Monday, 19 September 2016

About Financial Inclusion- Detailed Study

Financial Inclusion means creating for everyone access to appropriate financial services for the Poor it means Creating access to affordable banking and other financial services. FI is frontal attack on poverty.

We know that People also ask about financial exclusion:-

  1. What do you mean by financial exclusion?
  2. What is inclusive finance?
  3. What is the meaning of inclusive banking?

Key Features and Important Highlights About Financial Inclusion :
(1). Financial inclusion or inclusive financing is the provision of financial services to low income and disadvantaged sections of the society at affordable costs. Financial Inclusion Committee is headed by Deepak Mohanty.

(2). Globally about 2 billion working age adults have no access to any type of formal financial services delivered by the financial institutions.

(3). The goals of Financial inclusion as defined by the United nations is as follows:-

  • To provide sound and safe institutions governed by clear regulation and industry performance standard
  • To provide financial services like savings, deposit, payments, transfer, credit and insurance services at a reasonable cost to all
  • To facilitate financial and institutional sustainability
  • To ensure continuity and certainty of investments

(4). Alliance for Financial Inclusion (AFI) – world‟s largest and most prominent network of financial inclusion

  • AFI was founded in 2008
  • It is a Bill & Melinda Gates foundation funded project supported by AusAid to speed up the development of smart financial inclusion policy in developing countries.
  • Its main aim is to adopt and expand effective inclusive financial policies in developing nations to uplift 2.5 billion impoverished and unbanked citizens.
  • AFI has over 105 institutions in 88 countries.
  • It hosts annual Global Policy Forum(GPF) as an event for membership.
  • In 2011 GPF, AFI adopted Maya Declaration – a set of principles and goals for financial inclusion policy development.
  • AFI uses Polylateral Development model – to contrast and compare successful financial inclusion

(5). In partnership with NABARD the United Nations aims to increase financial inclusion of the poor by developing appropriate financial products.

(6). UN‟s financial inclusion is financed by United Nations Development Program.

(7). In India the term financial inclusion was 1st used in the Annual Policy Statement presented by Y. Venugopal Reddy former Governor of RBI.

(8). Some of the services provided under the term Financial Inclusion in India-
  • Mangalam – 1st village in India where all households were provided banking facilities.
  • Norms of banks were relaxed for people intending to open accounts with annual deposits less than Rs. 50,000.
  • General Credit Cards(GCC) were issued to poor and the disadvantaged to help them with easy access to credit.
  • RBI asked the commercial banks in different regions to start 100% financial inclusion campaign.
  • Pondicherry, Himachal Pradesh and Kerala announced 100% financial inclusion.
  • Pradhan Mantri Jan Dhan Yojna (प्रधानमंत्री जन धन योजना) – a national financial inclusion mission which aims to provide bank accounts to low income people.

(9). Deposit Penetration – key driver of financial inclusion, the number of savings account - 624 million, is 4 times the number of loan accounts -160 million.

(10). The top three states/ union territories which tops in financial inclusion are as follows
  • Pondicherry
  • Chandigarh
  • Kerala

(11). Top 3 districts are as follows-
  • Pathanamthitta – Kerala
  • Karaikal – Pondicherry
  • Thiruvananthapuram – Kerala

Here we are giving Detailed Study About Financial Inclusion. Below These notes are prepared by Dr. J Sadakkadulla, Regional Director-RBI, Chandigarh

Financial Inclusion not a new concept- earlier  initiatives 

  • Institutionalisation of rural credit-ACD
  • Democratic Socialism Model for Economic Development. 
  • Establishment of SBI
  • Establishment of ARC- Renamed as ARDC
  • Social control over banks
  • Introduction of Lead Bank Scheme
  • Growth with equity - objective of planning
  • Establishment of RRBs
  • Establishment of NABARD
  • Initiatives on Micro Finance, SHGs

Why inclusive growth ?
Growth in agriculture is necessary :
-To keep manufacturing prices under check

-Provide food security 
-Keep inflation under control.

  • Price stability is not merely important as an anti poverty measure but also as an instrument to ensure stable and sustained growth. 
  • In India, growth process is knowledge based and service led, hence substantial requirement of skilled labor.
Financial Inclusion & Development indicator
Recent data shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and high inequality.

Who are financially excluded?
  • Small and marginal farmers
  • Landless labourers, oral lessees
  • Self employed and unorganized sectors enterprises
  • Urban slum dwellers, migrants, ethnic minorities and socially excluded groups
  • Senior citizens , women , etc. 

Poverty anywhere is a threat to prosperity everywhere.

Reasons for Financial Exclusion
  • Physical access difficult: Remote hilly & sparsely populated areas with inadequate infrastructure
  • Demand Side: Lack of awareness, low income, social exclusion, illiteracy
  • Supply side: distance from branch, branch timings, cumbersome documents and procedures,unsuitable products, language, staff attitude, etc.
  • EFFECT: Higher transaction costs and procedural hassles
The Dimensions of the Challenge
Area - 3.3 million square kilometers 
Population - 1 billion +
GDP ~ US$3.9 trillion 
Annual Growth rate 8.5 to 9% last 5           Years
Total number of banks in operation in country - 300+
Total number of bank branches in country - 75000 + 
Unbanked Population: 400 Million !

