INTRODUCTION

TITLE
FINANCIAL INCLUSION IN INDIA
SUBMITTED BY
KSHITIJ KATIYAR
CLASS: B.COM.LLB. (HONS)
SEMESTER: 7
OF
FACULTY OF LAW
DR. SHAKUNTALA MISRA NATIONAL
REHABILITATION UNIVERSITY
IN
DECEMBER, 2021
UNDER THE GUIDANCE OF
MR. SHAIL SHAKYA
ASSISTANT PROFESSOR
OF
LAW FACULTY
DR. SHAKUNTALA MISRA NATIONAL
REHABILITATION UNIVERSITY
 ACKNOWLEDGEMENT
I would like to express my special thanks and gratitude to my teacher Mr.
SHAIL SHAKYA who gave the golden opportunity to do this wonderful
project on the topic FINANACIAL INCLUSION IN INDIA, which also
helped me in doing lots of research about the topic due to which, I came across
various new aspects about the topic. I am very much thankful to him.

Secondly, I want to thank my parents and my friends who supported me a lot

and helped me in completing this assignment within limited time frame.

Kshitij Katiyar

Semester VII Roll No. 40

B.COM LLB (HONS)

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 INDEX
SR. NUMBER PARTICULSRS PAGE
NUMBER

1 INTRODUCTION TO FINANCIAL 4-5

INCLUSION

2 HISTORY AND EVOLUTION OF 5-6

FINANCIAL INCLUSION IN INDIA

3 OBJECTIVE OF FINANCIAL 7-8

INCLUSION

4 LEGAL AND REGULATORY 8

FRAMEWORK GOVERNING
FINANCIAL INCLUSION IN INDIA
5 POLICIES UNDERTAKRN BY RBI 9-11

6 RECENT DEVELOPMENT IN 11-12

FINANCIAL INCLUSIONS

7 ADVANTAGES AND 12-13

DISADVANTAGES OF FINANCIAL
INCLUSION
8 CHALLENGES TO FINANCIAL 13
INCLUSION

9 CONCLUSION 14

10 BIBLIOGRAPHY 15

Introduction:
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India has a long history of development in banking system. After independence, the major
focus of the Government and Reserve Bank of India had been to develop a sound banking
system, which could support planned economic development through allocation of resources
them into productive sectors. Accordingly, the Government is decided to use the banking
system as an important agent to change the core policies that were formulated since
independence.

The recent developments in banking technology have transformed banking sector

enormously like staffed branches to a system supplemented by other channels like Automated
Teller Machines (ATM), Credit/Debit Card, Internet Banking, Online Money transfer, etc.
The point to focus on is that access to such technology is restricted to certain segments of the
customer segmentation technology sophisticated customer segmentation technology or more
accurate targeting of sections of the market led to restricted sections of the society.

Finance is very essential for every economic activity. Without adequate finance no activity
can be undertaken. Finance is also required by the every section of the society. But from the
beginning of the civilization, only the financial needs of the upper section of the society were
cared. Accesses to finance by the poor and weaker groups are very difficult. In regards with
need, the concept of financial inclusion is not a new one and it has become a catchphrase now
and has attracted the global attention in the recent past.

Financial inclusion may 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 cost1.

“Financial inclusion is a key determinant of sustainable and inclusive growth, which in turn is
essential for building an equitable society.”2 Financial Inclusion, broadly defined, refers to
universal access to a wide range of financial services at a reasonable cost. These include not
only banking products but also other financial services such as insurance and equity products.

1
The Committee on Financial Inclusion, Chairman: Dr. C. Rangarajan
2
Pranab Mukharjee, Former President of India
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The essence of financial inclusion is to ensure delivery of financial services which include -
bank accounts for savings and transactional purposes, low cost credit for productive, personal
and other purposes, financial advisory services, insurance facilities (life and non-life) etc.

History and Evolution of Financial Inclusion in India:

While inclusive banking began, in spirit, with the nationalization of banks in 1969 and 1980
in India, the real thrust on financial inclusion (FI) came in 2005 when the Reserve Bank of
India (RBI) highlighted its significance in its annual policy statement of 2005-06.

