Swabhimaan | Financial Inclusion | Microfinance


India is the fourth largest economy in the world on a purchasing power parity (PPP) basis and twelfth on a nominal basis. With the real GDP forecasted to grow by 5.7% in the year 2009-10, the Indian economy is marching ahead. This rapid expansion is expected to continue as growth in the services and high technology manufacturing sector accelerates. Agriculture, which continues to support around 60% of the population, has grown by a mere 2.7% in the second quarter of 200809. In addition, the organized sector employment presently comprises less than 10% of the workforce, leaving the vast majority of the working population with irregular income streams. Notwithstanding the rapid increase in overall GDP and per capita income in recent years, a significant proportion of the population in both rural and urban areas still experiences difficulties in accessing the formal financial system. There is currently a perception that there are a large number of people, potential entrepreneurs, small enterprises and others, who may not have adequate access to the financial sector, which could lead to their marginalization and denial of opportunity to grow and prosper.

1.1Financial Exclusion:
Broadly defined, financial exclusion signifies the lack of access by certain segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers. Financial exclusion is thus a key policy concern, because the options for operating a household budget, or a micro/small enterprise, without mainstream financial services can often be expensive. This process becomes self-reinforcing and can often be an important factor in social exclusion. Reserve Bank of India data shows that as many as 139 districts suffer from massive financial exclusion, with the adult population per branch in these districts being above 20,000 and only 3% with borrowings from banks. On the assumption that each adult has only one bank account (which does not hold good in practice, so that actual coverage is likely to be worse) on an all India basis, 59 percent of 1

the adult population in the country has bank accounts. 41 percent of the population is, therefore, unbanked. In rural areas the coverage is 39 percent against 60 percent in urban areas. The unbanked2 population is higher in the poorer regions of the country, and is the worst in the North-Eastern and Eastern regions.

1.1.1Causes of Financial Exclusion
Demand-side Barriers: On demand constraints and opportunities, the
following issues have a significant bearing on the extent of financial exclusion/inclusion: 1. Cultural factors - Women are often disadvantaged by credit requirements such as collateral since in most of the cases property is registered under their husband’s name and they are to seek male guarantees to borrow. 2. Mistrust of financial institutions - The feeling that there is no point in applying for financial products because he/she expects to be refused as banks are not interested to look into their cause has led to self-exclusion for many of the low income groups. 3. Level of income - A higher share of population below the poverty line results in lower demand for financial services as the poor may not have savings to place as deposit in savings banks. 4. Financial literacy and skills capacity – High information barriers, low awareness and limited literacy, particularly financial literacy, i.e., basic mathematics, business finance skills as well as lack of understanding often constrain demand for financial services.

Supply-side Barriers: The following issues on the supply side are major
obstacles in providing an adequate supply of financial services to the currently unbanked: 1. Locational constraints – Absence of physical infrastructure in interior-most parts of the country leads to difficulties in accessing financial institutions (like banks, etc) resulting in a substantial proportion of households in rural and remote areas being kept outside the ambit of the formal financial system.


2. Real and perceived risk in lending - The perceived risk of lending to the poor is higher than the real risk, creating a supply barrier by triggering higher than necessary transactions costs due to stricter than needed prudential requirements. 3. Approaches and products - Generally, financial services tend to be concentrated in urban areas, allowing rural clients little access to services and information for making well grounded decisions. 4. Financial viability of MFIs - MFI practitioners encounter difficulties in having a “double bottom line”: at the same time aiming to be profitable and stimulating local economic development.

1.1.2 Costs and Consequences of Financial Exclusion:
Broadly, the issue of cost of financial exclusion may be conceived from two angles, which are intertwined. First, the exclusion may have cost for individuals/entities in terms of loss of opportunities to grow in the absence of access to finance or credit. Second, from the societal or the national perspective, exclusion may lead to aggregate loss of output or welfare and the country may not realize its growth potential. In terms of cost to the individuals, financial exclusion leads to higher charges for basic financial transactions like money transfer and expensive credit, besides all round impediments in basic/minimum transactions involved in earning livelihood and day to day living. Individuals/families could get sucked into a cycle of poverty and exclusion and turn to high cost credit from moneylenders, resulting in greater financial strain and unmanageable debt. At the wider level of the society and the nation, financial exclusion leads to social exclusion, poverty as well as all the other associated economic and social problems. Another cost of financial exclusion is the loss of business opportunity for banks, particularly in the medium-term. Banks often avoid extending their services to lower income groups because of initial cost of expanding the coverage which may sometimes exceed the revenue generated from such operations.


