RAJIV GANDHI NATIONAL UNIVERSITY OF LAW

ROLE OF COMMERCIAL BANKS IN FINANCIAL INCLUSIONS: ISSUE AND

CHALLENGES
SUBMITTED BY-
NAME: Radhika Aggarwal
ROLL NUMBER: 20158
GROUP NUMBER: 13
SUBMITTED TO-
Ms. Jasmine Kaur
Assistant professor of Economics at Rajiv Gandhi National University of Law, Patiala

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ACKNOWLEDGEMENT
I express my gratitude to those who have made the delivery of this paper possible. My
first obligation is to RGNUL- an institution of academic excellence whose library
provided me with sufficient tools to complete this paper.
I am thankful that I was given an opportunity to undertake research on the topic ‘Role
of Commercial Banks in Financial Inclusion: Issues and Challenges’. I would also
like to express my gratitude to Ms. Jasmine Kaur who provided me with the required
guidance and support throughout my research for this project.
I would also like to extend my sincere thanks to all those who motivate me to
complete this paper.
Radhika Aggarwal

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RESEARCH METHODOLOGY
The researcher has made use of qualitative means of research such as articles, reports
and journals to gather information about the provided topic. The researcher has
focused on financial inclusion in India, its current state and the measures taken in the
past to reach at this stage. The research methodology used is partly descriptive and
partly analytical, in line with the topic provided.

TABLE OF CONTENTS
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COVER PAGE...............................................................................................................1
ACKNOWLEDGEMENT.............................................................................................2
RESEARCH METHODOLOGY...................................................................................3
1. INTROCUCTION......................................................................................................5
2. FINANCIAL INCLUSION IN INDIA......................................................................5
3. MSMEs......................................................................................................................7
4. AGRICULTURE........................................................................................................8
5. DIGITAL FINANCIAL INCLUSION......................................................................8
6. DIRECT BENEFIT TRANSFER..............................................................................9
7. CHALLENGES........................................................................................................10
8. CONCLUSION........................................................................................................11
9. BIBILIOGRAPHY...................................................................................................12

1. INTROCUCTION
The economic advancement of a nation is highly dependent upon a sound banking
framework which encourages mobilization of monetary assets towards productive
ventures and create higher capital. Hence the banking system plays a pivotal role in
the function of productive planning. This planning can be enhanced by the inclusion
of the deprived individuals in the framework and extend credit and financial services
to them. It would ultimately result in economic growth and overall advancement of
the nation. The absence of admittance of the more fragile segment of the general

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populace in the banking system is a grave threat to the advancement of nations,
particularly the non-industrial nations. Moreover, a prolonged and persistent hardship
of banking services to certain segments of the society is bound to create social strains
and conflicts. A nation must strive to endeavour investments from all areas of the
society and similarly extend the benefits to all segments of the society. 1

Financial inclusion is a consuming issue for the public authority in India and so has
been given considerably more importance. In order to improve the access to financial
services, a wide network of financial institutions have been set up over the years. The
coordinated monetary framework consisting of Commercial Banks, Regional Rural
Banks (RRBs), Urban Cooperative Banks (UCBs), Primary Agricultural Credit
Societies (PACS) and post offices cater to the needs of financial services. The
activities taken by the Reserve Bank and the Government of India towards advancing
monetary consideration since the last part of the 1960s have impressively improved
the admittance to formal monetary organizations.2

Inclusive finance or financial inclusion aims at deleting the obstacles that stop people
from being included in the monetary sector and benefit from the financial services for
the improvement of their living conditions. It refers to the efforts undertaken to
increase the reach of financial services across all individuals and enterprises
regardless of their net worth and capacity.3

2. FINANCIAL INCLUSION IN INDIA

The Government of India and the Reserve Bank of India have been putting forth
coordinated attempts to advance inclusive finance as one major national objective. A
portion of the significant endeavours made over the most recent fifty years include-
nationalization of banks, building up of robust branch network of scheduled
commercial banks, co-operatives and regional rural banks, introduction of mandated
priority sector lending targets, lead bank scheme, formation of self-help groups,
permitting BCs/BFs to be appointed by banks to provide door step delivery of
banking services, zero balance BSBD accounts, etc. The fundamental objective of
these initiatives is to extend the reach of financial services to the people who were in
the past excluded from the monetary framework.4

