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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,


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



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

1. LOW INCOME: 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.

2. LACK OF FINANCIAL AWARENESS: 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.

3. EASY ACCESS TO ALTERNATIVE CREDIT: For a good amount of low
income people, the alternative credit provided by the money lenders and
pawn shop owners are far more attractive and hassle free compared to
getting a loan from a commercial bank. Some of the poor that do not have
property find it impossible to get credit without the collateral. The
uneducated poor would rather put their trust in moneylenders who provide
easy non-collateral credit than on the well established commercial banks.
There might also be cultural reasons for trusting a moneylender rather than
a bank.

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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.

5. LACK OF INTEREST FROM COMMERCIAL BANKS: There is a lot of criticism
on the commercial banks because of their inherent tendency to think that
poor people 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.

6. DISINCENTIVES FOR THE CONSUMER: 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.

1. COMMERCIAL BANKS: 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.

2. COOPERATIVE BANKS: 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.

3. REGIONAL RURAL BANKS: 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.

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

5. MICRO FINANCE INSTITUTIONS (MFIS): 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.

6. POST OFFICE SAVINGS BANK: 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.

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

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

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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: 12,70,331
i) Of which No-frills account: 8,70,463

No. of GCCs issued: 48,885

No. of households covered: 11,82, 476

Average: 782 Accounts per village

Source: SLBC Report 2007


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
Name of the state Rural Poverty Urban Poverty Total (%)
(%) (%)
Andhra Pradesh 11.2 28.0 15.8
Bihar 42.1 34.6 41.4
Chhattisgarh 40.8 41.2 40.9
Gujarat 19.1 13.0 16.8
Haryana 13.6 15.1 14.0
J&K 4.6 7.9 5.4
Jharkhand 46.3 20.2 40.3
Kerala 13.2 32.43 15.0
Madhya Pradesh 36.9 42.1 38.3
Maharashtra 29.6 32.2 30.7
Orissa 46.8 44.3 46.4
Rajasthan 18.7 32.9 22.1
Tamil Nadu 22.8 22.2 22.5
Uttar Pradesh 33.4 30.6 32.8
All India 28.3 25.7 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 micro-
credits 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


The survey has been limited to areas around Chengalchoola and
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.


1. OCCUPATIONAL DISTRIBUTION: 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 the fact that the
Housing board which
has done the slum
rehabilitation has
offered financial
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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An important analysis
with respect to the
number of bank
accounts is the average
distribution of accounts
among the different
occupational groups
show that most
occupational groups
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

3. DISTRIBUTION OF BANK ACCOUNTS: 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. The number of
private 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

households without bank
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

5. CREDIT AND TYPE OF CREDIT: Of those who have accounts, around 55.5%
have taken credit from banks (mostly long term credit). Most of those who

22 | P a g e
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

The pie-chart on the types of credit taken shows how much of different
types of credit the
households have
availed from the
banks. Housing
loans, loans for self-
employment and
loans for family
reasons (mostly
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.

23 | P a g e
has shown a dismal
performance by banks in
reaching out to the
people and making them
aware about the new
initiatives taken for
financial inclusion. 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.

7. SELF-HELP GROUPS AND MFIS: 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.

8. SPENDING PATTERNS: 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.

24 | P a g e

When asked about the
credit requirements 44% of
the households responded
that they wouldn’t want to
have any long-term or
short-term credit fearing
that they might default.
Only a small minority
responded that 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 Number of respondents
Unemployed 16
Govt. employee 24
Self-employed 11
Pvt. Employee 0
Manual Labourer 17
Farmer 0
Total 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

25 | P a g e
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.

11. FINANCIAL AWARENESS: 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 services. The
awareness level was measured
according to 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.

26 | P a g e
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.


of the respondents have
little or average idea
about the risks of
informal credit. Only a
few have good
knowledge about the
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.

27 | P a g e
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 self-
employed 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.


1. PROGRAMMES FOR FINANCIAL LITERACY: 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

28 | P a g e
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 in-
debtedness 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.

2. WIDEN THE USE OF TECHNOLOGY: 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.

3. MORE FINANCIAL INDEPENDENCE: 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.


CORRESPONDENTS (B.C.): Instead of looking at chit-funds as a danger to
financial inclusion, they should be seen as partners of growth. The chit-
funds 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
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.

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.

7. PRIVATE-PUBLIC PARTNERSHIPS: 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

31 | P a g e
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.

8. WORKING WITH AGENCIES: 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.

9. PENSION SCHEMES: 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

32 | P a g e
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.


33 | P a g e

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

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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,

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