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A STUDY ON RELEVENCE & IMPACT ON FINANCIALINCLUSIONS IN INDIA

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 4

A STUDY ON RELEVENCE & IMPACT ON FINANCIALINCLUSIONS IN

INDIA
#1
Ms. Mini Mehta, #2Ms. Suman Vij
#1
Senior Lecturer, Uttaranchal University, Dehradun, UK ,India.
#2
Assistant Professor, Uttaranchal University, Dehradun, UK, India.
#1
[email protected] , #[email protected]

ABSTRACT

Financial Inclusion may be defined as a tool of the secondary data reveals that financial
that aims at engaging all the segments of the inclusions have played a major role in
society in an equitable manner in order to development of Indian Economy which is
achieve inclusive growth, which can only be reflected in percentage achievement of
achieved by establishing a systematic different sectors.
mechanism with all the resources aligned in Key-words: Financial Inclusion, Financial
an optimal manner, from top to bottom. It services, Inclusive Growth, Reserve Bank,
intends to provide financial help to the GDP.
economically weaker section of the society,
1. INTRODUCTION
in order to enhance their standard of living.
“The test of our progress is not whether we
Financial inclusion is a globally acclaimed
add more to the abundance of those who
conception which focuses to inculcate and
have much; it is whether we provide enough
promote the banking habits among the rural
for those who have too little.”
people because; India is a country with
- Franklin D. Roosevelt
significantly large rural population. The
Financial inclusion is a contemporary notion
objective of this paper is to examine the
which aids to attain the sustainable
current scenario of financial inclusion in
development, by means of available
India and highlight major challenges and
financial services to the unreached
bring about suggestions to improve its
population with the support of financial
growth in the days to come along with
institutions. In other words, financial
studying its impact of GDP in India. The
inclusion involves convenient access to
major tool for the data collection was
formal financial systems and their utilization
secondary data. The result from the analysis
by all the members of the corresponding

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 3

economy. The committee formed by the governor of RBI Dr. K. C. Chakrabarty has
Indian government on financial inclusion, clarified that neither the cost involved in
explains financial inclusion as the process of financial inclusion is unbearable by the
ensuring timely access to financial services banks nor the banks are unwilling to do
and adequate credit where needed by financial inclusion. He clearly expressed that
impecunious and vulnerable groups such as both of the above mentioned facts as a myth.
the weaker sections and low income groups Financial Inclusion is considered to be the
at an affordable cost (Rangarajan primary objective of several developing
Committee, 2008). This process of financial nations since many research findings
inclusion involves ensuring bank accounts to establish and explicitly expose a direct
each family and subscribing their inclusion relationship between the financial exclusion
in the banking system of the country. Stretch and the poverty that prevails in the
and contact to financial services encourages developing nations. According to World
social inclusion, assures financial Bank report “Financial inclusion, or broad
empowerment and constructs self- access to financial services, is defined as an
confidence. Former Deputy Governor of absence of price or non price barriers in the
Reserve Bank of India, Dr. K. C. use of financial services”. The degree of
Chakrabarty once stated that financial financial inclusion varies from nation to
inclusion is no longer a policy choice but it nation depending on the stage of
is a policy compulsion today and banking is development prevailing in the country. A
a key driver for inclusive growth. There are fact that is really worth pondering upon is
several socio-cultural and economic that India is globally ranked second in terms
concerns that obstruct the tremendous of financially excluded households just after
growth and development of financial china. The fact itself reflects the existing
inclusion. There are many arduous situation with respect to financial inclusion
challenges in attaining complete financial in India. Usually, the disadvantaged and the
inclusion such as the lack of awareness, high vulnerable classes of the society are
rate of illiteracy, poor penetration of banks, completely overlooked by the financial
reluctance of banks to do financial inclusion institutions in the blind race of increasing
and high costs involved in financial the bottom line. It is also sometimes said
inclusion etc. Although, former deputy that the complexities involved in providing

