CHAPTER 1

INTRODUCTION
Financial inclusion is integral to the inclusive growth process and sustainable development of the country. However, the financial inclusion growth model which came up with lots of expectations should be replicable and viable across the country. Though, the banking network has rapidly expanded over the years, the key challenge would be to extend the banking coverage to include the large population living in 6 lacs villages in the country. In the past, Indian banking system has demonstrated resilience in the face of the recent global financial crisis, nevertheless, these banks should adopt strong and urgent measures to reach the unbanked segment of society and unlock their savings and investment potentials. To accomplish this task, nearly 80 per cent of the public sector banks (PSBs) have already adopted the Core Banking Solutions (CBS), while just 20 per cent public sector banks are yet to adopt the core banking solutions. Efforts are on to persuade the private sector banks to build in the financial inclusion plans in their respective business strategies. Governments initiative can be understood on the adoption of new and appropriate technologies for promoting financial inclusion as the necessary requirements of channeling the wage payments through the banking system under the Mahatma Gandhi National Rural Employment Guarantee Act scheme. This has added new meaning to financial inclusion; other banks also need to come up with a definite financial inclusion plan to tap the fortune at the bottom of the pyramid. This will facilitate the rural customers to transfer their income electronically between the bank

branches located in the rural hinterland and conduct financial transaction impeccably. The financial services include the entire gamut-savings, loans, insurance, credit and payments etc. the financial system has to provide its function of transferring resources from surplus to deficit and surplus units are those with low incomes, poor background etc. by providing these services, the aim is to help them come out of poverty. So far, the focus has only been on delivering credit (it is called as microfinance but is microcredit) and has been quite successful. Similar success has to be seen in other aspects of finance as well. Financial inclusion refers to a process that ensures the ease of access, availability and usage of the formal financial system for all members of an economy. It facilitates efficient allocation of productive resources and thus can potentially reduce the cost of capital. An inclusive financial system can help reduce the role of informal sources of credit (such as money lenders) which are often found to be exploitative. The importance of an inclusive financial system is widely recognized in the policy circle and become a policy priority in many countries including India.

CHAPTER 2

DEFINITION
Leeladhar (2005) Financial inclusion is the delivery of banking services atan affordable cost to the vast sections of disadvantaged and low incomegroups. UshaThorat (2007) - by financial inclusion we mean the provision of affordable financial services, (viz., access to payments and remittance facilities, savings, loans and insurance services) by the formal financial systemto those who tend to be excluded. Rangarajan Committee (Jan 2008) process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups....at an affordable cost. Definition: Financial inclusion ensures ease of availability, accessibility and usage of the formal financial system to all members of the economy. Financial Inclusion as defined by RBI Financial Inclusion is the process of ensuring access to appropriate financial products and services needed by all sections of the society in general and vulnerable groups such as weaker sections and low income groups in particular at an affordable cost mainstream institutional players in a fair and transparent manner by

CHAPTER 3

OBJECTIVE OF FINANCIAL INCLUSION

The word Financial Inclusion could be described as being the opposite of financial exclusion.However, financial inclusion is more of a process rather than a phenomenon. It is a process by which financial services are made accessible to all sections of the population. It is a conscious attempt to bring the un-banked people into banking. The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost (The Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan, 2008) Financial Inclusion does not merely mean access to credit for the poor, but also other financial services such as Insurance. Financial Inclusion allows the state to have an easier access to its citizens, with an inclusive population, for e.g.: the government could reduce the transaction cost of payments like pensions, or unemployment benefits. It could prove to be a boon in a situation like a natural disaster, a financially included population means the government will have much less headaches in ensuring that all the people get the benefits. It allows for more transparency leading to curtailing corruption and bureaucratic barriers in reaching out to the poor and weaker sections. An intelligent banking

population could go a long way by effectively securing themselves a safer future. The objective of Financial Inclusion Access to various mainstream financial services e.g. saving bank account, credit, insurance, payments and remittance and financial and credit advisory services. The main objective is to provide the benefit of vast formal financial market, & protect them from exploitation of informal credit market, so that they can be brought into the mainstream. Financial Inclusion therefore, is delivery of not only banking, but also other financial serviceslike insurance, pension, remittance, mutual funds, etc. delivered at affordable, though marketdriven costs. Opening a no-frills account is just a beginning to a continuous process of providingbanking and financial services. Once the first step of safety of savings is achieved, the poorrequire access to schemes and products which allow their savings to grow at rates which providethem growth beyond mere inflation protection.

