Research Article

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banking: Spatial Role © 2021 Institute of Rural Management
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https://doi.org/10.1177/09730052211037110
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and Exclusion DOI: 10.1177/09730052211037110
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Rajat Singh Yadav1 and Kalluru Siva Reddy1

Abstract
Access to bank account is only a part of the problem when we talk of financial
inclusion because several people with a bank account are not necessarily using
them to deposit their savings or carry out transactions. This article makes an
attempt to examine the reasons for low utilisation of banking facilities. It employs
financial inclusion insights (FII) data for Indian population to find out an outcome
of financial inclusion (and thus social inclusion as well) based on the usage of
banking services with covariates like financial literacy, the probability that any
financial service is accessible to the respondent in terms distance, type of mobile
phone and spatial density. We use truncated probit model to measure the
incidence of under-banking. Our findings show that there is a negative association
between supply-side constraints and usage of banking services, implying that low
access to financial services in time and space stands as a hindrance to financial
inclusion. Further, we find from the financial inclusion and exclusion map at the
district level that even though economic agents intend to participate in the space
in which he/she is living is not much inclusive.

Keywords
Financial inclusion, spatial exclusion, spatial density, dormant account, financial
literacy

Introduction
Individuals can use financial services to smooth their consumption, absorb
unforeseen shocks and make household investments (Collins et al. 2009). While
much received work on financial inclusion focuses on its benefits for individuals,
it is also useful to the economy at large. Greater access to accounts can result in a

1 Gokhale Institute of Politics and Economics, Pune, Maharashtra, India.

Corresponding author:
Rajat Singh Yadav, MIG-108, Housing Board Colony, Nasibpur, Narnaul, Haryana 123001, India.
E-mail: rajatsingh.yadav@gipe.ac.in
2 International Journal of Rural Management

larger deposit base for banks or one that is more resilient in times of financial
stress (Han and Melecky 2013). Globally, about 2.5 billion people are unbanked
(Allen et al. 2016), though the unbanked number has come down to 1.3 billion in
2017. Supply-side factors point to insufficient progress in branching or outreach
(Beck et al. 2007), while demand-side factors emphasise distrust of financial
institutions, varying financial behaviour and insufficient financial literacy
(Bertrand et al. 2004; Cole et al. 2011). The financial market in the emerging
countries has remained underutilised due to the information gap between
consumers’ financial service providers arising out of financial illiteracy (OECD
2005). To bridge the gap in information asymmetry, the Reserve Bank of India
(RBI) has launched an initiative in 2007 to establish Financial Literacy and Credit
Counselling Centres throughout the country. But how does higher financial
literacy translate into greater wealth for an individual? Financial literacy has been
proven to affect both saving and investment behaviour, and debt management and
borrowing practices and also higher financial literacy are more likely to lead to
planning for retirement, probably because they are more likely to appreciate the
power of interest compounding and are better able to do calculations (Lusardi and
Mitchell 2011). In the context of India, financial literacy varies state- and district-
wise. The level of financial literacy can be inspected using financial knowledge,
financial behaviour and financial attitude (OECD 2011).
Our article contributes to literature by providing in-depth analysis on the order
choice of agents for financial inclusion process and evolution of the financial
inclusion in India. It also contributes to the existing literature on macro-behaviour
arising out of agent’s micro-motives in a distinct way. We see the impact of
technology adoption and spatial inclusion explained in methodology section in
detail. We find a negative relationship between supply-side constraints and usage
of banking services, suggesting low access to financial services in time and space,
which stands as a hindrance in financial inclusion. Financial inclusion is not
evenly distributed throughout the country, and hence, it is subject to considerable
spatial inequalities. Cartographic representations and symbol maps enable us to
visualise the extremely heterogeneous situation of financial inclusion.
Rest of the article is organised as follows: the second section presents some
facts about financial inclusion in India. The third section discusses literature
review. The fourth section provides methodology used in the study. The fifth
section deals with results and discussion. The sixth section concludes the article.

