Financial Inclusion for Inclusive Growth: Institutions and Innovations

Financial Inclusion for Inclusive Growth:

Institutions and Innovations

Debesh Roy*

This paper was presented at the India Finance Conference 2012 organised by IIMs A, B and C at IIM - Calcutta on 19th December 2012 

I. Introduction

An essential pre-requisite for inclusive and sustainable growth is capital formation through credit and financial services. While the benefits of growth due to reforms in India, have concentrated in the hands of those already served by the formal financial system, a large section of the rural and urban poor still do not have access to the formal banking channel. The backward regions of the country, too, lack basic financial infrastructure. The Reserve Bank of India (RBI) has, therefore, formulated the policy of financial inclusion with a view to provide banking services at an affordable cost to the disadvantaged and low-income groups. Financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded population.  

The idea of financial inclusion in India has its roots in the co-operative movement which started in the year 1904. Historically, nationalization of commercial banks in 1969 was the most significant effort towards financial inclusion, which led to the spread of bank branches in rural and semi-urban areas. The access to banking services has increased considerably, as may be gauged from the fact that the average population per branch has decreased from 64,000 in 1969 to 13,400 as at the end of March 2011[1]. However, there are still some under-banked states in the country like Bihar, Odisha, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, West Bengal, and the North-Eastern States. Further, in spite of the enhanced outreach of banks in rural areas and the implementation of directed credit, the growing credit needs of farmers, rural artisans and entrepreneurs could not be adequately met from banks during the post-nationalization period.  The RBI, therefore, urged banks to review their existing banking practices to align them with the objective of financial inclusion.

According to the RBI (RBI, 2008) access to safe, easy and affordable credit and other financial services by the poor and vulnerable groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating growth and reducing income disparities and poverty. Moreover, access to a well-functioning financial system, by creating equal opportunities, enables economically and socially excluded people to integrate better into the economy and actively contribute to development and also protect themselves against economic shocks.  

NSSO data reveal that 45.9 million farmer households in the country (51.4 per cent), out of a total of 89.3 million households do not have access to credit, either from institutional or non-institutional sources (Government of India, 2008). Further, despite the vast network of bank branches, only 27 per cent of total farm households are indebted to formal sources (of which one-third also borrow from informal sources). Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95.91 per cent, 81.26 per cent and 77.59 per cent in the north-eastern, eastern and central regions respectively. Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion (RBI, 2008). 

The RBI has observed that out of 600,000 habitations in the country, only about 5 per cent have a commercial bank branch (RBI, 2010). Also only about 61 per cent of the population across the country has bank account (savings), and this ratio is much lower in the north-eastern states.  Further, 18 per cent of the population has debit cards and about 2 per cent has credit cards (RBI, 2011). India has a significantly low level of financial penetration compared with OECD countries. Further, while the access to bank branches in India fares better than that of China and Indonesia it is worse off when compared with Malaysia and Thailand. However, in terms of financial access through ATMs, India fares poorly compared to select Asian peer group countries (RBI, 2010[2]).  In view of the poor level of financial inclusion in India, the RBI has accorded top-most policy priority to financial inclusion, by advising commercial banks, to formulate specific Board approved Financial Inclusion Plans (FIP) and to act on them on a mission mode. Banks were also advised by the RBI to provide banking services tin every village having a population of over 2000 by 31 March 2012, through bank branches as well as through various ICT-based models including through Business Correspondents (BCs).   Banks were also encouraged to cover the peripheral villages with population less than 2000.

There has been some improvement in the status of financial inclusion in the country in the last couple of years. Yet the extent of financial exclusion is staggering. Out of every 1000 persons, only 99 had a credit account and 600 had a deposit account as at end-March 2011. This underlined the need to strengthen the financial inclusion drive through well thought out policies (RBI, 2011).

Against this backdrop this paper attempts to examine and analyse policy issues related to the promotion of financial inclusion through various institutional and product innovations, and their impact on the achievement of widespread and sustainable inclusive growth. Rest of the paper is organized as follows: Section II presents the status of financial inclusion in India. State-wise Index of Financial Inclusion (IFI) has been developed in Section III. Section IV analyses the role of institutions in promoting financial inclusion. Section V examines innovations in financial inclusion which could lead to inclusive growth. Demand side innovations for financial inclusion have been analyzed in Section VI. Section VII concludes the paper and suggests policy initiatives for the achievement of inclusive growth through financial inclusion.

II. Status of Financial Inclusion in India

There has been a consistent increase in the penetration of banking services in India in recent years. However, the rate of increase in the penetration of banking services in the rural and semi-urban areas has been much lower than that in the urban areas. Further, penetration of banking services has been lower in the central, eastern and north-eastern regions of the country compared to the more developed northern, southern and western regions. In order to address this issue, the RBI liberalized the branch authorization policy in December 2009, giving freedom to domestic scheduled commercial banks to open branches at Tier 3 to 6 centres (with population of up to 49,999 as per the Population Census of 2001) without having the need to take permission from RBI in each case, subject to reporting.

The RBI has been encouraging banks to expand their network both through setting up of new branches and through the Business Correspondent (BC) model by leveraging upon information and communication technology (ICT). This has resulted in an improvement in the status of financial inclusion in 2010-11 over the previous year, as indicated in Table 1. However, the extent of financial exclusion is still quite substantial. This is evident from the fact that only 61.2 per cent of the population had a deposit account, and 9.9 per cent had a credit account. Hence, the extent of financial exclusion underscores the need to focus on the strengthening of the financial inclusion drive through a planned, coordinated and innovative approach.

Table 1

Progress of Financial Inclusion in India

Sl. No.	Indicator	2009-10	2010-11
1	Credit-GDP Ratio	53.4	54.6
2	Credit-Deposit Ratio	73.6	76.5
3	Population per Bank Branch	14,000	13,138
4	Population per ATM	19,700	16,243
5	Percentage of Population having deposit accounts	55.8	61.2
6	Percentage of Population having credit accounts	9.3	9.9
7	Percentage of Population having debit cards	15.2	18.8
8	Branches opened in Tier 3-6 centres as a per cent of total new bank branches	40.3	55.4
9	Branches opened in hitherto unbanked centres as a per cent of total new bank branches	5.6	9.7

Source: Report on Trend and Progress of Banking in India 2010-11, RBI

During 2010-11 4826 new branches of scheduled commercial banks were opened. It may be observed from Table 2 that majority of the branches (66.4 per cent) were opened in the more developed regions viz. northern (23.2 per cent), southern (26.2 per cent) and western (17.0 per cent).  The less developed regions accounted for 33.6 per cent of new branches opened viz. central (18.1 per cent), eastern (13.5 per cent) and north-eastern (2.0 per cent).  Further, rural and semi-urban branches accounted for 22.3 per cent and 41.7 per cent of new branches, respectively. On the other hand, the share of urban and metropolitan branches stood at 17.9 per cent and 18.1 per cent, respectively.

Table 2

Distribution of New Bank Branches of Scheduled Commercial Banks across Regions and Population Groups

(2010-11)

Regions	No. of new branches	Population groups	No. of new branches
Central	874 (18.1)	Rural	1077 (22.3)
Eastern	650 (13.5)	Semi-urban	2011 (41.7)
North Eastern	97 (2.0)	Urban	865 (17.9)
Northern	1120 (23.2)	Metropolitan	873 (18.1)
Southern	1263 (26.2)
Western	822 (17.0)
Total	4826		4826

Note: Figures in parentheses are percentages to total new bank branches.   