CHAPTER 4

THE IMPORTANCE OF FINANCIAL INCLUSION IN THE DEVELOPING WORLD

Financial inclusion poses policy challenges on a scale and with an urgency that is unique for developing countries, which house nearly 90% of the worlds unbanked population. Developing country policymakers have recognised that complex and multi-dimensional factors contribute to financial exclusion and therefore require a comprehensive variety of providers, products and technologies that work within and are a reflection of the socio-economic, political, cultural and geographic conditions in their countries. Nevertheless, a number of common trends and barriers can be identified.Emerging trends include the recognition of the changing role of policymakers and the importance of leadership to successful financial inclusion strategies and response; that microfinance can be used as an entry point for issues of access; that new technology is a very important but not the only consideration for developing country policymakers; that savings are the cornerstone of responses; that banks have an important role to play; and that financial inclusion policy can and should not only focus on the supply-side. Commonly identified barriers include issues of market response; need for greater stakeholder coordination; lack of reliable data as well as national identity documents and systems; and the need for greater consumer understanding, trust and protection.

Depending on the level of development of financial inclusion policy, there appears to be three broad groups of countries some early leaders, others for whom financial inclusion is a priority but much more policy development is needed, and others for whom chronic structural challenges in the financial sector mean financial inclusion may not be among the top priorities at this time. While there is no standard global solution for rapid replication in most places, it can be concluded that there is enormous potential to promote tailormade solutions based on available good practices. Adopting country-specific, comprehensive policies at the country level that respond to both demand and supply-side barriers will be most effective in fostering financial inclusion. There is openness and demand for technologybased solutions and public-private partnerships to foster access, though these must be gradually introduced within the broad range of evidence-based effective policy solutions for financial inclusion. Policymakers expressed a preference and need for two-way knowledge exchange opportunities with their peers to encourage learning from the experience of others. A better and broader understanding of financial instability risk within financial innovation is a key prerequisite for scaling-up particularly in the area of technology-enabled financial services. Mobile financial services are mostly limited to payments and are not connected with financial intermediation. However advances from a handful of countries have shown paths to safely extending beyond payments to banking services such as deposits through innovative leadership and partnerships with banks or microfinance
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institutions. Systematic global and regional efforts are needed to refine and spread insight on these areas widely. Mechanisms that help leverage existing insight need to be strengthened. The movement towards evidence-based policy through improved data permits a potential next step for some countries. Adopting realistic self-set targets when designing financial inclusion policies against which they can monitor their progress and make necessary policy adaptations. Quantitative objectives of this kind to be agreed upon by a larger number of countries could become a major incentive to build global commitment to effectively overcome financial exclusion. Access to sustainable and secure financial services contributes directly to increasing income and reducing vulnerability for the poor. Bringing more people, and therefore more money, into the formal financial system can lead to overall economic growth and development and increased stability in developing country economies. Policymakers in developing countries have an important role to play in creating the conditions for improved access, and thereby unlocking the economic potential of their populations. The potential for economic growth and poverty alleviation through the development of a more inclusive financial services sector has been recognised by leaders in developing and developed countries and is emerging as a priority issue on political agendas.

BENEFITS OF INCLUSION For the customer can avail a variety of financial products provided by institutions regulated and supervised by credible regulators. The regulator benefits from the audit trail which is available as transactions are Conducted transparently in supervised environment. The economy benefits, as greater financial resources become transparently available for efficient intermediation and allocation, for uses that have the highest returns.
It

strengthens the financial deepening and leads to financial

development in a country, Which would in-turn accelerate economic growth

of the country.