Stylised Data on Financial Inclusion in India

Financial inclusion in India is defined ‘as the process of ensuring access to
financial services and timely and adequate credit where needed by vulnerable
groups such as the weaker sections and low income groups at an affordable cost’
(Rangarajan Committee 2008). In 2014, the country was host to the world’s
largest financial inclusion intervention called the Pradhan Mantri Jan Dhan Yojana
(PMJDY) scheme, which was the latest, and undoubtedly largest, intervention in
Yadav and Reddy 3

a long list of reforms aimed at increasing financial inclusion. Financial inclusion

in India is now mandated, that opens up new challenges for getting bank accounts
to the poor. Having access to a banking account generally qualifies a household or
individual to be designated as financially included. Individuals with bank account
ownership has witnessed a huge structural change in India, starting at 35% bank
account ownership in 2011 to 80% ownership in 2017 (World Bank 2017).
Demand for bank account that was nudged by a policy of financial inclusion—
PMJDY—increased the number from 53% in 2014 to 80% in 2017. For example,
dormant accounts represent those bank accounts of individuals that do not have
any kind of banking activities to show in the account. Accounts are kept silent.
But dormant account does not mean dormant financial lives. The majority of
account enrolment takes place without any knowledge transfer, and customers are
unsure of their account features and how to access their benefits through them.
Out of the 80% bank account ownership in 2017, only 41% were in use, and the
remaining 39% of the bank accounts were not in use in terms of the type of deposit
or withdrawal from these bank accounts.
Table 1 presents the number of account ownerships in the bank, financial
institutions and mobile money in India. Mobile money account ownership does
not reflect any significant progress. India had only 2% of existing mobile money
account users in 2017. Demand for financial services/products from those who
belong to the poorer section of the society is 77%. When individuals do not have
a bank account or a mobile money account, they tend to keep themselves out of
the ambit of formal banking financial network, and this leads to social exclusion
(Leyshon and Thrift 1995).
As per Table 2, out of the large chunk of population that holds a bank account,
39% of the accounts are dormant accounts that have had no financial activity for
a long period of time, except for the posting of interest. Usage of debit card and
digital payment channel for digital payments is not in much demand. For poor
households, credit is not the only principal financial service they need: good
savings, payment services and insurance may rank higher. When people participate
in the financial system, they are better able to manage risk and absorb financial
shocks, invest in a business and fund large expenditures like education or a home
improvement (Lusardi and Mitchell 2011).

Table 1. Description of Account Ownership in India (%) for age 15+.

Indicator Percentage
Account 80
Financial Institution account 80
Mobile money account 2
Female 77
Out of labour force 75
Poorest 40% 77
Rural 79
Source: Global Financial inclusion Dataset, 2017.
4 International Journal of Rural Management

Table 2. Description of Usages of Various Financial Products by People Who Hold

Bank Accounts.
Indicators Percentage
Account holders 80
Dormant accounts 39
Used the debit card to make a payment in the past year 12
Digital payments in past year 20
Paid utility bills in past year 42
Received private sector wages in the past year 19
Received government payments in the past year 14
Received domestic remittances: using an account 5
Received domestic remittances: using OTC service 3
Send domestic remittances: using an account 6
Send domestic remittances: using OTC service 0
Source: Global Financial inclusion Dataset, 2017.

Therefore, an inclusive financial system allows both access to bank account

and usage of formal financial services that are likely to benefit the poor and
underprivileged section of the society by identifying opportunities and removing
supply-side barriers for not raising the demand from the population. Hence,
measuring financial inclusion is essential to understand an individual’s growth
and economic development.

Literature Review
Financial inclusion (or, alternatively, financial exclusion) has been defined in the
literature in the context of a larger issue of social inclusion (or exclusion) in a
society. One of early definitions by Leyshon and Thrift (1995) defines financial
exclusion as referring to those processes that serve to prevent certain social groups
and individuals from gaining access to the formal financial system. Financial
exclusion is defined as the inability to access necessary financial services in an
appropriate form (Sinclair 2001). Exclusion can come about as a result of problems
with access, conditions, prices, marketing or self-exclusion in response to negative
experiences or perceptions. It is broadly the inability (however occasioned) of
some societal groups to access the financial system (Carbo et al. 2005). Financial
Inclusion is not bounded just to the access of credit or access to savings account,
but it is a multidimensional phenomenon, which captures the level of financial
inclusion heterogeneity in a geography (Satyasai and Kumar 2020). There is an
increase in credit by households whenever there is the prospect of an increase in
income (Mutezo 2014). Household consumption is identified with household
income in the long haul and interest rates (Kim et al. 2014). There is a significant
Yadav and Reddy 5

