types of credit the households availed banks. employment loans reasons for from have the Housing and family (mostly

loans, loans for self-

marriage) make up the majority of loans taken. Loans taken for housing and self-employment can be taken as good indications as these show a confidence among the debtors. However the loans taken for family reasons (marriage, other family needs) cannot be seen as good signs of credit usage. The risks of defaulting for such loans could be higher as the families are already somewhat in a weaker financial position.

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The survey


shown out


dismal to the

performance by banks in reaching people and making them aware about the new initiatives financial taken inclusion. for It

was found that only in 8 out of the total 120 households the people had any knowledge about the new measures. Those who knew had some idea about no- frills account but not about the relaxation of the KYC norms, or the GCCs. The low awareness about the steps taken by RBI and the financial institutions shows that there is an urgent need to reach out to them and to spread the awareness about the initiatives. It seems that merely displaying posters informing consumers about no-frills account will not by itself increase the awareness about the new measures.

In the survey it was found that only around

40% of the households had members in an SHG or access to credit from a MFI. Most of the other 60% of the respondents belong to families who can become members of SHGs, but voluntarily decided to remain financially excluded. Interestingly about 80% of those who are part of the SHGs (Kudumbasree) are account holders, showing that those who are unbanked were at a serious disadvantage.

Most of the households showed a homogeneous

spending pattern with spending most on household items for immediate or near consumption. Only 10% showed that they were spending more on non-household expenditure (education, self-employment). It is understandable that household expenditure would constitute a greater share of the spending patterns due to the low income of the families.
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credit requirements 44% of the households responded that they wouldn’t want to have that Only any they a long-term credit might small that or short-term fearing default. minority banks


would not give any credit to them. As expected Credit for self-employment was in demand more than any other types of credit. More than half of the respondents have shown that they do have some awareness about the uses and types of credit. However many do feel sceptical whether the banks would pay any heed to their credit needs. The second highest demanded is that for housing, which for many living in sub-standard housing looking for a house of their own is not an unexpected answer. Occupation vs. Interest in banking and taking loans.
Occupation Unemployed Govt. employee Self-employed Pvt. Employee Manual Labourer Farmer Total Number of respondents 16 24 11 0 17 0 68

The above table shows the different occupation and the number of respondents who showed interest in taking credit from banks. In this also, the manual labourers are the most hesitant.

The majority of the
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respondents (64%) had taken no interest in informal credit. However there is no correlation between taking informal credit and the awareness of the risks associated with informal credit. Around 44 respondents accepted that they had taken informal credit mostly of sums between Rs 5,000-10,000. The unemployed showed the most interest in taking credit from the informal money lenders with 70% of them having taken credit from them. The largest occupational groups that has taken money from the money lenders are the manual labourers and Self-employed making around 38% and 27% of the total number of those who have taken informal credit. The minimum rate of interest charged on credit from informal money lender was 3.5% on a Rs. 28,000 loan. Most of the rate of interest (mode) was around 5% or 5 rupee interest as it is known among the slum dwellers. In at least 22% of the cases there are instances of 10% interest being charged on the people, which is the highest among the different interest rates. However there are hidden costs associated with dealing with informal money lenders which do not come under the rate of interest.

The respondents have fared average when it

comes to financial awareness, with around half of the total respondents having an average amount of awareness about financial according services. to The awareness level was measured respondent’s familiarity with basic banking services and the frequency of use of banking facilities. Financial Awareness when compared among the different occupational groups revealed that certain occupational groups had greater financial awareness than the other.

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It was seen that Government employees had a higher level of financial awareness when compared to other income groups. It is natural that Government employees being larger in number would have more financially aware people, but when compared to Self-employed and Manual Labourers there is a clear correlation between occupation and financial awareness. Manual Labourers fare the worst when it comes to financial awareness. The number of manual labourers without any financial awareness is more than the number of manual labourers with average financial awareness. Government employees and self-employed are the occupational groups that fare better when compared to other groups.


Most idea of good the

of the respondents have little about few or average the have about risks

informal credit. Only a knowledge

risks were willing to say that they would not like to take any credit from them. Most of those who replied so have had some bad experiences of dealing with informal money lenders.
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However the percentage of people with low awareness about informal credit is not uniform. Manual Labourers fare worse in terms of awareness

compared to the rest of the occupation groups. There is however a significant number of government employees with little awareness about alternative credit and even among the other occupational groups the same is true. There is also very little correlation between occupation and those who have taken informal credit. There are an equal percentage of government employees, unemployed, manual labourers, and selfemployed to their respective total numbers who have taken alternative credit. There is therefore a need for all sections of the occupational groups to be aware of the risks associated with informal lending.

