UNIT 3

FINANCIAL INCLUSION
INTRODUCTION

• Financial inclusion is increasingly being recognized as a key driver of economic growth

and poverty alleviation the world over.
• Access to formal finance can boost job creation, reduce vulnerability to economic shocks
and increase investments in human capital.
• Without adequate access to formal financial services, individuals and firms need to rely
on their own limited resources or rely on costly informal sources of finance to meet their
financial needs and pursue growth opportunities.
• At a macro level, greater financial inclusion can support sustainable and inclusive socio-
economic growth for all.
FINANCIAL INCLUSION

• It has a multiplier effect in boosting overall economic output, reducing poverty and income
inequality at the national level.
• Financial inclusion of women is particularly important for gender equality and women’s economic
empowerment.

• An inclusive financial system supports stability, integrity and equitable growth.

CAUSES OF FINANCIAL EXCLUSION

Lack of
surplus
income
High Lack of
transaction requisite
cost documents
Not suitable to
customer’s
requirements

Religious Lack of
reasons trust

Lack of
awareness
THE NATIONAL STRATEGY FOR FINANCIAL
INCLUSION
• The National Strategy for Financial Inclusion 2019-2024 sets forth the vision and key
objectives of the financial inclusion policies in India to help expand and sustain the
financial inclusion process at the national level through a broad convergence of action
involving all the stakeholders in the financial sector.
UNITED NATIONS SUSTAINABLE
DEVELOPMENT GOALS (SDG) OF 2030

• United Nations Sustainable Development Goals (SDG) of 2030 financial inclusion as a

key enabler for achieving sustainable development worldwide by improving the quality
of lives of poor and marginalized sections of the society. (Home- Sustainable
Development Goals, 2018)
GLOBAL FINANCIAL INCLUSION STRATEGY

• Achieving Universal Financial Access by 2020 has been one of the key developmental
agenda of the World Bank which aims to provide adults who currently aren’t part of the
formal financial system, with access to a transaction account to store money, send and
receive payments to manage their financial lives.
• To achieve this ambitious goal, the World Bank Group has committed to enable one
billion people to gain access to a transaction account through targeted interventions.
• Globally, the adoption of a formal National Financial Inclusion Strategy (NFIS) has
accelerated significantly in the past decade.
STATUS OF FINANCIAL INCLUSION IN INDIA

• India began its financial inclusion journey as early as in 1956 with the nationalisation of
Life Insurance companies. This was followed by nationalisation of banks in 1969 and
1980. The general insurance companies were nationalised in 1972.
• India has also been actively engaged with other countries viz. Global Partnership for
Financial Inclusion (GPFI) and Organization for Economic Co-operation and
Development (OECD).
• National Mission for Financial Inclusion, namely the Pradhan Mantri Jan Dhan Yojana
(PMJDY). Launched in August 2014, it was a watershed in the financial inclusion
movement in the country to provide every household with access to basic financial
services, thereby bridging the gap in the coverage of banking facilities.
STATUS OF FINANCIAL INCLUSION IN INDIA

• Under PMJDY, 34.01 crore accounts have been opened with deposits amounting to
₹89257 crore upto January 30, 2019 within a short span of five years. The achievement
of opening the largest number of accounts (1,80,96,130 nos.) under PMJDY, in one week
has found a place in the Guinness Book of World Records.
• Pradhan Mantri Suraksha Bima Yojana (PMSBY)
• Pradhan Mantri Jeevan Jyoti Bima Yojana (PMJJBY)
STATUS OF FINANCIAL INCLUSION IN INDIA

• Pension product named Atal Pension Yojana (APY)

guaranteed by the Government of India has also been made
available to the newly included bank account holders.
 Target based approach for specific sectors / regions
A. (MSME) National Mission for Capacity Building of Bankers
for financing MSME Sector’ (NAMCABS) was put in place to
familiarise bankers with the entire gamut of credit related
issues of the MSME sector.
 TARGET BASED APPROACH FOR SPECIFIC SECTORS / REGIONS

• B. Agriculture: Currently the target for agriculture lending under priority sector for all
domestic scheduled commercial banks and foreign banks having more than 20 branches
is 18 per cent of Adjusted Net Bank Credit (ANBC).
• The banks have been advised to extend collateral free loans to small and marginal farmers
upto ₹1.6 lakh. To provide adequate and timely credit support from the banking system
under a single window to the farmers for their cultivation & other needs an innovative
product viz., Kisan Credit Card Scheme (KCC)
ASPIRATIONAL DISTRICTS PROGRAMME
TARGET BASED APPROACH FOR SPECIFIC
SECTORS / REGIONS
• C. Aspirational Districts: In order to address regional disparity in inter-state and inter-
district variations in development, ‘Transformation of Aspirational Districts’ programme
was launched in January 2018.
• Under this programme, a set of attainable outcomes for immediate improvement have
been identified while measuring progress and ranking the selected districts on the basis of
their performance. The programme focuses on expeditiously transforming 117 identified
districts across 28 states and driven primarily by the State governments.
REGULATORY MEASURES

• RBI has adopted a bank-led model to deepen financial inclusion.