Source: Report on Trend and Progress of Banking in India 2010-11, RBI

            A major instrument of financial inclusion is the Kisan Credit Card (KCC). KCC enables farmers to access credit at the right time, to meet their pre-sowing as well as well as post-harvest needs. Region-wise and institution-wise status of sanction of KCC as on 31 March 2011 is furnished in Table 3. It may be observed that the southern region accounted for the highest share of KCC issued (36.3 per cent) and the amount sanctioned (32.5 per cent), followed by the central region with 22.8 per cent of KCC issued and 23.7 per cent of the amount sanctioned. The eastern region was ranked third with 17.2 per cent of cards issued, but was ranked fourth with 10.2 per cent of the amount sanctioned. The northern region which was ranked fourth (12.6 per cent) in terms of cards issued, was ranked third in terms of amount sanctioned (23.6 per cent). The more developed western region, however, accounted for 9.5 per cent of cards issued and 9.2 per cent of amount sanctioned. The least developed north-eastern region accounted for 1.6 per cent of cards issued and 0.8 per cent of the amount sanctioned.  Government of India has launched a programme called ‘Bringing Green Revolution in Eastern India (BGREI)’ in the states of Assam, Bihar, Chhattisgarh, Jharkhand, Odisha, Eastern Uttar Pradesh and West Bengal, with a view to address the constraints limiting the productivity of rice based cropping systems. BGREI is expected to raise the demand for agriculture credit and accordingly, banks need to give a special thrust to issuing KCC in these states.

            Among institutions, the share of commercial banks was the highest in terms of the number of KCC issued (54.9 per cent) as well as amount sanctioned (69.4 per cent). While the share of cooperative banks in terms of the number of KCC issued was higher (27.7 per cent) than that of RRBs (17.4 per cent), the share of RRBs (15.8 per cent) was higher than that of cooperative banks (14.8 per cent) in terms of amount sanctioned.  It is, therefore, imperative that in order to achieve greater financial inclusion, there should be a focus on strengthening RRBs and the cooperative credit institutions.

Table 3

Kisan Credit Card Scheme

(As on 31 March 2011)          

 (Amount in `crore and Number of cards issued in ‘000)

	Cooperative Banks		RRBs		Commercial Banks		Total
Region	Cards Issued	Amount Sanctioned	Cards Issued	Amount Sanctioned	Cards Issued	Amount Sanctioned	Cards Issued	Amount Sanctioned
Central	742	3698	502	3148	1076	10362	2320 (22.8)	17208 (23.7)
Eastern	415	860	546	2417	784	4088	1745 (17.2)	7365 (10.2)
North Eastern	6	9	51	195	107	393	164 (1.6)	597 (0.8)
Northern	507	2488	166	3433	608	11217	1281 (12.6)	17138 (23.6)
Southern	962	2220	490	2112	2236	19275	3688 (36.3)	23607 (32.5)
Western	180	1444	19	162	772	5104	971 (9.5)	6710 (9.2)
Total	2812 (27.7)	10719 (14.8)	1774 (17.4)	11467 (15.8)	5583 (54.9)	50439 (69.4)	10169	72625

Note: Figures in parentheses are percentages to All-India cards issued and amount sanctioned.

Source: Author’s calculation based on data sourced from Appendix Table V.10 of Report on Trend and Progress of Banking in India 2010-11, RBI

It is evident from the foregoing analysis that achieving 100 per cent financial inclusion across the country is a daunting task. This calls for a planned and coordinated approach by the RBI and NABARD, on one hand, and commercial banks and rural financial institutions (RFIs), on the other. This approach involves implementation of financial inclusion plans by banks, which include opening of new branches in the unbanked and under-banked areas, deployment of Business Correspondents (BC) and Business Facilitators (BF), opening of “no-frill” accounts, the introduction of information technology (IT) enabled innovative products and services, and the creation of appropriate physical and financial infrastructure. Financial inclusion policy should also involve strengthening of RFIs, viz. RRBs and cooperative credit institutions through recapitalization and the creation of IT infrastructure, viz. Core Banking Solutions (CBS).

III. Index of Financial Inclusion

There are several indicators which have been used in economic literature to assess the extent of financial inclusion. Some of the commonly used indicators are: the number of bank accounts (per 1000 adult persons); the number of bank branches (per million people); number of ATMs (per million people); amount of bank credit and amount bank deposit. When used individually, such indicators present only partial information about the extent of financial inclusion in an economy. There is, therefore, a need to develop a comprehensive measure of financial inclusion, by incorporating several dimensions of financial inclusion, in one single number.

Accordingly, Sarma (2008) developed a multi-dimensional index of financial inclusion (IFI). The approach is similar to that used by the UNDP for computation of the HDI, the GDI, etc. Sarma (2008) developed the index by first calculating a dimension index for each dimension of financial inclusion. The dimension index for the i^th dimension, d_i is computed by the following formula:

d_i = A_i – m_i                                                                                                           (1)    

       M_i – m_i         

where

A_i = actual value of dimension i

m_i = minimum value of  dimension i

M_i = maximum value of dimension i

Formula (1) ensures that 0 £ d_i £ 1. Higher the value of d_i. higher the country’s / state’s achievement in dimension i. If n dimensions of financial inclusion are considered, then a country/ state will be represented by a point D_i = (d₁, d₂, d₃,  … d_n) on the n-dimensional Cartesian space.  While Sarma (2008) has developed a country-wise index of financial inclusion (IFI), this paper adopts the model developed by her and develops a state-wise IFI for India.

            In the n-dimensional space, the point O = (0, 0, 0, …0) represents the point indicating the worst situation while the point I = (1, 1, 1, … 1) represents the highest achievement in all the dimensions. The IFI for the i^th state, is measured by the normalized inverse Euclidean distance of the point D_i from the ideal point I = (1, 1, 1, … 1). The formula for IFI is as under:

                 ___________________________

IFI = 1 - Ö (1-d₁)² + (1-d₂)² +…. + (1-d_n)²                                       (2)    

                                      ___                  

                                   Ö   n

              

In formula (2), the numerator of the second component is the Euclidean distance of Di from the ideal point I, normalizing it by n and subtracting by 1 gives the inverse normalized distance. The normalization is done in order to make the value lie between 0 and 1 and the inverse distance is considered so that higher value of the IFI corresponds to higher financial inclusion.

Three basic dimensions of an inclusive financial system have been considered in the IFI presented in this paper, viz. banking penetration (dimension 1), availability of banking services (dimension 2) and usage of the banking system (dimension 3). These dimensions have been selected mainly due to availability of data and recent development in the literature.

Banking penetration (dimension 1): An inclusive financial system should penetrate widely amongst its users. If every person in an economy has a bank account, then the value of this measure would be 1. In the absence of the data on “banked” population, number of deposit accounts as a proportion of the total population has been used as an indicator of this dimension.

Availability of banking services (dimension 2): The services of inclusive financial system should be easily available to its users. Availability of services can be indicated by the number of bank outlets (per 1000 population) and/or by the number of ATM per 1000 people, or the number of bank employees per customer. In the absence of comparable data on the number of ATMs and number of bank staff for a large number of countries, number of bank branches per 1000 population has been used to measure this dimension.

Usage of the banking system (dimension 3): It is not enough to have a bank account in an inclusive financial system. It is imperative that banking services are adequately utilised. Accordingly, outstanding deposit and credit taken together as a percentage of GSDP has been used to measure this dimension.

            Considering the three dimensions of penetration, availability and usage, a state i can be represented by a point (p_i, a_i and u_i) in the three dimensional Cartesian space, such that 0 £ p_i, a_i, u_i £ 1, where p_i, a_i and u_i denote the dimension indexes for state i computed using formula (1). In the three dimensional Cartesian space, the point (0,0,0) will indicate the worst situation (complete financial exclusion) and the point (1,1,1) will indicate the best or ideal situation (complete financial inclusion).

