Financial Inclusion in India

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups.As banking services are the nature of public good,it is essential that availability of banking and payment services to entire population without discrimination is the prime objective of the public policy.

• Low-income groups do not have access to the formal banking systems,as they usually do not have the documents needed to open a bank account.
• Therefore,they rely on the informal sector(chit funds,bessi etc) for their savings and loan requirements
• The aim of financial inclusion,which the RBI is promoting,is to get the vast low-income population into the fold of the basic banking system through no-frills account.
• No-frills bank accounts are of a restricted nature and put a limit on the number of transactions.
• The individual who wants to open a bank account needs to be certified by an existing account holder on whom all the know-your-customer norms have been completed.

A vast segment of India's population exists on the margins of India's financial systems.Whilst the per-capita savings of this class may not be very high their sheer number means that taken together their savings are of a considerable amount.If their entry in the formal financial sector is made easier these savings can be channelized for the formal economy.Also savings cum risk products that are their primary need can be structured for them once they are part of the formal banking system.

Financial exclusion becomes of more concern in the community when it applies to lower income consumers and/or those in financial hardship.

Problems due to Financial Exclusion

Consequences of Financial exclusion will vary depending on the nature and extent of services denied.It may lead to:

• Increased travel requirements
• Higher incidence of crime
• General decline in investment
• Difficulties in gaining access to credit
• Getting credit from informal sources at exorbitant rates
• Increased unemployment
• Small business affected:The small business may suffer due to loss of access to middle class and Higher-income consumers,higher cash handling costs,delays in remittances of money.
• Social exclusion:According to certain researches,financial exclusion can lead to social exclusion.

Banking in India

Banking sector in India has undertaken several social banking initiatives for a long time now.RBI and Government of India have made several policy decisions to increase the scope of banking sector in all parts of the country.These include the following:

• Initiation of the Lead Bank scheme in 1970
• Establishment of Regional Rural banks in 1975
• Introduction of the Self-Help Group-Bank Linkage scheme in 1992
• Formulation of the Kisan Credit Card scheme in 2001
• Steps for financial inclusion in the RBI policy from 2005 onwards

The recent guidelines issued by RBI for promoting financial inclusion as follows:

• Introduction of a basic banking no-frills account with minimum or Nil balance requirements and charges
• Simplification of Know Your Customer(KYC) procedures for opening accounts for low income groups
• Simplification of general credit card schemes to provide easy access to credit for rural customers
• Use of IT-enabled services for increasing the scope and coverage of financial services
• Inculcation of awareness in masses through financial education and credit counseling

The banking sector has tried to address the needs of financially excluded by providing the following the following services:

• Small Saving Products
• Insurance schemes
• Credit cards
• Easy and cheap credit facilities

Issues and Challenges of Financial Inclusion

1. In remote,hilly and sparsely populated areas with poor infrastructure,physical access itself acts as a deterrent.
2. From the demand side,lack of awareness,low incomes/assets,social exclusion,illiteracy act as barriers.
3. From the supply side,distance from branch,branch timings,cumbersome documentation and procedures,unsuitable products,language,staff attitudes are common reasons for exclusion.All these result in higher transaction cost apart from procedural hassles.
4. Lack of Financial education among the masses.
5. Provision of Insurance scheme to the financially excluded class to protect them against natural calamities,thefts,deaths etc still remains a challenge.
6. Sustainable and suitable financial products have to be developed such that they appropriately address the risk faced by the poor people and also promote economically viable activities.
7. Monitoring if the donations and funds received by SHGs and of the interest rates charged by MFIs is required.

The entire system's success depends on how often the villagers use the available infrastructure and how quickly we can get them to place their trust in the system.