for e. saving bank account. but also other financial services such as Insurance. The main objective is to provide the benefit of vast formal financial market. insurance. payments and remittance and financial and credit advisory services. It could prove to be a boon in a situation like a natural disaster. 1.& protect them from exploitation of informal credit market.” Financial Inclusion does not merely mean access to credit for the poor.2 Financial Inclusion: The definitional emphasis of financial inclusion varies across countries and geographies.1 The objective of Financial Inclusion The access to various mainstream financial services e.: the government could reduce the transaction cost of payments like pensions. the structure of stake holding in the financial sector. economic and financial development.2. so that they can be brought into the mainstream 4 . or unemployment benefits. The Report of the Committee on Financial Inclusion in India (Chairman: C Rangarajan) (2008) defines financial inclusion as the “process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. credit. It allows for more transparency leading to curtailing corruption and bureaucratic barriers in reaching out to the poor and weaker sections. depending on the level of social.g. Financial Inclusion allows the state to have an easier access to its citizens. a financially included population means the government will have much less headaches in ensuring that all the people get the benefits. with an inclusive population. socioeconomic characteristics of the financially excluded segments. and also the extent of the recognition of the problem by authorities or governments. An intelligent banking population could go a long way by effectively securing themselves a safer future.g.1.

the poor require access to schemes and products which allow their savings to grow at rates which provide them growth beyond mere inflation protection. where to go credit needs. Once the first step of safety of savings is achieved. 1.2. regulator and the economy alike. Entrepreneurial credit – this means. mutual funds. pension.to plan future better Financial education\credit counseling centers – to guide them which product suits them better. easy credit should be provided. remittance.3 Benefits of Financial Inclusion: Improvements in access to financial institutions accrue several benefits to the consumer. 5 .1. such as.an account with all basic feature of saving account.2. etc. Establishment of an account relationship can pave the way for the customer to avail the benefits of a variety of financial products. delivered at affordable. they should be provided immediate credit. Opening a no-frills account is just a beginning to a continuous process of providing banking and financial services. though market driven costs. so that financial dependence can be created amongst households. is delivery of not only banking. Financial Inclusion therefore.2 WHAT IS CONSIDERED FOR AS MAINSTREAM FINANCIAL OF SERVICES • • • • NECESSARY FINANCIAL INCLUSION HOUSEHOLD? Basic saving bank account. but also other financial services like insurance.funding for purchasing new residential or reconstruction Insurance – life\healthcare. medical treatment etc. to run/expand small scale business/shop or any economic activity. • • • Housing finance. Payment and remittances services – Immediate credit – in case of contingencies like accidents. The bank accounts can also be used for multiple purposes. making small value remittances at low cost and making purchases on credit. what are various services available to better their personal financial planning.

small and medium sized enterprises. in the narrow sense. manage risk. The economy benefits. over time. bolster the poorer segments of the population as well as those segments of the economy that most affect the lives of poor people. the objective of “comprehensive financial inclusion” would be to provide a holistic set of services encompassing all of the above. Therefore. appropriately designed loans for poor and low income households and for micro. fuelled by domestic savings to the greatest extent possible. Inclusive finance . having a bank account becomes a very important aspect of financial inclusion. for uses that have the highest returns. 6 . and work their way out of poverty. status and empowerment and provides access to the national payment system.Furthermore. Holding a bank account itself confers a sense of identity. and appropriate insurance and payments services . Increasing the inclusiveness of financial sectors.safe savings. Promoting financial inclusion can also help in the regeneration of local areas if money saved by increased access to financial services can be re-invested in the community. While financial inclusion. may be achieved to some extent by offering a single financial service/product. will. acquire capital. as the audit trail is available and transactions are conducted transparently in a medium that can be monitored. the regulator benefits. as greater financial resources become transparently available for efficient intermediation and allocation.can help people help themselves to increase incomes.

those customers who are actively and persistently courted by the financial services industry. At the other extreme. and who have at their disposal a wide range of financial services and products.3 THE INDIAN SCENARIO In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills. i. This phenomenon is observed mostly in developed countries with high degree of financial development. At one extreme.. There could be multiple levels of financial inclusion and exclusion. there exists duality of hyper inclusion with some having access to a range of financial products and at the same time a minority lacking even the basic banking services. who are denied access to even the most basic of financial products. 7 . 1.Figure 1: Anatomy of Various Financial Products or Services and the Institutional Structure Thus. it is possible to identify the ‘super-included’.e. to all. we may have the financially excluded.

1 Policy Developments: In our country the financial services has been\being used by a very limited group of people\individuals.In between are those who use the banking services only for deposits and withdrawals of money. stable and an inclusive economy be created. The large presence of informal credit. FIRST PHASE DEVELOPMENTS (1969-1981) In 1969. 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. Further. Policy development in India for financial inclusion can be seen in three stages • • • Nationalisation of banks presecription of priority sector targets lead bank scheme 1969-1991 I. it would be impossible even for the most efficient of the governments to reach out to all sections of the people. To enlarge the area and service sector. the banks were nationalised in order to spread bank’s branch network in order to develop strong banking system which can mobilise resources/deposits and channel them into productive/needy sections of society and also government wanted to use it as an important agent of change. Financial exclusion may not definitely mean a social exclusion in India as it does in the developed countries. So. but it is a problem that needs to be addressed. certain policy measures have been taken by government. the planning strategy recognized the critical role of the availability of credit and financial services to the public at large in the holistic development of the country with the benefits of 8 . 1. Without a formal and a legally recognized financial system in which all sections of the population are a part of. could avoid social exclusion but the legal validity of such financial services pose an obstacle for creating a modern globalizing economy. But these persons may have only restricted access to the financial system. and may not enjoy the flexibility of access offered to more affluent customers.3.