            The IFI for the state i is measured by the normalized inverse Euclidean distance of the point (p_i, a_i, u_i) from the ideal point (1,1,1). The formula is as follows:

                 _______________________

IFI = 1 - Ö (1-p₁)² + (1-a₁)² + (1-u₁)²                                          (3)         

                                      ___

                                   Ö   3

            Using data for all three dimensions (penetration, availability and usage) for 26 sates for the year 2010-11, IFI values have been computed and presented in Table 4. Depending on the value of IFI, states have been categorized as follows:

1. 0.5 < IFI £ 1 – High Financial Inclusion
2. 0.3 < IFI £ 0.5 – Medium Financial Inclusion
3. 0 < IFI £ 0.3 – Low Financial Inclusion

In the group of 27 states, 6 states have been placed in High Financial Inclusion category. Punjab leads with the highest value of IFI (0.61), followed by Karnataka (0.59), Maharashtra (0.57), Kerala (0.57), Tamil Nadu (0.52) and Himachal Pradesh (0.51).  Out of 7 states placed in Medium Financial Inclusion category, 3 states viz. Uttarakhand (0.46), Haryana (0.45), Andhra Pradesh (0.45) have IFI value higher than all-India value (0.41).  Other states in the Medium Financial Inclusion category are Jammu & Kashmir (0.39), Sikkim (0.37), Gujarat (0.36) and West Bengal (0.32). The states placed under the Low Financial Inclusion category are mostly from the Eastern region, viz. Odisha (0.26), Jharkhand (0.23) and Bihar (0.10), north eastern region, viz. Tripura (0.24), Meghalaya (0.23), Arunachal Pradesh (0.22), Mizoram (0.21), Assam (0.18), Nagaland (0.09) and Manipur (0), and Central region viz. Uttar Pradesh (0.25), Madhya Pradesh (0.22) and Chhattisgarh (0.18). Rajasthan (0.21) has the lowest IFI in the northern region.  

Table 4 also displays state-wise ranking of per-capita NSDP. Although IFI rank and per-capita NSDP rank are not strictly comparable, it is observed that most of the states in the eastern, north-eastern and central regions which rank low in terms of IFI also have low ranking in terms of per capita NSDP. However among the 6 states with high IFI ranking, only 3 states viz. Maharashtra, Tamil Nadu and Punjab, rank among the top 6 states in terms of per capita NSDP ranking.  

It is evident from the above analysis that states in the north-eastern, eastern and central regions fare poorly in terms of financial inclusion compared to the states in the western, southern and northern regions. Hence, banks need to focus on expanding their outreach in these states. The RBI in the year 2008 had devised a Special Dispensation Scheme (SDS) to encourage banks to open branches at commercially unviable centres in the north-eastern region. Under the scheme, the RBI had to bear a one-time capital cost and recurring expenses for a period of five years while the state governments were to provide premises, security for the branch and rental accommodation for the bank staff. State Level Bankers Committees (SLBCs) in consultation with the concerned state governments identified 42 ‘agreed centres’ in five north eastern states. Up to June 2012, branches had been opened at 34 of these centres (RBI, 2012). The experience of SDS has revealed that expansion of the banking network depends on efforts by the respective state governments to provide basic infrastructure like roads and digital connectivity, and the lack of the same impedes the expansion of the banking network in this region.  

                                                         

Table 4

State-wise Index of Financial Inclusion

State	D1 (Penetration)	D2 (Availability)	D3 (Usage)	IFI	IFI Rank	Per Capita NSDP Rank
High Financial Inclusion (0.5-1)
Punjab	1.00	0.85	0.34	0.61	1	6
Karnataka	0.75	0.59	0.48	0.59	2	9
Maharashtra	0.61	0.37	1.00	0.57	3	2
Kerala	0.92	0.85	0.28	0.57	4	10
Tamil Nadu	0.74	0.50	0.39	0.52	5	4
Himachal Pradesh	0.86	0.98	0.16	0.51	6	11
Medium Financial Inclusion (0.3-0.5)
Uttarakhand	0.71	0.74	0.15	0.46	7	5
Haryana	0.71	0.65	0.17	0.45	8	1
Andhra Pradesh	0.74	0.46	0.26	0.45	9	8
All-India	0.50	0.35	0.40	0.41
Jammu & Kashmir	0.57	0.41	0.24	0.39	10	21
Sikkim	0.47	0.81	0.07	0.37	11	3
Gujarat	0.54	0.42	0.17	0.36	12	7
West Bengal	0.44	0.25	0.29	0.32	13	17
Low Financial Inclusion (<0.3)
Odisha	0.33	0.32	0.15	0.26	14	20
Uttar Pradesh	0.39	0.19	0.19	0.25	15	26
Tripura	0.40	0.29	0.08	0.24	16	19
Jharkhand	0.27	0.23	0.19	0.23	17	23
Meghalaya	0.18	0.34	0.17	0.23	18	13
Madhya Pradesh	0.27	0.24	0.16	0.22	19	25
Arunachal Pradesh	0.27	0.25	0.14	0.22	20	12
Rajasthan	0.25	0.27	0.13	0.21	21	18
Mizoram	0.14	0.47	0.06	0.21	22	14
Assam	0.26	0.15	0.13	0.18	23	22
Chhattisgarh	0.22	0.20	0.12	0.18	24	16
Bihar	0.08	0.09	0.13	0.10	25	27
Nagaland	0.08	0.14	0.05	0.09	26	15
Manipur	0.00	0.00	0.00	0.00	27	24

Note: Author’s own calculations based on data drawn from (1) Basic Statistical Returns of Scheduled Commercial Banks in India Vol. 40, March 2011, RBI; (2)  Economic Survey 2011-12, Government of India

IV. Financial Inclusion and Inclusive Growth – Role of Institutions

Commercial Banks                                                                                                          

Nationalization of commercial banks in India was a pioneering step towards accessibility of banking services to the vast rural population of the country. This was a significant effort towards financial inclusion, which led to the spread of bank branches in unbanked rural and semi-urban areas. However, in spite of the enhanced outreach of banks in rural and semi-urban areas and the implementation of directed credit, farmers and rural artisans still did not receive adequate credit from banks during the post-nationalization period. Moreover accessibility to avenues for savings in the formal banking channel was limited.  

With a view to achieving the goal of bringing banking services to identified 74,414 villages with population above 2,000 by March 2012, and thereafter progressively to all villages over a period of time, the RBI advised commercial banks that while preparing their Annual Branch Expansion Plan (ABEP), they should allocate at least 25 per cent of the total number of branches proposed to be opened during the year in unbanked rural centres[3] (RBI, 2012). In order to provide enhanced banking services in Tier 2 centres (with population 50,000 to 99,999 as per Census 2001), the general permission available to domestic scheduled commercial banks for opening of branches in Tier 3 to Tier 6 centres, has been extended to Tier 2 centres.

Region-wise distribution of branches of Scheduled Commercial Banks is furnished in Table 5.  The share of branches is the highest in the southern region (28 per cent), followed by the central region (19.7 per cent). While the northern states account for 17.6 per cent of branches, the share of eastern states stood at 16.4 per cent, and that of the western states account for 15. per cent. Not surprisingly, the north-eastern states have made the least progress in financial inclusion with a share of only 2.6 per cent of bank branches. The extent of financial inclusion in different regions of the country in the form of average population per branch is also furnished in Table 5. The southern region has the lowest average population per branch (9387), followed by the northern region (9823), western region (12125), central region (16,920), eastern region (17906) and north-eastern region (18,915).

