Prepared By

Manoj S Rengar

Submitted To
Prof. Ranjani Srinivasan

Xcellon Institute
Ahmedabad
17/12/2010
Introduction

India is the fourth largest economy in the world on a purchasing power parity
(PPP) basis and twelfth on a nominal basis. With the real GDP forecasted to
grow by 5.7% in the year 2009-10, the Indian economy is marching ahead.
This rapid expansion is expected to continue as growth in the services and
high technology manufacturing sector accelerates. Agriculture, which
Continues to support around 60% of the population, has grown by a mere
2.7% in the second quarter of 2008-09. In addition, the organized sector
employment presently comprises less than 10% of the workforce, leaving the
vast majority of the working population with irregular income streams.

Notwithstanding the rapid increase in overall GDP and per capita income in
recent years, a significant proportion of the population in both rural and
urban areas still experiences difficulties in accessing the formal financial
system. There is currently a perception that there are a large number of
people, potential entrepreneurs, small enterprises and others, who may not
have adequate access to the financial sector, which could lead to their
marginalization and denial of opportunity to grow and prosper.

Financial Exclusion

Broadly defined, financial exclusion signifies the lack of access by certain

segments of the society to appropriate, low-cost, fair and safe financial
products and services from mainstream providers. Financial exclusion is thus
a key policy concern, because the options for operating a household budget, or
a micro/small enterprise, without mainstream financial services can often be
expensive. This process becomes self-reinforcing and can often be an
important factor in social exclusion.

2
Reserve Bank of India data shows that as many as 139 districts suffer from
massive financial exclusion, with the adult population per branch in these
districts being above 20,000 and only 3% with borrowings from banks. On the
assumption that each adult has only one bank account (which does not hold
good in practice, so that actual coverage is likely to be worse) on an all India
basis, 59 percent of the adult population in the country has bank accounts. 41
percent of the population is, therefore, unbanked. In rural areas the coverage
is 39 percent against 60 percent in urban areas. The unbanked population is
higher in the poorer regions of the country, and is the worst in the North-
Eastern and Eastern regions.

Causes of Financial Exclusion

Demand-side Barriers: On demand constraints and opportunities, the

following issues have a significant bearing on the extent of financial
exclusion/inclusion:

1. Cultural factors - Women are often disadvantaged by credit requirements

such as collateral since in most of the cases property is registered under their
husband’s name and they are to seek male guarantees to borrow.

2. Mistrust of financial institutions - The feeling that there is no point in

applying for financial products because he/she expects to be refused as banks
are not interested to look into their cause has led to self-exclusion for many of
the low income groups.

3
3. Level of income - A higher share of population below the poverty line
results in lower demand for financial services as the poor may not have
savings to place as deposit in savings banks.

4. Financial literacy and skills capacity – High information barriers, low

awareness and limited literacy, particularly financial literacy, i.e., basic
mathematics, business finance skills as well as lack of understanding often
constrain demand for financial services.

Supply-side Barriers: The following issues on the supply side are major
obstacles in providing an adequate supply of financial services to the
currently unbanked:

1. Locational constraints – Absence of physical infrastructure in interior-most

parts of the country leads to difficulties in accessing financial institutions (like
banks, etc) resulting in a substantial proportion of households in rural and
remote areas being kept outside the ambit of the formal financial system.

2. Real and perceived risk in lending - The perceived risk of lending to the
poor is higher than the real risk, creating a supply barrier by triggering higher
than necessary transactions costs due to stricter than needed prudential
requirements.

3. Approaches and products - Generally, financial services tend to be

concentrated in urban areas, allowing rural clients little access to services and
information for making well grounded decisions.

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4. Financial viability of MFIs - MFI practitioners encounter difficulties in
having a “double bottom line”: at the same time aiming to be profitable and
stimulating local economic development.

Costs and Consequences of Financial Exclusion

Broadly, the issue of cost of financial exclusion may be conceived from two
angles, which are intertwined. First, the exclusion may have cost for
individuals/entities in terms of loss of opportunities to grow in the absence of
access to finance or credit. Second, from the societal or the national
perspective, exclusion may lead to aggregate loss of output or welfare and the
country may not realize its growth potential.

In terms of cost to the individuals, financial exclusion leads to higher charges

for basic financial transactions like money transfer and expensive credit,
besides all round impediments in basic/minimum transactions involved in
earning livelihood and day to day living. Individuals/families could get sucked
into a cycle of poverty and exclusion and turn to high cost credit from
moneylenders, resulting in greater financial strain and unmanageable debt. At
the wider level of the society and the nation, financial exclusion leads to social
exclusion, poverty as well as all the other associated economic and social
problems.

Another cost of financial exclusion is the loss of business opportunity for

banks, particularly in the medium-term. Banks often avoid extending their
services to lower income groups because of initial cost of expanding the
coverage which may sometimes exceed the revenue generated from such
operations.

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Financial Inclusion

The definitional emphasis of financial inclusion varies across countries and

geographies, depending on the level of social, economic and financial
development; the structure of stake holding in the financial sector;
socioeconomic characteristics of the financially excluded segments; and also
the extent of the recognition of the problem by authorities or governments.