and positive trend between wealth and debt behaviour (Herispon 2019), and it is
hard for somebody to stay away from debt, who has an obsession with his/her
current lifestyle, and debt or credit from financial institution acts as an alternative
income (Baker 2014). So, wealth dimension is very important from a consumer’s
perspective.
Quasi-experimental evidence from India’s social banking suggests that
increasing financial accessibility is an instrument in enhancing the capability of
individuals, and it, subsequently, enables them to get rid of poverty (Burgess and
Pande 2005). We need to consider the complexity of the Indian society and look
for financial inclusion at a disaggregated level as the outreach of the banking
sector varies across countries (Beck et al. 2007), and when it comes to monetary
transactions, the villagers prefer channels that they trust (Donner and Tellez 2008;
Gu et al. 2009; Luarn and Lin 2005).
According to Chakrabarty (2012), providers of financial services generally
target the economically active group, namely the middle-aged population.
Schemes for the old and young are scarce, as the banks do not expect any business
or profit from them. Age group is a crucial factor for the determination of financial
inclusion (Uddin et al. 2017).
While it is important to understand how financially literate people are, in
practice, it is difficult to explore how people process economic information and
make informed decisions about household finances (Lusardi and Mitchell 2011).
Financial literacy is defined as a combination of awareness, knowledge, skills,
attitude and behaviour necessary to make sound financial decisions and
ultimately achieving individual financial well-being (OECD 2011). Individuals
achieve financial literacy through the process of financial education (Kumar
and Saini 2020).
People are part of ‘communities without propinquity’, that is, ‘footloose’
relations, associations and institutions (Webber 1963). The basic idea is that the
expansion of social relations that transcends place causes a decline of local
solidarity, the ‘eclipse of community’ (Stein 1964). The ‘neighbourhood’ loses its
relevance as a meaningful ‘framework of integration’ (Van Doom 1955).
Accordingly, the district and the neighbourhood have an impact on the lives of
individuals. From this perspective, the neighbourhood exerts influence on the
degree of social exclusion and social cohesion (Bolt et al. 2016). Policymakers
need to look at how spatial interactions may help to provide convergence between
the financial inclusion levels of countries because the studies about this issue are
still insufficient (Bozkurt et al. 2018).
Demand for and usage of financial services or products require some kind of
capability to make a choice (Sen 1989). A gap exists in the usage of financial
services in terms of physical banking infrastructure in parts of rural and remote
areas. Poor connectivity of Internet plays a key role in creating the gap between
the last-mile customer and the financial service provider, and hence, digital divide
is established; the innovation and design of banking services or products do not
provide flexibility to the customer who is employed in an informal occupation;
local culture and norms create sociocultural barriers, which lead to the restricted
freedom for the women to use the banking services (Nadan et al. 2021), particularly
6 International Journal of Rural Management

in emerging market economies like India. Under this backdrop, we, in this article,
look at the role of socio-economic variables like education, wealth, demographic
factors like age groups, demand-side barriers like financial literacy and technology
adoption along with supply-side constraints as financial accessibility and spatial
spread of financial inclusion.1