Financial specialists contend that banking is the most fundamental advance of

bringing such people under the financial sector. So, the main target of monetary in
corporation or financial inclusion should be to open bank accounts of the unbanked
people. These individuals have remained detached from the banking and financial
framework. They do not have any bank accounts, they possess no financial
knowledge, they are unable to receive any interest on whatever marginal amount of
cash they have to their name. Financial inclusion is needed for the upliftment of the
1
Ankita Birla, ‘Role of Commercial Banks in Financial Inclusion: A Study with
Respect to the Indian Economy’, International Journal of Science Technology and
Management, pp. 178
2
Infra pp. 179
3
Mitchell Grant, ‘Financial Inclusion’ (2020), Investopedia, at
https://www.investopedia.com/terms/f/financial-inclusion.asp
4
Singh, Sanjay. (2017), Impact Of Indian Commercial Banks In Financial Inclusion,
Research Journal of Social Science and Management, Singapore, 06. 71-75.
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poor and distraught individuals by giving them customised monetary services and
goods. This leads to inclusive growth encompassing the deprived and marginalized
individuals of the society.5

Reserve Bank of India set up the Khan Commission in 2004 to look into financial
inclusion and the recommendations of the Commission were incorporated into the
mid-term review of the policy (2005-06) and urged banks to review their existing
practices to align them with the objective of financial inclusion. In 2005, the Planning
Commission found that for every rupee the government spends on the Targeted Public
Distribution System only 27 paisa reaches the poor. However, the progress is far from
satisfactory as evidenced by the World Bank Findex Survey (2012). According to the
survey findings, only 35 percent of Indian adults had access to a formal bank account
and 8 percent borrowed formally. Only 2 percent of adults used an account to receive
money from a family member living in another area and 4 percent used an account to
receive payment from the Government. The introduction of a universal and targeted
public distribution system (PDS), the provision for employment in rural areas through
the National Rural Employment Guarantee Scheme (NREGS), the implementation of
the project to bring the population under a unique identification number (AADHAR)
and the Direct Benefit Transfer (DBT) Scheme in 2015 are the most recent measures
by the government to realize inclusive growth targets. The NDA government focused
on the NREGA scheme and they passed an amount Rs. 48 thousand crores. 6

India began its financial inclusion journey as early as in 1956 with the nationalisation
of Life Insurance companies. This was followed by nationalisation of banks in 1969
and 1980. The general insurance companies were nationalised in 1972. A review of
the status of financial inclusion in India indicates that a host of initiatives have been
undertaken over the years in the financial inclusion domain.7

India has also been actively engaged with other countries and multilateral forums
namely Global Partnership for Financial Inclusion (GPFI) and Organization for
Economic Co-operation and Development (OECD). India is one of the co-chairs
along with Indonesia and United Kingdom in the GPFI Subgroup on Regulation and
Standard Setting Bodies. India has been actively involved in preparation of relevant
research and policy guides in Digitalisation, Regulation and Financial Inclusion that
are published by GPFI from time to time. Further, the Reserve Bank of India is
currently a member of four working groups viz. Standards, Implementation and
Evaluation, Digital Financial Literacy, Financial Education for MSMEs and Core
Competencies for Financial Literacy under the International Network for Financial
Education (INFE), set up under OECD. Keeping in view the various developments in
the global front, India had also initiated the process of preparing its National Strategy
for Financial Inclusion (NSFI) in June 2017 under the aegis of Financial Inclusion
Advisory Committee (FIAC). The document has been formulated, based on the
feedback received from various stakeholders viz., Department of Financial Services
(DFS), and Department of Economic Affairs (DEA), Ministry of Finance (MoF),
Govt of India, RBI, SEBI, IRDAI, PFRDA, NABARD and NPCI.