The immediate tasks set for the nationalised banks were mobilisation of deposits on a massive scale and lending of funds for all productive activities. several initiatives were undertaken for enhancing the use of the banking system for sustainable and equitable growth. II. V. Creation of specialised financial institutions to cater to the requirement of the agriculture and the rural sectors having bulk of the poor population. Introduction of priority sector lending norms. Social control of banking policy was soon followed by the nationalisation of major Indian banks in 1969. SOCIAL NETWORKING APPROACH The announcement of the policy of social control over banks was made in December 1967 with a view to securing a better alignment of the banking system with the needs of economic policy. which was an important step towards 9 . The Lead Bank Scheme. A special emphasis was laid on providing credit facilities to the weaker sections of the economy. III. These included I. In recognition of this role. IV.economic growth being distributed in a democratic manner. Interest rate ceilings for credit to the weaker sections and VI. Branch licensing norms with focus on rural/semi-urban branches. Nationalization of private sector banks. the authorities modified the policy framework from time to time to ensure that the financial services needs of various segments of the society were met satisfactorily Before 1990. The National Credit Council was set up in February 1968 mainly to assess periodically the demand for bank credit from various sectors of the economy and to determine the priorities for grant of loans and advances. THE PRIORITY SECTOR APPROACH The administrative framework for rural lending in India was provided by the Lead Bank Scheme introduced in 1969.

The branch expansion policy was designed. was subsequently discontinued. in the case of foreign banks) for specified priority sectors. along with other guidelines including those relating to Government sponsored programmes. small business and the weaker sections within these sectors.implementation of the two-fold objectives of deposit mobilisation on an extensive scale and stepping up of lending to weaker sections of the economy. Sub targets under the priority sector. The Differential Rate of Interest (DRI) Scheme was instituted in 1972 to provide credit at concessional rate to low income groups in the country LEAD BANK SCHEME APPROACH But all these measure were focused towards inclusion of a sector. as a tool for reducing inter-regional disparities in banking development. inclusive of export credit. small-scale industry. self-employed. religious minorities and scheduled tribes.. however. the priority sector guidelines were issued to the banks by the Reserve Bank in the late 1960s to step up the flow of bank credit to agriculture. regional areas etc. the Reserve Bank promoted the establishment of the Credit Guarantee Corporation of India in 1971 for providing guarantees against the risk of default in repayment. inter alia. there was a very less or no emphasis was on financial inclusion of Individual/household level. resulting in a significant expansion of bank branches and decline in population per branch. Realising that the flow of credit to employment oriented sectors was inadequate. In order to encourage commercial banks and other institutions to grant loans to various categories of small borrowers.The promotional aspects of banking policy have come into greater prominence. The major emphasis of the branch licensing policy during the 1970s and the 1980s was on expansion of commercial bank branches in rural areas. deployment of credit and urban-rural pattern of credit distribution. The target for priority sector lending was gradually increased to 40 per cent of advances in the case of domestic banks (32 per cent. 10 . were used to encourage the flow of credit to the identified vulnerable sections of the population such as scheduled castes. The scheme.

and 3. It is observed that there were legitimate concerns in regard to the banking practices that tended to exclude rather than attract vast sections of population. urged banks to review their existing practices to align them with the objective of financial inclusion. implicit or explicit. to make available a basic banking ‘no frills’ account either with nil or very minimum balances as well as charges that would make such accounts accessible to vast sections of the population. With a view to enhancing the financial inclusion. Banks urged to review their existing practices to align them with the objective of financial inclusion. self-employed and those employed in the unorganised sector. as a proactive measure. while recognizing the concerns in regard to the banking practices that tend to exclude rather than attract vast sections of population. of basic banking services to the common person. Implement policies to encourage banks which provide extensive services. The nature. the Reserve bank of India has taken steps to ensure financial inclusion in the country. scope and cost of services would be monitored to assess whether there was any denial. It has tried to make banking more attractive to citizens by allowing for easier transactions with banks. The nature and number of transactions in such accounts would be restricted and made known 11 . with a view to achieving greater financial inclusion. in particular pensioners. In 2004 RBI appointed an internal group to look into ways to improve Financial Inclusion in the country. It also indicated that the Reserve Bank would 1. 2. In the Mid Term Review of the Policy (2005-06).II. SECOND PHASE – ANNUAL POLICY (2005-2006) As the central bank of the country. while dis-incentivising those which were not responsive to the banking needs of the community. RBI exhorted the banks. including the underprivileged. the RBI in its Annual Policy Statement for the year 2005-06.