Table 5

Region-wise distribution of Branches of Scheduled Commercial Banks

(As on 31 March 2011)

Regions	No. of bank branches	Population	Average population per branch
Central	18,194 (19.7)	30,78,35,000 (25.4)	16,920
Eastern	15,138 (16.4)	27,10,54,000 (22.4)	17,906
North Eastern	2,378 (2.6)	4,49,80,000 (3.7)	18,915
Northern	16,176 (17.6)	15,88,92,000 (13.1)	9,823
Southern	25,814 (28.0)	25,26,31,000 (20.9)	9,787
Western	14,417 (15.7)	17,48,01,000 (14.5)	12,125
All-India	92,117	121,01,93,000	13,138

Note: Figures in parentheses are (i) percentages to total number of bank branches and (ii) percentages to total population. Average population per branch has been calculated by the author based on 2011 census estimate.

Sources: (1) Basic Statistical Returns of Scheduled Commercial Banks in India Vol. 40, March 2011, Reserve Bank of India.

(2) Economic Survey 2011-12, Government of India

(3) Own calculation based on Census 2011

Table 6

Deposits and Credit of Scheduled Commercial Banks

According to Population Group

(As on 31 March 2011)

(Amount in ` crore)

Population Group	No. of bank branches	Deposits		Credit
		No. of Accounts	Amount	No. of Accounts	Amount
Rural	33,367 (36.2)	250,253,643 (30.9)	493265.52 (9.2)	39,129,655 (32.4)	295814.54 (7.3)
Semi-urban	22,725 (24.7)	212,043,091 (26.2)	716831.20 (13.3)	28,672,791 (23.8)	381572.75 (9.4)
Urban	18,997 (20.6)	168,036,910 (20.7)	1110513.31 (20.6)	16,522,322 (13.7)	683883.09 (16.8)
Metropolitan	17,028 (18.5)	179,795,709 (22.2)	3068941.29 (56.9)	36,399,327 (30.2)	2714376.61 (66.6)
Total	92,117	810,129,353	5389551.33	120,724,095	4075647.00

Note:  Figures in parentheses are percentage share of rural, semi-urban, urban and metropolitan branches, deposits and credit to total  branches, deposits and credit.

Source: Table 1.3 Basic Statistical Returns of Scheduled Commercial Banks in India Vol. 40, 30 March 2011, Reserve Bank of India.

            Deposits and credit of scheduled commercial banks are other important parameters for assessing the status of financial inclusion. It may be observed from Table 6, that urban and metropolitan centres together accounted for 39.1 per cent of bank branches, 42.9 per cent of deposit accounts, 77.5 per cent of deposit amount outstanding, 43.9 per cent of loan account and 83.4 per cent of credit outstanding. On the other hand, while the rural branches accounted for 36.2 per cent of the total number of branches, the share of deposit outstanding was a meagre 9.2 per cent, and that of credit outstanding was only 7.3 per cent. Thus, while a large number of rural branches have been opened since nationalisation of banks in 1969,  financial inclusion has been less effective in rural areas compared to urban and metropolitan areas. Hence, promotion of financial inclusion is imperative in the rural and semi-urban areas of the country.

Issuance of New Banking Licences

             It has generally been observed that greater financial system depth, stability and soundness contribute to economic growth. However, for growth to be truly inclusive, broadening and deepening the reach of banking becomes imperative. A wider distribution and access to financial services helps both consumers and producers raise their welfare and productivity. Such access is especially powerful for the poor as it provides them opportunities to build savings, make investments, avail credit, and more important, insure themselves against income shocks and emergencies (RBI, 2011a).

 The Union Finance Minister in his budget speech for 2010-11 while announcing that the RBI was considering giving some additional banking licences to private sector players said: “The Indian banking system has emerged unscathed from the crisis. We need to ensure that the banking system grows in size and sophistication to meet the needs of a modern economy. Besides, there is a need to extend the geographic coverage of banks and improve access to banking services.” In pursuance of the budget announcement, the Reserve Bank put out a Discussion Paper on its website. Based on the feedback received, the RBI issued draft guidelines for licensing of New Banks in the Private Sector on 29 August 2011 (RBI, 2011a). The guidelines underscore the need to promote financial inclusion as follows:

a)      The bank should operate on Core Banking Solution (CBS) from the beginning.

b)      The bank shall comply with the priority sector lending targets and sub-targets as applicable to other domestic banks, and  at least 25 per cent of its branches in unbanked rural centres (population up to 9,999 as per 2001 census) to avoid over concentration of their branches in metropolitan areas and cities which are already having adequate banking presence.

c)      The RBI will consider allowing the new bank to take over and convert the existing NBFC branches into bank branches only in the Tier 3 to 6 centres.

d)     Existing branches of the NBFC in Tier 1 and 2 centres may be allowed to convert into bank branches only with the prior approval of RBI and subject to the existing rules / methodology applicable to domestic banks regarding opening of branches in these centres and also subject to maintaining 25% of the bank branches in unbanked rural centres (population up to 9,999 as per 2001 census).  

Rural Financial Institutions

(a) Regional Rural Banks

Regional Rural Banks (RRBs) are actively involved in promoting financial inclusion by opening “No Frill Accounts”, issuing Kisan Credit Cards (KCC) and General Credit Cards (GCC) and dispensing micro credit under the SHG-Bank Linkage Programme. Considering the strategic importance of RRBs in the acceleration of financial inclusion RBI has directed sponsor banks to implement CBS in all RRBs. As on March 31, 2012, CBS has been implemented in 80 RRBs covering 16,741 branches (RBI, 2012). Fifteen RRBs were identified from 14 States for R & D project on Financial Inclusion with ICT-based solutions, through use of smart cards, Point of Sale (PoS) devices and mobile technology, in different regions and client groups in the country. In order to provide banking services to the remotest corners of the country ultra small branches as per RBI guidelines need to be opened.

 (b) Rural Cooperative Credit Institutions

The cooperative movement was the first ever experiment with financial inclusion in India. However, the health of the rural cooperative credit institutions has been a major cause of concern for policy makers. Financial assistance has been provided under the Revival Package for the Short-term Cooperative Credit Structure (STCCS) for cleansing of balance sheets and capital infusion to ensure a minimum Capital to Risk-Weighted Assets Ratio (CRAR) of 7 per cent, subject to legal and institutional reforms.

With a view to furthering the cause of financial inclusion, NABARD has decided to offer support to cooperative banks in CBS. Commercial banks and more recently RRBs have moved ahead by leveraging technology to enhance their operations. However, most of the cooperative banks did not or could not use ICT solutions which greatly diminished their capacity to offer a wider range of products to customers (Bakshi, 2012). Thus, the cooperative banks got bypassed in the financial inclusion drive and were not able to provide even MNREGS and Pension payments to the rural population despite their far higher physical outreach. Their inability to be part of the payment system was putting a serious challenge even to their existence (ibid.).

High costs of initial investment, inability to appraise the right software and vendors due to limited internal technical skills, limited internal skills in managing computerised systems as well as limited project management skills, prevented cooperative banks from adopting CBS.  NABARD's involvement as project manager and guide helped in bringing 163 cooperative banks with 5,543 branches on board in the first phase, which is expected to be completed by 31 December 2012 (Bakshi, 2012).