FI is considered as an effective means to sustainable economic growth, and is intended to

ensure that each citizen of the country is able to use their earnings as a national financial
resource for redeployment in productive sectors of the economy. Such pooled financial
resources can be channelized to develop enterprises, fueling the nation’s progress.

Prior and after to 1990, several initiatives were undertaken for enhancing the use of the
banking system for sustainable and equitable growth. These included nationalization of
private sector banks, introduction of priority sector lending norms, the lead bank scheme,
branch licensing norms with focus on rural/ semi-urban branches, interest rate wiling for
credit to the weaker sections and creation of specialized financial institutions to cater to the
requirement of the agricultural and rural sectors having the bulk population. The different
phases of financial inclusion measure at various point of time.

In 1982: Establishment of NABARD (National Bank for Agriculture and Rural

Development) through the transfer of RBI’s agricultural credit department provision of Bank
credit under Government. Sponsored subsidy schemes linking credit targets at 18% with
individual bank’s net bank credit; 1990: Implementation of the concept if village level credit
planning for 15 to 20 villages allotted to each of rural, semi-urban and urban branches of
PSBs (Public Sector Banks) and RRBs (Regional rural bank)under service area approach.
Formulation of potential linked credit plan for each district annually by NABARD.
Agricultural Debt relief scheme and Financial sector reforms; 1992: SHG (Self help group)-

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Bank linkage as the most suitable model in Indian context a/c to NABARD. In 1998: Kisan
credit card introduced

2000: Reforms sharply focused on Agricultural credit, Doubling the flow of agricultural
credit implementation of agricultural credit package, Annual special agricultural credit plan, ,
2005: RBI advices bank to open no frill account, 2006: RBI allowed BC/BF to act as agents
of banks. (BC- Business Correspondent, BF- Business Facilitator), 2010: RBI allows for
profit companies (excluding NBFC {Non Banking Financial Companies}) to act as Business
correspondent, 2011: National Payment Corporation of India (NPCL), Launched Interbank
Mobile payment system (MPS), 2014: Pradhan Mantri Jan Dhan Yojana launched, 2016: PSL
(Priority sector lending) target for RRBs increased from 60% to 75% of total outstanding.

FI as a policy initiative entered the banking lexicon only after the recommendations of the
Rangarajan Committee in 2008. It began to attract the attention of stakeholders when banks
realized the significance of connecting with more people for business growth. The span of
financial services included provision of basic savings accounts, and access to adequate credit
at affordable costs to vulnerable groups such as the excluded sections of the society and low-
income households. The experience of microfinance units in India and abroad shows that
vulnerable groups who pay usurious interest rates to local moneylenders, can also be worthy
borrowers of banks. One of the broader objectives of FI is to pull the poor community out of
the net of exploitative moneylenders. But despite such emphasis, the penetration of banking
services was initially mostly confined to urban areas and major cities, after which they started
spreading to the rural areas also.3

Bank Correspondents (BCs)/ Customer Service Point/ use of electronic/kiosk modes for
provision of financial services; opening of no-frills accounts; and so on. For the dispensation
of credit, Kisan Credit Cards (KCC), General Credit Cards (GCC), and other specific
products designed to cater to the financially excluded segments, were introduced. Such
accelerated microcredit was part of priority sector lending schemes of banks.

Among associated developments, RuPay – an Indian domestic debit card – was introduced on
26 March 2012 by the National Payments Corporation of India (NPCI). It has been a game
changer in creating better digital infrastructure and enabled faster penetration of debit card
culture. Commercial banks opened new rural branches, increased coverage of villages, set up
ATMs and digital kiosks, deployed BCs, opened no-frills accounts, and provided credit
through KCCs and GCCs. The introduction of core banking technology and proliferation of
alternate delivery channels aided the process of inclusion on a larger scale.
4

3
https://www.ideasforindia.in/topics/money-finance/financial-inclusion-in-india-progress-and-prospects
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Objectives of Financial Inclusion:

Financial inclusion more particularly, when promoted in the wider context of economic
inclusion, can uplift financial conditions and improve the standards of lives of the poor and
the disadvantaged. Access to affordable financial services would lead to increasing economic
activities and employment opportunities for rural households with a possible multiplier effect
on the economy. Despite India boosting economic growth rates higher than most developed
countries in recent years, a majority of the country’s population still remains unbanked.