and asking SLBCs and UTLBCs to start a campaign to promote financial inclusion on a pilot basis.2 Brief glimpses of main initiative are followings:a) No-Frill Accounts It is a basic saving fund account having all the features of a normal saving fund account which it differs in the following aspects 1. better customer services. 1. There is no account maintenance cost Similar types of accounts. Transaction are limited to 5-10 free transactions per month 4.to customers in advance in a transparent manner. ATM facility is provided free of cost 5. though with different names. Financial Inclusion offers immense potential not only for banks but for other businesses. KYC norms have been simplified so that everyone can have this account 3. All banks are urged to give wide publicity to the facility of such no frills account so as to ensure greater financial inclusion. have also been extended by banks in various other countries with a view to make financial services accessible to the common man either at the behest of banks themselves or the respective Governments 12 . The holder is not required to maintain any minimum balance requirement and also nothing is charged for opening this type of account 2. promoting the use of IT and intermediaries. RBI has realized that a push is needed to kick start the financial inclusion process. easier KYC norms. Some of the steps taken by RBI include the directive to banks to offer No-frills account. the government agencies as well as the banks can be partners in growth. Through an integrated approach the businesses. offering GCC cards to the poor.3. the NGOs. RBI came out with a report in 2005 (Khan Committee) and subsequently RBI issued a circular in 2006 allowing the use of intermediaries for providing banking and financial services. Through such policies the RBI has tried to improve Financial Inclusion.

c) KYC norms The Know Your Customer (KYC) norms were revised in order to make it easy for people to avail financial services on February 18. 3. and use of the pooled resource to make interestbearing loans to the members of the group. banks have been advised to keep in mind the spirit of the instructions and avoid undue hardships to individuals who are otherwise classified as low risk customers. They involve voluntary thrift activities on a regular basis. in order to ensure that persons belonging to low income group both in urban and rural areas do not face difficulty in opening the bank accounts due to the procedural hassles. banks can obtain an identity document and a utility bill of the relative with whom the prospective customer is living.000/-) in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed rupees one lakh (Rs.1. 50.00. d) SHG Model A Self Help Group (SHG) is a group of about 15 to 20 people from a homogenous class who join together to address common issues. can be met in.000/-) in a year.b) Overdraft in Saving Bank Accounts Bank were advised to give credit in form of overdraft on saving bank account to its customer so that in case of small credit need like medical bill. In case of close relatives who find it difficult to furnish documents relating to place of residence while opening accounts. along with a declaration from the relative that the said person (prospective customer) wanting to open an account is a relative and is staying with him/her. Banks should review the risk categorization of customers at a periodicity of not less than once in six months. Further. 2. 4. Banks can also use any supplementary evidence such as a letter received through post for further verification of the address. In the course of this process. they 13 . any accidental charges etc. 2008. These guidelines include 1. the KYC procedure for opening accounts has been simplified for those persons who intend to keep balances not exceeding rupees fifty thousand (Rs.

it is considered for linking to banks. However. self-employed individuals and federations of SHGs. the SHGs need self-help promoting institutions (SHPIs) to promote and nurture them. These SHPIs include various NGOs. The groups decide the terms and conditions of loan to their own members. some SHGs have also been formed without any assistance from such SHPIs. The members also learn to handle resources of size. while Models I and III accounted for around 20 per cent and 6 per cent. farmers’ clubs. Banks find it comfortable to lend money to the groups as the members have already achieved some financial discipline through their thrift and internal lending activities. much beyond their individual capacities. Model III: This involves lending. There are three different models that have emerged under the linkage programmeI. Model II: This envisages lending by banks directly to SHGs with facilitation by NGOs and other agencies. III. 14 .imbibe the essentials of financial intermediation and also the basics of account keeping. Generally. banks. II. Banks are encouraged to provide loans to SHGs in certain multiples of the accumulated savings of the SHGs. respectively. Loans are given without any collateral and at interest rates as decided by banks. government agencies. Once the group is stabilized. Model I: This involves lending by banks directly to SHGs without intervention/facilitation by any NGO. and shows mature financial behavior. The peer pressure in the group ensures timely repayment and becomes social collateral for the bank loans. with an NGO acting as a facilitator and financing agency. which generally takes up to six months to 1 year. They begin to appreciate the fact that the resources are limited and have a cost. Model II accounted for around 74 per cent of the total linkage at end-March 2007.

Financial literacy programs are being launched in each state with the active involvement of the state government and the SLBC. films. women and small entrepreneurs. Each SLBC convener has been asked to set up a credit counselling centre in one district as a pilot project and extend it to all other districts in due course. local government machinery. The objective of the project is to disseminate information regarding the central bank and general banking concepts to various target groups. The banking information would be disseminated to the target audience with the help of. including. school and college going children. which would act as a resource centre in this field. Various initiatives taken by the Reserve Bank in order to promulgate Financial Literacy: • A multilingual website in 13 Indian languages on all matters concerning banking and the common person has been launched by the Reserve Bank on June 18. women. rural and urban poor. Similar books will be prepared for different target groups such as rural households. The ‘Financial Inclusion and Financial Literacy Cell’ has been established the college of Agricultural Banking. the Reserve Bank’s website. as also. defence personnel. banks. • Comic type books introducing banking to schoolchildren have already been put on the website. defense personnel and senior citizens. urban poor.e) Financial Literacy Program Recognizing that lack of awareness is a major factor for financial exclusion. 2007. schools/colleges using pamphlets. 15 . among others. brochures. The Reserve Bank has undertaken a project titled “Project Financial Literacy”. the Reserve Bank has taken a number of measures towards imparting financial literacy and promotion of credit counseling services.

