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AN ANALYTICAL STUDY: ROLE OF FINANCIAL INCLUSION FOR SOCIAL AND

ECONOMIC DEVELOPMENT IN INDIA

Conference Paper · June 2014

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 AN ANALYTICAL STUDY: ROLE OF FINANCIAL INCLUSION FOR SOCIAL
AND ECONOMIC DEVELOPMENT IN INDIA

Dr. Kameshwar Jain

Professor, MLB College of Excellence
drkjain@yahoo.in

Pooja Jain
Asst. Professor, Vikrant Institute of Technology and Management
pjain1203@gmail.com

Bhuvanesh Kumar Sharma

Asst. Professor, Oriental College of Management
bhuvanesh_sharma86@rediffmail.com

ABSTRACT

India is considered as largest rural populations in the world and belongs to agriculture
activities, financial inclusion is aimed at providing banking and financial services to all
people in a transparent and equitable manner at reasonable cost. Financial inclusion or
inclusive financing is the delivery of financial services to sections of low income segments of
society. A nation can grow economically and socially if it’s weaker section can turn out to be
financial independent. The study focuses on the role of financial inclusion, in strengthening
the India’s position in relation to other countries economy. For analysing such facts data for
the study has been gathered through secondary sources including report of RBI, NABARD
and other articles written by eminent authors. After analysing the facts and figures it can be
concluded that undoubtedly financial inclusion is playing a vital role for the economic and
social development of society but still there is a long road ahead to achieve the desired
outcomes.

Keywords: Financial Inclusion, Financial Services, Economic Development, Social

Development
INTRODUCTION
Financial Inclusion is considered to be the core objective of many developing nations since
from last decade as many research findings correlate the direct link between the financial
exclusion and the poverty prevailing in developing nations. Financial inclusion or inclusive
financing is the delivery of financial services, at affordable costs, to sections of
disadvantaged and low income segments of society. There have been many formidable
challenges in financial inclusion area such as bringing the gap between the sections of society
that are financially excluded within the ambit of the formal financial system, providing
financial literacy and strengthening credit delivery mechanisms so as to improvised the
financial economic growth. According to World Bank report “Financial inclusion, or broad
access to financial services, is defined as an absence of price or non price barriers in the use
of financial services.” The term Financial Inclusion needs to be interpreted in a relative
dimension. Depending on the stage of development, the degree of Financial Inclusion differs
among countries. It‟s been surprising fact that India ranks second in the world in terms of
financially excluded households after china .For the inclusive growth process of economy the
central bank has also provided high importance to the financial inclusion. Normally the
weaker sections of the society are completely ignored by the formal financial institutions in
the race of making chunks of profits or the complexities involved in providing finance to the
weaker section. Thus the term Financial Inclusion can be defined 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.

LITERATURE REVIEW
Finance Minister Pranab Mukherjee (2010) said financial inclusion was a key determinant of
sustainable and inclusive growth which could unlock the vast hidden potential of savings
consumption and investment propensities of the poorer sections of society. Transact the
national forum for financial inclusion, (2007 ) Financial inclusion is a state in which all
people have access to appropriate, defined financial products and services in order to manage
their money effetely. It is achieved by financial literacy and financial capability on the part of
the consumer and financial access on the part of product, services and advice suppliers.
Farhat Husain (1986) has made a detailed analysis of the development of Commercial banks
in India in the light of reorientation of banking policy, credit planning and resource
mobilization for the regional development. Choubey, B.N. (1983) has evaluated that
Commercial Banks have failed to fill the serious gap and deficiencies in farm credit, which
the RRBs could manage to do. Choubey emphasized that the NABARD would be required to
pay special attention to the politicisation of the agricultural credit and government credit
agencies. Hesuggested that NABARD might help the agricultural and rural sector in raising
their productivity at reasonable faster rate.

World Bank (2008) financial inclusion is also influenced by specific credit needs of various
segment people arises for a number activities such as housing, microenterprises, agriculture
difficulties in accessing formal sources of credit, the poor individuals and small savings or
internal resources to invest in housing, health and education, and opportunities
Vaidya, B.V. (2002) has made a comprehensive effort to highlight some of the aspects of
rural development of the country under the policy of liberalisation and globalisation,
including economic aspect, agricultural aspect, industrial aspect, infrastructural aspect and
management aspect. From his analysis, he has drawn the conclusion that a comprehensive
methodology will be necessary for rural development which is the bed-rock of development
for the whole country.