Financial inclusion of the unbanked masses is a critical step that requires political will,
bureaucratic support and constant pressure by the RBI. It is expected to unleash the hugely
untapped potential of the bottom-of-pyramid section of Indian Economy. The policy makers
have been focusing on financial inclusion of Indian and rural and semi rural areas primarily
three most important pressings needs, like:

 Creating a platform for inculcating the habit to save money-

The lower income category has been living under the constant shadow of financial
duress mainly because of the absence of savings.
 Providing formal credit avenues-
So far the unbanked population has been vulnerably dependent of informal channels
of credit like family, friends and moneylenders. Availability of adequate and
transparent credit from formal banking channels shall allow the entrepreneurial spirit
of the masses to increase outputs and prosperity in the countryside.
 Fill gaps and Fix leaks in public subsides & welfare programmers-
A considerable sum of money that is meant for the poorest of poor does not actually
reach them. While these money lenders through large system of Government
bureaucracy much of it is widely believed to leak and is unable to reach the intended
parties. Government is therefore, pushing for direct cash transfer to beneficiaries

4
Annual Report of RBI, 2016-17
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 through their BANK ACCOUNTS rather than subsidizing products and making cash
payments.

Some other objectives are as follows:

 Economic: Equitable growth and Boosting development process

 Mobilization of Savings: Capital formation
 Social: Poverty Eradication and Financial Literacy or financial counselling
 Sustainability: To improve income generation by low income groups
 Institutional: Effective Implementation

Legal framework and regulations governing financial inclusion in India:

The motto of financial inclusion is to provide the services to the people who are deprived of
such services and are unreached. The goal of the Financial Inclusion is to create a mass that is
self-dependent and self-sustained people knowing enough and competent to take their own
financial decisions which in turn allows maximal investments in government schemes,
educational schemes, entrepreneurial projects, businesses, retirement plans, banking schemes,
insurances; which in turn can benefit the mass at large and also can provide the economy a
steady inflow which acts as a backbone of any healthy economy and ensures growth.5

People in rural zones do not prefer this type of banking services due to language barriers,
typical and twisted procedures, non-availability of bank branches in the remote areas of the
country, low income generation amongst the rural population, no steady income, financial
illiteracy and numerous of such factors due to which there is no healthy demand of financial
inclusion in the backward sections of the country and society.

The government as well as the Reserve Bank of India has undertaken various innovative steps
to increase the demand of the Financial Inclusions is the rural areas by launching easy KYC
(Know Your Customer) schemes, Kisan Credit Cards and special benefits on it only for
farmers, buying of the produce on Special Supported Price by the Government, payments to
the farmers re done directly to their bank accounts, subsidies are granted directly to the bank
accounts.

Use of bank information and ‘Adahar’ information of the fair price shops, linking of Adahar
cards to the bank accounts to assure that the benefits are allocated to the right person, banks
and governmental bodies now a day’s educate the rural people about their rights and benefits
which are given to them by the government and what benefits they are missing out on by not
having bank accounts, opening of bank accounts of small children to teach them about
savings, Jan-Dhan accounts, handing of Gas subsidy directly to the bank accounts, Zero
Balance accounts for people falling under Below Poverty Line, Adahar Scheme, payment to
the people under Rural Employment Guarantee Scheme only by the way of bank accounts,
payment of insurance claims are to be done directly to the bank account, any relief granted by
the government id transferred directly to the banks, scholarships are transferred directly to
students bank accounts, compulsory Bank Account for every salaried employee whether
5
https://blog.ipleaders.in/legal-framework-regulations-governing-financial-inclusion-india/
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government employee or private employee etc. through these changes and schemes the
government is trying to create a subtle demand or Financial Inclusion which can be in turn
fulfilled.