The Report of the Committee on Financial Inclusion in India (Chairman: C

Rangarajan) (2008) defines financial inclusion as 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.”

Financial Inclusion - Defined

By financial inclusion, we mean delivery of banking services and credit at an

affordable cost to the vast sections of disadvantaged and low income groups.

The various financial services include savings, loans, insurance, payments,

remittance facilities and financial counseling / advisory services by the formal
financial system. An open and efficient society is always characterized by the
unrestrained access to public goods and services. As banking services are in
the nature of public goods, financial inclusion should therefore be viewed as
availability of banking and payment services to the entire population without
discrimination of any type.

However, the term financial inclusion is perceived in different ways under

different contexts. There is a view that only access to credit is treated as
6
financial inclusion whereas the other view includes all the services extended
by the financial institutions. That apart, financial inclusion by banks and other
institutions must target, apart from personal / private investment
requirements of individuals and groups, the universal public investment
requirements necessary for development of infrastructure, social sector
services, public utilities and productive forces / capacity building efforts, etc.
Thus, financial inclusion may well be all about money and finance, but with
the ultimate objective of directly abolishing the state of social exclusion in the
economy.

The Committee, on several occasions, deliberated at length the need for

arriving at a working definition of the term “Financial Inclusion”. In these
deliberations, a consensus emerged that merely having a bank account may
not be a good indicator of financial inclusion. Further, indebtedness as
quantified in the NSSO, may also not be a fully reflective indicator. Hence, the
ideal definition should look at people who want credit, but are denied the
same. However, the Committee also appreciated the fact that bankers cannot
be advised to extend credit to everyone who approached them. If genuine
claimants for credit are denied, then there is a case of exclusion. Therefore, it
naturally means that all cases of denial of credit may not be exclusion. Further,
the fact of denial of credit should be probed further. As this aspect raises the
issue of creditworthiness or bankability, the Committee also deliberated on
what could be done to make the “institutionally excluded”, bankable or
creditworthy. The Committee was also concerned with the issue regarding the
denial of credit by formal sources for no fault of the credit applicant and what
is needed to address such a situation? This may require re-engineering of
existing financial products or delivery systems and making them more in line
with the expectations of the intended clientele.

The segregation between institutional and non-institutional sources of credit

was recognised, as indebtedness to the moneylender cannot be a sign of

7
financial inclusion. Rather it has to be seen as a sign of exclusion as a major
part of this segment would have been denied access to institutional credit.

The Committee felt the need for a normative definition – one, which would
look into the issues, related to people desiring access to credit, but denied the
same. Other issues may be a spin-off from this basic premise. A broader
definition could also be considered; one, which would take care of issues not
only, related to savings and credit, but also insurance and financial advisory
services. Viewed from the angle of indebtedness, nearly 49% of the farmer
households in the country were indebted – of which, 27% to formal sources
and 22% to informal sources. Can this be interpreted to mean that this 22%
were in need of bank credit, but denied? Of the remaining 51% of farm
households who are not indebted at all, 78% were small and marginal farmers
who would, definitely, welcome access to credit on reasonable terms. Only the
remaining segment may not require any form of external support.

The Committee also considered the segment of the population “once

included”, but has since gone out of the system either due to default or other
reasons. The Committee held the view that this aspect formed a part of the
sub-set of those who got credit at some time in the past, but were denied the
same, later on. The number of defaulted loan accounts could be taken as a
proxy to translate this aspect into a quantifiable indicator.

Financial Inclusion

Saving

8
Financial Inclusion
Bank Account Insurance
Financial Inclusion - Working Definition

Based on the above discussions, the following working definition of

“Financial Inclusion” was considered by the Committee:

Financial inclusion may be defined as 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.
9
Holding a bank account itself confers a sense of identity, status and
empowerment and provides access to the national payment system.
Therefore, having a bank account becomes a very important aspect of
financial inclusion. Further, financial inclusion, apart from opening and
providing easy access to a No Frills account, should also provide access to
credit, perhaps in the form of a General Credit Card (GCC) or limited OD
against the no frills account. It should encompass access to affordable
insurance and remittance facilities. It should also include credit counseling
and financial education / literacy. While financial inclusion, in the narrow
sense, may be achieved to some extent by offering any one of these services,
the objective of “comprehensive financial inclusion” would be to provide a
holistic set of services encompassing all of the above.

Measurement of Financial Inclusion/Exclusion

While the importance of financial inclusion has been widely accepted, much
less is known about how inclusive the financial systems are and who has
access to which financial services. Individual indicators, viz. number of bank
accounts and number of bank branches that are generally used as measures of
financial inclusion, can provide only partial information on the level of
financial inclusion in an economy. Financial services or products rendered by
banks, postal savings banks, credit unions, finance companies, micro-finance
institutions (MFIs), and other formal and quasi-formal non-bank institutions
generally form the basis for measuring the financial inclusion.