Methodology

Theoretical Framework
According to the Centre for Financial Regulation and Inclusion, up-taking of
financial service does not necessarily translate into usage. According to Carrington
et al. (2010), any individual interacts with all the contextual factors when taking
financial service usage decision. For example, someone decides to transfer the
money using Internet banking but when he starts to use the service, Internet is
down. The provider of the financial service is important, but it is the decision-
making framework of consumers, which leads to usage of financial service, and
there are various factors associated with consumer decision, and one very crucial
factor is the space where he or she is living. This understanding from a consumer’s
point of view is very important to find out the drivers of usage (Bester et al. 2016).
And, thus, intent or decision to use financial service can be differentiated or
distinguished from an individual’s actual action. This article specifies two models.
In both the models, we have generated a dependent variable, which shows the
extent of financial service. In the first model, the dependent variable is ordinal or
hierarchical in nature, that is, bank use, with three indications, where 0 signifies
not having a bank account, entry of 1 indicates having a bank account and 2
indicates usage of financial services. The first model is employed to find out the
significant strength of the various factors influencing the responsiveness of the
agent towards her/his demand for financial services, which ultimately leads to
financial inclusion. In order to analyse both ends of demand separately, we have
incorporated a separate econometric technique—ordered probit model for model
I.
For a sustained use of financial services, a specific event or favourable
circumstance is required to trigger the event. Sometimes there is a compulsion or
auto-enrolment to take up the financial device due to some scheme, but there is a
breakdown or discontinuation in usage, leading to dormancy as a result. Such
accounts are owned but not used, which limit the benefits to consumers that can
be extracted from the financial services sector (FinMark Trust 2018). The
proportion of dormant account has increased at a faster rate in some of the
countries. According to Global Findex survey 2017, the percentage of adults
having a dormant account is 39% in India. And, thus, analysing the usage of
financial service becomes a sweet spot in financial inclusion, and finding this
sweet spot is very challenging. So the effect of making choice 1, that is, having a
bank account, will affect the agent to go for choice 2, that is, whether he or she
Yadav and Reddy 7

uses financial services frequently, and this is the motivation of our research. And
so model II only deals with a sample of individuals who own a bank account to
see if they are active users of financial services and the extent of their inclusive
behaviour.

Data and Variables

This article employs the Financial Inclusion Insight survey, conducted by Inter
media, a not-for-profit global consultancy, specialising in strategic research and
evaluation. The Data for our analysis are based on the fifth wave of the survey,
comprising 47,000 individuals, which was conducted during December 2017. The
samples of the FII surveys cover the adult populations of the countries, not the
entire populations. In most cases, this means the samples cover individuals aged
15 years and over.
The variables used in the models are specified as follows:
Bank use: It is a dummy dependent variable with three order-preserving
categories, that is, dummy 0, if an individual does not have a bank account;
dummy 1, if an individual has a bank account; dummy 2, if an individual uses
advanced banking services such as mobile payment, school fee, sent or received
money or grants from the government.
Wealth: This is generated by using principal component analysis predictions on
basic and necessity goods such as stove/gas burner, pressure cooker, refrigerator, etc.
Perception on wealth: It is a dummy variable with 1 if an individual has
enough money to buy basic amenities and can afford expensive items, else 0 if he/
she does not have enough money to buy basic amenities.
Education level: Level of education is divided into four categories—no
education, primary, secondary and higher education.
Behaviour: Financial behaviour is determined by examining spending
behaviour of the individual.
Attitude: Financial attitude is determined by looking at survey questions—
how involved or uninvolved are they in deciding? How is your mobile phone
used? How is your mobile account being used? How is your bank account
maintained?
Knowledge: Financial knowledge is determined on the basis of their response
on basic mathematical questions like addition and subtraction.
Mobile ownership: It is a dummy variable with four different types of mobile
phone users, that is, basic feature, smartphone and no phone.
Age group: Adults (15+) are divided into different cohorts—16–25, 26–35,
36–45, 46–55 and 55+—so that each cohort’s economic motive can be analysed.
Financial accessibility: It is a dummy variable with accessibility to any
financial service available within 10 km of an individual’s residence, otherwise 0.
Spatial inclusion: It is a probability that any financial service is accessible
within 0.5 km of an individual’s residence clustered by district.
8 International Journal of Rural Management