Policies Undertaken by RBI:

Basic Saving Bank Deposit (BSBD)

Reserve Bank of India advised all the nationalized banks to open accounts with Basic Saving
Bank Deposits; meaning such type of accounts featuring basic saving and transacting features
such as no minimum balance clause, cash deposit and withdrawal feature from the branches
as well as ATM’s, credit/debit cards, access to electronic payments channels etc. This policy
resulted in increased number of general accounts across the country. The rural population
reacted positive to this policy as the accounts were featured with zero balance limit, ATM
Cards were allotted; helping in easy transaction of money etc.

Compulsory opening of branches in Un-banked Villages

Reserve Bank of India directed the banks to compulsorily open 25% of the total number of its
branches opened in a year in tier-5 and tier-6 centers which generally consists of villages.
This step resulted in increased branches in rural areas which further resulted in increasing the
number of people connected to accounts for regular transactions.

KYC Norms to be simplified

Reserve Bank of India directed the banks to simplify its norms to register a person as a
customer of the bank for the sake of simplicity in process for opening a bank account
especially for bank accounts to contain amount of Rs. 50,000/- and credit up to Rs. 1,00,000.
A large proportion of the population of India is either financially illiterate or totally illiterate
which caused difficulty in opening the account and filling the formalities required to be filled
in form. The RBI directed the banks to accept Aadhar Card as a proof of identity as well as
address of the customer.

Establishment of Financial Literacy Centers

Reserve Bank of India revised the guidelines in 2012 which stated opening of Financial
Literacy Centers which should conduct Financial Literacy Campaigns once a month in rural
areas and if possible more than once. Though one campaign a month is compulsory. Through
these campaigns the banks make it definite that people are well educated about their rights
and duties related to banking regulations and encourage them to opt for financial inclusion
services.

Licensing of new banks

Reserve Bank of India has started licensing new banks for properly implementing the
Financial Inclusion scheme throughout the country. This new licensing emphasizes upon new

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and innovative business models targeting rural and those areas which are still out of reach of
banking sectors.

Kisan Credit Cards

Government of India and Reserve Bank of India has with collaborated directions started
issuing Kisan Credit Cards to farmers of the country. The scheme was started in 1998-99 and
till date numerous of farmers are equipped with Kisan credit cards which are issued keeping
in mind the necessities and benefits of farmers.

Rural Infrastructural Development

National Bank for Agriculture and Rural Development (NABARD) provides loans and
deputes amounts to the state governments for the development of infrastructure, agriculture
sectors, rural connectivity and social frontiers. These loans have been gradually increasing
with every financial year.

Cheap e-commerce transactions

Government has initiated e-commerce sites and mobile apps to encourage banking
transactions rather than cash transactions which result in regulated and easy money transfer
which can be accessed anytime and anywhere

Pradhan Mantri Jan Dhan Yojana

This is the most recent advancement to encourage financial inclusion in India by our Present
Prime Minister Shri Narendra Modi, launched on 15th of August 2014 on his first
Independence Day speech further enabling the financial prudence and independence of
citizen of India. The yojna (scheme) was launched with a goal to provide the banking
facilities to all, at all times. This universal availability of banking solutions would, in turn,
help the economy to grow at a better pace as the transactions through a channel recognized by
the government will increase and increase with a rapid speed. This will also let the
government track the movement of the money which will help in curtailing the flow of black
money in the economy which slowly degrades the economy by stealing and converting the
white money into cash which is totally tax exempted as it is out of notice of the authorities
and regulatory bodies. The scheme was launched as a national priority.