Core and headline indicators place a given population along a continuum of

access, depending on its usage of formal, semi-formal, and informal financial

10
services, and those excluded from the use of financial services. The access to
finance could be divided into five segments:

The proportion of the population that uses a bank or bank like

institution;
The population which uses service from non-bank ‘other formal’
financial institutions, but does not use bank services;
The population which only uses services from informal financial service
providers;
The proportion of the population transacting regularly through formal
financial instruments; and
The population which uses no financial services.

There exists no single comprehensive measure that can be used to indicate the
extent of financial inclusion across economies. Specific indicators such as
number of bank accounts, number of bank branches, that are generally used
as measures of financial inclusion, can provide only partial information on the
level of financial inclusion in an economy.

Scope of Financial Inclusion

The scope of financial inclusion can be expanded in two ways:

(i) Through state-driven intervention by way of statutory enactments ( for

instance the US example, the Community Reinvestment Act and making it a
statutory right to have bank account in France).

11
(ii) Through voluntary effort by the banking community itself for evolving
various strategies to bring within the ambit of the banking sector the large
strata of society.

Internationally, financial exclusion has been viewed in a much wider

perspective. Merely having a bank account is not regarded as an accurate
indicator of financial inclusion. Rather, its scope is considered to be quite large
and ranges from empowerment of people through schemes of financial
literacy/education to ensuring their participation in institutional credit,
insurance cover and remittance services. The scope of financial inclusion is
much broader and hence, it is considered to be critical for achieving inclusive
and sustainable growth in the country.

Benefits of Financial Inclusion

Improvements in access to financial institutions accrue several benefits to the

consumer, regulator and the economy alike. Establishment of an account
relationship can pave the way for the customer to avail the benefits of a
variety of financial products. The bank accounts can also be used for multiple
purposes, such as, making small value remittances at low cost and making
purchases on credit.

Furthermore, the regulator benefits, as the audit trail is available and

transactions are conducted transparently in a medium that can be monitored.
The economy benefits, as greater financial resources become transparently
available for efficient intermediation and allocation, for uses that have the
highest returns. Promoting financial inclusion can also help in the
regeneration of local areas if money saved by increased access to financial
services can be re-invested in the community.

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Inclusive finance - safe savings, appropriately designed loans for poor and low
income households and for micro, small and medium sized enterprises, and
appropriate insurance and payments services - can help people help
themselves to increase incomes, acquire capital, manage risk, and work their
way out of poverty. Increasing the inclusiveness of financial sectors, fuelled by
domestic savings to the greatest extent possible, will, over time, bolster the
poorer segments of the population as well as those segments of the economy
that most affect the lives of poor people.

Holding a bank account itself confers a sense of identity, status and

empowerment and provides access to the national payment system.
Therefore, having a bank account becomes a very important aspect of
financial inclusion. While financial inclusion, in the narrow sense, may be
achieved to some extent by offering a single financial service/product, the
objective of “comprehensive financial inclusion” would be to provide a holistic
set of services encompassing all of the above.

Financial Education/Financial Literacy

Financial literacy allows people to increase and better manage their earnings -
and therefore better manage their life events like education, illness, job loss or
retirement. It also promotes understanding and acceptance of important
political reforms, such as health care or pension reforms. While the
significance of financial literacy has not yet been fully articulated and
recognized by the international development community - or by policy
makers and practitioners in developing countries - measures to promote and
improve financial education are becoming more frequent.

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It has been noted that low financial literacy significantly contributes to
financial exclusion in general and self-exclusion in particular. It accounts for
many low-income households not using insurance and deposit services, for
instance, or keeping their savings under the mattress. It prevents people from
understanding how inflation affects the real value of money and what options
they have to protect against erosion. Many poor people opt out of formal
financial systems due to misconceptions about price of credit. Many are
unaware of the best utilization of credit facilities and become over-indebted,
including micro credit facilities where markets have become more
competitive in recent years.

Improved financial education can bridge these gaps. It can also strengthen
accountability and competitiveness across financial sectors, and reduce the
elite capture of community level institutions, such as cooperatives, that
provide financial services to low-income people. And it can also contribute
towards efficient use of public resources that are targeted to assist the poor in
various ways. Thus, benefits of financial education can be enormous not only
to individuals, but to society as a whole. With increased financial literacy,
there will also be an increased demand for financial services from the poor,
which will further assist in percolating the benefits of inclusive finance
throughout every strata of the society.

Indian Scenario

Bank nationalization in India marked a paradigm shift in the focus of banking

as it was intended to shift the focus from class banking to mass banking. The
rationale for creating Regional Rural Banks was also to take the banking
services to poor people. The branches of commercial banks and the RRBs
have increased from 8321 in the year 1969 to 68,282 branches as at the end of

14
March 2005. The average population per branch office has decreased from
64,000 to 16,000 during the same period. However, there are certain under-
banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh,
Jharkhand, West Bengal and a large number of North-Eastern states, where
the average population per branch office continues to be quite high compared
to the national average. As you would be aware, the new branch authorization
policy of Reserve Bank encourages banks to open branches in these under
banked states and the under banked areas in other states. The new policy also
places a lot of emphasis on the efforts made by the Bank to achieve, inter alia,
financial inclusion and other policy objectives.