Spatial exclusion: It is a probability that any financial service is accessible at

a distance more than 5 km of an individual’s residence clustered by district.
Spatial density: An individual’s residence is categorised into seven dummies,
that is, from village—class three, to town—class one.
Model I
An ordered probit model is adopted to estimate relationships between an ordinal
dependent variable and a set of independent variables. An ordinal variable is a
variable that is categorical and ordered, which entails the rank ordering of cases
into three or more categories, based on the degree to which a given phenomenon
is present (Mahoney 1999) (for instance, no bank account, having a bank account,
using banking financial services). An agent’s demand for financial inclusion
requires putting the financial literacy attributes with socio-demographic characters
and other proximate variables in increasing financial inclusion opportunities and
accessibility to financial services or products. The structural model of a usage of
banking financial services, that is:

y∗i = xi b + i , where i ∼ N (0, s 2). xs are observed for all cases.

where,
yi* = latent variable;
β = column vector of structural coefficients; and
xi = row vector with intercept and the ith observation of x.
We assume that a latent variable ‘Bank use’ is a continuous variable, which is
mapped to an observed value y. The variable y is thought of as providing
incomplete information about an underlying y* according to the measurement
equation, that is:

Yi = m if tm−1 ≤ y∗i < tm for m = 1 to j

The observed y is related to y* according to the measurement model, that is:

Yi = {0 = no bank use, if t0 = −• ≤ yi < t1

1 = bank use, if t1 ≤ y∗i < t2
2 = advanced bank use if t2 ≤ yi < t3 = •}

where
Yi = observed variable;
yi* = unobserved/latent variable; and
τ = threshold/cut points.
Model II
A truncated probit regression model is specified. Truncation limits the data more
severely by excluding observations based on characteristics of the dependent
Yadav and Reddy 9

variable. In our case, we sample only individuals who have bank account and who
also use banking financial services because individuals who do not have a bank
account are less likely to use banking services. The truncated regression model is
used to analyse these types of data.

y∗i = xi b + i , where i ∼ N (0, s 2). xs are observed for all cases.

where
yi* = latent variable;
β = column vector shows structural coefficients; and
xi = row vector with intercept and the ith observation of X.
The observed y is related to y* according to the measurement model, that is:

Yi = { yi∗ if y∗i > t ,

t y if y∗i ≤ t}

Combining the aforementioned two equations:

Yi = { yi∗ = xi b + i if yi∗ > t

tv , if yi∗ ≤ t}
where
Yi = censored variable;
yi* = latent variable; and
τy = value assigned to y if yi* is censored.

Results and Discussion

Table 3 presents the regression results from probit models. In the output of model
1, at iteration 0, a null model is fitted, that is, the intercept-only model. It then
moves on to fit the full model and stops the iteration process once the difference
in log likelihood between successive iterations become sufficiently small. The
likelihood ratio indicates that our model as a whole is statistically significant, as
compared to the null model with no predictors. The regression results show that
individual characteristics play a significant role in measuring financial inclusion.
Wealth in terms of living standards, education, food and clothing can be treated as
proxy to see the ability of an individual to use banking financial services. In our
case, an individual’s wealth shows significant relation as more the wealth of an
individual, the more is the usage of services provided by banks. But after
controlling the wealth effect, the role of an individual’s financial literacy is a
major covariate for the usage of formal banking services.
10 International Journal of Rural Management

Table 3. Regression Results.

Model I (ordered probit, de- Model II (probit truncated, de-
Indicator pendent variable is bank use) pendent variable is bank use)
Number of obs. 46813 41673
LR χ2 (40) 4180.7 4020
Prob. > χ2 0.000 0.000
Pseudo R2 0.0613 0.113
Log likelihood –31985.1 –15863
Y = bank use Coef. Coef.
Wealth 0.021 (5.48*) 0.010 (1.94)
Perception of wealth (ref.: hh is not having enough money)
Having enough money 0.129 (7.13*) 0.002 (0.06)
to buy basic goods
Can buy basic goods 0.152 (6.68)* –0.069 (–2.16*)
DK (do not know) 0.164 (2.37*) –0.192 (–1.84)
Education level (ref.: no education)
Primary 0.005 (0.26) –0.042 (–1.61)
Secondary 0.091 (5.5*) 0.103 (4.39*)
Senior secondary 0.143 (6.3*) 0.209 (6.72*)
Graduate 0.18 (6.77*) 0.306 (8.7*)
Financial literacy
Behaviour 0.014 (0.82) –0.001 (–0.03)
Attitude 0.014 (0.26) 0.017 (0.24)
Knowledge –0.067 (–1.25) –0.036 (–0.5)
No asset 0.006 (0.27) –0.016 (–0.51)
mobile ownership (ref.: none)
Basic 0.045 (3.13*) 0.208 (10.16) *
Feature 0.024 (1.18) 0.145 (5.01*)
Smartphone 0.196 (9.06*) 0.414 (14.35*)
Age group (ref.: 16–25)
26–35 0.061 (3.5*) 0.101 (4.02*)
36–45 0.099 (5.27*) 0.200 (7.52*)
46–55 0.108 (5.16*) 0.265 (8.99*)
55+ 0.173 (8.36*) 0.422 (14.51*)
Gender (ref.: female)
Male 0.035 (2.76*) –0.054 (–3.07*)
Financial accessibility –0.032 (–2.31*) –0.032 (–1.71)
Occupation: unem- 0.118 (3.51*) 0.231 (5.18*)
ployed
(Table 3 Continued)
Yadav and Reddy 11

