Financial inclusion

Meaning:
Financial inclusion is the availability of banking services at an affordable cost to disadvantaged and low-income groups. In India the basic concept of financial inclusion is having a saving or current account with any bank. In reality it includes loans, insurance services and much more.

Definition of financial inclusion as per the Rangarajan commitee :
Government of India "Committee on Financial inclusion in India" : The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable group such as the weaker sections and low income groups at an affordable cost. (Rangarajan committee,2008)

Definition of financial inclusion as defined in the paper:
A process that ensures the ease of access, availability and usage of formal financial system for all members of an economy.
Index of financial inclusion (IFI) takes values between 0 to 1 and is based on the following factors in general:
Number of bank accounts per 1000 adult persons.
Number of bank branches per million people.
Number of ATM’s per million people.
Amount of bank credit. (Credit to GDP ratio)
Amount of bank deposit. (Deposit to GDP ratio)


Research paper has used the following three parameters for ranking the countries :
Banking penetration
Availability of banking services (branches, ATM’s or number of employees per customer)
usage of banking system. (credit and deposit)

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Summary:

1. India ranked 50th in a recent study for financial inclusion by ICRIER among 100 countries.
2. Only 34% of Indian individuals have access to or receive banking services.
3. Financial inclusion mainly focuses on the poor who do not have formal financial institutional support and getting them out of the clutches of local money lenders.
4. Banks are now permitted to utilize the service of NGOs, SHGs and other civil society organizations as intermediaries in providing financial and banking services through the use of business facilitator and business correspondent models.

In order to increase FI, the Reserve Bank of India had the Government of India take innovative steps:
1. opening new branches of Regional Rural Banks to make banking services accessible to poor.
2. With the directive from RBI, our banks are now offering “No Frill” Accounts to low income groups.These accounts either have a low minimum or nil balance with some restriction in transactions.
3. some of our banks have now come forward with general purpose credit cards and artisan credit cards which offer collateral-free small loans.
4. The RBI has simplified the KYC (Know your customer) norms for opening a ‘No frill’ account. This will help the low income individual to open a ‘No Frill’ account without identity proof and address proof


Reason for financial exclusion:
1. Lack of a regular or substantial income.
2. In most of the cases people with low income do not qualify for a loan.
3. The proximity of the financial service is another fact.
4. The loss is not only the transportation cost but also the loss of daily wages for a low income individual.
5. Most of the excluded consumers are not aware of the bank’s products, which are beneficial for them.
6. Getting money for their financial requirements from a local money lender is easier than getting a loan from the bank.
7. Most of the banks need collateral for their loans. It is very difficult for a low income individual to find collateral for a bank loan.
8. Banks give more importance to meeting their financial targets. So they focus on larger accounts. It is not profitable for banks to provide small loans and make a profit.

Ways to achieve Financial Inclusion:

1.The provision of uncomplicated, small, affordable products will help to bring the low income families into the formal financial sector

2.Correspondents can be considered to be an excellent channel which banks can use to distribute their product information.

3.Educating the consumers about the financial benefits and products of banks which are beneficial to low income groups will be a great step to tap their potential.

4.Banks are now using new technologies like mobile phones to reach low income consumers. It is possible that the telephone providers themselves will start basic banking services like savings and payments.

5. Kirana store owners may emerge as the new bankers for rural India with commercial banks lining up to enlist them as business facilitators to increase their reach. The RBI has allowed banks to explore tie ups with local operators such as kirana stores, medical shop owners and public call office operators, agents selling small savings schemes, petrol pump owners and retired teachers to further the cause of financial inclusion.

6. The real push has come from the government which is putting pressure on state-owned banks to achieve greater financial inclusion and even wants to include it in the criteria used for evaluating their performance.

7. Other state-owned banks such as Bank of Baroda and Oriental Bank of Commerce (OBC) are also in the process of firming up agreements with kirana store owners. Kirana store owners are already in the business of giving small domestic loans and will have the wherewithal to help banks with the know-your-customer (KYC) norms.

8.Norms allow a kirana store acting as a banking facilitator to disburse loans up to Rs 25,000 per borrower for which they will get a fee from the bank. The final liability for the loan will, however, rest with the bank only. They can also recover the same amount besides selling other financial products such as micro insurance, mutual fund and pension products.

Financial inclusion is a great step to alleviate poverty in India.