V. Financial Inclusion – Innovations for Inclusive Growth

The Rangarajan Committee (Government of India, 2008) defined financial inclusion as “delivery of financial services at an affordable cost to the vast sections of the disadvantaged and low-income groups”. Further, the Committee on Financial Sector Reforms (Government of India, 2009) had proposed a paradigm shift in the way financial inclusion is viewed. It had observed that instead of seeing the issue primarily as expanding credit, there was a need to refocus to seeing it as expanding access to financial services, such as payments services, savings products, insurance products, and inflation-protected pensions. It is being increasingly realized that financial inclusion is not about social banking without profitability concerns, but that it could well be a profitable business proposition for banks. The delivery models should aim at generating revenue rather than being cost centric such that customers get quality banking services at their door step while simultaneously creating business opportunities for the banks (RBI, 2011). As advocated by the late C.K.Prahalad (2005) “what is needed is a better approach to help the poor, an approach that involves partnering with them to innovate and achieve sustainable win-win scenarios where the poor are actively engaged and, at the same time, the companies providing products and services to them are profitable”.   Banks need to provide a simplified, and at the same time fully loaded banking experience, while reducing costs and achieving increased profit.  Further, access to financial services should empower the rural poor to take up income generating activities, which could raise their living standards and in the process develop long term partnership with banks.

Opening of bank branches as a strategy to improve inclusion seems to have reached diminishing returns. The poor have no more access in the richly branched urban areas than in the rural areas. Inclusion has to be more than opening up more branches (Government of India, 2009).

SHG-Bank Linkage Programme

One of the early attempts at financial inclusion during the period of economic reforms in India has been the launching of the Pilot Project on SHG-Bank Linkage in February 1992 by NABARD. It proved to be a revolutionary programme for attacking poverty through capacity building and empowerment of the rural poor, especially women. Microcredit extended either directly or through any intermediary is reckoned as part of banks’ priority sector lending. The SHG-Bank Linkage Programme (SHG-BLP) provides opportunities for the rural poor to participate in the development process.  It is cost effective, and ensures that more and more people are brought under sustainable developmental activities, within a short span of time.  

The SHG-Bank Linkage Programme (SHG-BLP), over the past twenty years has become the common vehicle in the development process, converging important development programmes. From the viewpoint of bankers the SHG-BLP has proved to be a cost effective business proposition. Further, the average recovery of loans disbursed to SHGs has been found to be around 90-95 per cent. The programme had resulted in 74.6 lakh saving-linked SHGs and 47.9 lakh credit-linked SHGs as on 31 March 2011 (NABARD, 2011). Overall, 53.4 per cent of total rural households are members of SHG-BLP. Therefore, there is a need for a massive upscaling of SHG-BLP, as it would not only spread the benefits of financial inclusion to a vast majority of the poor and the financially excluded, but would also provide banks with a cost effective business model. 

Region-wise and institution-wise savings and credit linkage of SHGs are presented in Tables 7 and 8. The share of the southern states is the highest both in terms of savings and credit linkage. This is followed by the eastern states, which are among the less developed regions of the country and are also low in terms of financial inclusion. The SHG-BLP, especially in the states of West Bengal and Odisha, has enabled banks to reach some of the remote corners of the region. The western and central regions fare moderately under the SHG-BLP. The northern and north-eastern regions, however, have been laggards under this Programme. It is, therefore, imperative that banks, NGOs, and government agencies need to upscale the SHG-BLP in the north-eastern states.

Table 7

Progress under Microfinance – Savings of SHGs with Banks

(As on 31 March 2011)

                                                                                                                   (Amount in ` crore)                                                      

Region	Commercial Banks		RRBs		Cooperative Banks		Total
	No. of SHGs	Saving Amount	No. of SHGs	Saving Amount	No. of SHGs	Saving Amount	No. of SHGs	Saving Amount
Central	356303	355.68	374334	177.39	55799	70.31	786436 (10.5)	603.38 (8.6)
Eastern	737516	512.00	557313	557.75	232789	338.63	1527618 (20.5)	1408.38 (20.1)
North Eastern	124604	56.12	165494	60.78	34641	14.15	324739 (4.3)	131.05 (1.9)
Northern	192748	190.62	84890	79.67	95134	58.28	372772 (5.0)	328.57 (4.7)
Southern	2375350	2676.33	698056	501.22	416054	538.37	3489460 (46.8)	3715.92 (52.9)
Western	536952	439.31	103310	58.58	320659	331.11	960921 (12.9)	829.01 (11.8)
Total	4323473	4230.06	1983397	1435.40	1155076	1350.84	7461946	7016.30

Note: Figures in parentheses are percentages to All-India No. of SHGs which are saving-linked and Saving amount outstanding.

Source: Status of Microfinance in India 2010-11, NABARD

  

Table 8

Progress under Microfinance – Credit-linked SHGs - Bank Loans Outstanding

(As on 31 March 2011)

                                                                                                          (Amount in ` crore)

Region	Commercial Banks		RRBs		Cooperative Banks		Total
	No. of SHGs	Loan O/S	No. of SHGs	Loan O/S	No. of SHGs	Loan O/S	No. of SHGs	Loan O/S
Central	190642	1476.77	152963	824.77	15267	63.85	358872 (7.5)	2365.39 (7.6)
Eastern	532176	2506.36	458461	1449.43	114896	246.77	1105533 (23.1)	4202.55 (13.5)
North Eastern	74954	393.61	61024	217.45	14043	84.19	150021 (3.2)	695.25 (2.2)
Northern	58993	459.76	42121	243.83	47994	199.55	149108 (3.1)	903.14 (2.9)
Southern	1983225	16181.91	525918	4510.93	197265	1115.75	2706408 (56.5)	21808.59 (69.8)
Western	213482	864.84	41006	183.63	62333	197.76	316821 (6.6)	1246.23 (4.0)
Total	3053472	21883.26	1281493	7430.05	451798	1907.86	4786763	31221.17

Note: Figures in parentheses are percentages to All-India No. of SHGs which are credit-linked and Credit outstanding.

Source: Status of Microfinance in India 2010-11, NABARD

A unique SHG-Bank Linkage model viz. Indira Kranthi Patham (IKP) is being implemented by the Society for Elimination of Rural Poverty (SERP), in the State of Andhra Pradesh, through financial support from Government of Andhra Pradesh, Government of India and the World Bank. As on 31 March 2012 there were 115.56 lakh members in 10.59 lakh SHGs exclusively for women (SERP, 2012). A total of 38,821 Village Organizations (VOs), 1099 Mandal Samakhyas (MSs) and 22 Zilla Samakhyas have come into existence in 22 districts. As on 31 March 2012, the total Savings and Corpus of SHG Members are Rs.3724.07 crore and `5538.33 crore respectively. The poor women through disciplined utilization of funds and prompt repayment have achieved an average repayment level of 95 per cent. Further, several major initiatives have been successfully taken up under IKP project towards empowerment  of women in the form of community managed food security, marketing at the doorsteps of the poor producers, green initiative (an initiative for non-pesticide management), community managed insurance scheme,  community managed health and nutrition interventions,  initiatives for disabled persons (to develop their livelihoods), gender interventions (through counseling centres, balika sanghams[4], campaign against alcoholism etc.), and convergence with all line departments and Panchayati Raj Institutions. The SHGs and their federations also work closely with gram panchayats, and each institution provides support to the other whenever required. Moreover, Community Managed Sustainable Agriculture is encouraged to reduce cost of cultivation and increase income of farmers. Further, under the Dairy initiative, SHGs and their federations are operating 210 Bulk Milk Chilling Centres covering 4225 village procurement centres with 1.51 lakh milk producers (SERP, 2012). The IKP project has demonstrated that financial inclusion could lead to sustainable and inclusive growth in rural areas, through various need based interventions and innovations. The model developed under this project could be replicated in other states, with suitable modifications as per regional or local needs.