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 3

finance to the weaker section, act as a village in country where banking facility
supporting reason for financial exclusion. was made available for each and every
Uninhibited reach to public goods and family was Mangalam. Further, the KYC
services is the sine qua non of a well (Know your Customer) norms were also
organized and proficient society. Thus relaxed for individuals anticipating to open
Financial Inclusion can be defined as the these no frills accounts with an annual
process of confirming access to various deposit of less than Rs. 50,000. General
financial services and timely and adequate Credit Cards (GCC) were issued to the
credit where required by the financially underprivileged and the poor with a view to
disadvantaged segments such as support them in accessing easy credits. It
economically weaker sections at a was the January of 2006, when the Reserve
reasonable cost. Bank permitted commercial banks to make
use of the services of non-governmental
2. FINANCIAL INCLUSION IN INDIA
organizations (NGOs/SHGs), micro-
financing institutions and other civil society
Keeping the growing importance of
organizations such as intermediaries for
financial inclusion in view, the Reserve
making the financial and banking services
Bank of India formed a commission (Khan
available to all. The commercial banks were
Commission) in the year 2004 to look into
free to use these intermediaries as either
Financial Inclusion. The recommendations
business facilitators (BF) or as business
of the erudite commission were later
correspondents (BC). Reserve Bank
integrated into the Mid-term review of the
enquired the commercial banks in different
policy (2005-06). In the report, Reserve
expanses to initiate a campaign to ensure
Bank of India encouraged the banks to
100% Financial Inclusion on a pilot basis.
achieve greater Financial Inclusion to make
As a result of this campaign, several states
a basic "no-frills" banking account available
and Union Territories like Himachal
to the disadvantaged class of the society.
Pradesh, Pondicherry, and Kerala announced
The Financial Inclusion was initially
100% financial inclusion in all of their
introduced in India in the year 2005, when it
districts. Reserve Bank of India’s aims to
was presented, by means of a pilot project in
open nearly 600 million new customers'
Pondicherry, by the then chairman of Indian
accounts and service them through a wide
Bank, Dr. K. C. Chakrabarty. The first

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Volume 4, Issue 3

spectrum of channels by leveraging on the delivery of banking services at an affordable

advanced information technology, as a part cost ('no frills' accounts,) to the vast sections
of its “vision 2020”. However, the poor of disadvantaged and low income group.
literacy rate along with the extremely low Unrestrained access to public goods and
income savings and the lack of bank services is the sine qua non of an open and
branches in rural areas continue proving to efficient society. As banking services are in
be a stumbling block in the glitch-free the nature of public good, it is essential that
implementation of financial inclusion in availability of banking and payment services
many states. Indian economy is primarily an to the entire population without
agriculture based economy due to which it discrimination is the prime objective of the
lacks in schemes and plans that lend to public policy. " In the words of Mr. V. Leela
agriculture. It is thus equally important to dhar, Reserve bank of India bulletin, Jan
focus on micro insurance besides 2006, financial inclusion is delivery of
microfinance. banking services at an affordable cost to the
vast sections of advantaged and low income
3. REVIEW OF LITERATURE
groups. Unrestrained access to public goods
and services is the sine qua non of an open
Mandira Sarma and Jesim Paise in their
and efficient society. As banking services
research paper “Financial Inclusion and
are in the nature of public good, it is
Development: A Cross Country Analysis”
essential that availability of banking and
(2008) recommend that the matter of
payment services to the entire population
financial inclusion is a priority related to the
without discrimination is the prime objective
development policy in several countries.
of the public policy. The findings of the
Among various socio-economic factors,
research conducted by Oya Pinar Ardic et al
income is related positively with the degree
(2011) in their paper “Access to financial
of financial inclusion. Further physical and
services and the financial inclusion agenda
electronic connectivity and information
around the world: A cross-country analysis
availability, indicated by road network,
with a new data set” that counts the number
telephone and internet usage, also play
of unbanked adults across the globe, besides
positive role in enhancing financial
analyzing the state of access to deposit and
inclusion. According to Indian institute of
loan services, and also discusses the state of
banking and finance, "financial inclusion is