5
Infra
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Infra
7
National Strategy for Financial Inclusion2019-2024, Shri MK Jain, at
https://rbidocs.rbi.org.in/rdocs/content/pdfs/NSFIREPORT100119.pdf

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Under PMJDY, 34.01 crore accounts have been opened with deposits amounting to
₹89257 crore up to January 30, 2019 within a short span of five years. The
achievement of opening the largest number of accounts (1,80,96,130 nos.) under
PMJDY, in one week has found a place in the Guinness Book of World Records. A
bouquet of products viz., overdraft of ₹10,000, accidental death cum disability
insurance cover, term-life cover and old age pension have been made available under
PMJDY to the account holders. The focus has also shifted from opening account for
“every household to every adult”. III.6 Under Pradhan Mantri Suraksha Bima Yojana
(PMSBY) a renewable one- year accidental death cum disability cover of ₹2 lakhs is
offered to all subscribing bank account holders in the age group of 18 to 70 years for a
premium as low as ₹12/- per annum per subscriber. Another insurance product with
one-year term life cover of ₹2 lakhs under Pradhan Mantri Jeevan Jyoti Bima Yojana
(PMJJBY) is made available to all subscribing bank account holders in the age group
of 18 to 50 years, for a premium of ₹330/- per annum per subscriber. III.7 To take
care of the financial needs in old age, a pension product named Atal Pension Yojana
(APY) guaranteed by the Government of India has also been made available to the
newly included bank account holders. Under APY, a subscriber (in the age group of
18 to 40 years) will receive fixed monthly pension in the range of ₹1,000 to ₹5,000
after completing 60 years of age, depending on the contributions made by the
subscriber.8

A. 1950-1970: consolidation of the banking sector and facilitation of Industry and

Trade.
B. 1970-1990: focus on channelling of credit to neglected sectors and weaker
sections.
C.1990-2005: focus on strengthening the financial institutions as part of financial
sector reforms.
D. 2005- 2015: financial inclusion was explicitly made as a policy objective.

3. MSMEs
MSMEs are considered the engines of growth of the Indian economy. They contribute
nearly 31% to India’s GDP, 45% to exports and provide employment opportunities to
more than 11.1 crore skilled and semi-skilled people. There are approximately 6.33
crore MSMEs in the country. A number of initiatives have been undertaken for
facilitating credit off take in this sector. In order to bring about an attitudinal change
in the mindset of the bankers while dealing with entrepreneurs from MSME sector, a
special capacity building programme named ‘National Mission for Capacity Building
of Bankers for financing MSME Sector’ (NAMCABS) was put in place to familiarise
bankers with the entire gamut of credit related issues of the MSME sector. A Certified
Credit Counsellors (CCC) scheme was launched for creating a structured mechanism
to assist the entrepreneurs in preparing financial plans and project reports in a
professional manner, thus facilitating the banks to make informed credit decisions.9

Web portals like the ‘Udyami Mitra’ and ‘psbloanin59minutes’ have also been
launched to provide easy access to credit. Trade Receivables Discounting System
(TReDS) platforms have been set up to address the problem of delayed payments to
MSMEs. Pradhan Mantri Mudra Yojana (PMMY)3, a scheme to finance small
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business enterprises has been launched in April 2015 whereby lending institutions
would finance to micro entrepreneurs up to ₹10 lakh. Interest subvention scheme has
been launched for MSMEs to reduce cost of borrowings.10

4. AGRICULTURE
India’s agrarian economy is the source of around 15 percent of GDP, 11 per cent of
exports and provides livelihood to about half of India’s population. The importance of
the sector from a macroeconomic perspective is also reflected in a significant flow of
bank credit to finance agricultural and allied activities relative to other sectors of the
economy11.