With already 70% financial

inclusion in the area, the rest 30% could be brought into the mainstream quite easily. This would require giving the occupants of the area a simple bank account and thereby become financially included. Financial Inclusion however will be meaningless even if all the citizens have a bank account on paper. Meaningful financial inclusion can only happen if the banks or other relevant agencies like MFIs take a proactive role in the spreading of financial literacy. Without making the citizens aware of the uses of being
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financially inclusive, it could result in even more financial exclusion. People would chose to be voluntarily excluded since their experience with banking had not brought them any specific benefits. Wrong financial decisions in the absence of financial advice can lead to severe consequences like indebtedness and permanent financial exclusion. The first phase of helping every one access to financial services should be supplemented by a programme of equal vigour to spread financial literacy and advice on the proper use of financial services.

The importance of technology for

financial inclusion need not asserted as it has already been done before. However the pace at which the technology should be implemented needs to be faster, or else financial inclusion will still remain as a white paper. The initial phase of making accounts available to all should be supplemented by low-cost technology which aids the neo-banked (the newly banked). Systems need to as user-friendly as possible, since a good percentage of the financially excluded have little formal education. The technologies such as Tele-banking, mobile banking and kiosks with voice recognition technology with little or minimum text inputs can be used in areas with low educational levels. According to a recent report it is estimated that for lending credit to the poor the cost of funds is 10%, the provision for bad debts is 10% and the cost of consumer acquisition, transaction and operation cost is 13%.3 This makes banking with the poor unviable for most commercial banks. However, by leveraging modern technologies and outsourcing some of the jobs to cheaper workforce the banks could make the availability of credit viable. Out-of-the-box thinking is necessary for banking with the poor to become viable.

Banks should be given more freedom

to deal in the manner in which they would want to deal with the public. With

“The Next Billion Customers: A road map for expanding Financial Inclusion in India”, Sinha J. and A. Subramaniam – Boston Consulting Group, 2007 29 | P a g e

increasing competition, a lackadaisical outlook would certainly spell doom for the banks; therefore banks have an incentive to perform well. In the case of MFIs they should be allowed to offer more facilities to the poor and the marginal customers. MFIs need to upgrade to Small Commercial Bank status to function and to offer normal banking facilities. A major problem with respect to all the MFIs is the low amount of total assets. If all the 54 MFIs are combined together their total assets would add up to less than 300 crores which is the minimum required to be considered as SCBs.4 It would require another 5 to 10 years for the bigger MFIs to become SCBs. Flexibility and independence are needed to make small banking viable. The experiences in the developed countries show that the small banks can successfully exist among the large banks and credit organizations by catering to certain communities rather than the whole population. Targeted banking by SCBs is one of the ways in which the small banks can compete with the larger commercial banks.


Instead of looking at chit-funds as a danger to

financial inclusion, they should be seen as partners of growth. The chitfunds have had a strong presence in India and their valuable experience could be used by banks to reach out to the poor. However, there will be a need of transparency in the way they conduct their business, a system of credit rating can be used to keep out the unscrupulous individuals. Another option is looking at retired bank employees as Business correspondents for branchless banking. Retired bank employees with their experience in banking are far more likely to be professional in their dealings and more accustomed to new methods of banking. They could provide an essential middle link between the banks and the thousands of customers that they intend to serve.


Draft Report of Committee on Financial Sector Reforms, Planning Commission, 2008. 30 | P a g e


The credit needs and

amount of credit needed by the poor or the financially excluded differs from the middle class and the upper class needs hence require adoption of new strategies. Most of the self-employed and the daily wage earners find it cumbersome to go to banks and cash their money; therefore, the use of Business Correspondents (BC) could bring in such occupational groups who have little time for the conventional system of banking. It would require person-to-person interactions to make banking and the use of financial services a part of their lifestyle.

There is a need

for increasing professionalism among MFIs, SHG and NGOs. There is no doubt that these organizations have helped the poor tremendously but just as in the case of many co-operative banks and RRBs they remain prone to lack of professionalism and negligence. The intention with which NGOs have been working to help the un-banked poor cannot be doubted but NGOs have to become more professional and pragmatic if they want to help the poor access to micro-finance. If banks have to use individuals from SHGs or NGOs as correspondents to reach out to the poor, then they have to be accountable for the work and it would an understanding of how the financial system works. The commercial banks and other agencies can play their part by training individuals and organizations that help to reach out to the poor.