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 3

financial inclusion mandates across the MDGs. An empirical study conducted by

globe clearly indicate that there is much to Nalini G.S and Mariappan. K (2012)
be done in the domain of financial inclusion disclosed that the banks should motivate
yet. Paper concludes interestingly that fifty- people to access banking services by ways
six percent of adults in the world do not of No Frills Account, financial inclusion
have access to formal financial services. campaigns and business correspondents. The
Dr.Maniklal Adhikay and Supravat Bagli in study also suggested that the government
their article “Impact of SHGs on Financial should encourage the banks to take up
Inclusion A Case Study in the District of financial inclusion with the help of financial
Bankura” implied the multiple regression assistance and awareness programme etc.
model for approximation of the financial Dev Mahender. S (2006) stated that banks
exclusion along with a binary logic model should look at financial inclusion both as a
for estimating the access of people to the business opportunity and as a social
system of formal credit. They interestingly responsibility. The role of SHG’s and MFI’s
concluded in the paper that in order to boost is also important to improve financial
the pace of the financial inclusion through inclusion. Joseph Massey (2010) in his
restricting the domination of village money periodical study stated that in a developing
lenders it is commendable to implement the economy, the role of formal financial
SHG-Bank/ Co-operative Linkage more institutions is essentially inevitable and
intensively in the rural areas covered under crucial in the advancement of financial
study.Michael Chibba (2009) analyzes inclusion. Various formal financial
Financial Inclusion as a strategy for institutions have a very crucial and a wider
tremendous inclusive development and role to play in nurturing the concept of
Poverty Reduction. He states financial financial inclusion. The efforts of the
inclusion clearly displays itself as part of the government to help financial inclusion grow
embryonic FI-PR-MDG interconnection. can be further supported by the pro-active
However, in the situation of present day attitude of the financial institutions. Efforts
financial crises, the necessity to promote to include the impecunious class in the
Financial Inclusion is perhaps more mainstream of financial inclusion are clearly
important as a harmonizing and incremental visible on national and global level.
approach to work in order to meet the

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Volume 4, Issue 3

4. OBJECTIVES OF STUDY 6. PROGRESS OF FINANCIAL

INCLUSION IN INDIA
1. To explore the need and importance of
financial inclusion for socio-economic India’s economy expanded at its fastest pace
progress of society. in more than two years in the April-June
quarter growing by 5.7% compared with
2. To analyze the present standing of
4.7% for the same period last fiscal. GDP
financial inclusion in Indian economy.
growth for Q1 FY15 came in higher than
general expectation, including CARE’s
3. To study the access of GDP in various
estimate of 5.2%. The GDP growth of 5.7%
sectors.
is mainly driven by healthy growth in
4. To analyze the initiative of RBI in ‘finance, insurance, real estate & business
financial Inclusion. services’, ‘community, social and personal
services’ and electricity, gas & water supply.
5. RESEARCH METHODOLOGY
Highlights: India’s GDP growth for
Research methodology employed is
FY2014Q1
descriptive to some extent, exploratory to a
certain degree and partially causal.
Secondary sources of data are used. The data
and all relevant information for this study
has been collected with the valuable
assistance of various Books, Magazines,
Research Articles, Newspapers, Research
Journals and online resources etc. Data
published by various institutions such as
Government of India, World Bank, CGAP,
Agriculture, forestry & fishing registered a
Reserve Bank of India, NABARD, State
growth of 3.8% in quarter 1 FY15, lower
Level Bankers Committee (SLBC), etc are
than the 4.0% growth registered in Q1 FY14
used for the objective of the present paper.