(Table 3 Continued)
Model I (ordered probit, de- Model II (probit truncated, de-
Indicator pendent variable is bank use) pendent variable is bank use)
Saving type
Formal savings 0.51 (38.27*) 0.386 (21.35*)
Informal savings 0.787 (40.88*) 0.848 (36.71*)
Borrower 0.053 (2.81*) 0.110 (4.37*)
Spatial inclusion –0.046 (–3.72*) –0.018 (–1.04)
Spatial exclusion –0.045 (–5.58*) 0.016 (1.37)
Zone (ref.: North)
South 0.268 (14.11*) 0.748 (27.82*)
East 0.166 (9.76*) 0.368 (14.52*)
West 0.14 (7.82*) 0.391 (14.6*)
B_dist 0.22 (1.19) –0.066 (–0.26)
A_dist –0.093 (–0.17) –1.718 (–2.06*)
K_dist 2.668 (5.02*) 5.793 (7.98*)
Spatial density (ref.: village class 3)
Village class 2 0.1 (5.08*) 0.057 (1.99*)
Village class 1 0.14 (6.89*) 0.135 (4.64*)
Town class 5 0.035 (1.34) –0.081 (–2.16*)
Town class 4 0.196 (5.63*) 0.132 (2.79*)
Town class 3 0.156 (5.98*) 0.164 (4.55*)
Town class 2 0.059 (1.83) 0.099 (2.16*)
Town class 1 0.108 (3.51*) 0.032 (0.78)
/cut1 –0.496
/cut2 1.988
_constant 2.21734(–35.5*)
Source: The authors.
Note: *Denotes that the p-value of the variable is significant at 95% confidence interval.
Values in parenthesis represent Z-statistic value.

Table 4. Variance–Covariance Matrix (VCE) Corresponding to the Parameter Estimates.

Pr(bank use = 0), predict()
Spatial density Margin Z-statistic
Village class 3 0.128 37.73*
Village class 2 0.110 48.15*
Village class 1 0.103 48.03*
Town class 5 0.122 32.43*
Town class 4 0.094 19.5*
Town class 3 0.100 29.84*
Town class 2 0.117 23.08*
Town class 1 0.108 24.07*
Source: The authors.
Note: *Denotes that the p-value of the variable is significant at 95% confidence interval.
12 International Journal of Rural Management

Model 1
Education of an individual has a significant role in financial inclusion. As
scholastic attainment increases from primary education to graduate, there is an
18% chance of increased financial inclusion in comparison to no education.
Individuals belonging to the old-age cohort show a high significant impact and a
17% chance of being involved in the financial inclusion process. Male individuals
are significant with 3.5% of a more likely chance of using financial services with
a positive coefficient with as compared to females. Structural variable like
unemployment is significant and around 12% of the unemployed are more likely
to use financial services after having a bank account. Savings in formal and
informal types of institutions lead to an individual’s financial inclusion, and credit
is indispensable to those who find a negative mismatch between their income and
expenditure, protecting the households from unexpected income shocks. Analysis
reveals that individuals who have informal savings are 79% more likely to use
banking services, and individuals having formal savings enhance their involvement
in using financial activities by 51%, while individuals who borrow money also
show significant involvement in using banks’ financial services. Region has a
very important role to play. All the regions (South, East and West) with respect to
North has a very significant role. With respect to the north region, the southern
region is financially included with 27% more chances of using financial services.