One of the benchmarks employed to assess the degree of reach of financial

services to the population of the country, is the quantum of deposit accounts
(current and savings) held as a ratio to the adult population. In the Indian
context, taking into account the Census of 2001 (ignoring the incremental
growth of population thereafter), the ratio of deposit accounts (data available
as on March 31, 2004) to the total adult population was only 59% (details
furnished in the table). Within the country, there is a wide variation across
states. For instance, the ratio for the state of Kerala is as high as 89% while
Bihar is marked by a low coverage of 33%. In the North Eastern States like
Nagaland and Manipur, the coverage was a meager 21% and 27%,
respectively. The Northern Region, comprising the states of Haryana,
Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the
developed world, the coverage of our financial services is quite low. For
instance, as per a recent survey commissioned by British Bankers'
Association, 92 to 94% of the population of UK has either current or savings
bank account.

Steps towards financial inclusion

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In the context of initiatives taken for extending banking services to the small
man, the mode of financial sector development until 1980’s was characterized
by

a hugely expanded bank branch and cooperative network and new

organizational forms like RRBs;

a greater focus on credit rather than other financial services like savings and
insurance, although the banks and cooperatives did provide deposit facilities;

lending targets directed at a range of ‘priority sectors’ such as agriculture,

weaker sections of the population, etc;

interest rate ceilings;

significant government subsidies channeled through the banks and

cooperatives, as well as through related government programmes;

a dominant perspective that finance for rural and poor people was a social
obligation and not a potential business opportunity.

It is absolutely beyond any doubt that the financial access to masses has
significantly improved in the last three and a half decades. But the basic
question is, has that been good enough. As I mentioned earlier, the quantum of
deposit accounts (current and savings) held as a ratio to the adult population
has not been uniformly encouraging. There is a tremendous scope for financial
coverage if we have to improve the standards of life of those deprived people.

With a view to enhancing the financial inclusion, as a proactive measure, the

RBI in its Annual Policy Statement for the year 2005-06, while recognizing the
concerns in regard to the banking practices that tend to exclude rather than
attract vast sections of population, urged banks to review their existing
practices to align them with the objective of financial inclusion. In the Mid
Term Review of the Policy (2005-06), RBI exhorted the banks, with a view to

16
achieving greater financial inclusion, to make available a basic banking ‘no
frills’ account either with nil or very minimum balances as well as charges that
would make such accounts accessible to vast sections of the population. The
nature and number of transactions in such accounts would be restricted and
made known to customers in advance in a transparent manner. All banks are
urged to give wide publicity to the facility of such no frills account so as to
ensure greater financial inclusion.

Further, in order to ensure that persons belonging to low income group both
in urban and rural areas do not face difficulty in opening the bank accounts
due to the procedural hassles, the KYC procedure for opening accounts has
been simplified for those persons who intend to keep balances not exceeding
rupees fifty thousand (Rs. 50,000/-) in all their accounts taken together and
the total credit in all the accounts taken together is not expected to exceed
rupees one lakh (Rs.1,00,000/-) in a year.

Coverage of Banking Services (Ratio of Demand Deposit Accounts to the adult

population)

No. of No. of
acc. acc.
Saving Adult Total Per Per
Region/St s Total Population No. Of 100 of 100 of
ate/Union Current Accou Populati (Above 19 account popul adult
Territory Accounts nts on years) s ation pop.
NORTHER 52416 1326764 566318
N REGION 4215701 125 62 67822312 26 43 84
80314 2108298 860413
Haryana 572660 72 9 11308025 2 41 76

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Himachal 24335 256788
Pradesh 134285 95 6077248 3566886 0 42 72
Jammu & 30947 1006991 337231
Kashmir 277529 90 7 5379594 9 33 63
13742 2428929 148983
Punjab 1156137 201 6 14185190 38 61 105
12139 5647312 128289
Rajasthan 689657 302 2 28473743 59 23 45
Chandigar 11266 120730
h 80607 96 900914 546171 3 134 221
11848 1378297 131528
Delhi 1304826 069 6 7929589 95 95 166
NORTH-
EASTERN 68910 3849508 736768
REGION 476603 81 9 19708982 4 19 37
Arunachal 20907
Pradesh 10538 3 1091117 544582 219611 20 40
50710 2663840 544978
Assam 378729 58 7 14074393 7 20 39
20059
Manipur 12514 3 2388634 1222107 213107 9 17
45877
Meghalaya 24305 9 2306069 1088165 483084 21 44
11788
Mizoram 3441 5 891058 476205 121326 14 25
19545
Nagaland 13819 2 1988636 995523 209271 11 21
Tripura 33257 63824 3191168 1784212 671498 21 38

