Financial Inclusion

This article looks at some of the measures taken by the government to increase financial inclusion, the factors affecting, benefits brought about by and the impact of financial inclusion..

Abstract

Only 5 per cent of the 6 lakh habitations in the country have a commercial bank branch; the proportion of the population that has a bank account is less than 20 per cent. An even starker picture is provided by the statistic that more than 650 million people have mobile phones while fewer than 200 million have bank accounts.

What makes mobile phones more important than bank accounts in this country? The answer lies in the fact that telecom companies have cracked the problem of reach, availability, products, service, technical support and value for money for the poor, rural and underprivileged sections of the society and have made mobile phones a reality for everyone. Banks, on the other hand, have been slow to tailor services and products to suit the poor, uneducated, geographically dispersed and financially illiterate sections of the society, thereby resulting in financial exploitation by local money lenders, inappropriate and unsafe saving methodologies and the complete absence of social security measures like health and life insurance.

This article looks at some of the measures taken by the government to increase financial inclusion, the factors affecting, benefits brought about by and the impact of financial inclusion.

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Financial inclusion and exclusion

The delivery of financial services to all sections of the society – the poor, the underprivileged and the disadvantaged, is called financial inclusion. For a long time, financial inclusion was only understood as providing savings accounts to people. However, the focus has widened to include loans, credits, financial advice and insurance.1

Financial exclusion means the lack of access by certain section of the population / consumers to affordable, appropriate and secure financial services.
  technical support  
 
At a micro level, the divide between haves and have-nots keeps widening, while at a macro level, this affects national and economic growth.
  

Financial inclusion efforts in India

The RBI (Reserve Bank of India) set up the Khan Commission in 2004 to look into aspects of financial inclusion. The significant recommendations that were implemented through a mid-term policy review in 2005-06 included:
  1. 1. Making available a basic 'no frills' banking account
  2. 2. Relaxing the KYC (Know Your customer) norms for customers with probable annual deposits of less than Rs. 50,000/-
  3. 3. Issuing GCC (General Credit Cards) for the poor and disadvantaged in order to help them avail easy credit
  4. 4. Permitting commercial banks to make use of the services of NGO (Non-governmental organizations), SHG (Self Help Groups) and MFI (Micro Finance Institutions) as intermediaries to provide financial and banking services to the marginalized. The primary aim of financial inclusion is to make people access financial markets/services, avail credit services and become financially educated.
The Finance Minister, Mr Pranab Mukherjee, promised in the Budget speech that every habitation of over 2,000 in the country will have access to banking services by March 2012. This implies that banks have to come up with innovative ways to reach the even the most financially excluded customer. This could mean:
  1. Expanding their reach
  2. 6. Simplifying the product range to suit the needs of the customer, whether it involves savings accounts, loans or insurance
  3. 7. Using innovative means to reach the customers, like the use of mobile phones in transactions or the use of SHG in financial education or post offices to place ATMs
  4. 8. Ensuring that the financial transactions in the rural, agriculture, farming and unorganized sector happen through banks.

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