Model 2
A measure of financial inclusion based on proportion of ‘banked’ adults, is a very
important aspect of financial inclusion. Education, here too, plays a significant
role, and higher education has a role in eradicating incidences of under-banking
among people, as with higher education, people are 31% more likely to use their
account actively in comparison to no education. People with smartphones are
41.4% more likely to use the financial services as compared to people with no
mobile phones. People belonging to the higher age group (55+) are significant
with 42.2% more likely to use banking services in comparison to the younger age
group (16–25) and the reason for this can be saving at older age either to cater to
health issues or for pension benefits. A total of 5.4% of male individuals are not
likely to significantly use financial service as compared to females as a reference
category. Saving, whether formal or Informal, is the reason for people to be more
active users of financial services, with 39% and 85%, respectively. With reference
to the northern region, the southern region has more active users of financial
services, with 75% of individuals showing active behaviour towards using
banking services—one reason can be financial literacy due to technological
advancements, improvements in infrastructure and higher levels of education,
with major changes occurring in the way of banking facilities being made
available to users.
Demand for and usage of banking financial services requires some kind of
capability to go for choice modelling. In this context, a rational agent’s
Yadav and Reddy 13

micro-motives need to be looked at in a discreet manner. So, demand-side barriers

such as an individual’s attitude, behaviour and knowledge as a separate component
of financial literacy is not significant in both our models to explain the financial
inclusion process, but the knowledge variable shows a negative coefficient,
implying the failure of institutions by not pushing agents to use banking financial
services. Agent’s attitude and knowledge are significant in our model with
negative and positive coefficients, respectively, when we cluster both the variables
at the district level.
Figure 1 shows state-wise score of financial literacy, which is based on attitude,
behaviour and knowledge. The attitude score is based on the mean calculated
from a question on how likely an individual would involve himself in maintaining
a bank account, mobile phone or mobile money account. It ranges between 0 and
3. The average of behaviour score is computed as a count of the number of
‘financially savvy’ behaviours relating to budgeting, active saving, avoiding
borrowing to make ends meet, choosing products, keeping watch on financial
affairs, striving to achieve goals, making considered purchases or paying bills on
time. It ranges between 0 and 11. The mean score of knowledge is computed as
the number of correct responses of the seven questions asked in the FII
questionnaire. It ranges between 0 and 8.
Figure 2 reveals that Kerala has the highest number of smartphones, with
women in rural areas, which implies that Kerala has an economic motive for
inclusive growth. But access to mobile phones does not show any type of inclusive
process till the causal effect of mobile telephony on economic outcomes is easily
understood. In Table 3, to understand the role of diffusion of information and
communication technologies in driving economic growth, we employ mobile
phones as an explanatory variable with basic feature and smartphone users relative
to users who do not use mobile phones. Basic and smartphone users have a

Figure 1. Financial Literacy = Average of Attitude + Average of Behaviour + Average

of Knowledge (Y-axis represents mean scores of knowledge, behaviour and attitude
towards financial services and X-axis represents States of India).
Source: The authors.
14 International Journal of Rural Management

Figure 2. Gender-based Exclusion on Use of Mobile Phones (Y-axis represents percentage

of women using mobile phones and X-axis represents states [rural/urban] of India).
Source: The authors.

significant impact on participating in financial inclusion process, that is, nearly

4% and 19%, respectively, in Model 1. However, the feature mobile phone–type
holders do not show a significant usage of financial services.