2006 to prepare a strategy of financial inclusion. and Leveraging on technology-based solutions. This would require semi-urban and rural branches of 16 .4 per cent of farmer households are financially excluded from both formal/informal sources and 73 per cent of farmer households do not access formal sources of credit. should include access to mainstream financial products such as bank accounts. The Report observed that in India 51. 2008. Exclusion is most acute in Central. Keeping in view the enormity of the task involved. credit. Rangarajan) constituted the Committee on Financial Inclusion on June 26. particularly by vulnerable groups such as weaker sections and low-income groups at an affordable cost9. According to the Report. C. the Committee recommended the setting up of a mission mode National Rural Financial Inclusion Plan (NRFIP) with a target of providing access to comprehensive financial services to at least 50 per cent (55. The Report viewed financial inclusion as a comprehensive and holistic process of ensuring access to financial services and timely and adequate credit.RANGRAJAN COMMITEE The Government of India (Chairman Dr. THIRD PHASE . remittances and payment services. Eastern and North-eastern regions with 64 per cent of all financially excluded farmer households. financial advisory services and insurance facilities. Financial inclusion.III.77 million) of the excluded rural households by 2012 and the remaining by 2015. the overall strategy for building an inclusive financial sector should be based on • • Effecting improvements within the existing formal credit delivery mechanism Suggesting measures for improving credit absorption capacity especially amongst marginal and sub-marginal farmers and poor non-cultivator households • • Evolving new models for effective outreach. according to the Committee. therefore. The Committee submitted its final Report on January 4.

The Report of the Committee on Financial Inclusion Committee has also recommended that the Government should constitute a National Mission on Financial Inclusion (NaMFI) comprising representatives of all stakeholders for suggesting the overall policy changes required. separate credit plans for excluded regions to be drawn up by RRBs and strengthening of their boards. The major recommendations relating to RRBs are extending their services to unbanked areas and increasing their credit-deposit ratios. legal status for SHGs. widening of network and expanding coverage in a time bound manner. and supporting stakeholders in the domain of public. The major recommendations relating to commercial banks included target for providing access to credit to at least 250 excluded rural households per annum in each rural/semi urban branches. no further merger of RRBs. measures for urban micro-finance and separate category of MFIs. the major recommendations were early implementation of Vaidyanathan Committee Revival Package. In the case of co-operative banks. incentivising human resources for providing inclusive financial services and simplification of procedures for agricultural loans. provision of customised savings. credit and insurance products. 17 . Other important recommendations of the Committee are encouraging SHGs in excluded regions. targeted branch expansion in identified districts in the next three years. private and NGO sectors in undertaking promotional initiatives.commercial banks and RRBs to cover a minimum of 250 new cultivator and noncultivator households per branch per annum. use of PACS and other primary co-operatives as BCs and co-operatives to adopt group approach for financing excluded groups.

Many states with high incidence of poverty have shown poor performance under the program. SHGs are operating as thrift and credit groups. NGOs have played a commendable role in promoting SHGs and linking them with banks. Lack of access to credit was seen as a binding constraint on the economic activities of the poor. NABARD has identified 13 states with large population of the poor.Bank linkage program in different regions has been uneven with southern states accounting for the major chunk of credit linkage. They may evolve to a higher level of commercial enterprise in future.4 HOW GOVERNMENT AND RBI CAN BUILD ON EXISTING BANKING STRUCTURE TO PROVIDE FINANCIAL SERVICES TO ALL: Banking system is like a team. As of now. However. The program has been growing rapidly YOY basis. Currently. the spread of the SHG. This number needs to be increased substantially. it becomes critical to examine the prospect of providing a simplified legal status to the SHG B)MICRO FINANCE INSTITUTIONS (MFIs) From the late 1980s.credit as a source of finance for microentrepreneurs. A)SHG BANK LINKAGE PROGRAM The SHG-Bank Linkage program can be regarded as the most powerful initiative since independence for providing financial services to the poor in a sustainable manner. which constitutes from various entities which are different in nature. The ongoing efforts of NABARD to upscale the programme need to be given a fresh impetus. 10 million SHG’s are working across the country with a credit base of Rs. but exhibiting low performance in implementation of the programme. form.1. But this is not enough to reach the entire mass. 100000 Crore. Hence. the emergence of the Grameen Bank in Bangladesh drew attention to the role of micro. 18 . structure and its working but together they makes system in which they efficiently work for a common motive.