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 1
EASTERN 47876 2276130 496903
REGION 1814219 140 73 122136133 59 22 41
13225 8287879 136897
Bihar 464511 242 6 40934170 53 17 33
58343 2690942 600034
Jharkhand 166007 41 8 13737485 8 22 44
70300 3670692 725816
Orissa 228160 04 0 21065404 4 20 34
12536
Sikkim 4097 5 540493 288500 129462 24 45
West 21544 8022117 224874
Bengal 942733 753 1 45896914 86 28 49
Andaman
& Nicobar 11643
Islands 8711 5 356265 213660 125146 35 59
CENTRAL 64254 2557134 664564
REGION 2202217 189 95 129316677 06 26 51
Chhattisga 33468 2079595 353896
rh 192067 98 6 11209425 5 17 32
Madhya 11731 6038511 122852
Pradesh 553381 918 8 31404990 99 20 39
Uttar 45804 1660528 471288
Pradesh 1324509 350 59 82229748 59 28 57
Uttaranch 33710 350328
al 132260 23 8479562 4472514 3 41 78

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WESTERN 49525 1490717 527032
REGION 3178102 101 47 86182206 03 35 61
15841 166572
Goa 81551 77 1343998 891411 8 124 187
16220 5059699 171762
Gujarat 955964 262 2 28863095 26 34 60
Maharasht 31568 9675224 336954
ra 2127240 184 7 56207604 24 35 60
Dadra &
Nagar
Haveli 6076 69308 220451 122765 75384 34 61
Daman &
Diu 7271 83170 158059 97331 90441 57 93
SOUTHER 83386 2234453 880529
N REGION 4666014 898 81 135574225 12 39 65
Andhra 23974 7572754 251309
Pradesh 1156405 580 1 44231918 85 33 57
19147 5273395 202344
Karnataka 1086662 819 8 30623289 81 38 66
17669 3183861 182697
Kerala 600065 723 9 20560323 88 57 89
Tamil 22052 6211083 238393
Nadu 1786514 812 9 39511038 26 38 60
Lakshadw
eep 491 22997 60595 33686 23488 39 70
Pondicher 51896
ry 35877 7 973829 613971 554844 57 90
ALL-INDIA 1655285 30434 1027015 541031553 320902 31 59

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 6 9534 247 390

Scheduled Commercial Banks 2005 – Credit Gap – District Level Estimate

According to Basic Statistical Returns of Scheduled Commercial Banks 2005

(including RRBs), there were 77 million credit accounts and 467 million
deposit accounts. Of the credit accounts, 98% were extended to individuals
(including partnership, proprietary concerns and joint families). Of the
deposit accounts, 28% were term deposits while 72% were current or savings
deposits.

The RBI had also attempted an analysis of the district-wise gaps in financial
inclusion by Scheduled Commercial Banks disaggregated by population group
features (viz., rural, semi-urban, urban and metropolitan). As the
preponderance of financially excluded population occurs in rural and semi-
urban areas, the analysis lays primary focus on this group. To arrive at the
gaps in financial inclusion, the district wise population and the number of
credit accounts held by the scheduled commercial banks, separately for the
rural and semi-urban branch offices were taken. Taking the difference of per
branch population and per branch credit accounts, the gaps in financial
inclusion, are estimated.

The Committee has perused the analysis made by RBI. It agrees with the view
that the inter-district variations are much sharper vis-à -vis the inter State
variations, which is only to be expected, taking into account the huge regional
disparities in development indices.

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For the purpose of addressing the issue of critical exclusion, the Committee
identified those districts where the exclusion is most severe. For the same, it
identified two parameters – districts with:

Per branch rural and semi-urban population above 19,272 (AI average)
and
Credit Gap +95%

This analysis revealed that out of 583 districts, as many as 256 districts
(spread over 17 States and 1 UT) fall in the above category. Almost all the
major States in the North-Eastern, Eastern and Central Regions are affected as
well as a few districts in States like Gujarat, Rajasthan and Maharashtra. The
district-wise, State wise particulars are indicated in table given below. A
summary of the analysis

No. of Range of credit

State
Sr. no. Districts gap (%)
1 Arunachal Pradesh 5 99.3-98.3
2 Assam 19 98.5-96.1
3 Bihar 37 98.6-95.0
4 Chhattisgarh 15 98.0 – 96.5
5 Dadra & Nagar Haveli 1 97.6
6 Gujarat 7 98.1 – 95.7
7 Haryana 5 96.9 – 95.4
8 Jharkhand 12 97.8 – 95.6

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 9 Madhya Pradesh 30 98.3 – 95.3
10 Maharashtra 20 98.0 – 95.1
11 Manipur 9 99.2 – 97.9
12 Meghalaya 1 99
13 Mizoram 1 98.3
14 Nagaland 6 99.3 – 98.2
15 Orissa 2 95.3 – 95.2
16 Rajasthan 14 97.8 – 95.2
17 Uttar Pradesh 58 98.6 – 95.1
18 West Bengal 14 97.1 – 95.2
  Total 256  

Note : The above analysis considers only commercial banks (including RRBs).
Co-operatives (which have a strong presence in Gujarat, Maharashtra and
Rajasthan) are not covered.

