CHAPTER-1

INTRODUCTION
1.1 INTRODUCTION
India has a long history of development of banking system. After independence, the
major focus of the Government and the Reserve Bank of India had been to develop a
sound banking system which could support planned economic development through
mobilization of resources/deposits and channel them into productive sectors.
Accordingly, the Government is decided to use the banking system as an important agent
to change the core policies that were formulated since independence. The planning
strategy recognized the critical role of the availability of credit and financial services to
the public at large in the holistic development of the country. In recognition of this role,
the authorities modified the policy framework from time to time and whereby it ensured
that the needs of financial services in various segments of the society were met
adequately. The recent developments in banking technology have transformed banking
from the traditional brick and mortar infrastructure like staffed branches to a system
supplemented by other channels like Automated Teller Machines (ATM), Credit/Debit
Cards, Internet Banking, Online Money Transfers, etc. The moot point, however, is that
access to such technology is restricted only to certain segments of the society. Indeed,
allowing, such increasingly sophisticated customer segmentation technology or more
accurate targeting of sections of the market has led to restricted 2 access to financial
services for some groups. With an increased range of personal finance options for
segments of high and upper middle income population and a significantly large section of
the population who lack access to even the most basic banking services, the gap widens
and leads to “financial exclusion”. These large section of people, particularly, those
living on low incomes, cannot access mainstream financial products such as bank
accounts, credit, remittances and payments services, financial advisory services,
insurances facilities, etc., The subject matter of financial inclusion contributed to a
consensus that merely having a bank account may not be a good indicator of financial
1.2 HISTORY OF FINANCIAL INCLUSION

Identifying the term "financial inclusion" has gained importance since the early 2000s, a
result of financial exclusion and it is a direct correlation to poverty according to the
World Bank. The United Nations defines the goals of financial inclusion as follows:

Access at a reasonable cost for all households to a full range of financial services,
including savings or deposit services, payment and transfer services, credit and insurance.

Sound and safe institutions governed by clear regulation and industry performance
standards.

Financial and institutional sustainability, to ensure continuity and certainty of investment.

Competition to ensure choice and affordability for clients. Former United
Nations Secretary-General Kofi Annan, on 29 December 2003, said: The stark reality is
that most poor people in the world still lack access to sustainable financial services,
whether it is savings, credit or insurance. The great challenge is to address the constraints
that exclude people from full participation in the financial sector. Together, we can build
inclusive financial sectors that help people improve their lives.” More recently, Alliance
for Financial Inclusion (AFI) Executive Director Alfred Hannig highlighted on 24 April
2013 progress in financial inclusion during the IMF-World Bank 2013 Spring Meetings:
"Financial inclusion is no longer a fringe subject. It is now recognized as an important
part of the mainstream thinking on economic development based on country leadership.In
partnership with the National Bank for Agriculture and Rural Development, the UN aims
to increase financial inclusion of the poor by developing appropriate financial products
for them and increasing awareness on available financial services strengthening financial
literacy, particularly among women. The UN's financial inclusion product is financed by
the United Nations Development Programmed.
1.3 MEANING

Financial inclusion refers to efforts to make financial products and services accessible
and affordable to all individuals and businesses, regardless of their personal net worth or
company size. Financial inclusion strives to remove the barriers that exclude people from
participating in the financial sector and using these services to improve their lives. It is
also called inclusive finance.

Financial Inclusion is the process of Ensuring easy access to financial services and
adequate credit to lower income groups and weaker sections of society.

1.4 OBJECTIVE OF FINANCIAL INCLUSION

➢ Financial inclusion intends to help people secure financial services and products
at economical prices such as deposits, fund transfer services, loans, insurance,
payment services, etc.
➢ It aims to establish proper financial institutions to cater to the needs of the poor
people. These institutions should have clear-cut regulations and should maintain
high standards that are existent in the financial industry.
➢ Financial inclusion aims to build and maintain financial sustainability so that the
less fortunate people have a certainty of funds which they struggle to have.
➢ Financial inclusion also intends to have numerous institutions that offer affordable
financial assistance so that there is sufficient competition so that clients have a lot
of options to choose from. There are traditional banking options in the market.
However, the number of institutions that offer inexpensive financial products and
services is very minimal.
➢ Financial inclusion intends to increase awareness about the benefits of financial
services among the economically underprivileged sections of the society.
➢ The process of financial inclusion works towards creating financial products that
are suitable for the less fortunate people of the society.
 ➢ Financial inclusion intends to improve financial literacy and financial awareness
in the nation.
➢ Financial inclusion aims to bring in digital financial solutions for the
economically underprivileged people of the nation.
➢ It also intends to bring in mobile banking or financial services in order to reach
the poorest people living in extremely remote areas of the country.
➢ It aims to provide tailor-made and custom-made financial solutions to poor people
as per their individual financial conditions, household needs, preferences, and
income levels.