CHAPTER 5

FINANCIAL INCLUSION IN INDIA

The Reserve Bank of India (RBI) set up the Khan Commission in 2004 to look into financial inclusion and the recommendations of the commission were incorporated into the mid-term review of the policy (200506). In the report RBI exhorted the banks with a view to achieving greater financial inclusion to make available a basic "no-frills" banking account. In India, financial inclusion first featured in 2005, when it was introduced by K.C. Chakraborthy, the chairman of Indian Bank. Mangalam became the first village in India where all households were provided banking facilities. Norms were relaxed for people intending to open accounts with annual deposits of less than Rs. 50,000. General credit cards (GCCs) were issued to the poor and the disadvantaged with a view to help them access easy credit. In January 2006, the Reserve Bank permitted commercial banks to make use of the services of non-governmental organizations (NGOs/SHGs), micro-finance institutions, and other civil society organizations as intermediaries for providing financial and banking services. These intermediaries could be used as business facilitators or business correspondents by commercial banks. The bank asked the commercial banks in different regions to start a 100% financial inclusion campaign on a pilot basis. As a result of the campaign, states or union territories like Puducherry, Himachal Pradesh and Kerala announced 100% financial inclusion in all their districts. Reserve Bank of Indias vision for 2020 is to open nearly 600 million new customers' accounts and service them through a variety of channels by leveraging on IT. However, illiteracy and the low income savings and lack of
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bank branches in rural areas continue to be a roadblock to financial inclusion in many states and there is inadequate legal and financial structure. In India, RBI has initiated several measures to achieve greater financial inclusion,such as facilitating no-frills accounts and GCCs for small deposits and credit. Some of these steps are: Opening of no-frills accounts: Basic banking no-frills account is with nil or very low minimum balance as well as charges that make such accounts accessible to vast sections of the population. Banks have been advised to provide small overdrafts in such accounts. Relaxation on know-your-customer (KYC) norms:KYC requirements for opening bank accounts were relaxed for small accounts in August 2005, thereby simplifying procedures by stipulating that introduction by an account holder who has been subjected to the full KYC drill would suffice for opening such accounts.The banks were also permitted to take any evidence as to the identity and address of the customer to their satisfaction. It has now been further relaxed to include the letters issued by the Unique Identification Authority of India containing details of name, address and Aadhaar number. Engaging business correspondents (BCs):In January 2006, RBI permitted banks to engage business facilitators (BFs) and BCs as intermediaries for providing financial and banking services. The BC model allows banks to provide doorstep delivery of services, especially cash in-cash out transactions, thus addressing the last-mile problem.
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The list of eligible individuals and entities that can be engaged as BCs is being widened from time to time. With effect from September 2010, forprofit companies have also been allowed to be engaged as BCs. India map of Financial Inclusion by MIX provides more insights on this. Use of technology: Recognizing that technology has the potential to address the issues of outreach and credit delivery in rural and remote areas in a viable manner,banks have been advised to make effective use of information and communications technology (ICT), to provide doorstep banking services through the BC model where the accounts can be operated by even illiterate customers by using biometrics, thus ensuring the security of transactions and enhancing confidence in the banking system. Adoption of EBT: Banks have been advised to implement EBT by leveraging ICT-based banking through BCs to transfer social benefits electronically to the bank account of the beneficiary and deliver government benefits to the doorstep of the beneficiary, thus reducing dependence on cash and lowering transaction costs. GCC:With a view to helping the poor and the disadvantaged with access to easy credit, banks have been asked to consider introduction of a general purpose credit card facility up to `25,000 at their rural and semi-urban branches. The objective of the scheme is to provide hasslefree credit to banks customers based on the assessment of cash flow without insistence on security, purpose or end use of the credit. This is
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in the nature of revolving credit entitling the holder to withdraw up to the limit sanctioned. Simplified branch authorization: To address the issue of uneven spread of bank branches, in December 2009, domestic scheduled commercial banks were permitted to freely open branches in tier III to tier VI centres with a population of less than 50,000 under general permission, subject to reporting. In the north-eastern states and Sikkim, domestic scheduled commercial banks can now open branches in rural,semi-urban and urban centres without the need to take permission from RBI in each case, subject to reporting. Opening of branches in unbanked rural centres: To further step up the opening of branches in rural areas so as to improve banking penetration and financial inclusion rapidly, the need for the opening of more bricks and mortar branches, besides the use of BCs, was felt. Accordingly, banks have been mandated in the April monetary policy statement to allocate at least 25% of the total number of branches to be opened during a year to unbanked rural centres.

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CHAPTER 6

FINANCIAL INCLUSION IN INDIA: IMPORTANT

The policy makers have been focusing on financial inclusion of Indian rural and semi-rural areas primarily for three most important pressing needs: 1. Creating a platform for inculcating the habit to save money The lower

income category has been living under the constant shadow of financial duress mainly because of the absence of savings. The absence of savings makes them a vulnerable lot. Presence of banking services and products aims to provide a critical tool to inculcate the habit to save. Capital formation in the country is also expected to be boosted once financial inclusion measures materialize, as people move away from traditional modes of parking their savings in land, buildings, bullion, etc. 2. Providing formal credit avenues So far the unbanked population has