Source: Analysis by DESACS, RBI, New Delhi

Summing up

(a) General :

51.4% of farmer households are financially excluded from both formal /

informal sources (459 lakh out of 893 lakh).
Of the total farmer households, only 27% access formal sources of
credit; one third of this group also borrow from non-formal sources.
Overall, 73% of farmer households have no access to formal sources of
credit.

(b) Region-wise:
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 Exclusion is most acute in Central, Eastern and North-Eastern regions –
having a concentration of 64% of all financially excluded farmer
households (from formal sources) in the country (415.61 lakh
households out of 649.54 lakh households).Overall indebtedness to
formal sources of finance alone is only 19.66% in these three regions
(4.09% for North-Eastern Region, 18.74% for Eastern Region and
22.41% for Central Region).

(c) Occupational Groups:

Marginal farmer households constitute 66% of total farm households.

Only 45% of these households are indebted to either formal or non
formal sources of finance (small farmers – 51%, medium farmers –
65.1% and large farmers – 66.4%).
About 20% of indebted marginal farmer households have access to
formal sources of credit (medium farmers – 57.6% and large farmers –
around 65%).
Among non-cultivator households nearly 80% do not access credit from
any source.

(d) Social Groups:

Only 36% of ST Farmer households are indebted (SCs and Other

Backward Classes - OBC - 51%) mostly to informal sources.

Analysis of the data provided by the Basic Statistical Returns of Scheduled

Commercial Banks reveal that critical exclusion (in terms of credit) is manifest
in 256 districts, spread across 17 States and 1 UT, with a credit gap of 95%
and above. This is in respect of commercial banks and RRBs. Credit coverage
by cooperatives is also on a relatively low level, as nearly 62% of its members
are non-borrowing members.

While NSSO and BSR data (as indicated above) show critical exclusion as
manifest in certain regions and social / economic groups, there are other sets
of data which show a different picture. As per CMIE (March 2006), there are
11.56 crore land holdings. 5.91 crore KCCs have been issued as at the end of
March 2006, which translated into a credit coverage of more than 51% of land

24
holdings by formal sources. Further data with NABARD on the doubling of
agricultural credit indicates that agricultural loan disbursements during
2006-07 covered 3.97 crore accounts.

Thus, there are different estimates of the extent of inclusion thru’ formal
sources. Further, the reference period of the data is also not uniform – the BSR
statistics take 2004 as the base, CMIE 1995 (published March 2006), while
NSSO covers position during 2003. Consequently, this has had an impact on
quantifying the extent of levels of exclusion. RBI / NABARD should look into
this aspect and study the reasons for such large differences arising in the
estimate of levels of exclusion.

However, notwithstanding such differences in the data available, what can be

stated with certainty is that exclusion exists – to a large extent among specific
occupational groups, specific social groups and in specific regions, either in
isolation or in conjunction. It is, therefore, imperative to roll out an action plan
to cover the highly excluded areas / regions in a very definite, time-bound
manner.

Role of Financial Institutions

Commercial banks play a pivotal role in financial inclusion initiatives. The

survey carried out by the World Bank in 142 economies reveals that 85
percent of total deposit volume and 96 percent of all deposit accounts are held
in commercial banks. But, in a number of economies, non-banking institutions
play an important role in providing basic deposit services. For example, in
countries like Chile, Spain, and France, cooperatives or specialized state
financial institutions hold more deposit accounts than commercial banks.
Similarly, in a number of West African countries, such as Benin, Burkina Faso,
Ivory Coast, and Niger, deposit-taking microfinance institutions have more
depositors than commercial banks, suggesting that non-banking institutions
can play an important role in providing basic deposit services. The percentage
of total volume of deposits held by banks and non-banking institutions on a
global scale is shown in the chart.

25
Situation in India

Savings rate in India grew from 22.3 percent of GDP in 1998-99 to 32.5
percent in 2008-09. India is known for its high level of household savings and
the contribution of the household sector to total savings is 70 percent.

Percentage of Global Deposit

23% Business Deposit in

13% commerical bank
2%
Individual Deposit in
Commerical Bank
Business Deposit in Non-
banking Institutions
Individual Deposit in Non-
62% banking Institutions

While the overall savings ratio increased significantly, financial savings

remained at around 50 percent of household savings. Within financial savings,
share of bank deposits increased from 33 percent in 2000-01 to 55 percent in
2008-09. In March 2004, there were 590 savings and current accounts per
1,000 adults and the number rose to 747 in a period of five years. The statuses
of India vis-a-vis some select economies are shown in the table.