Ansari (2007) in her study reveals that reaching the poorest and whose credit requirements
were very small, frequent and unpredictable, was found to be difficult. Further, the emphasis
was on providing credit rather than financial products and services including savings,
insurance, etc. to the poor to meet their simple requirements. Therefore, need was felt for
alternative policies, systems and procedures, savings and loans products, other
complementary services and new delivery mechanisms, which would fulfil the requirements
of the poorest.

Shetty (1997) in his studies that the ‘social banking’ policies being followed by the country
resulted in widening the ‘geographical spread and functional reach’ of commercial banks in
rural area in the period that followed the nationalization of banks. NABARD (1999)
remarked that the despite having a wide network of rural bank branches in India which
implemented specific poverty alleviation programmes that sought creation of self
employment opportunities through bank credit, a very large number of the poorest of the poor
continued to remain outside the fold of the formal banking systems. Gundannavar, V.R.
(1992) has highlighted the role of banks in implementing social banking schemes to keep
pace with changing social needs. He has strongly opposed any move to reduce resources
allocation to priority sectors, which will have an adverse impact on the agricultural credit. He
has suggested to increase higher interest rate on commercial lending and to continue
concessional rate of lending to priority sectors.

Shylendra, (1998) spoke of SHGs as meaning small informal associations created for the
purpose of enabling members to reap economic benefit out of mutual help, solidarity, and
joint responsibility. The benefits include mobilization of savings and credit facilities and
pursuit of group enterprise activities. The group-based approach not only enables the poor to
accumulate capital by way of small savings but also helps them to get access to formal credit
facilities. To Beck & De la Torre, (2006) financial inclusion should signify access to a range
of different financial services, the percentage of people in a given area with access to a bank
account is the typical measuring stick for breadth of financial services.

Karmarkar, K.G.(1997) has highlighted the role of Micro financing (SHGs) on the rural credit
delivery system in the state of Orissa with example of successful projects in the different
parts of the state. He has suggested for active participation of banks and other development
agencies to promote micro financing in large scale to accelerate the pace of rural
development.
Verrashekharappa (1997) in his work on “Institutional Finance for Rural Development” has
highlighted the importance of institutional finance on farm sector
in a changing perceptive. Taking into account the transaction cost, utilization of loan,
repayments and over dues, he has advocated for policy implications to be implemented more
cautiously to reduce the gap between bank credit and farm sector and to remove the size of
landholding as collateral security against farm credit..

OBJECTIVES OF STUDY
 To explore the need and significance of financial inclusion for economic and social
development of society.
 To analyse the current status of financial inclusion in Indian economy.
 To find out the steps taken by the banks in the area of financial inclusion.
 To measure the level of financial inclusion by dimension.

RESEARCH DESIGN AND METHODOLGY

The secondary data has been used from various sources to analyze the role of Reserve Bank
and Govt of India in promoting Financial Inclusion. The analytical studies are used to analyze
role financial inclusion in India. Special references of some articles has been also used to find
out the economic development in India.

FINANCIAL INCLUSION STATUS IN INDIA:

The status of financial inclusion in India has been assessed by various committees in terms of
her people’s access to avail banking and insurance services. Only 34% of the India’s
population has access to banking services. The Eleventh Five Year Plan (2007-12) envisions
Inclusive growth as a key objective. Achieving inclusive growth in India is the biggest
challenge as it is very difficult to bring 600 million people living in rural India into the
mainstream . One of the best ways to achieve inclusive growth is through financial inclusion.
The process of financial inclusion in India can broadly be classified into three phases. During
the First Phase (1960-1990), the focus was on channeling of credit to the neglected sectors of
the economy. Special emphasis was also laid on weaker sections of the society. Second Phase
(1990-2005) focused mainly on strengthening the financial institutions as part of financial
sector reforms. Financial inclusion in this phase was encouraged mainly by the introduction
of Self- Help Group (SHG)-bank linkage programme in the early 1990s and Kisan Credit
Cards (KCCs) for providing credit to farmers. The SHG-bank linkage programme was
launched by National Bank for Agriculture and Rural Development (NABARD) in 1992,
with policy support from the Reserve Bank, to facilitate collective decision making by the
poor and provide‘door step’ banking. During the Third Phase (2005 onwards), the ‘financial
inclusion’ was explicitly made as a policy objective and thrust was on providing safe facility
of savings deposits through ‘no frills’ accounts. The Report Committee on Financial
Inclusion headed by Dr.C.Rangarajan (2008) has observed that financial inclusion must be
taken up in a mission mode and suggested a National Mission on Financial Inclusion (NMFI)
comprising representation of all stakeholders for suggesting the overall policy changes
required, and supporting stakeholders in the domain of public, private and NGO sectors in
undertakingpromotional initiatives.