There are many governmental agencies and non-governmental organizations that are
dedicated to bringing in financial inclusion. These agencies are focused on improving the
access to receiving government-approved documents. Many poor people are unable to
open bank accounts or apply for a loan as they do not have any identity proof. There are
so many people who live in rural areas or tribal villages who do not have knowledge
about documents such as PAN, Aadhaar, Driver’s License, or Electoral ID. Hence, they
cannot avail many of the services offered by governmental or private institutions. Due to
lack of these documents, they are unable to avail any form of subsidies offered by the
government that they are actually entitled to.

1.5 NEED FOR FINANCIAL INCLUSION

A large section of the society still remains unbanked. Unbanked people are people who
only have the basic transaction bank accounts. These are people who have secured the
traditional tools for conducting transactions but aren’t privy enough to digital
incorporation of the same.
Financial inclusion enhances the financial system of the country comprehensively. It
strengthens the availability of economic resources. Most importantly, it toughens the
concept of savings among poor people living in both urban and rural areas. This way, it
contributes towards the progress of the economy in a consistent manner.

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Many poor people tend to get cheated and sometimes even exploited by rich landlords as
well as unlicensed moneylenders due to the vulnerable condition of the poor people. With
the help of financial inclusion, this serious and hazardous situation can be changed.
Financial inclusion engages in including poor people in the formal banking industry with
the intention of securing their minimal finances for future purposes. There are many
households with people who are farmers or artisans who do not have proper facilities to
save the money that they earn after putting in so much effort.

1.6 THE IMPORTANCE OF FINANCIAL INCLUSION

➢ Access to financial services enables the poorest and most vulnerable in society
to step out of poverty and reduces the inequality in society
➢ Financial inclusion not only helps individuals and families, but collectively it
develops entire communities and can help drive economic growth
➢ Financial inclusion is about enabling and empowering people and communities.
➢ Participation within the financial system leads to all kinds of individual benefits.
➢ Ability to start and grow a business, which gives people an opportunity through
micro-financing schemes.
➢ Financial inclusion through access to an account, savings and a payment system
(whatever that maybe) enables potential and empower men, women and whole
communities. This in turn promotes.
➢ Investment within the community provides jobs and again research shows that
employment boosts status, income and ones outlook on life. Collectively this
helps to invigorate economies.
➢ Equality both within the community and within families.

1.7 FINANCIAL INCLUSION IN INDIA

Despite India boasting economic growth rates higher than most developed countries in
recent years, a majority of the country’s population still remains unbanked. Financial
Inclusion is a relatively new socio-economic concept in India that aims to change this
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dynamic by providing financial services at affordable costs to the underprivileged, who
might not otherwise be aware of or able to afford these services. Global trends have
shown that in order to achieve inclusive development and growth, the expansion of
financial services to all sections of society is of utmost importance. As a whole, financial
inclusion in the rural as well as financially backward pockets of cities is a win-win
opportunity for everybody involved – the banks/NBFC’s intermediaries, and the left-out
urban population. Banks will handle core infrastructure and services while intermediaries
known as Business Correspondents (BC’s) will be the executors and act as the face of
these banking & financial institutions in dealing with end-users. The Business
Correspondents (BC’s) shall be carrying handheld terminals like Tablets (GSM enabled)
coupled with portable biometric scanner, smart card swipe machines as well as thermal
Bluetooth printers for carrying out their online banking activities on the field.
Authentication and customer information is provided by the UIDA through NPCI or
NSDL once the institution becomes an authorized UIDAI user. As income levels and
consequently, savings in rural areas increase, it is essential to help earners manage their
funds and facilitate incoming and outgoing payments. Allowing people to create simple,
no-frills current and savings accounts, relaxing KYC norms and directly crediting social
benefits to account owners will bolster an inclusive approach to finance & banking in
rural areas.

1.8 ADVANTAGES OF FINANCIAL INCLUSION

➢ The rural masses will get access to banking like cash receipts, cash payments,
balance enquiry and statement of account can be completed using fingerprint
authentication. The confidence of fulfillment is provided by issuing an online
receipt to the customer.
➢ Reduction in cash economy as more money is brought into the banking ecosystem
➢ It inculcates the habit to save, thus increasing capital formation in the country and
giving it an economic boost.

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 ➢ Direct cash transfers to beneficiary bank accounts, instead of physical cash
payments against subsidies will become possible. This also ensures that the funds
actually reach the intended recipients instead of being siphoned off along the way.
➢ Availability of adequate and transparent credit from formal banking channels will
foster the entrepreneurial spirit of the masses to increase output and prosperity in
the countryside.