Financial Access through Commercial Banks

26
 Deposit Loan Outreach
Sr. Emerging
N Economie
Accounts Value Accounts Value Branches
o s
per 1000 (% of per 1000 (% of per
adult GDP) adult GDP) 100,000
1 India 747.29 55.03 137.46 40.93 10.11
2 Indonesia 504.74 36.95 196.86 26.93 7.74
3 Malaysia 2063.33 105.45 963.6 113.16 11.44
4 Taiwan 5187.77 172.84 635.68 136.4 17.95
5 Thailand 1448.84 79.58 272.45 87.25 11.04
6 Japan 7172.42 146.24 177.63 85.08 12.46
7 Singapore 2236.25 280.88 914.55 213.43 10.54
8 UK 2923.25 61.32 80.64 20.74
9 US 2021.89 43.91 44.81 36.33
Source: www.cgap.org

Conclusion

Achieving higher rates of financial inclusion calls for higher financial savings
and much greater penetration of banks and other financial intermediaries like
insurance companies, mutual funds, and pension funds. The Indian
government is taking proactive steps such as rural employment under the
National Rural Employment Guarantee Act (NREGA), in which payments are
made through bank accounts, with job cards serving as document of identity.
The UIDs (Unique Identification Cards) planned to be provided to residents
will further facilitate financial penetration as these will serve to meet the KYC

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(Know Your Customer) norms for account holders with small value
transactions.

Interview on Extent of Financial Inclusion

Substantial literature on financial inclusion in India with particular reference

to groups with low incomes is very much available. Although various
organizations especially NGOs, are working with people who are especially
vulnerable to financial exclusion, significant changes on a much wider and
larger scale can be brought about only by giving special emphasis to financial
inclusion by Indian policy makers and practitioners. In order to address the
needs of these underserved sections of the population, a number of financial
inclusion initiatives have been launched by the Reserve Bank of India. Since
these initiatives are relatively recent and remain at the early stages, my
survey aims at evaluating the institution how far they reached to poor people
and their contribution to financial inclusion.

Objectives

The broad objectives of conducting the survey are as follows:

To identify the extent and nature of financial inclusion in and around

Ahmedabad; To understand the drivers of financial exclusion/inclusion;
To determine the level of awareness of people in various financial
products and interest in undergoing courses in financial inclusion;
To know the Microfinance lending model of selected Institution.
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Methodology

Primary data collected from 2 Institution in Ahmedabad region with one

register with Reserve Bank of India NBFC and second is unorganized
Institution run on regional based. In both the Institution I did interview with
the concern personal to collect the primary data (information) to support my
report with various question.

Mas Finance Service Ltd.

Shree Vijaya Laxmi Society

About

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Secondary Data

INTRODUCTION
Mas is specialized retail financing organization engaged in financial services
since1988, registered with Reserve Bank of India as an NBFC.

In existence since last 18 years. Turned corporate in the year 1995.

A focused retail finance company spread all over Gujarat with its 61 branches
and more than 1400 Locations' reach pan Gujarat.

Created the expertise in the distribution of credit and a base of more than
2,50,000 customers.

Completed close to 7 cycles per customers tenor assuming the tenor to be on

average 30 months.
Current Activities

Focused approach in retail asset lending

Micro Loans

Micro Enterprise Loans

Two Wheeler Loans

Commercial Vehicle Loans

Pre-Owned Car Loans

Mortgage Loans.

Agri-Based Loans

BUSINESS MODEL
Focused approach on distribution of credit. Sourcing, servicing and bearing

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delinquency.
Retains the portfolio in its balance sheet to the extent of its NOF and
borrowings.

Securitizes the assets originated.

Works under back to back arrangement with some leading banks.

Works as a sourcing agent in the area of high ticket financing.

MICRO FINANCE POTENTIALITY IN INDIA

India is the largest Market for micro credit in the world.

The funding to this sector will prove to be the driver of economy.

Eradicating poverty through profit is the most sustainable way.

Sustainable & Scalable module required to tap market potentiality.

MAS-POSITIVES
Wide geographic spread in Gujarat.

Sound grip on distribution of credit, especially in rural market.

In-depth understanding of local needs, profiles, business, living conditions,

earning and repayment capabilities with understanding of
culture/geographical differences in within the state.

Structuring of finance to meet local credit need of people at large.

Small ticket size which results into large spread of risk- concentration of risk
on particular individual and group has been avoided.

Centralized Credit and Operations Processing for better control by senior

management.

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A suitable mix of in-house team and outsourced agencies for marketing, credit
and collection network to optimize productivity.

Micro Finance/Micro Enterprise Loans to be key focused area

Microfinance Investors

Debt Investor

MAS, in its quest to have a significant market share in Micro Financial

Services, activities is always keen to have synergy with investors (Equity &
Debt )

Many leading banks such as ICICI Bank Ltd., HDFC Bank Ltd., UTI Bank Ltd.,
State Bank of India, Standard Chartered Bank Ltd., Development Credit Bank
Ltd., Centurion Bank of Punjab Ltd., SIDBI to name a few have taken debt
exposure on MAS

Equity Investor

ICICI Venture Fund Management Company Limited

ICICI Venture Fund Management Company Limited, the private equity arm of
ICICI Bank Ltd., India’s second biggest lender, has invested INR 400 Million
through a mezzanine fund, India Advantage Fund - VII. The investment is in
the form of redeemable preference shares.

It will help MAS to fuel its ambitious growth plans. I-Venture through this
investment partners one of the leading financial services company of Gujarat
having a long term strategy to be one of the premier financial services

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provider.

The Bellwether Micro Finance Fund.