Financing Joint Liability Groups (JLG)

The Rangarajan Committee (Government of India, 2008) had recommended that adoption of the Joint Liability Group (JLG) concept could be another effective method for purveying credit to mid-segment clients such as small farmers, marginal farmers, tenant farmers, etc. and thereby reduce their dependence on informal sources of credit. Studies conducted by NABARD, have shown that financing of JLGs is a good business proposition. It needs simplified documentation, group dynamics, timely repayment culture and prospects of credit enhancement to quality clients. Keeping in view the need and findings of the studies, NABARD has issued comprehensive guidelines on JLGs to Banks focusing on small and marginal farmers, oral lessees, tenant farmers engaged in farm sector and other clients under non-farm activities. NABARD supports banks for nurturing and financing of JLGs for the initial three years. Banks can also use the services of JLG-promoting agencies.

MFI-Bank Linkage

This model focuses on financing of Micro Finance Institutions (MFIs) by banking agencies for on-lending to SHGs and other small borrowers. MFIs have been playing a significant role in facilitating financial inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. The Committee on Financial Inclusion (Government of India, 2008) has, therefore, recommended that greater legitimacy, accountability and transparency will not only enable MFIs to source adequate debt and equity funds, but also eventually enable them to take and use savings as a low cost source for on-lending.

No Frill Accounts

Basic banking “No Frill” accounts have nil or very low minimum balances as well as charges that make such accounts accessible to vast sections of the population. With a view to encourage transactions in No Frill accounts RBI has advised banks to provide small overdrafts (ODs) in such accounts. The number of No Frill accounts has increased from 50.3 million as on 31 March 2010 to 105.5 million as on 31 March 2012. Up to end March 2012, banks have provided 1.5 million ODs amounting to `6 crore (RBI, 2012). No Frill accounts make access to savings bank accounts affordable for the poor. They also help banks maintain higher Current and Savings Accounts (CASA), which would enable them to improve margins. 

Mainstreaming BC Model

It has been widely recognized that it is not feasible to have physical banking facility in every habitation. Hence, the financial inclusion strategy largely focuses on the use of information and communication technology (ICT) to expand access to banking facilities through Business Correspondent (BC), who carries a hand-held device which is networked to the bank’s systems.  RBI issued guidelines in January 2006 for the engagement of BCs by banks for providing banking and financial services in addition to the traditional ‘brick and mortar’ model. Under the BC Model, banks have been permitted to use the services of various entities like NGOs/SHGs, Farmers Clubs (FC), PACS, Micro Finance Institutions (MFIs) and other Civil Society Organizations (CSOs), companies registered under Section 25 of the Companies Act, 1956, ‘for profit’ companies, retired Government/bank employees/ teachers, ex-servicemen, individual owners of kirana/medical/Fair Price shops/individual PCO operators, agents of small savings schemes of Government of India/Insurance companies, individuals who own petrol pumps, and Post Offices to act as BCs.

The BC model has the potential to speed up the process of financial inclusion in India and bring the vast majority of population within the banking fold. An RBI Working Group (RBI, 2009) recognised the fact that the process of financial inclusion involves the three critical aspects of (a) access to banking markets, (b) access to credit markets and (c) financial education. The BC model should, therefore, encompass each of the above three aspects in order to be able to address the issue of financial inclusion in a holistic manner. Banks need to appreciate the benefits arising out of adopting the ‘branchless’ BC model and implement the same with missionary zeal so as to achieve the ultimate goal of financial inclusion (RBI, 2009).

The number of BCs in the country has increased steadily from 33,042 as on 31 March 2010 to 95,767 as on 31 March 2012[5]. However, in order to achieve 100 per cent financial inclusion, there is a need to mainstream the BC Model by banks, by utilising the services of SHGs, NGOs, Farmers Clubs, Post Offices, PACS, retired school teachers, and other suitable persons and agencies.  There are 1,39,182 Post Offices in rural India, and they are in closest proximity (2 km on an average) to rural clients compared to branches of commercial banks, RRBs and cooperatives (5km on an average) (Priyadarshee, 2010). Thus Post Offices functioning as BCs, could lead to a massive expansion in the outreach of banks.

Business Facilitator (BF)

As per extant RBI guidelines, banks are encouraged to use intermediaries, such as NGOs, Farmers' Clubs, cooperatives, community based organizations, IT enabled rural outlets of corporate entities, Post Offices, insurance agents, well functioning Panchayats, Village Knowledge Centres, Agri Clinics/ Agri Business Centres, Krishi Vigyan Kendras and KVIC/ KVIB units, as Business Facilitator (BF) for providing facilitation services, viz. identification of borrowers and fitment of activities; collection and preliminary processing of loan applications including verification of primary information/data; creating awareness about savings and other products and education and advice on managing money and debt counseling; processing and submission of applications to banks; promotion and nurturing SHGs/ JLGs; post-sanction monitoring; monitoring and handholding of SHGs/ JLGs/ Credit Groups/ others; and follow-up for recovery.  

Financial Literacy

Financial literacy is instrumental in expanding financial inclusion. This in turn is helpful in further expanding financial literacy, thus, mutually reinforcing each other in a positive manner (Chakrabarty, 2011). NABARD is working with the Indian School of Microfinance for Women and has identified state level partners on modalities for alliance, monitoring systems and impact evaluation mechanism, for formulating a National Alliance on Financial Literacy (NABARD, 2011).

Financial Inclusion Fund (FIF) and Financial Inclusion Technology Fund (FITF)

Two funds, viz. Financial Inclusion Fund (FIF) for meeting the cost of developmental and promotional interventions of financial inclusion, and Financial Inclusion Technology Fund (FITF) for meeting the cost of technology adoption, were set up in NABARD during 2007-08, based on the recommendations of the Committee on Financial Inclusion (Chairman : Dr. C. Rangarajan) (Government of India, 2008). The corpus of each Fund is `500 crore, to be contributed by the Government of India (GoI), RBI and NABARD in the ratio of 40:40:20 in a phased manner over a period of five years.  

The following major projects were undertaken by NABARD during 2011-12 towards promotion of financial inclusion by utilizing the FIF and FITF (NABARD, 2012): (a) support for CBS for 26 weak RRBs with an assistance of `216.52 crore; (b) grant assistance of `107.07 crore for application of ICT solution in BC/ CF models in 53 RRBs, under FITF; (c) establishment of financial literacy and credit counseling centres (FLCCs) by Lead Bank in 256 excluded and 10 disturbed districts out of FIF; (d) grant assistance of `3.28 crore was provided to Doordarshan out of FIF for producing and directing financial literacy programmes .; (e) support to Invest India Micro Pension Services to the extent of `2.25 crore from the FIF to pilot test a micro pension model among SHG members in eight districts of four states, viz., Odisha, Uttar Pradesh, Bihar and Tamil Nadu; (f) financial support to the extent of `2.08 crore out of FIF has been sanctioned to 22 RRBs in 12 states for Farmers Clubs acting as BFs in villages having population of more than 2000 in their command area; (g) eight RRBs were sanctioned ` 0.43 crore for training of authorized functionaries of well-run SHGs in 6 states; and (h) an amount of ` 0.22 crore was sanctioned and disbursed to National Informatics Centre for development of web-based Geographical Information System (GIS) application for assessing the reach and extent of banking in the country and also the development of a web-based MIS for capturing banking facility.         

NABARD-UNDP Collaboration for Financial Inclusion

UNDP-NABARD Financial Inclusion Fund has been established in NABARD to provide better access to financial products and services for reducing risks and enhancing livelihood for the poor, especially the SC and ST, minorities and the displaced. During 2011-12, ` 0.47 crore had been utilised for activities conducted by NABARD in seven states, viz. Bihar, Chhattisgarh, Jharkhand, Madhya Pradesh, Odisha, Rajasthan and Uttar Pradesh (NABARD, 2012).