To give a thrust to agriculture financing from the formal sector, banks have been
mandated specific targets under priority sector scheme. Currently the target for
agriculture lending under priority sector for all domestic scheduled commercial banks
and foreign banks having more than 20 branches is 18 per cent of Adjusted Net Bank
Credit (ANBC) or Credit Equivalent Amount of Off-Balance Sheet Exposure
(CEAOBE), whichever is higher. Within the 18 per cent target for agriculture, a sub-
target of 8 percent of ANBC or Credit Equivalent Amount of Off-Balance Sheet
Exposure, whichever is higher is prescribed for Small and Marginal Farmers. The
banks have been advised to extend collateral free loans to small and marginal farmers
upto ₹1.6 lakh. To provide adequate and timely credit support from the banking
system under a single window to the farmers for their cultivation & other needs an
innovative product viz., Kisan Credit Card Scheme (KCC) was introduced in August
1998 as a revolving cash credit for ease of access and delivery. The scheme covers
tenant farmers, oral lessees and share croppers and has now been extended to cover
animal husbandry and fisheries. The scheme provides for sanction of the limit for 5
years with simplified renewal every year.12

5. DIGITAL FINANCIAL INCLUSION

Digitalization of the finance sector has ensured that monetary administrations are
embarked by the click of a button. Consequently, the poor have again been excluded
from this development as they store their monetary assets in physical forms like
tangible currency, gold, livestock etc.13

The process of financial inclusion has three aspects which are referred as clouds by
Reference. It was stated that first aspect is physical cash cloud which is operated by
the existing poor people, a traditional cash management system. Secondly, virtual
account operated through e- money and thirdly neither physical nor virtual but
psychological, where people plan their financial life through thought process of brain.
Blending traditional and virtual clouds reveals access and mixture of virtual and
psychological cloud leads to usage of financial system. It is evident that the extension
of payments through digital platforms offers the opportunity to connect the needy
with service providers. Nevertheless, this system will not automatically pull in the
people to save the money but it paves the way to embed the systems of automated

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financial process like deposits, scheduled reminders and other financial activities.
Digital financial inclusion highly insists on poor people because it directly reaches for
the welfare of needy through appropriate channels and provides access to basic
account, payment connections to peers, institutions, governments and enhanced
financial services.14

6. DIRECT BENEFIT TRANSFER

The objective of DBT Scheme is to ensure that money under various developmental
schemes reaches beneficiaries directly and without any delay. The scheme has been
launched in the country from January, 2013 and has been rolled out in a phased
manner, starting with 26 welfare schemes, in 43 districts. The scheme is now being
extended to additional 78 districts and additional 3 schemes from 1st July, 2013 and
would be extended to the entire country in a phased manner. The Government has
also started the transfer of cash subsidy for domestic LPG cylinders to Aadhaar linked
bank accounts of the customers with effect from 1st June 2013, in 20 pilot districts.
About 75 lakh beneficiaries would be benefitted in these districts. 15

Banks play a key role in implementation of DBT and this involves four important
steps, viz.
(I) Opening of accounts of all beneficiaries.
(ii) Seeding of bank accounts with Aadhaar numbers and uploading on the NPCI
mapper.
(iii) Undertaking funds transfer using the National Automated Clearing House -
Aadhaar Payment Bridge System (NACH-APBS).
(iv) Strengthening of banking infrastructure to enable beneficiary to withdraw
money.16

All PSBs have also joined the Aadhaar Payment Bridge of National Payments
Corporation of India (NPCI). Banks are also issuing debit cards to beneficiaries.
Banks have also started action for strengthening banking infrastructure and providing
business correspondents in areas, which were so far unserved. Banks have also been
advised to provide an onsite ATM in all the branches in identified districts and a
Debit Card to all beneficiaries to enable him / her to withdraw the money as per his
ease and convenience. Issuance of a Debit Card to all beneficiaries to enable him / her
to withdraw the money as per his ease and convenience will also strengthen the
withdrawal infrastructure.17

7. CHALLENGES
1. Inadequate Infrastructure: Limited physical infrastructure, limited transport facility,
inadequately trained staff etc., in parts of rural hinterland and far-flung areas of the
Himalayan and North East regions create a barrier to the customer while accessing
financial services.