Bellwether has the backing of some of the leading names in the microfinance
sector; both in India and the world.

It is the result of the collaborative effort between two leading international

microfinance investors and an Indian fund manager with local presence and
expertise.

Visit the website at: http://www.bellwetherfund.com

Nederlandse Financierings Maatschappij voor Ontwikkelingslanden N.V.

FMO an entrepreneurial development bank of the Netherlands has invested
INR 434.71 Million in equity through Cumulative Compulsorily Convertible
Preference Shares.

FMO`s investment portfolio is EUR 3,4 billion, making it one of the largest
bilateral development banks worldwide. FMO has an AAA rating from
Standard and Poor`s and has recently obtained a banking license from the
Dutch Central Bank (DNB).

Through such investments FMO is stepping up to achieve their mission to

stimulate sustainable private sector development and optimise economic
growth through its investment activities in emerging markets.

FMO’s investment decisions are based on the fundamental concept that

sustainable economic growth is stimulated by the development of a healthy
private sector, which in turn contributes to combating poverty and to
improving living standards in developing countries

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Board of Directors

PROMOTER DIRECTORS
Mr. Kamlesh Gandhi
He is the founder and Managing Director of the company. He manages the
company with the guidance and support of the Board. He is a proficient and
experiences industry practitioner with a brilliant track record and an in
depth understanding of Indian financial activities. His expertise of the
business combined with remarkable marketing acumen has led the
company on a growth track that will set new benchmark in the industry.

Mr. Mukesh Gandhi

He is the Co-founder & Director finance of the company. He is actively
involved in the strategic decisions of the company. He is well-known
industry expert and a popular public speaker on various issues in Finance.
He is an academician and Chairman of Gujarat Finance Company
Association & also the committee Member of Finance Industry
Development Council ( FIDC ).

PROFESSIONAL DIRECTORS
Mr. Bala Bhaskaran
He is the Director of the company. He is a management graduate with two
experience in industry, consultancy and the financial sector. Presently he is
the Dean of ICFAI Business School at Ahmedabad. He has a number of
management consultancy inputs for his rich experience. He is An Engineer,
MBA from IIM , Banglore and CFA from ICFAI.
Mr. Chetan Shah
He is the Director of the company. He is a FCA. He is Finance Consultant. He
was associated with Co-Operative Bank as a Finance Manager for 25 yrs. In

34
practice as a Charted Accountant since 1979.
Dr. Jagdish Joshipura
He is the Director of the company. He is a Chartered Accountant ,Ph.D.
(Finance). He is a director of Som Lalit Institute of Management,
Ahmedabad. He was associated with GSFC, Gandhinagar as a General
Manager.

NOMINEE DIRECTOR
Mr. S.Viswanatha Prasad
He is the Nominee Director of the company, nominated by Bellwether
Microfinance Fund. He is having a Master Degree in Business
Administration from BITS, Pilani. He has vast experience of retail asset
finance, corporate finance, investment banking and micro finance.
Mr. Subir Nag
He is the Nominee Director of the company, Nominated by ICICI Venture
Fund Management Company Limited. He is an Electrical Engineer and MBA
from XLRI, Jamshedpur. He is a Director of ICICI Venture Fund Management
Company Limited, having an experience of 14 yrs in the areas of Project
Management, Investment Banking, Stressed Asset Management , Corporate
Banking and Entrepreneurship

Products
They OFFER THE WIDEST RANGE OF PRODUCTS

Micro Finance

35
 Micro finance loans / Personal Loans
are offered on very attractive terms.
We at MAS have customized credit
programs to assess your creditability
and extend the right amount of loan
for your various needs. We cater as
many as 500 different categories of
small type entrepreneurs and have
helped driven in main financial
stream. Our financing options are
available at as many as 1300 locations
in Gujarat.

Two- Wheeler Finance

Two Wheeler Finance facility is
available in a wide range of options to
suit your requirements. We provide
finance for all models of motorcycles,
mopeds, scooterettes and scooters of
reputed brands.We provide spot
financing facility at the dealer place
through out Gujarat.

Commercial Vehicle : Three-Wheeler

36
 We specialized in funding 3 Wheelers and
Multi-Utility Vehicles. We extend financial
services across the state by virtue of our deep
penetration network. Quick turnaround time
and flexible financing solutions is the essence
of the services.

BIBLIOGRAPHY

37
www.microfinanceinfo.com

http://ifmr.ac.in/cmf

www.basixindia.com

www.nabard.org

www.sewa.com

www.wikipedia.com

www.sbi.com

http://www.unitedprosperity.org/us/faqs

http://mas.co.in/contactus.aspx

http://www.edarural.com/documents/SHG-Study/Executive-Summary.pdf

http://www.microfinancefocus.com/news/2010/04/01/special-report-is-
the-crisis-over-the-outlook-for-microfinance-investment-2010/

CGAP Microfinance Global Evaluation Survey 2010

http://indiamicrofinance.com/financial-regulation-financial-inclusion-
speech-deputy-governor-reserve-bank-india.html

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