Financial Inclusion in India: Initiatives and Achievements

Article by : Prof. Paromita Dutta, Assistant Professor, Finance, Calcutta Business School

With the progress of the Indian economy, especially when the focus is on the achievement of sustainable development, there must be an attempt to include maximum number of participation from all the sections of the society. But the lack of awareness and financial literacy among the rural population of the country is hindering the growth of the economy as majority of the population does not have access to formal credit.

RBI has been pursuing the goal of financial inclusion for a long time. RBI’s financial inclusion efforts can be traced back to the 1960s when the focus was on channelizing of credit to the neglected sectors of the economy and weaker sections of the population. While the Government of India nationalized the banking operations of few commercial banks in two tranches in 1969 and 1980; RBI also took initiatives like laying down priority sector lending requirements for banks, Lead Bank Scheme, establishment of Regional Rural Banks (RRBs-1975-76), Service Area Approach (1989), Self-Help Group Bank Linkage Programme (1989-90), setting up of Local Area Banks etc., all aimed at making available benefits of banking services to the masses.

The penetration of financial services in the rural areas of India is still very low. The factors responsible for this condition can be looked at from both supply side and demand side and the major reason for low penetration of financial services is, probably, lack of supply. The reasons for low demand for financial services could be low income level, lack of financial literacy, other bank accounts in the family, etc. On the other hand, the supply side factors include no bank branch in the vicinity, lack of suitable products meeting the needs of the poor people, complex processes and language barriers. On the supply side, absence of technology was a major impediment as it restricted expansion of banking services to far flung areas of the country comprising of 600 thousand plus villages. In the absence of technology, developing a cost-effective delivery model also remained a challenge.

Since 2006, RBI has adopted a planned and structured approach to address the issues of financial inclusion. RBI’s approach has been to focus both on the demand as well as on the supply side. This has in a large way been possible due to the availability of technology and its gradual adoption within the banking processes.

Some measures and consequent achievements which have been taken by RBI are given below:

• Institutionalization of the framework of Banking Correspondents (BCs) has been a major step towards enhancing access of banking services. RBI advocated a combination of ‘Brick and Mortar’ structure with ‘Mouse and Click’ technology for extending financial inclusion in geographically dispersed areas.
• The banks were mandated to open at least 25 per cent of their new branches in unbanked rural centers. Taking into account the difficulties encountered by common people in meeting the ‘Know Your Customer (KYC)’ requirements for opening bank accounts, several measures were taken.
• RBI has granted in-principle approval to some entities to set up differentiated banks namely “Small Finance Banks” (SFBs) and “Payments Banks” to further accelerate the financial inclusion process in the country.
• Banks in India have been mandated to set up Financial Literacy Centers (FLCs) for extending financial literacy.
• No-frill accounts introduced by RBI in November 2005 to provide access to basic baking services to financially excluded peoples.

Banks issue Kisan Credit cards (KCCs) as smart cards to the farmers for providing timely and adequate credit support from single window banking system for their farming needs.

• RBI also issues General Purpose Credit Card (GCC) which facilitate credit up to Rs.25000/- without any collateral requirement for rural and semi urban people based on assessment of household cash flows. Now as per the revised guidelines in Dec.‟2013 under this approach bank also fulfill Non- farm entrepreneurial credit requirement of individuals (e.g. Artisan Credit card, Laghu Udyami Card, Swarojgar Credit Card, Weaver‟s Card etc). There will be no ceiling on the loan amount as long as the loan is for the purpose of non-farm entrepreneurial activity and is otherwise eligible for classification as priority sector.
• The SLBP or Self Help Group – Bank Linkage Program has been the major institutional based innovation in India for enabling access and covering the gap of reaching financially excluded population of the country in the last two decades. In this model, the banks involve themselves with a group of local people with the idea of enabling them to pool up their savings. The same is deposited with the bank against which the bank also provides a certain amount of credit facility. The group takes a decision to whether to lend to any member of the group. The bank provides the framework, accounting services and support to the group to manage their deposits and lending.
• One of the most remarkable developments in terms of innovation in order to harness the full power of technology, the banks have tied up with mobile operators to provide financial services like bill and utility payment, fund transfer, ticket booking, shopping etc through mobile banking. Some examples of this model are m-Pesa by Vodafone and Airtel Money.
• In some states, the state government has taken initiatives for providing kiosk based model for access to financial services. Also banks have used the technology to enable their ATMs to virtually act like a 24x7 branches.
• In Aadhar enabled payment services, any Indian citizen having an Aadhaar number updates his account with the same. All accounts having aadhaar number updated are to be reported to RBI, which in turn reports it to various government departments.
• Some of the leading banks have come up with this concept where there would be an online system with chat facility assisting the person to make use of various electronic machines for depositing and withdrawing cash and cheques, which can be termed as Branchless Banking.

Table 1: Progress made under financial inclusion plans – as on September 2016 (Scheduled commercial banks including RRBs)

Particulars Year ended Year ended Half year ended#

March 2010 March 2016 September 2016

Banking Outlets in Rural locations – Branches 33,378 51,830 52,240

Banking Outlets in Rural locations – Branchless mode 34,316 534,477 537,609

Urban Locations covered through BCs 447 102,552 91,039

BSBDA-Through branches (No. in million) 60.2 238.2 247.4

BSBDA-Through branches (Amt. in ` billion) 44.3 474.1 537.9

BSBDA-Through BCs (No. in million) 13.3 230.8 247.8

BSBDA-Through BCs (Amt. in ` billion) 10.7 164.0 181.1

BSBDA-Total (No. in million) 73.5 469.0 495.2

BSBDA Total (Amt. in ` billion) 55.0 638.1 719.0

OD facility availed in BSBDAs (No. in million) 0.2 8.0 8.4

OD facility availed in BSBDAs (Amt. in ` billion) 0.1 14.8 18.1

KCCs -Total (No. in million) 24.3 47.3 46.4

KCCs -Total (Amt. in ` billion) 1,240.1 5,130.7 5,543.4

GCC-Total (No. in million) 1.4 11.3 11.5

GCC-Total (Amt. in ` billion) 35.1 1,493.3 1,613.2

ICT-A/Cs-BC- Total number of transactions (in million) * 26.5 826.8 550.6

ICT-A/Cs-BC- Total amount of transactions ( in ` billion) * 6.9 1,686.9 1,199.2

Source: Report on Trend and Progress on Banking in India as on half-yearly ended September, 2016

References:

1. https://rbidocs.rbi.org.in/rdocs/.../MFI101213FS.pdf, Financial Inclusion in India – An Assessment, assistance provided by Shri M. Sreeramulu, AGM, DNBS.
2. https://iimb.ac.in/research/.../WP%20No.%20474, Financial Inclusion in India: Select Issues, Working paper no. 474, August 2014.
3. https://rbidocs.rbi.org.in/.../PDFs/FII240916C9952578..., Financial Inclusion in India – The Journey so far and the Way Ahead, Address delivered by Shri S. S. Mundra, Deputy Governor, Reserve Bank of India at the BRICS Workshop onFinancial Inclusion in Mumbai on September 19, 2016.