Technological Innovations

Technology helps financial institutions to go where the customer is, while playing an important role in reducing the operating costs for providing banking services, particularly in remote rural areas (Chakrabarty, K.C. (2011a). The telecom revolution in India has led to widespread access to internet and mobile services. This has enabled the availability of information and communication technology (ICT) at various levels of the technology delivery chain. In the context of financial inclusion the challenge would be to get the technology pieces together in a complete whole that is viable and sustainable (ibid.). Thus, it is imperative that all banks should accord top priority to provide connectivity to ensure that banking facilities reach all its customers spread over all regions of the country in an efficient and cost effective manner.

Some of the cost-effective technological innovations for achieving financial inclusion are discussed in the following paragraphs.

(a) CBS, ATMs, Smart Cards and Biometric Cards

Financial inclusion could be a cost-effective business proposition if appropriate low-cost technology is adopted by commercial banks and rural financial institutions.  Such technology should be able to reduce transaction costs of providing banking services in the rural, unbanked and backward areas of the country.  In this context, there is a need for banking service providers to enter into passive infrastructure sharing arrangements. Technology-enabled projects, viz. the Unique Identification Number (UID) project, CBS in RRBs and cooperative credit institutions, mobile banking, hand-held devices, smart cards, bio-metric cards, tech-savvy BCs (trained out of FITF), routing of payment under government social schemes through banks and micro-finance, have the ability to catapult financial inclusion into mainstream banking business.

There is a greater concentration of ATMs in urban and metropolitan areas than in rural areas. However, the number and percentage of ATMs in rural areas has been on a steady rise in recent years. ATMs in rural areas in 2010-11 accounted for an increase of 37.7 per cent over the previous year. But while only 9.6 per cent of the total ATMs were located in rural areas, as on 31 March 2012, semi-urban, urban, and metropolitan centres accounted for 24.3 per cent, 32.3 per cent and 33.8 per cent, respectively (RBI, 2011). The share of the North Eastern region at 2.1 per cent was the lowest in the incremental deployment of ATMs in 2010-11, followed by the Eastern (11.6 per cent) and Central (14.3 per cent) regions, respectively (ibid.). Thus, there is an urgent need to expand ATM network in the rural areas and the financially excluded regions of the country.

(b) IT-enabled Kisan Credit Card/ General Credit Card

Kisan Credit Card (KCC) aims at providing adequate and timely support from the banking system to the farmers for their short term credit needs. Banks need to convert KCC and General Credit Cards (GCC) to electronic credit cards, which could enable farmers to withdraw cash from ATMs anywhere in the country. Banks may consider issuing multipurpose cards which could function as Debit Cards, KCC, and GCC, as per customer’s needs. Any other financial services/ products could also be embedded in the multipurpose card. The RBI has advised banks to consider introduction of a GCC facility up to `25,000 at their rural and semi-urban braches. The objective of the scheme is to provide hassle free credit to banks’ customers based on the assessment of cash flow without insistence on security, purpose or end-use of the credit.

The Union Budget 2011-12 had announced that the KCC scheme would be modified to introduce smart cards that could be used at ATMs. Accordingly, a working group[6] was constituted, which made recommendations about introducing standardised KCCs and specified technical details to make the biometric smart card compatible for use in ATMs and hand-held swipe machines and capable of storing adequate information on farmers’ identity, assets, land holdings and credit profile. The recommendations of the working group were accepted by the government and subsequently the KCC Scheme was revised by the Reserve Bank (RBI, 2012).

In 2011-12 NABARD initiated a pilot project linking KCC to a farmer’s mobile phone, which significantly reduces transaction costs. However, as every farmer does not have a mobile phone, NABARD has initiated a programme of linking KCC account to the biometric authentication of Aadhaar or NPR so that the KCC account holder is able to transact business almost anywhere.

(c)  Mobile Banking

There were 323.27 million mobile subscribers in Rural India, as on 31 March 2012 (TRAI, 2012). Thus, mobile phones could be a major instrument for rapid upscaling of financial inclusion. RBI’s operative guidelines on Mobile Banking issued in October 2008 were reviewed and relaxed in December 2009 by enhancing the limits for mobile banking transactions up to `50,000 for both e-commerce and money transfer transactions, and permitting the money transfer facility up to `5,000 from a bank account to beneficiaries not having a bank account (RBI, 2010). Mobile banking presents banks with the lowest per-transaction cost. Further, value added services like fund transfer, payment of telephone/ electricity bills and pre-paid mobile recharge could be enabled.

One of the biggest challenges in Financial Inclusion is to reduce the cost of micro-transactions which mainly include authentication and cash handling costs. The ‘Yes Mobile Money Services’ of Yes Bank is a frugal innovation which uses various BC outlets as convenient points for converting physical currency into digital currency (and vice versa) which is stored on the customer’s mobile phone in a secure manner. The customer can use this digital currency for various types of payments and even remittances to family and friends in a self-authenticated manner through a mobile network (Kapoor, 2011).  

(d) ICT-enabled Mobile Banking Vans

As directed by the RBI scheduled commercial banks have prepared ICT- based roadmap for providing banking services to all villages with population above 2,000 falling under the lead district programme by March 2012. In this context ICT-enabled Mobile Banking Vans (MBV) could provide efficient and cost-effective banking services in the unbanked and remotest corners of the country. Bank of Baroda and Indian Bank have introduced MBVs to provide banking services in the financially excluded regions. The MBVs units have CBS connectivity to provide all banking services, including deposit and withdrawal of money. The model has already been successfully tested by Bank of Baroda in Gujarat and Bihar.  

            Chakrabarty (2011a) has expressed the view that it is imperative to facilitate opening new accounts, provide need based credit, remittance facilities and help promote financial literacy in rural India. It is expected that new technologies and business correspondents will drive this movement. In the long run, it is expected to cover the economic distance between rural and urban India.

VI. Demand-side Interventions for Financial Inclusion

The Rangarajan Committee (Government of India, 2008) expressed the view that in order to improve the level of inclusion among people and regions with limited or weak demand for financial services, demand side efforts need to be undertaken including improving human and physical resource endowments, enhancing productivity, mitigating risk and strengthening market linkages. Technological innovations, infrastructure development, farm sector development and capacity building of SHGs, farmers and rural youth, are efforts on the demand side, which could make financial inclusion more widespread and sustainable.

Technological innovations

Infrastructure of village level kiosks is being promoted across the country by internet service providers, public-private partnerships and agri-business corporates. ITC’s e-Choupal is by far the most successful model that has unlocked value for all the stakeholders. Under the Information Village Research Project implemented by the M.S.Swaminathan Research Foundation for Pondicherry fishermen, computers with internet connections are placed in the village centre, through which regular weather reports of the Indian Meteorology office can be accessed. Village level internet kiosks, by creating awareness and demand for financial services, can be an effective channel to deliver cost effective financial services to the rural poor right at their doorstep.

Rural Infrastructure Development

It is widely acknowledged that lack of infrastructure is a major constraint for growth and poverty alleviation. Improvement in rural infrastructure is, therefore, crucial for broad-based inclusive growth. Under Rural Infrastructure Development Fund (RIDF), NABARD provides loans to State Governments for the creation of rural infrastructure, broadly under agriculture and related sectors, rural connectivity and social sector. Completed projects under RIDF have led to the realisation of economic and social benefits in terms of creation of additional irrigation potential; generation of additional employment for the rural people; contribution to the economic wealth of the country; all weather connectivity/ improved connectivity to villages and marketing centres; and improvements in quality of life through better facilities in education, health and drinking water supply. Such infrastructure facilities promise to improve the accessibility of the rural poor to banks, and also improve their savings habit and credit absorption capacity (Roy, 2011).