A Disaggregated Look
Spatial inclusion is a probability of financial services accessibility within 0.5 km
of an individual’s residence along with agents’ demand for financial services that
is clustered at district level. Spatial exclusion is a probability of lack of financial
services accessibility or accessibility of financial services, which is more than 5
kms from an individual’s residence along with agents not demanding financial
services clustered at the district level. Both spatial inclusion and spatial exclusion
are supply-side factors. The coefficients of these two are negative and statistically
significant. This means that supply-side constraint with lack of infrastructure is a
factor associated with not using banking financial services. Spatial exclusion is a
space where accessibility for usage of banking financial services is not available,
whereas spatial inclusion is where institutional facilities are easily accessible. By
incorporating spatial density variable with banking infrastructure space, we try to
capture the behaviour of socially excluded population in the quest for usage of
banking financial services. This is presented in Figure 3. Spatial density is a
variable with dummies of different village class and tier class to visualise the
movement of individuals from village class to towns (Tier 1) for using the banking
services. Table 4 represents the Co-variance between bank use and spatial density.
And all village class and tier class is highly significant. With the movement in
spatial density, more of the socially excluded population would want to use
banking services, but less accessibility to banking financial services in time and
space are a hindrance in financial inclusion. Movement of individuals towards tier
class 1 leads to more inclusion.
Yadav and Reddy 15

Figure 3. Interaction of Probabilities of Spatial Exclusion/Inclusion (Y-axis) with Dummy

Variable Spatial Density (X-axis).
Source: The authors.

When we look at the availability of financial services within 0.5 km at the

district level, we observe that space has a lot to do with making the financial
resource available to people. It is observed from Figure 4 that the southern zone is
better at financial inclusion, which is consistent with findings from our regression
analysis. It is evident in Figure 5 that financial exclusion prevails more in central
parts of India, which is also justified from Figure 3, that is, probability of exclusion
is more in villages and states in central parts of India. Policymakers should work
towards increasing banking infrastructure, technology adoption and financial
literacy. Micro-motives of agents for availing formal banking services can lead to
macroeconomic goals (financial inclusion).

Concluding Remarks
This article confirms that the usage of formal finance does not appear to have
adequately embodied in vast segments of the society due to the lack of financial
literacy, micro-incentives and supply-side constraints to economic agents. Spatial
dimensions of financial inclusion/exclusion process conclude that financial
inclusion is subject to considerable territorial inequalities at the district level,
which implies that financial inclusion is not distributed homogeneously throughout
the country. It is observed that both spatial inclusion and spatial exclusion are
huge and impact an agent’s decision to use banking services. On the other side,
demand-side constraints like person’s attitude, behaviour and knowledge for
dealing with their funds are not noteworthy enough to clarify the variety in
person’s monetary consideration measure and yet the attitude coefficient sign is
16 International Journal of Rural Management

Figure 4. District-level Spatial Financial Inclusion.

Source: The authors.

Figure 5. District-level Spatial Financial Exclusion.

Source: The authors.
Yadav and Reddy 17

positive. However, knowledge variable shows negative coefficient, which infers

the disappointment of establishments in boosting the demand for utilising the
banking facilities or services. Technology innovation in terms of access to mobile
phones and mobile money banking is very helpful in motivating individual’s
demand for use of banking services, while the dispersion of innovation is not
spread to the weak area of the general public, and therefore, they are financially
excluded. Bank account ownership is necessary but not sufficient for usage for
banking services, and hence, financial inclusion is not fully achievable. The
financial inclusion is additionally determined by various components of human
development like the level of education and endowment of wealth. Individuals
with high education levels and wealth are ready to contribute towards financial
institutions by maintaining their savings and borrowings from formal institutions,
leading an individual into the mould of financial inclusion. From our viewpoint,
it appears that financial exclusion is a confluence of multiple barriers: lack of
access, lack of physical and social infrastructure, lack of support and lack of
technology adoption, among many others. Therefore, legislative attention as an
institution should work effectively by incentivising the economic agent’s micro-
motives for use of formal financial services to achieve the macroeconomic goals
like financial inclusion.

Declaration of Conflicting Interests

The authors declared no potential conflicts of interest with respect to the research,
authorship and/or publication of this article.

Funding
The authors received no financial support for the research, authorship and/or publication of
this article.

Note
1. We consider administrative district as granularity for spatial spread.

ORCID iD
Rajat Singh Yadav https://orcid.org/0000-0002-4993-3181

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