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2. 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 tele and
internet connectivity in the rural hinterland and achieving connectivity across the
country.

3. Convenience and Relevance: The protracted and complicated procedures act as a

deterrent while on-boarding customers. This difficulty is further increased when the
products are not easy to understand, complex and do not meet the requirements of the
customers such as those receiving erratic and uncertain cash flows from their
occupation.

4. Socio-Cultural Barriers: Prevalence of certain value system and beliefs in some

sections of the population results in lack of favourable 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.

5. 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,
digitising Government transfers by strengthening the digital transactions’ eco-system,
enhancing acceptance infrastructure, enhancing financial literacy and having in place
a robust customer protection framework.

6. Payment Infrastructure: Currently, majority of the retail payment products viz.,

CTS, AEPS, NACH, UPI, IMPS etc. are operated by National Payments Council of
India (NPCI), a Section (8) Company promoted by a group of public, private and
foreign banks. 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.18

8. CONCLUSION
Financial inclusion is a core tool for the economic advancement of a nation like India.
India cannot achieve economic growth without incorporating financial inclusion as a
major policy objective and working toward achieving this objective. In layman terms,
financial inclusion refers to the process of including the deprived and distraught
individuals in the banking and monetary framework by extending the benefits of
financial services to them. Substantial efforts are needed not only from banks and

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other financial institutions, but also from an array of other stakeholders including civil
society.

Indian authorities have made significant attempts to achieve financial inclusion. This
includes nationalization of banks, building up of robust branch network of scheduled
commercial banks, co-operatives and regional rural banks, introduction of mandated
priority sector lending targets, lead bank scheme, formation of self-help groups,
permitting BCs/BFs to be appointed by banks to provide door step delivery of
banking services, zero balance BSBD accounts, etc. India has also been actively
engaged with other countries and multilateral forums namely Global Partnership for
Financial Inclusion (GPFI) and Organization for Economic Co-operation and
Development (OECD). India is one of the co-chairs along with Indonesia and United
Kingdom in the GPFI Subgroup on Regulation and Standard Setting Bodies. India has
been actively involved in preparation of relevant research and policy guides in
Digitalisation, Regulation and Financial Inclusion that are published by GPFI from
time to time. For the MSME sector a special capacity building programme named
‘National Mission for Capacity Building of Bankers for financing MSME Sector’
(NAMCABS) was put in place, a Certified Credit Counsellors (CCC) scheme was
launched, web portals were launched etc. The Priority Sector Scheme and the Kisan
Credit Card Scheme are the two major attempts at financially including the small and
marginal farmers. Apart from this PMJDY is also another significant attempt towards
the same. Furthermore, the DBT Scheme is one of the most significant attempts at
financial inclusion. This scheme was rolled out to ensure that cash benefits reach the
beneficiaries directly. Commercial banks have a strong role to play in the
implementation of this policy.

Despite all these attempts there are several challenges associated with realizing the
goal of inclusive financing. Poor infrastructure and socio-cultural barriers continue to
haunt the progress toward financial inclusion. On one hand many are unable to access
financial services due to poor infrastructure particularly in the extreme backward rural
regions, Himalayan regions and the North Eastern regions and on the other, those who
would otherwise have access to these services are unable to do so owing to cultural
barriers. As digital financing is on the rise, poor connectivity continues to hinder
people’s access to these services.

9. BIBILIOGRAPHY
1. Ankita Birla, ‘Role of Commercial Banks in Financial Inclusion: A Study with
Respect to the Indian Economy’, International Journal of Science Technology
and Management.
2. Mitchell Grant, ‘Financial Inclusion’ (2020), Investopedia, at
https://www.investopedia.com/terms/f/financial-inclusion.asp

11
3. Singh, Sanjay. (2017), Impact Of Indian Commercial Banks In Financial
Inclusion, Research Journal of Social Science and Management, Singapore
4. National Strategy for Financial Inclusion2019-2024, Shri MK Jain, at
https://rbidocs.rbi.org.in/rdocs/content/pdfs/NSFIREPORT100119.pdf

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