been vulnerably dependent of informal channels of credit like family, friends and moneylenders. Availability of adequate and transparent credit from formal banking channels shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the countryside. A classic example of what easy and affordable availability of credit can do for the poor is the microfinance sector. 3. Plug gaps and leaks in public subsidies and welfare programmes A

considerable sum of money that is meant for the poorest of poor does not actually reach them. While this money meanders through large system of
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government bureaucracy much of it is widely believed to leak and is unable to reach the intended parties. Government is therefore, pushing for direct cash transfers to beneficiaries through their bank accounts rather than subsidizing products and making cash payments. This laudable effort is expected to reduce governments subsidy bill (as it shall save that part of the subsidy that is leaked) and provide relief only to the real beneficiaries. All these efforts require an efficient and affordable banking system that can reach out to all. Therefore, there has been a push for financial inclusion.

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CHAPTER 7

FACTORS ASSOCIATED WITH FINANCIAL INCLUSION

Socio-economic factors income, employment, inequality, literacy Infrastructure related factors road network, telephone and television network,access to information through newspapers, radio,cable TV, computer and internet Banking sector factors indicators of the health of the banking system, ownership pattern and interest rate.

Socio-economic factors and financial Inclusion

Higher the income level, both at the individual level and for a country, higher is the financial inclusion. Beyond income level, income inequality is negatively associated with financial inclusion. Adult literacy is positively and significantly associated with financial inclusion implying that higher the adult literacy, higher will be the financial inclusion. Proportion of rural population is found to be negatively associated with financial inclusion.
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 This cross country findings are in line with the earlier findings based onsurveys within a country/region.

Infrastructure and financial Inclusion

Physical infrastructure like network of paved roads is highly positivelysignificant in enhancing financial inclusion. Telephone and internet subscription are also found to be positive andsignificant. This is in line with Beck et al (2007) who found that telephonenetwork to be positively associated with banking outreach. Road network, telephone and internet usage being positively associatedwith the level of financial inclusion indicate that connectivity andinformation play an important role in financial inclusion. Our results also indicate strong links between infrastructure

developmentand the development of financial sector.

Banking Sector and financial Inclusion

NPA in an economy is found to be significantly and negatively associatedwith financial inclusion. Contradicts the view for high NPA of a banking system is that NPAs are aresult of providing credit to the low income groups (who are more likely to default), sometimes to comply with the directed lending programmes suchas the priority sector lending in India.
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 Our results show the opposite, they indicate higher level of NPA to beassociated with lower level of financial inclusion. Thus, efforts to includemore people into the financial system is not the significant cause for theNPA, on the contrary, the cause for NPAs lies elsewhere (Reddy 2002). Capital Asset Ratio (CAR) is found to have a negative coefficient that is significant at 0.05 level. Thus, highly capitalized banking systems seem to be less inclusive. This is not surprising, as banking systems having high CARtend to be more cautious in lending, thus negatively affecting financialinclusion. High share of foreign ownership in the banking system is found to be negativelyassociated with financial inclusion. This is in line with cream skimming theory offoreign banks. (Detragiache et al, 2006; Gormley, 2007; Beck et al, 2007) Advocates of banking sector liberalization have argued that entry of foreign banks willincrease the supply of credit and improve efficiency by increasing competition (WTO2005). Several studies have shown that this argument may not always be true. For example,an IMF study by Detragiache et al (2006) found that in poor countries, a strongerforeign bank presence is robustly associated with less credit to the private sector. Inaddition, they found that in countries with more foreign bank penetration, creditgrowth is slower and there is less access to credit.

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 Gormley (2007) found that in case of India, the entry of foreign banks is associatedwith an overall decrease in credit availability for firms. Using cross country data, Beck et al (2007) have also found a significantly negativeassociation between share of foreign banks assets and number of accounts (credit aswell as deposit) per capita in a country. Share of government ownership in the banking system, our resultsshow, does not have a significant association with financial inclusion. This can be interpreted as the inefficacy of state owned banks inbringing about financial inclusion. Real interest rate does not show any significant relationship withfinancial inclusion.