providing food security. semi-urban or urban areas for enabling them to raise their income level and improve living standards. Lately. the potential of MFIs as promising institutions to meet the demands of the poor has been realized. C)COOPERATIVE CREDIT INSTITUTIONS Rural credit cooperatives in India were originally envisaged as a mechanism for pooling the resources of people with small means and providing them with access to different financial services. informal sector microfinance institutions have comparative advantage in terms of small transaction cost achieved through adaptability and flexibility of operations. out of some 400 million poor workers. credit. 19 . The closer proximity with the people at grassroots level and the mix of offering right products at right price based on the actual needs of the masses makes their role very important in deepening financial inclusion. which provide thrift. there is exigency to upscale their outreach. For example. It has served as an effective institution for increasing productivity. and other financial services and products of very small amounts mainly to the poor in rural. • Efforts are needed to make MFIs an integral part of mainstream banking and to bring down the rates of interest on microcredit to ensure the micro finance movement gets further impetus • A mutual beneficial partnership should be established between MFIs and Banks contingent on comparative strength of each sector. less than 20 per cent have been linked with financial services provided by MFIs. In India. However.Microfinance Institutions (MFIs) are those. generating employment opportunities in rural areas and ensuring social and economic justice to the poor and vulnerable sections. Steps needed to promote MFIs • One of the ways of expanding the successful operation of microfinance institutions in the informal sector is through strengthened linkages with their formal sector counterparts.

thus. they need to be oriented suitably to serve the rural population with a specific mandate to achieve financial inclusion. represent a powerful instrument for financial inclusion. It is hoped that recent regulatory changes and fresh impetus provided by the regulator will help in making RRBs front institution in achieving the target of reaching out to financially excluded people. However. D) RRBs RRBs. the best suited vehicles to widen and deepen the process of financial inclusion.Despite the phenomenal outreach and volume of operations. RRBs have a large presence in regions marked by financial exclusion of high order. 20 . They account for 31% of deposit accounts and 37% of loan accounts in rural areas. the health of a very large proportion of these credit cooperatives has deteriorated significantly. RRBs are. post-merger. RRBs account for 37% of total rural offices of all scheduled commercial banks and 91% of their workforce is posted in rural and semi-urban areas. Various problems faced by these institutions are: • • • • • • Low resource base High dependence on external source of funding Excessive government control Huge accumulated losses and imbalances Poor business diversification Low recovery Taking all these facts in mind. there is an urgent need to address the structural deficiencies of these institutions in order to make them play an effective role in meeting the financial inclusion goal.

E)THE BUSINESS CORRESPONDENT MODEL In January 2006. • Liberalize the business correspondent regulation so that a wide range of local agents can serve to extend financial services. Recent guidelines issued by RBI to ensure adequate supervision over operations of BCs: • Every BC to be attached to a certain bank to be designated as the base branch • The distance between the area of operation of a BC and the base branch should not exceed 30 km in rural. the Reserve bank permitted banks to utilize the services of nongovernment organizations (NGOs/SHGs). Banks are also entering into agreement with Indian Postal Authority for using the enormous network of post offices as business correspondents for increasing their outreach and leveraging the postman’s intimate knowledge of the local population and trust reposed in him. micro-finance institutions and other rural organizations as intermediaries in providing financial and banking services through the use of business facilitator (BF) and business correspondent models(BC). thus addressing the last mile problem. Initiatives needed to be undertaken to promote BC model • • Allow more entry to private well governed small finance banks. semi-urban and urban areas. The BC model allows banks to do ‘cash in cash out’ transactions at a location much closer to the rural population. The intent is to bring local knowledge to financial products that are needed locally. The intention behind the model is to promote the business of banking with low capital cost by enabling outsourcing of rural business to agents on a commission basis. Facilitate the use of existing networks like cell phone kiosks or kirana shops as business correspondents to deliver products of large financial institutions. 21 .

Mobile Banking can become the most promising front end technology for facilitating financial inclusion in India. • As more than one million new mobile users are being added every month in India. The key role the technology is expected to play is to reduce the last two components drastically. provision for bad debts at 10% and cost of operation and transaction at 13% for poor customers in far flung areas. which account for 70% of assets. Banks could leverage the network for expanding operations. Unfortunately. banks need to consider certain facts before leveraging technology to bring more and more population under the net of financial inclusion • • • • Cost effectiveness of technology Security of accounts Financial viability of technology in rural areas Ability of potential beneficiaries to use the technology 22 . reducing costs and increase reliability of their operations. As mobile phones have reached out to segments and geographies but not yet penetrated by banking sector. this may be one of the most preferred choices for banks for spreading their network in unbanked areas. public sector banks (PSBs). banking for the poor by formal sector becomes unviable. with cost of funds today at 9%. have been slow in making use of modern technology to bring down transaction costs. communication technology could play an important role in bridging the last miles between the customer and the provider thus facilitating faster transactions.1. • The telecom network in India is expanding rapidly as more and more private operators are entering in the telecom sector. different villages are separated by large distances and poor connectivity. However. How technology can lower operating costs as well as lending rates? • In rural areas.5 ROLE OF TECHNOLOGY IN FINANCIAL INCLUSION According to recent Boston Consulting Group report. Consequently.