The major benefits provided by the scheme are:

1. Basic Savings Accounts: General savings accounts with zero balance limit (no frill
accounts) and an overdraft facility of Rs. 5000/-.
2. “RuPay” Debit Card: A debit card available on easy terms and covering a term
insurance of Rs. 1, 00,000/- as accidental damage fund inbuilt with the card.
3. “RuPay” Kisan Card: A credit card specially built keeping in mind the needs of
financial transaction as by the farmer community of the country. The card embeds
inbuilt crop insurance subjected to notification which helps the farmers in case of crop

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 damage and the card is also allowed to make more free transactions than a normal
commercial card.
4. Micro Finance: The scheme provides micro finance or the household utilities and
betterment of infrastructure in Rural Areas as well as Semi Rural areas. The finance is
available on businesses as well as crops and building bathrooms with subsidy.

Performance of PMJDY:6

The performance of PMJDY in terms of accounts opened, deposit balance and average
deposit balance over the time is tabulated as under:

It may be observed from the above table that on major parameters, consistent progress has
been observed under PMJDY over the years. Since its inception, over 42 crore new accounts
have been opened and over Rs. 1, 45,551 crore has been deposited by the newly banked
people in the formal banking system. The number of operative PMJDY accounts has
increased from 17.01 crore on March’17 to 36.26 crore on March’21. There are 55.40%
women Jan-Dhan account holders and 65.99% Jan-Dhan accounts are in rural and semi-urban
areas.

Recent Development in Financial Inclusion:

The Reserve Bank of India (RBI) has said that there was a 24% improvement in financial
inclusion as measured by RBI’s FI index between March 2017 and March 2021. One of the
important elements of development of financial inclusion is cashless or digital transaction and
financial literacy about it which is much easier than bank transaction or cash transaction asit
has less formality and procedures.

6
https://financialservices.gov.in/sites/default/files/FinancialInclusion_annualreport_material31.3.2021.pdf
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One of the biggest drivers of financial inclusion in India is Pradhan Mantri Jan Dhan Yojana
(PMJDY). There are about 42.6 crore PMJDY account holders with more than 55% being
women. While the JDY was launched in 2014, the usage of account picked up with the
increase with direct benefit transfer (DBTs), which were facilitated from digital platform and
Adahar. The impact of digital transfer in DBTs can be seen from the fact that 5.5lakh crore
have been transferred digitally across 319 government scheme spread over 54 ministries in
the year 2020-20217. Since the pandemic, financial inclusion got a boost due to the increased
usage of digital platform by small merchants and peer to peer payment.

“As of March 2021, banks have achieved a digital coverage of 95.9% individuals while the
achievement of businesses is at 89.8%”, RBI governor Shaktikant Das said in Financial
Inclusion Summit

The rises of the fintech’s have also supported financial inclusion as they have promoted and
simplify the digital payment like UPI interface (Unified Payment Interface).

Advantages of Financial Inclusion:

(a) Benefits to Individual:

 Making habit of people to save money and get interest from banks.
 Helping people by giving loans from banks in which they have deposited money
instead going lenders and people which exploit rates or lagan.
 Filing the gaps and leaks in welfare schemes and subsidies.
 Day-to-day transaction easier and on paper.
 Plan and pay recurring expenses like telephone bill, school etc. or we can say manage
your expenses easily.

(b) Benefits to Country Economy:

 More money in banks helps providing loans to people and business an lower interest
rates.
 Financial stability to economy in times of depression
 Cashless economy
 Higher and better productivity and enabling competition which lowers the rates of
products ultimately.
 Overall development or we can say widespread development in all area enabling
faster growth in economy.
 Global recognition and reduction of poverty
 Increase in National income
 Increase in employment and income opportunity or jobs

7
https://timesofindia.indiatimes.com/business/india-business/financial-inclusion-grew-24-across-fy17-21-rbi/
articleshow/85415519.cms
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  Correction of leakage in demand and supply (Example implementation of schemes,
subsides transfer, distribution channels leakage etc)
 No middle agent

Disadvantages of Financial Inclusion:

Financial can lead to increase in non-performing assets (NPAs) of the banks (due to raise in
default rates). It will affect the profitability and sustainability of the financial market.

Also financial inclusion is basically seen as access and availability of basic financial services
to all without any discrimination. But this has been done in conjunction with increasing the
credit absorption capacity of the people. Otherwise focus on credit availability can drive
farmers to commit suicide due to inability to repay their debt. This inability arises because
they have no avenues to use their loans to generate more income.