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CHAPTER 8

FINANCIAL INCLUSION INITIATIVES Encouraged Electronic Benefit Transfer for routing social security payments through the banking channel. Separate program for Urban Financial Inclusion initiated Roadmap for providing banking services A structured way of covering villages. In the first phase villages with population above 2000 was targeted. The focus has now shifted to villages with population less than 2000. Financial Inclusion Plan for Banks - All domestic commercial banks - public and private sector have drawn a Board approved 3 year Financial Inclusion Plan (FIP) starting April 2010. Self-set targets - FIPs to be integrated with Business plan of the banks Banks advised to finalise their next 3 year FIP for the period 2013-16

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CHAPTER 9

WHAT IS CONSIDERED AS MAINSTREAM FINANCIAL SERVICES NECESSARY FOR FINANCIAL INCLUSION OF HOUSEHOLD?
Basic saving bank account- an account with all basic feature of saving account. Payment and remittances services Immediate credit in case of contingencies like accidents, medical treatment etc, they should be provided immediate credit. Entrepreneurial credit this means, to run/expand small scale business/shop or any economic activity, easy credit should be provided, so that financial dependence can be created amongst households. Housing finance- funding for purchasing new residential or reconstruction Insurance life\healthcare- to plan future better Financial education\credit counseling centers to guide them which product suits them better, where to go credit needs, what are various services available to better their personal financial planning.

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CHAPTER 10

PRESENT STATUS OF FINANCIAL INCLUSION IN THE COUNTRY

Axis Bank to cover 12,000 villages under new financial inclusion plan. Axis Bank, Indias third-largest private bank has begun implementing its rural expansion plans and intends to cover 5,500 villages for financial inclusion by March 2011 and scale it up to 12,000 villages in five years time. Speaking to media, Mr. SK Chakrabarti, executive director Axis banks retail banking division said that the bank is looking at several low cost delivery models such as the use of smart card, mobile banking and point of transaction devices. Axis Bank has also set up separate financial inclusion team to implement its financial inclusion roadmap. It may be recalled that Reserve Bank of India had asked all private and public sector banks to chart a road map on financial inclusion. The plan was expected to cover issues like the number of branches that banks would plan to open in rural India, the number of no-frill accounts they plan and the number of business correspondents they would appoint to achieve their financial inclusion target.
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SBI plans financial inclusion of 50,000 villages this fiscal. The bank under financial inclusion initiative has planned to cover 50,000 unbanked villages during 2010-11 which will take total reach to 1, 50,000 villages," a senior official of SBI said. SBI to set up 600 financial inclusion centers. The move to set up FICs is aimed at powering the bank's drive to reach basic and affordable banking services to 12,421 out of the 72,315 unbanked villages (identified according to 2001 census) having a population of over 2,000 by March-end 2012. Under the financial inclusion plan, our bank is currently providing basic banking services in 1,300 villages. This number will jump to 5,300 by Marchend 2011. We will complete the target of providing banking outreach in 12,421 villages b March-end 2012, said Mr. M.I. Dholakia, Deputy General Manager, SBI.

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CHAPTER 11

CONCLUSION
Financial inclusion should be measured not only by the number of bank accounts held by the weaker sections, but also by the amounts borrowed by them, which so far shows dismal picture. Financial inclusion could no doubt be inhibited by the higher transaction costs of dealing with large number of small accounts rather than a small number of large accounts. The experience with the linkages of banks with micro finance institutions (MFIs) and Self-Help Groups (SHGs) clearly demonstrates that the poor are bankable; even the margins are low; high volumes can make the business profitable. Therefore, there is an urgent need to corroborate Financial inclusion programmes as an integral part of the poverty alleviation programmes. The unbridled growth in population may even thwart the entire endeavor made to reach high growth trajectory.

Our empirical analysis confirms that income as measured by percapita GDP is an important factor in explaining the level offinancial inclusion in a country. Going beyond per capita GDP, we find that income inequality,adult literacy and urbanisationare also important factors. Further, physical and electronic connectivity and informationavailability, indicated by road network, telephone and internetusage, also play positive role in enhancing financial inclusion.

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 These findings strengthen the assertion that financial exclusion isindeed a reflection of social exclusion, as countries having lowGDP per capita, relatively higher levels of income inequality, lowrates of literacy, low urbanisation and poor connectivity seem to beless financially inclusive. From among the banking sector variables, we find that theproportion nonperforming assets is inversely associated withfinancial inclusion, indicating that attempts by different countrytowards greater financial inclusion have not contributed in anyway to the non-performing assets of the banking system. The capital asset ratio (CAR) is seen to be negatively associatedwith financial inclusion. In other words, when the CAR of acountry is high, the banking system tends to be more cautious inopening its doors to the financial excluded. Foreign ownership in the banking sector is seen to benegatively affecting financial inclusion, while governmentownership does not have a significant effect.

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CHAPTER 12

BILBLOGRAPHY Www.google.com financialservices.gov.in/banking

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