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a. Mining & Quarrying grew at 2.1%, after 7. PROSPECTS FOR INDIA’S GDP
GROWTH IN FY 2015
registering a negative growth in quarter 1
FY14.
The GDP growth of 5.7% for Q1 FY15 has
come in higher than expectations. This does
b. Manufacturing grew by 3.5% as against -
provide signs of the economy coming out of
1.2% in quarter 1 FY14.
the low growth phase and has given rise to
c. Electricity, gas & water supply and expectations that economic growth would be
construction grew at 10.2% and 4.8% above 5% for the rest of the year. The
respectively. government has taken various steps to revive
investment through clearance and removal
d. Services sector which includes ‘trade,
of administrative roadblocks. This would
hotel, transport & communication’; ‘finance,
result in higher investments in Q2 and Q3 as
insurance, real estate & business services’
the spending season starts from August and
and ‘community, social & personal services
lasts till December. However, the current
grew by 2.8%, 10.4% and 9.1%
optimism needs to be viewed with caution.
respectively.
The GDP component ‘Community, social &
personal services’ which is basically
government spending has played an
important role in the latest GDP growth
numbers, with the fiscal deficit being very
high in the first four months of the financial
year (April-July). With the commitment to
Private Final Consumption Expenditure
4.1% of GDP for the fiscal deficit, there is
increased marginally to 58.8% of GDP
little room for substantial contribution from
while Government Expenditure to GDP
this end for the remainder of the year. Also,
increased to 13.4% (12.9% in Q1FY14).
the poor monsoon will drag down the
owever, Gross fixed capital formation
growth in the agriculture sector and inflation
experienced a marginal decline to 28.6% as
continues to be a problem, especially on the
against 28.7% in the previous year,
food side. This means the Reserve Bank will
indicating stagnation in the investment
not be lowering rates any time soon.
activities.

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 3

Therefore, while growth has been robust this impecunious customers devoid of access to
quarter, sustaining it at this level would be a any formal financial institution. Such
challenge. It also needs to be noted that part minimum facilities include conditions such
of the growth in Q1 has been due to the low as no minimum balance, deposit and
base effect, with only agriculture and the withdrawal of cash at either branches of the
finance sector maintaining momentum over banks and ATMs, receipt/ credit of money
last year. As the low base effect will persist through electronic payment channels and the
in the next two quarters, there is room for facility of providing ATM card to the
optimism this year. Care Ratings expects customers etc.
India’s GDP growth to be in the range of 5.2
1. Hassle-free and abridged KYC norms in
– 5.5% for FY 2015.
order to facilitate convenient opening of
8. FINANCIAL INCLUSION RBI bank accounts, especially for trivial accounts
INITIATIVES that have balances not exceeding the limit of

The Reserve Bank of India, in order to Rs. 50,000 and their aggregate credits in the

achieve financial inclusion, has embraced a accounts also do not exceed Rs. one lakh per

bank-led model. It has removed all annum. Besides, banks are also advised not

regulatory issues which posed a threat in to insist on the need for having an introducer

attaining a higher degree of financial to open bank accounts of these

inclusion in the nation. Further, for disadvantaged customers. In addition to this,

achieving the targeted goals, the Reserve banks are also permitted to accept the

Bank has created a very encouraging and Aadhar Card of the customer as a proof of

facilitating governing atmosphere by both, his identity and his address. Reserve

providing institutional support to the banks Bank has also simplified its Branch

in order to support, accelerate and fortify Authorization Policy, so that the concern of

heir financial inclusion efforts. irregularly spread of bank branches can be

resolved. Domestic Scheduled Commercial

Initiatives: Reserve Bank has advised all Banks (SCBs) are allowed to open their

the banks to open Basic Saving Bank branches liberally in Tier 2 to Tier 6 cities

Deposit (BSBD) accounts with minimum which have a population of less than 1 lakh.

common facilities that can be given to the Reserve Bank has even relaxed this limit in