Financial inclusion would become

meaningless if the burden of it falls wholly on the government. The Corporates, the large commercial banks and NBFCs should be made aware of the advantages of Financial Inclusion and the business opportunities it offers to them. Private partnership will ensure that there would be financial products which are more in tune with the needs of the customers, big and small. The partnership of private financial institutions would ensure a healthy competition leading to on-time delivery of services
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at affordable rates. Small private banks can be encouraged to practice targeted banking aimed at delivering services to certain communities rather than the society as a whole. This would not only ensure a steady number of banking customers for the small banks but also a chance to do business in a market dominated by large commercial banks. By doing so, the chances of financial exclusion are reduced as small banks would try to bring in as much customers as possible.

In the preliminary study before the survey it

was found that the municipal corporation of Thiruvananthapuram had envisaged a bold plan to bring basic facilities to the urban poor. This included providing to the people a constant water supply, subsidized housing and sanitation. However there is little or no mention about the access to financial services to the poor except the passing reference to SHGs. The MFIs, banks and other agencies interested in financial inclusion should therefore work with the city administration in the case of urban areas and local governments in rural areas not in just implementing 100% financial inclusion but also making it a part of the long term development strategy. By doing this, financial inclusion and access to financial services by the poor becomes a part of the planning process.

An important suggestion with regard to catering to

specific needs of the manual labourers or self-employed is that of the creation of a pension fund. Instead of spending thousands of crores of Rupees on programmes to help the poor which have been futile the government should help the marginal poor, the manual labourers and the self-employed with pension schemes. An example of this could be that of the manual labourer contributing at least Rs. 2 per day of his daily wages for the pension fund, while the government pitches in with another Rs. 2. The pension fund would ensure that in the old age they would not need to do hard labour for sustaining themselves. In addition to this, in the absence of other necessary documents for accessing credit, the manual
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labourers and other with the pension fund can use it as collateral for getting loans such as for housing.


Financial Inclusion has been a catch phrase for the past few years. Delivering financial services to all sections of the population will remain a challenge that central banks around the world will face over the next few years. Increasing educational level means more financial inclusion; therefore a literate population must be created in order to create a meaningful financially included population. Innovation and out-of-the-box thinking are what has made the World what it is today. We can never be complacent with what we have or what we have achieved, the human life is an endeavour for progress and a better life. This should be the case with Financial Inclusion; we cannot become complacent and become victims of our own success. Not only should people have access to basic financial services but should also actively use them. A modern and a globalized economy cannot be successful unless it is inclusive. With enthusiasm and foresight this challenge would be overcome rather simply. We should not lose the enthusiasm with which we started and that mediocrity or partial success cannot considered as same as success. ……………………………………………….

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1. Building Inclusive Financial Sectors for Development, UNCDF Report, 2006 2. Financial Services Provision And Prevention Of Financial Exclusion, European Commission, 2008 3. Report of C. Rangarajan Committee on Financial Inclusion, 2008 4. How India Earns, Spends and Saves, Max-New York Life -NCAER, 2007 5. Draft Report of the Committee on Financial Sector Reforms (CFSR), ch.3, Planning Commission, 2008 6. Scoping Paper On Financial Inclusion, Ramesh S. Arunachalam, UNDP India, 2008 7. Promoting Financial Inclusion, UK Task Force, HM Treasury, 2004 8. Financial Inclusion – The Indian Experience, Text of speech by Smt. Usha Thorat, Reserve Bank of India, 2007. 9. “The Next Billion Customers: A road map for expanding Financial Inclusion in India”, Sinha J. and A. Subramanian – Boston Consulting Group, 2007 10. Financial Inclusion-Reaching the Unreached, Indian Bank, 2007 11. Financial Inclusion & Financial Literacy: SBI Initiatives, V. Ramkumar, pg. 49-53, CAB Calling, July-Sept. 2007. 12. Financial Inclusion for Sustainable Development: Role of IT and Intermediaries, Smt. Usha Thorat, Reserve Bank of India, 2007. 13. Banks for everyone, Vijay Mahajan, Mint, July,2007 14. Dissecting the Rajan Report, Column, Mint, April, 2008 15. Finance for all, Column, Sanjay Nayar, Mint, September, 2007 16. Will financial inclusion ever be executed?, Column, Rajrishi Singhal, The Economic Times, 2007 17. Financial inclusion and micro-credit, Column, Manoj Pant, The Economic Times, 2007 34 | P a g e

18. SLBC( for the region of Kerala)Report, 2007 19. Govt aims for financial inclusion in 5 years: FM - Daily News & Analysis, 2008 20. Annual Report 2006-07, Reserve Bank of India, 2007 21. Report on Trends and Progress of Banking in India, 2006-07, Reserve Bank of India, 2007

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