• To strengthen financial inclusion, RBI has relaxed the branch authorization guidelines in
2017
• To widen financial inclusion, RBI has issued differentiated banking license viz., Small
Finance Banks (SFBs) and Payments Banks in 2015.
• In order to strengthen the BC model of delivery and help prospective users to identify BC
having good service track record, the BC Registry has been launched under the aegis of
Indian Banks’ Association (IBA).
STRENGTHENING INFRASTRUCTURE

• RBI operates the large-value payment system (RTGS) and retail payment systems
(NEFT), other retail payment system products (CTS, AEPS, NACH, UPI, IMPS etc.) are
operated by National Payments Council of India (NPCI).
• Unique Identification Authority of India (UIDAI)7 has been created with the objective to
issue Unique Identification numbers (UID), named as “Aadhaar”
• To solve the problem of delayed payment to MSMEs, RBI had laid down guidelines for
operationalisation of Trade Receivables Discounting System (TReDS). It was put in
place to facilitate Electronic Bill Factoring Exchanges, which could electronically accept
and auction MSME bills so that MSMEs could realize their of receivables without delay.
LAST MILE DELIVERY

• To bridge the gap in the last mile connectivity, RBI permitted banks to engage Business
Correspondents / Business Facilitators (2006).
• Another step to deepen financial inclusion in the country has been the launching of India
Post Payments Bank (IPPB) in September 2018. IPPB is also leveraging the vast network
of Department of Posts with 1.55 lakh Post Offices, more than 3 lakh postmen and
Grameen Dak Sewaks to further scale up financial inclusion initiatives in the country.
FINANCIAL LITERACY AND AWARENESS

• Implementation of Financial Literacy Centres (FLCs) and rural branches of banks.

• It has also advised banks to observe a “Financial Literacy Week” across the country
simultaneously every year.
• Centres for Financial Literacy (CFLs) have been set up at block level, involving
community participation in association with banks to spread financial literacy.
• Work is under progress to incorporate financial education in school curriculum in
association with State Governments and also National Council for Educational Research
and Training (NCERT).
BANKING CORRESPONDENT
LEAD BANK SCHEME & SERVICE AREA
APPROACH
OVERVIEW OF LEAD BANK SCHEME

• The Lead Bank Scheme was launched by the RBI in 1969 as an area approach for providing
banking facilities in rural areas based on the recommendation of D.R. Gadgil study group that
pioneered the idea of providing social banking in the post-independence period.
• The Study Group drew attention to the fact that commercial banks did not have adequate
presence in rural areas and also lacked the required rural orientation.
• Under LBS, every district across the country would be assigned to a commercial bank. The
bank should have major presence in that district to do the work of the Lead Bank.
LEAD BANK SCHEME

•  The Scheme aims at coordinating the activities of banks and other developmental
agencies through various forum in order to achieve the objective of enhancing the flow of
bank finance to the priority sector and other sectors and to promote banks' role in the
overall development of the rural sector.
• For coordinating the activities in the district, a particular bank is assigned ‘Lead Bank’
responsibility of the district. The Lead Bank is expected to assume a leadership role for
coordinating the efforts of the credit institutions and the Government.
OBJECTIVES OF THE LEAD BANK SCHEME

• To identify unbanked and underbanked centers in districts and to evaluate their physiographic,
agro climatic end Socio-economic conditions through economic survey.
• To help in removing regional imbalances through appropriate credit deployment;
• To extend banking facilities to unbanked areas;
• To estimate credit gaps in various sectors of an economy of a district and prepare a credit plan
accordingly.
• To effect structural and procedural changes in banking sector.
• To develop co-operation amongst financial and non-financial institutions, in overall development
of the districts.
• To serve as a clearing house for discussions of problems arising out of financing priority sectors
WORKING OF LEAD BANK SCHEME

• Lead Bank as Consortium Leader

• Allotment of districts
• District Consultative Committees (DCCs)
• District Credit Plan (DCP)
• Village adoption scheme (VAS)
WHY LBS BECAME INEFFECTIVE

• The Lead bank Scheme was not fully able to achieve its targets due to shift in policies,
complexities in operations and issues shifting to the Financial Inclusion.
• Lack of coordination between district planning authorities and banking institutions operating
in a district on one side and between NABARD and the Lead Bank on the other is the
prominent reason which required attention. Duplication of efforts in credit plan preparation
should be avoided by empowering the plan team at the district level appropriately.
• Over the period the system of lead bank scheme and associated district-level coordination
committees of bankers has apparently become inactive.
USHA THORAT COMMITTEE RECOMMENDATIONS ON LBS

• The Government of India had constituted a High-Power Committee headed by Mrs Usha
Thorat, Deputy Governor of the RBI, to suggest reforms in the LBS.
• The committee recommended the enhancing the scope of the scheme and suggests a sharper
focus on facilitating financial inclusion rather than a mere review of the government sponsored
credit schemes.
• LBS should be continued to accelerate financial inclusion in the unbanked areas of the country.
• Enhance the business correspondent model, making banking services available in all villages
having a population of above 2,000, and relaxation in KYC (know your customer) norms for
small value accounts.
SERVICE AREA APPROACH