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 3

the caseof the North-Eastern States and 1. The private and public sector banks were
Sikkim where domestic Scheduled advised to submit a three year Financial
Commercial Bankscan freely open their Inclusion Plan (FIP) which must be
branches without seeking any permission approved by board starting from April 2010.
from RBI. Although, general permission for These policies are supposed to keep a close
opening branches in Tier 1 cities to the watch at keeping self-set goals with
domestic SCBs (other than RRBs) is subject reference to the opened brick and mortar
to some conditions yet it serves the objective rural branches, serving the un-banked
of further liberalizing. villages with population above and below
2000, Kisan Credit Cards issued, Basic
a. The commercial banks are compulsorily
Saving Bank Deposit (BSBD) accounts
directed by RBI to apportion at least 25% of
opened, , General Credit Cards (GCC)
the total number of branches scheduled to be
issued and several others. Reserve Bank
opened during the financial year in the (Tier
since then has been witnessing and keeping
5 and Tier 6) rural centers that are devoid of
a careful watch on these plans on a monthly
banking facilities.
basis.

b. It has also been suggested to the banks to

2. Banks have been advised that their FIPs
open intermediate brick and mortar
should be considered individually and
structures that will be located between the
should be dripped down up to the branch
existing base branch and BC locations. This
level. This would definitely warrant that all
intermediate branch could be like that of a
the stake holders are involved actively in the
cost effective simple brick and mortar
Financial Inclusion Plans of the bank.
structure. This infrastructure shall be aided
by the minimum infrastructure required for
3. It was also recommended that Financial
banking operations such as a core banking
Learning Camps should be set up and all the
solution terminal connected to pass book
rural branches of SCBs should fortify the
printer and a safe where the cash can be
efforts for spreading the financial literacy by
retained in case of successful operations of a
means of outdoor Financial Literacy Camps
larger customer transaction.
(FLCs) at least on a monthly basis. It was
expected that these FLCs would assist the

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 International Journal of Research Fellow for Engineering
Volume 4, Issue 3

plans of financial inclusion with the help of [1] Adhikay Maniklal, Bagli Supravat.
high ‘Financial Literacy’ and easy Impact of SHGs on Financial Inclusion – A
‘Financial Access’. As a result, 718 Case Study in the District of Bankura.,
Financial Literacy Camps have been Journal of Management and Information
established as at end of March 2013 and Technology, Vol.2, No.1 (2010).
around 2.2 million people have been
[2] Arunachalam .R. S. (2008), “Scoping
financially educated with the help of
Paper on Financial Inclusion”, UNDP.
awareness camps, seminars and lectures etc.

[3] Ansari, S. A (2007), “Microfinance in

9. CONCLUSION
India” Asian Economic Review.
There is an overall growth in GDP from FY
[4] Chakrabarthy K. C. (2009), “Financial
14 to FY 15 in few sectors like
Inclusion, RBI Initiatives” at National
agriculture,forestry & fishing, mining and
seminar on launching a National initiative
quarrying, manufacturing, electricity gas and
for financial inclusion, DFS GoI.
water supply, construction, trade, hotel
transport & communication, finance,
[5] CGAP Technology Programme (2009),
insurance, real estate, there is an overall
Notes on Branchless Banking, Policy and
increase in GDP from 4.7% to 5.7% and on
Regulation in Mexico.
the other hand consumption as a percentage
of GDP xpenditure was increased [6] Dev Mahender S. 2006. Financial
marginally to 58.8% while government Inclusion: Issue and Challenges. Economic
expenditure wasincreased to 13.4% and this and Political weekly, October.
research also concludes that various [7] Dasgupta Rajaram. 2009. Two
initiatives have been taken by RBI for approaches to financial inclusion. Economic
financial inclusions, government of India is and political weekly, vol. xiiv no. 26 & 27,
launching various schemes for the overall June.
sustainable development of India.
[8] Jagapathi Rao G. V. 2010. Micro
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 International Journal of Research Fellow for Engineering
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