NABARD has introduced NABARD Infrastructure Development Assistance (NIDA) as a new line of credit support to State owned institutions/ corporations for creation of rural infrastructure outside the ambit of RIDF. Projects sanctioned under NIDA are expected to generate widespread benefits towards attainment of inclusive and sustainable development. Some of these projects are: (a) construction of warehouses of 1.06 lakh MT to Karnataka State Warehousing Corporation; (b) establishment of 220 kV substation and associated transmission system in Purulia district of West Bengal to West Bengal State Electricity Transmission Co. Ltd.; (c) two solar power projects with generation capacity of 2 MW to Gujarat State Electricity Transmission Co. and 5MW power generation projects to Gujarat Power Corporation. These projects, being located in the rural areas have the potential of increasing financial inclusion by benefiting agriculture, and micro, small and medium enterprises (MSME), thereby enhancing the credit absorption capacity and savings of the rural population

Farm Sector Development – Public Private Partnership

ITC’s e-Choupal infrastructure enables even small and marginal farmers, who have no access to the formal market, to receive relevant knowledge and agricultural extension services. This enables real-time price discovery and improvement in farm productivity and quality, making them more competitive in the national and global markets. Presently, ITC has 6,500 e-Choupals covering 40,000 villages and over 4 million farmers. By 2012, the e-Choupal network is expected to cover over 100,000 villages, representing one-sixth of rural India, and create more than 10 million e-farmers. On the other hand, the Farmers Club Programme formulated by NABARD and implemented by banks, aims to organize farmers to facilitate accessing of credit, extension services, farm technology and markets. Farmers’ Clubs are provided with information on weather, market prices, crop advisory services through SMS on mobile phones and 36,654 connections have been provided to farmers / Farmers’ Clubs as on 31 March 2012, as part of an ICT initiative (NABARD, 2012). While ITC is planning to upscale the e-Choupal initiative, the possibility of collaborating with ITC to provide such infrastructure to about 1.02 lakh Farmers’ Clubs, could be explored. The synergy from such collaboration could result in sustainable financial inclusion.

Other initiatives by NABARD towards farm sector development include promotion of participatory watershed development projects with the aim of enhancing the productivity and profitability of rainfed agriculture in a sustainable manner. It anchors four watershed development programmes in the country covering over 1.78 million hectares. ITC too has been supporting sustainable agriculture through watershed development initiative, by irrigating over 64,000 hectares of water-stressed areas (ITC, 2012). Similarly, HUL is also involved in the promotion of sustainable agricultural practices viz. improving soil fertility, water management, use of drip irrigation and pest control. HUL is also collaborating with State Bank of India to promote financial inclusion.

Collaboration between NABARD, government agencies, agriculture universities, research institutions, Krishi Vigyan Kendras, civil society organisations, banks and the corporate sector have the potential of promoting sustainable agriculture in India. This would facilitate the achievement of sustainable and inclusive growth through financial inclusion.

VII. Conclusion

Financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded population.  This paper has underscored the need for banks to promote financial inclusion in the unbanked and under-banked regions of the country, especially in the north-eastern, eastern and central regions, and also in the rural and semi-urban areas.  

The paper develops an index of financial inclusion (IFI) using data on three dimensions of financial inclusion, and examines state-wise IFI vis-à-vis per capita net state domestic product IFI of states in India. The findings corroborate the fact that financial exclusion is more prominent in the less developed regions of the country, compared to the more developed states.

Achieving 100 per cent financial inclusion across the country is a daunting task. This calls for a planned and coordinated approach by RBI and NABARD, on one hand, and commercial banks and rural financial institutions (RFIs), on the other. Harnessing low cost technology, and provision of technical, financial and policy support from Government of India, RBI and NABARD could facilitate faster financial inclusion. Demand side factors like IT innovations, development of rural infrastructure and development initiatives in the farm sector by NABARD, research institutions, government agencies, corporate sector and civil society organizations could lead to widespread and sustainable financial inclusion.

The right policy initiatives by RBI and NABARD and special focus on financial inclusion by banks, along with development of critical infrastructure could enable the achievement of financial inclusion to act as a springboard for attaining the goal of inclusive and sustainable growth.

References

Bakshi, P (2012), Speech by Dr Prakash Bakshi, Chairman, NABARD on the occasion of NABARD’s 30^th Foundation Day on 12 July 2012. . www.nabard.org

Chakrabarty, Dr K C (2011), ‘Banking and Beyond: New Challenges before Indian Financial System’. RBI Monthly Bulletin April 2011.  

______________  (2011a),  Beyond CBS : Fast Forward to BANKING 2.0! Address by Dr K C Chakrabarty, Deputy Governor, RBI, at the Executive Roundtable organized by IDRBT in collaboration with Union Bank of India at Mumbai on Feb 18, 2011.  www.rbi.org.in

Government of India (2008) Report of the Committee on Financial Inclusion, Chairman: C Rangarajan. www.nabard.org

___________________ (2009), A Hundred Small Steps, Report on the Committee on Financial Sector Reform,  Chairman: Raghuram Rajan, Sage, New Delhi

Kapoor, R (2011), Fugal Innovations for Financial Inclusion, Rana Kapoor, Founder, MD and CEO, Yes Bank, published in BANCON Conference Papers, Bankers’ Conference 2011, Indian Banks Association and Indian Overseas Bank.

ITC (2012), Sustainability Report 2011

NABARD (2011),  Status of Microfinance in India 2010-11.

______________ (2012), Annual Report 2011-12 NABARD

Prahalad, C.K. (2005), The Fortune at the Bottom of the Pyramid: Eradicating Poverty through Profits, Wharton School Publishing/ Pearson Education (Singapore) Pte Ltd.

Priyadarshee, A (2010), Rural Development and India Post, India Post

Reserve Bank of India (2008), Report on Currency and Finance 2006-08, Volume II, RBI, Mumbai

_______________________ (2009), Report of the Working Group to Review the Business Correspondent Model

__________________ (2010), Report on Trend and Progress of Banking in India 2009-10

__________________ (2011), Report on Trend and Progress of Banking in India 2010-11

____________________ (2011a), Draft Guidelines for Licensing of New Banks in the Private Sector, August 29, 2011.

____________________ (2012), Annual Report 2011-12, Reserve Bank of India

Roy, Debesh (2011), Financial Inclusion in India: Emerging Profitable Models, published in BANCON Conference Papers, Bankers’ Conference 2011, Indian Banks Association and Indian Overseas Bank.

Sarma, M (2008), Index of Financial Inclusion, Working Paper no. 215, ICRIER, June 2008.

Society for Elimination of Rural Poverty (SERP) (2012), Annual Report 2011-12, March 2012

Telecom Regulatory Authority of India (2012), Indian Telecom Services Performance Indicators, January-March 2012, New Delhi

---

* Dr Debesh Roy is Assistant General Manager, NABARD.  Views expressed by the author are personal.

[1] Source: Basic Statistical Returns of Scheduled Commercial Banks in India, Vol. 40, March 2011, Reserve Bank of India (Table 1.1 Progress of Commercial Banking at a Glance).

[2] Reference: Table IV.34, Report on Trend and Progress of Banking in India 2009-10, RBI

[3] Unbanked rural centres are Tier 5 and Tier6 centres that do not have a brick and mortar structure of any SCB for customer based banking transaction.

[4] This is a unique initiative under which minor girls are formed into SHGs. They meet regularly, save small amounts and discuss issues relating to education, environment, cleanliness, nutrition, etc.

[5] Table IV.6 Annual Report 2011-12, Reserve Bank of India.

[6] The working group was constituted under the chairmanship of T.M.Bhasin, CMD, Indian Bank.