• Service area approach (SAA) is an improved version of area approach of Lead Bank
Scheme. It was launched by the RBI in 1989 for an orderly development of the rural areas
with the of the country. 
• Under SAA plan each commercial bank / RRB branch in rural and semi-urban area is
designated to serve 15 to 25 villages for planned and orderly development of rural and
semi-urban areas. The designated branch of a bank has to meet the banking needs of its
service area vis-à-vis forge effective linkages between bank credit, production,
productivity and increase in income levels of the villages.
RANGARAJAN COMMITTEE ON FINANCIAL
INCLUSION

• The Committee on Financial Inclusion was constituted by the Government of India

(Chairman Dr. C. Rangarajan) on June 26, 2006 to prepare a strategy of financial
inclusion.
• The Committee submitted its final Report on January 4, 2008. The Report viewed
financial inclusion as a comprehensive and holistic process of ensuring access to
financial services and timely and adequate credit, particularly by vulnerable groups
such as weaker sections and low income groups at an affordable cost.
• Financial inclusion, therefore, according to the Committee, should include access to
mainstream financial products such as bank accounts, credit, remittances and
payment services, financial advisory services and insurance facilities.
REPORT

• The Report observed that in India 51.4 per cent of farmer households are financially
excluded from both formal/informal sources and 73 per cent of farmer households do
not access formal sources of credit.
• Exclusion is most acute in Central, Eastern and North-Eastern regions with 64 per
cent of all financially excluded farmer households.
• According to the Report, the overall strategy for building an inclusive financial sector
should be based on (i) effecting improvements within the existing formal credit
delivery mechanism; (ii) suggesting measures for improving credit absorption
capacity especially amongst marginal and sub-marginal farmers and poor non-
cultivator households; (iii) evolving new models for effective outreach; and (iv)
leveraging on technology based solutions.
• Committee recommended the setting up of a mission mode National Rural
Financial Inclusion Plan (NRFIP) with a target of providing access to
comprehensive financial services to at least 50 per cent (55.77 million) of the
excluded rural households by 2012 and the remaining by 2015.
• This would require semi-urban and rural branches of commercial banks and
RRBs to cover a minimum of 250 new cultivator and non-cultivator households
per branch per annum.
• The Committee has also recommended that the Government should constitute a
National Mission on Financial Inclusion (NaMFI) 
MAJOR RECOMMENDATIONS OF THE
COMMITTEE
• Target based financial inclusion
• Branch expansion
• Provision of customised savings, credit and insurance products
• Extension of services by RRB
• Encouraging SHGs
PRADHANMANTRI JAN DHAN YOJANA (PMJDY)

• Pradhan Mantri Jan-Dhan Yojana (PMJDY) is National Mission for Financial Inclusion to
ensure access to financial services, namely, Banking/ Savings & Deposit Accounts,
Remittance, Credit, Insurance, Pension in an affordable manner.
FINANCIAL INCLUSION & SME FINANCE

• SME finance is the funding of small and medium-sized enterprises, and

represents a major function of the general business finance market 
• Small and Medium Enterprises (SMEs) play a major role in most economies,
particularly in developing countries. SMEs account for the majority of businesses
worldwide and are important contributors to job creation and global economic
development.
WHY ARE SMALL & MEDIUM ENTERPRISES
IMPORTANT
• They represent about 90% of businesses and
• More than 50% of employment worldwide. (111million people are employed
in India)
• Contribute up to 30-40% of national income (GDP) in emerging economies.
• Contribute towards earning foreign exchange through encouraging exports.
FINANCIAL INCLUSION OF SMES

• Access to finance is a key constraint to SME growth, it is the second most

cited obstacle faced by SMEs to grow their businesses in emerging markets
and developing countries. 
• The International Finance Corporation (IFC) report 2018 estimates that 40% of
the credit need is served by informal credit, 25% through personal loans and only about
one-fifth of the total credit demand will be fulfilled by formal credit..
ROLE OF GOI IN FUELLING MSME SECTOR

• India has seen more than 50 alternate lending companies crop up each year between 2014
and 2016.
• These companies are armed with venture capital that allows them to use technology and
scale much faster than the time a bank would normally take in deciding to open an SME
branch in a semi-urban area.
• Emergence of digital KYC, data from ministry of corporate affairs portal, EPFO data,
utility payments data as well as GST returns data is facilitating loan processing time
reduction and enhancing customer experiences.
• NBFCs are also aiming for a share in this market
GOVERNMENT LOAN SCHEMES FOR SMALL BUSINESSES IN INDIA

• MSME Business Loans in 59 Minutes

• MUDRA Loans
• Sishu Loans up to Rs. 50,000/-
• Kishor Loans up to Rs. 5,00,000/-
• Tarun Loans up to Rs. 10,00,000/-

• Credit Guarantee Fund Scheme for Micro and Small Enterprises

• National Small Industries Corporation Subsidy