CURRENT STATUS
Table 1: Number of branches of Scheduled Commercial Banks as on 30th June, 2012

Bank group Rural Urban Semi urban Metropolitan Total

Public sector 221146 17803 14223 13231 67403

banks
Private 1555 4660 3580 3621 13416
sector banks
Foreign 7 9 61 247 324
banks
Regional 12258 3094 830 148 16330
Rural banks
Total 35966 25566 18694 17247 97473

Table 2: No. of villages and Average Population per Branch (APPB)

Number of villages in Indiaas per the 2001 600,000 (approx.)

Census
Average Population per Bank Branch(APBB) 12,921
as on 31.3.2012

Table 3: No. of bank branches of SCBs over the years

Number of scheduled commercial bank 8,826

branches as on 31st
December, 1969

Number of scheduled commercial bank 59,762

branches as on 31st
March, 1990

Number of scheduled commercial bank 93,659

branches as on 31st
March, 2012
MEASURING FINANCIAL INCLUSION
One of the measures of the level of financial inclusion is the Financial Inclusion Index. This
index is based on three basic dimensions of an inclusive financial system
1) Banking Penetration: Banking penetration is definitely the most critical parameter for
measuring the depth financial inclusion and is measured as a ratio of bank accounts to the
total population.
2) Availability Of The Banking Services: The second parameter, availability of banking
services provides an indication to the number of bank outlets available per 1000 people to
deliver financial services. The bank outlets may include the brick and mortar branches,
ATMs, business correspondents, etc
3) Usage Of The Banking System: The third parameter seeks to determine the usage of
banking services going beyond mere opening of accounts. Therefore, this is evaluated on the
basis of outstanding deposits and credits. Accordingly, the volume of outstanding deposit and
credit as proportion on the net district domestic product is used for measuring this dimension.

STATE WISE ANALYSIS OF FINANCIAL INCLUSION:

According to the value of the index, Indian States can be classified into three categories, i.e.,
states having high, low and medium extent of financial exclusion. According to the empirical
results, Kerala, Maharashtra and Karnataka are some of the States having wider extent of
financial inclusion as compared to other States of India. Tamil Nadu, Punjab, Andhra
Pradesh, Himachal Pradesh, Sikkim and Haryana fall under the category of medium financial
exclusion evaluated on the basis of outstanding deposits and credits. Accordingly, the volume
of outstanding deposit and credit as proportion on the net district domestic product is used for
measuring this dimension. According to the value of the index, Indian States can be classified
into three categories, i.e., states having high, low and medium extent of financial exclusion.
According to the empirical results, Kerala, Maharashtra and Karnataka are some of the States
 having wider extent of financial inclusion as compared to other States of India. Tamil Nadu,
Punjab, Andhra Pradesh, Himachal Pradesh, Sikkim and Haryana fall under the category of
medium financial exclusion.

CONCLUSION
For standing out on a global platform India has to look upon the inclusive growth and
financial inclusion is the key for inclusive growth . Today the fact remains that nearly half of
the Indian population doesn't have access to formal financial services and are largely
dependent on money lenders . A nation can grow economically and socially if it’s weaker
section can turn out to be financial independent. After analysing the facts and figures it can
be concluded that undoubtedly financial inclusion is playing a vital role for the economic and
social development of society but still there is a long road ahead to achieve the desired
outcomes. Financial Inclusion has not yielded the desired results and there is long road ahead
but no doubt it's working on the positive side.

REFERENCES
[1.] Mandira Sarma and Jesim Pais. (2008). Financial Inclusion and Development: A Cross
[2.] Country Analysis, Indian Council for Research on International Economic Relations,
pp 1-28.
[3.] Oya Pinar Ardic Maximilien Heimann Nataliya Mylenko. (2011). Access to Financial
[4.] Services and the Financial Inclusion Agenda Around the World, The World Bank, pp 1-
17
[5.] Reserve Bank of India (2006b), “Economic Growth, Financial Deepening and Financial
Inclusion”, Speech by Rakesh Mohan, Deputy Governor of the Reserve Bank of India,
November 20, available at ttp://www.rbi.org.in.
[6.] Ghorude, K.N. (2009). “Micro Finance for Financial Inclusion and Sustainable Rural
Development, Southern Economist , Vol. 48, No.1, PP.47 –50.
[7.] Manoharan, B.“A study on commercial banks in India – An overview”, Indian Journal
of Marketing, Vol. 45, No.1
[8.] Report of the Committee (Chairman: C.Rangarajan) on the FinancialInclusion”,
Government of India, January 2008

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