Challenges to Financial Inclusion:8

 Inadequate Infrastructure: Limited physical infrastructure, limited transport facility,
inadequately trained staff etc., in parts of rural areas and far flung areas of the
Himalayan and North East regions create a barrier to the customer while accessing
financial services.
 Poor Connectivity: With technology becoming an important enabler to access
financial services, certain regions in the country that have poor connectivity tend to be
left behind in ensuring access to financial services thereby creating a digital divide.
Technology could be the best bridge between the financial service provider and the
last mile customer. Fintech companies can be one of the best solutions to address this
issue. The key challenge that needs to be resolved would be improving
telecommunication and internet connectivity in the rural areas and achieving
connectivity across the country.
 Socio-Cultural Barriers: Prevalence of certain value system and beliefs in some
sections of the population results in lack of favorable attitude towards formal financial
services. There are still certain pockets wherein women do not have the freedom and
choice to access financial services because of cultural barriers.
 Product Usage: While the mission-based approach to financial inclusion has resulted
in increasing access to basic financial services including micro insurance and pension,
there is a need to increase the usage of these accounts to help customers achieve
benefits of relevant financial services and help the service providers to achieve the
necessary scale and sustainability. This can be undertaken through increasing
economic activities like skill development and livelihood creation, digitizing
Government transfers by strengthening the digital transactions’ eco-system,
enhancing acceptance infrastructure, enhancing financial literacy and having in place
a robust customer protection framework.
8
https://rbidocs.rbi.org.in/rdocs/content/pdfs/NSFIREPORT100119.pdf (National Strategy for Financial
Inclusion 2019-2024)
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  Payment Infrastructure: Currently, majority of the retail payment products viz., CTS,
AEPS, NACH, UPI, and IMPS etc. are operated by National Payments Council of
India (NPCI), there is a need to have more market players to promote innovation &
competition and to minimize concentration risk in the retail payment system from a
financial stability perspective.

Conclusion
Financial inclusion is important for a developing country like India as it is one of the largest
populous countries in the world. Being a developing country also a large part of its
population is not advancing with the evolving global society. Large part of the population is
still using conventional method in various sectors, one of which is banking sector. Large
mass of the population is not even financially included or is not able to take benefit of the
banking sector or its services. There are several advantages of financial inclusion such as
every single person of country even those who resides in the farthest places can take benefits
of banking services. It will generate a habit in individuals of saving money by depositing in
banks and earn interest on that money. It will save people from taking loans from
moneylender or sahukars at very high rate of interest which they are unable to pay in most of
the situations. Instead they can take loans from banks at reasonable interest and can also take
benefits of government schemes related to such loans. It also helps in stabilizing countries
economy at times of financial crises and also increases nation income. In process of financial
inclusion to connect more and more people there must be more banks which in turn will
create employment for more persons.

The process of financial inclusion has made immense progress but then also a large part of
population is unbanked as we are not able to overcome all the hurdles in this process. To
become more efficient in the process of financial inclusion we can take some measures such
as improving banking infrastructure in farthest areas basically rural areas, since digital
transactions is important part of modern banking system problems related to poor
connectivity must be solved, some methods must be found to remove socio- cultural barriers,
customer protection /customer care and grievance redressal team must consist of skill
employees to provide every possible help to customer and provide a customer friendly
environment so as to encourage them to use different financial services, financial literacy and
awareness must be created amongst people to remove all the misconceptions and myths
related to the financial services / banking sector etc to encourage them to use financial
services and banks

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 ANNEXURE-A

RESEARCH PAPER:

 National Strategy for Financial Inclusion 2019-2024: An approach paper

to accelerate financial inclusion to promote economic wellbeing,
prosperity and sustainable development

WEBSITES:
 www.vikaspidea.in
 www.ideasforindia.in
 www.financialservice.gov.in
 www.blog.ipleaders.in
 www.timesofindia.indiatimes.com
 www.rbi.org.in

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