The aim of the government is to bring a bank within the reach of every village with a population of over 2000 by the end of March. It is the campaign started by the Ministry of Finance. The business correspondents and writers will play a great role in this mammoth campaign launched for promoting the banking sector with a social outlook. The other partners in promoting this gigantic programme will be our newspapers and the electronic media carrying the news of this programme to even the remote corners of the country.1. the Union Minister of State for Finance on February 10.6 SWABHIMAAN- A FINANCIAL INCLUSIVE SCHEME Swabhiman – Our Account Our Pride Swabhiman – Our Account Our Pride was launched by Smt. It will provide a need-based credit to the villagers. Government of India and the Indian Banks Association (IBA)-( an association of most of the Indian banks) to bring banking within the reach of the masses of the Indian population. the Chairperson of the UPA in the presence of Shri Pranab Mukherjee. 2012. 2011.000 villages in the country which are not served by any bank so far. New computer based technology connecting all the banks with one another in the country. 23 . the Union Finance Minister and Shri Namo Narain Meena. Remittance facilities to transfer funds from one place to another will also be the part of the banking services to these villagers. This campaign or the movement is started to promote banking facilities and basic banking services to 73. Sonia Gandhi. The main objective of the government is to promote and bring about a financial literacy in rural parts of India. This will be a path-breaking achievement of the government to help the rural masses of India. This great initiative of the government of India and the Indian Banks Association to cover up the gap between the rural and urban India is going to complete the banking revolution which started in our country in the sixties by nationalising the banks and giving them a social outlook. The bank in the village will facilitate the opening of an account by a villager. is going to play a very important role in this campaign.

Taking into account of the illiterate nature of the rural people. "Swabhiman" . To address this need. the procedures for opening the bank accounts will be simplified. The scheme will also promote the micro-insurance and micro-pension plans for the villagers. 24 . There will be a speedy transfer of funds and payment of government subsidies and other developmental funds allotted by the government from time to time for the rural sector. the Government has directed all banks to provide appropriate banking facilities to habitations having population in excess of 2000 by March. 2012 using various models and technologies including branchless banking through Business Correspondents (BCs). is now ready for roll out.Swabhiman (pronounced as swaa-bhi-maan) meaning self-respect comes from Swa-(meaning Self) and -abhiman (meaning Respect or Pride) in Sanskrit language. The social security benefits can be directly transferred to the beneficiary accounts removing the operations of middlemen who loot the illiterate rural population before the benefits finally reach them. The linking of the rural population with the urban markets will be a great achievement of this revolutionary campaign. The banks have formulated their road maps for Financial Inclusion and have identified about 73. estimated to cover approximately 5 crore households. Financial Inclusion is an important priority of the Government as only about 38 per cent of the 85292 bank branches of Scheduled Commercial Banks are in rural areas and only 40 per cent of the country's population has bank accounts. it is proposed to open five crore new rural bank accounts.000 habitations having a population of over 2000 for providing banking in India. The banking sector has also to ensure that banking transactions are safe and secure. It is reported that the banking will be taken door to door through business correspondents who will be called 'Bank Saathi (Friend)'. Opening accounts for so many illiterate and semi literate people of rural India is apparently going to test the mettle and perseverance of the banking officials. Facilities of easy access to credit and saving products will be provided under this scheme. a nationwide programme on financial inclusion.Under the programme.

Eapen.In the financial year 2009-10. 3. has some assured benefits for the common man. Shri K. which is 113% of the annual target. provide need-based credit.000 crore. Swabhiman. EBT is mode through which the government currently makes payments to the workers involved in various public welfare schemes. But. Thus. Swabhiman will provide a platform for banks to launch their products and services like small overdraft facility.V.66. The total credit flow to agriculture during 2009-10 was of the order of Rs. 75.919 crore. remittance facilities 25 . Reaching out at such a grand scale can face a number of challenges that are meticulous in nature. Ranging from connectivity of handheld devices. tackling these challenges and bottlenecks is now expected from Indian Government. It will facilitate opening of bank accounts. In an interview about Swabhiman. small loans and small deposits to the rural poor. the Government has set agriculture credit flow target at Rs 3.000 ‘unbanked’ villages with over 2. For the financial year 2010-11. A common man can now be included in the organized financial sector without the tedious paperwork. the Joint Finance Secretary of India told media that banks are expected to popularize the electronics benefit transfer (EBT) scheme for efficiency of the program. Swabhimaan is a movement that promises to bring basic banking services to all 73. though is in planning stage.000crore. 2012.000 population by March. remittance. geographical connectivity to literacy rate of the population can raise issues in smooth implementation of the program. It will not only ensure availing of a variety of financial services at doorstep but also easy enrolment to all public welfare schemes.25. the Government had announced the ground level credit target for agriculture at Rs 3.