Financial Inclusion for Inclusive Growth 
  • The formal financial sector -mainly the banking system serves most of the population, in developing countries.
  • Most of the population in developed countries (99 per cent in Denmark, 96 per cent in Germany, 91 per cent in the USA and 96 per cent in France) have bank accounts.
  • In India Composite Index of Financial Inclusion (per cent of population with access to financial services) is only 48%.

India’a annual average growth rate

-3.5 per cent during 1950 to 1980
-6.0 per cent in the 1980s and 1990s
-8.8 per cent in 2003-04 to 2006-07
-9.4 and 9.6 per cent in 2005-06 and 2006-07 respectively
India GDP Annual Growth Rate  1951-2016 | Data | Chart | Calendar
India's gross domestic product advanced 7.1 percent year-on-year in the second quarter of 2016, slowing from a 7.9 percent expansion in the previous period and missing market expectations of 7.6 percent growth. It was the lowest reading since the fourth quarter of 2014, as private consumption expanded at a slower pace while fixed investment dropped further. GDP Annual Growth Rate in India averaged 6.08 percent from 1951 until 2016, reaching an all time high of 11.40 percent in the first quarter of 2010 and a record low of -5.20 percent in the fourth quarter of 1979. GDP Annual Growth Rate in India is reported by the Ministry of Statistics and Programme Implementation (MOSPI).

  • Despite continuous growth, growth is not sufficiently inclusive specially after mid 1990s. The approach paper to Eleventh Plan indicates poor population to be 300 million in 2004-2005.
Inclusive growth in India
Financial sector in India is dominated by the banking system. 
Scheduled commercial banks (SCBs) account for three-fourths of the total assets. 
Public sector banks (PSBs) account for 70 per cent of the total assets of SCBs 
Developments relating to public policy objectives underlying banking policy took place in two distinct phases :

The 1st phase viz. the two decades since 1970 –
  • the period of State control
  • Average population per branch decreased from 64,000 to 16,000
  • Credit cum subsidy programmes sponsored by the government taken up for financial inclusion for the poor.
2nd phase 
  • SHG Bank linkage programme by NABARD
  • Creation of RIDF(Rural Infrastructure Development Fund)
Recent Strategies
Financial inclusion is intended to connect people to banks with consequential benefits. 
Steps taken up for financial inclusion :
  • Reserve Bank advised banks to make available a basic banking ‘no-frills’ account with low or ‘nil’ minimum balance as well as charges, with a view to expanding the outreach of such accounts 
  • The know your customer (KYC) procedure simplified.
  • Revolving credit - besides the Kisan Credit Cards (KCCs), banks have been asked to consider introduction of a General purpose Credit Card (GCC) facility up to Rs.25000 at their rural and semi urban braches.
  • lending by MFIs that are societies, trusts, cooperatives or "not for profit" companies or non-banking financial companies registered with the RBI. 
  • Measures have been taken to step up credit to the micro, small and medium enterprises (MSME) sector 
  • In the Union Budget 2007-08, the Government announced the creation of two funds - Financial Inclusion Fund and Financial Inclusion Technology Development Fund - for meeting the costs of development, and promotional and technology interventions 
Approach to financial inclusion
  • Aim at connecting people with banking system 
  • Aim at giving people access to  payment & credit system
  • Use of BC/BF multiple channels such as NGOs, PO, farmers clubs, etc.
  • Retired bank employees, ex-servicemen, retired Government employees and Section 25 Companies  permitted as BF/BCs 
  • Sub agents allowed with distance criteria
  • Use of ICT- Affordable infrastructure and low operational costs 
RBI welcomes suggestions for resolution of any issue

RBI’s recent initiatives on Financial Literacy
  • Comics brought out on role of RBI & banking system in general in various regional languages for wider circulation and coverage.
  • Launch of RBI’s multilingual website in 13 Indian languages on all matters concerning banking.
  • Conduct of an Essay competition for 3 different levels VI to XII class school children in Hindi / Punjabi and English in this region in Sep-Oct last year with and overwhelming response of 2911 entries.
  • For students pursuing degree courses, RBI has announced the “Young Scholars Award Scheme” this January  and conducted the objective type exam last month and announced 150 awards for the year all over the country who will have a stint with RBI, a sort of summer internship with a stipend of Rs.7500/- pm.
RBI’s recent initiatives on Financial inclusion
  • A pilot project has been set up on credit counseling and financial education. A model paper is in the public domain for comments.
  • H.P. has become the first state in the country to achieve 100% financial inclusion and very recently the state of Punjab has also achieved 100% financial inclusion in the rural areas and Haryana is marching ahead in this regard.
  • The KYC procedures for opening accounts were simplified for those persons with balances not exceeding Rs.50,000/- and credits in the accounts not exceeding Rs.1lakh in a year.
  • General credit card facility upto Rs.25,000/-in rural and semi urban branches of banks is introduced.
  • In Jan 2006, banks were permitted to utilize the services of NGOs / Self Help groups to provide micro finance through the use of business facilitator and business correspondent. India being agrarian in economy, RBI continues to play its vital role in rural credit dispensation.
Different Technology Models

  • Simputers


  • Composite Hand Held Devices

Programmed Mobiles

Operating Model Customer in Indian Banking Industry

  • Enroll customer during village camps
  • Additional enrollment at FINO points at mandal level
  • Issuance of biometric multi-application smart card to customer
  • Transactions posted to customer card through terminals on designated days
  • Customer withdraws amount on any convenient day.
  • Transaction captured on the card and printout of transaction given

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