1.9 DISADVANTAGES OF FINANCIAL INCLUSION

➢ The Need to Improve Financial Literacy
Based on studies on remittance services among migrants and surveys conducted
by the World Bank Group in Morocco and Mozambique, it has been found that
the lack of awareness among the study group prevented them from utilizing the
right products and services that suited their particular needs. By improving the
financial literacy rate among these individuals, this will lead to better financial
decisions and the selection of the right products that best suits the needs of these
individuals. It will also lead to knowing how to better utilize the various channels
that are available for their banking needs. In other words, more effective and
lower cost measures can be utilized to improve the uptake of new bank accounts
which will ultimately result in increased savings.
➢ Lack of Formal Identification Documents
One of the key factors which prevent the unbanked from getting access to basic
banking services is the lack of formal identification documents. In most countries,
a proper ID is required before an individual can open a bank account. IDs are also
needed for claiming social benefits and the transfers of funds. Hence in order to
improve access to banking services for the unbanked, authorities need to simplify
and streamline the process for obtaining a formal ID card.
➢ Consumer Protection
Although there has been a proliferation of financial services such as mobile
money and virtual currencies designed to expand financial inclusion, there is a
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lack of trust among consumers as to the security and reliability of these newly
established platforms. In order to promote confidence in these new methods of
payment services, authorities must release clear guidelines and regulations that
will ensure that the consumers are adequately protected and have access to key
product information to allow them make informed decisions.
➢ The Rural Poor and Gender Inequality
According the latest data from Finder, approximately 1.1 billion of the 2 billion
unbanked individuals around the world are women. In developing countries, the
rural poor and women in general face unique obstacles when trying to access
financial services. Based on research conducted by the World Bank, even though
women form a larger share of the self-employed category in developing countries,
they have a lower chance of securing credit from banks. IFC research has shown
that this is largely due to a lack of collateral or poor credit history which leads to
more women being denied credit by the financial institutions.
Even if these women were able to secure formal credit from the banks, they often
have to pay higher interest rates than the men. In order to expand financial
inclusion among the rural poor and women, stakeholders must come up with ways
which will remove the impediments that these two demographics face in trying to
gain access to financial services. These efforts can include providing this target
group with an ID which they can use to open a saving account to build up a credit
history from an early age. Other measures can include more investment into
financial awareness programs to help reinforce the ability of the women and the
rural poor to make better-informed financial decisions.
➢ Promoting the Use of the Transaction Account
Most initiatives by policymakers have been targeted to increase the uptake of new
bank accounts among the unbanked. However, it should be remembered that
opening an account is just the first step rather than the ultimate objective. It has
been noted that of the 355 million adults in developing countries that reported
having a bank account, still resort to remitting money by cash or over the counter.
 For a bank account to be relevant in these people lives, it must be useful and
function as a gateway to other financial services which can improve their overall
economic welfare.
1.10 NEED OF FINANCIAL INCLUSION IN INDIA
Through financial inclusion the resource base of Indian financial system can be
enhanced as it promotes a culture of savings amongst large segment or rural
population. Further, by provision of financial services to low income groups helps
them to protect their financial wealth and use it in any insistent circumstances. Easy
access to formal credit will protect the vulnerable sections of society from usurious
money. The main objectives of Financial Inclusion in India are enumerated below:
➢ Providing formal credit channels: So far major chunk of the population which is
deprived of any formal access to credit depends on family, friends and
moneylenders for fulfilling their financial needs. Formal banking channels will
enable people from lower income groups to stabilize their livelihood and will in
improving their standards of living.
➢ Creating a platform for inculcating the habit of saving money: For growth of a
nation financial system is a crucial component. By aiming for financial inclusion
Government of India wants to increase the financial resource base through
motivating all individuals to have a bank account and thus inculcate habit of
saving (Singh and Singh, 2016).
➢ Providing direct benefits of subsidies and welfare programmer. A major challenge
faced by Government is that the sum of money designated for rural masses under
several schemes does not reach them in reality. If every individual residing in
rural areas will have a bank account, the disbursal of cash will be quick and
transparent (Sehrawat and Giri, 2016). Consequently government has opted
for direct cash transfers in accounts of beneficiaries.
1.11 FINANCIAL INCLUSION SCHEMES IN INDIA
The Government of India has been introducing several exclusive schemes for the
purpose of financial inclusion. These schemes intend to provide social security to
the less fortunate sections of the society. After a lot of planning and research by
several financial experts and policymakers, the government launched schemes
keeping financial inclusion in mind. These schemes have been launched over
different years. Let us take a list of the financial inclusion schemes in the country.
➢ Pradhan Mantri Jan Dhan Yojana (PMJDY)
➢ Atal Pension Yojana (APY)
➢ Pradhan Mantri Vaya Vandana Yojana (PMVVY)
➢ Stand Up India Scheme
➢ Pradhan Mantri Mudra Yojana (PMMY)
➢ Pradhan Mantri Suraksha Bima Yojana (PMSBY)
➢ Sukanya Samriddhi Yojana
➢ Jeevan Suraksha Bandhan Yojana
➢ Credit Enhancement Guarantee Scheme (CEGS) for Scheduled Castes
(SCs)
➢ Venture Capital Fund for Scheduled Castes under the Social Sector
Initiatives
➢ Varishtha Pension Bima Yojana (VPBY).
1.12 CHALLENGES OF FINANCIAL INCLUSION IN INDIA
➢ Agent and vendor risk.
➢ Consumption oriented expenditure patterns.
➢ Dormant accounts.
➢ Inadequate awareness levels.
➢ Lack of infrastructure.
➢ Low literacy rates.
➢ Measuring actual extent of financial exclusion.
➢ Poor saving habits.
➢ Recovery related issues.
➢ Small ticket transactions & high transaction costs.
➢ Sustainability factor.
➢ Varied local conditions.