000 unbanked rural habitations with over 2. Highlights • • • • Covering all 73. New technologies and Business Correspondents will drive the movement.and help to promote financial literacy in rural India.000 population Providing branchless banking through technology Ensuring safe and secure banking Enhancing linkages between rural and urban markets Benefits • • • • • Banking at the door step through Business Correspondents (Bank Saathi) Simplified procedures for opening bank accounts Facility of easy access to credit and savings products Speedy transfer of funds/remittances and payment of Government subsidies and social security benefits directly to beneficiary accounts Micro-insurance and Micro-pension products 26 . Swabhimaan is a path-breaking initiative by the Government of India and the Indian Banks’ Association to cover the economic distance between rural and urban India.

No 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 Name Region Madurai Meerut Nagapattinam Nagercoil Puducherry Pune Salem Tanjore Tirunelveli Trichy Trivandrum Tuticorin Vellore Vijayawada Visakapattinam of No of villages covered 8 2 1 9 1 41 20 1 15 2 15 26 49 4 2 covered 33 2 4 14 85 1 33 70 50 25 2 14 41 11 8 ALL INDIA :: 589 2)CANARA BANK:Financial Inclusion And Micro-finance Initiatives: PRIORITY CREDIT WING Bank has taken up Financial Inclusion in a multi . 27 .7 Few business correspondents are: 1) INDIAN OVERSEAS BANK:List of Villages covered and business correspondents engaged as on 30 Nov 2010 Sl.No 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Name Region Ahmedabad Bangalore Berhampur Bhubaneswar Chandigarh Coimbatore Dindigul Ernakulam Erode Goa Hyderabad Kancheepuram Karaikudi Kolkatta II Kozhikode of No of villages Sl.pronged approach under which the bank has initiated the following steps.1.

The State has been declared as Total Financially included on 24. namely: o o o o General credit Card Scheme. Plakkad. Bank has issued 2.13 lakhs persons under Financial inclusion Achieved Total Financial inclusion in all Twenty six lead districts. Bank has provided 35 vehicles in 35 potential districts to facilitate the branches to reach the rural poor and the excluded families by using the vehicle. Opened 2.programme. Kolar and Chikkaballapura in Karnatak state. Bank has so far formed 1231 farmers clubs. • • • • Bank is the SLBC convener of Kerala State. Tamil Nadu.• Brought 1639 villages across the country under Total Financial inclusion under one village under one Rural/Semi urban branch. The vehicle is called 'Canara Gramina Vikas Vahini' • • Bank has also devised various products for financial inclusion. Joint Liability Groups of Tenant farmers.2007.83 lakh SHGs since inception. Kerala. namely Chitradurga. Bank has started financial Literacy and Credit Counseling Centres (FLCCs) in 10 districts. namely Karnataka. Bihar and Uttar Pradesh.34 lakhs SHGs and credit linked 2. Bank has so far formed 3.12. 28 . Madurai. Erode. Covered 24.33 lakhs no frill Accounts during the current financial year. • • • • • Bank has brought out two comic books in Kannada and English.22 lakhs General Credit Cards since inception. Trissur in Kerala and Sheikpura in Bihar state. Malappuram. namely "Money" and "Savings" forfinancial education of the people. Lead Districts. Revised DIR scheme. Dindigul in Tamil Nadu. spread over five states. Self Help Group(SHG) finance.

Bhuvaneswar. Bellary. • • Bank has installed Bio Metric Voice enabled ATM in sixteen semi urban locations all over the country.Chandigarh. Jaipur. Bangalore and Chennai. Trivandrum. is a unique institute .Lucknow. Visakapatnam. • Bank has opened 19 micro finance branches in urban centres. in which even the illiterate customers and the Smart Card holders can withdraw money from their accounts.o o o o Krishi Mitra Card Scheme.Coimbatore. was set up in 1993. Patna. Bhopal. • Bank has taken up Smart card implementation in 500 locations across the country for financial inclusion. namely Madurai. Shimoga.. Bank has a MOU with Government of Karnataka for implementation of Smart Card Technology for payment of NREGP Wages and Social Security Pension in three districts namely. Bank has also launched Bio metric. OTHER INITIATIVES : • Bank has adopted the Business Facilitator Model and Business Correspondent Model for extending the services in rural areas and deepening of financial inclusion in the unbanked areas. Voice enabled Mobile ATM in Bangalore. The institute has so are trained 11840 candidates. It is engaged in training SHGs and promoting the micro finance concept. Gulbarga and Chitradurga. Micro Credit Groups (MCG). Kolkatta. Mumbai. Debt swapping scheme for farmers from non institutional sources. • • Canara Bank Training Institute for Micro finance.Hyderabad. Pune. Sonnahallipura. 29 . Debt swapping scheme for urban poor from non institutional sources. Delhi. Amritsar.

30 .• Bank's Financial Inclusion Plan (FIP) and the list of villages taken up for providing banking services are displayed separately.

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