Financial Inclusion for Inclusive Growth

Financial Inclusion for Inclusive Growth: Institutions and Innovations Debesh Roy( I. Introduction An essential pre-requisite for inclusive and sustainable growth is capital formation through credit and financial services. While the benefits of growth due to reforms in India, have concentrated in the hands of those already served by the formal financial system, a large section of the rural and urban poor still do not have access to the formal banking channel. The backward regions of the country, too, lack basic financial infrastructure.
The Reserve Bank of India (RBI) has, therefore, formulated the policy of financial inclusion with a view to provide banking services at an affordable cost to the disadvantaged and low-income groups. Financial inclusion makes growth broad based and sustainable by progressively encompassing the hitherto excluded population. The idea of financial inclusion in India has its roots in the co-operative movement which started in the year 1904. Historically, nationalization of commercial banks in 1969 was the most significant effort towards financial inclusion, which led to the spread of bank branches in rural and semi-urban areas.
The access to banking services has increased considerably, as may be gauged from the fact that the average population per branch has decreased from 64,000 in 1969 to 13,400 as at the end of March 2011[1]. However, there are still some under-banked states in the country like Bihar, Odisha, Rajasthan, Uttar Pradesh, Chhattisgarh, Jharkhand, West Bengal, and the North-Eastern States. Further, in spite of the enhanced outreach of banks in rural areas and the implementation of directed credit, the growing credit needs of farmers, rural artisans and entrepreneurs could not be adequately met from banks during the post-nationalization period.

The RBI, therefore, urged banks to review their existing banking practices to align them with the objective of financial inclusion. According to the RBI (RBI, 2008) access to safe, easy and affordable credit and other financial services by the poor and vulnerable groups, disadvantaged areas and lagging sectors is recognized as a pre-condition for accelerating growth and reducing income disparities and poverty. Moreover, access to a well-functioning financial system, by reating equal opportunities, enables economically and socially excluded people to integrate better into the economy and actively contribute to development and also protect themselves against economic shocks. NSSO data reveal that 45. 9 million farmer households in the country (51. 4 per cent), out of a total of 89. 3 million households do not have access to credit, either from institutional or non-institutional sources (Government of India, 2008). Further, despite the vast network of bank branches, only 27 per cent of total farm households are indebted to formal sources (of which one-third also borrow from informal sources).
Farm households not accessing credit from formal sources as a proportion to total farm households is especially high at 95. 91 per cent, 81. 26 per cent and 77. 59 per cent in the north-eastern, eastern and central regions respectively. Thus, apart from the fact that exclusion in general is large, it also varies widely across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion (RBI, 2008). The RBI has observed that out of 600,000 habitations in the country, only about 5 per cent have a commercial bank branch (RBI, 2010).
Also only about 61 per cent of the population across the country has bank account (savings), and this ratio is much lower in the north-eastern states. Further, 18 per cent of the population has debit cards and about 2 per cent has credit cards (RBI, 2011). India has a significantly low level of financial penetration compared with OECD countries. Further, while the access to bank branches in India fares better than that of China and Indonesia it is worse off when compared with Malaysia and Thailand. However, in terms of financial access through ATMs, India fares poorly compared to select Asian peer group countries (RBI, 2010[2]).
In view of the poor level of financial inclusion in India, the RBI has accorded top-most policy priority to financial inclusion, by advising commercial banks, to formulate specific Board approved Financial Inclusion Plans (FIP) and to act on them on a mission mode. Banks were also advised by the RBI to provide banking services tin every village having a population of over 2000 by 31 March 2012, through bank branches as well as through various ICT-based models including through Business Correspondents (BCs).
Banks were also encouraged to cover the peripheral villages with population less than 2000. There has been some improvement in the status of financial inclusion in the country in the last couple of years. Yet the extent of financial exclusion is staggering. Out of every 1000 persons, only 99 had a credit account and 600 had a deposit account as at end-March 2011. This underlined the need to strengthen the financial inclusion drive through well thought out policies (RBI, 2011).
Against this backdrop this paper attempts to examine and analyse policy issues related to the promotion of financial inclusion through various institutional and product innovations, and their impact on the achievement of widespread and sustainable inclusive growth. Rest of the paper is organized as follows: Section II presents the status of financial inclusion in India. State-wise Index of Financial Inclusion (IFI) has been developed in Section III. Section IV analyses the role of institutions in promoting financial inclusion.
Section V examines innovations in financial inclusion which could lead to inclusive growth. Demand side innovations for financial inclusion have been analyzed in Section VI. Section VII concludes the paper and suggests policy initiatives for the achievement of inclusive growth through financial inclusion. II. Status of Financial Inclusion in India There has been a consistent increase in the penetration of banking services in India in recent years. However, the rate of increase in the penetration of banking services in the rural and semi-urban areas has been much lower than that in the urban areas.
Further, penetration of banking services has been lower in the central, eastern and north-eastern regions of the country compared to the more developed northern, southern and western regions. In order to address this issue, the RBI liberalized the branch authorization policy in December 2009, giving freedom to domestic scheduled commercial banks to open branches at Tier 3 to 6 centres (with population of up to 49,999 as per the Population Census of 2001) without having the need to take permission from RBI in each case, subject to reporting.
The RBI has been encouraging banks to expand their network both through setting up of new branches and through the Business Correspondent (BC) model by leveraging upon information and communication technology (ICT). This has resulted in an improvement in the status of financial inclusion in 2010-11 over the previous year, as indicated in Table 1. However, the extent of financial exclusion is still quite substantial. This is evident from the fact that only 61. 2 per cent of the population had a deposit account, and 9. 9 per cent had a credit account.
Hence, the extent of financial exclusion underscores the need to focus on the strengthening of the financial inclusion drive through a planned, coordinated and innovative approach.
Table 1 Progress of Financial Inclusion in India

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Sl. No.

Credit-GDP Ratio
53. 4
54. 6


Credit-Deposit Ratio
76. 5


Population per Bank Branch


Population per ATM


Percentage of Population having deposit accounts
55. 8
61. 2


Percentage of Population having credit accounts
9. 3


Percentage of Population having debit cards
15. 2
18. 8


Branches opened in Tier 3-6 centres as a per
40. 3
55. 4

Сent of total new bank branches


Branches opened in hitherto unbanked centres as


A per cent of total new bank branches

Source: Report on Trend and Progress of Banking in India 2010-11, RBI During 2010-11 4826 new branches of scheduled commercial banks were opened. It may be observed from Table 2 that majority of the branches (66. 4 per cent) were opened in the more developed regions viz. northern (23. 2 per cent), southern (26. 2 per cent) and western (17. 0 per cent). The less developed regions accounted for 33. per cent of new branches opened viz. central (18. 1 per cent), eastern (13. 5 per cent) and north-eastern (2. 0 per cent). Further, rural and semi-urban branches accounted for 22. 3 per cent and 41. 7 per cent of new branches, respectively. On the other hand, the share of urban and metropolitan branches stood at 17. 9 per cent and 18. 1 per cent, respectively.
Table 2 Distribution of New Bank Branches of Scheduled Commercial Banks across Regions and Population Groups (2010-11)
Note: Figures in parentheses are percentages to total new bank branches. Source: Report on Trend and Progress of Banking in India 2010-11, RBI
A major instrument of financial inclusion is the Kisan Credit Card (KCC). KCC enables farmers to access credit at the right time, to meet their pre-sowing as well as well as post-harvest needs. Region-wise and institution-wise status of sanction of KCC as on 31 March 2011 is furnished in Table 3. It may be observed that the southern region accounted for the highest share of KCC issued (36. 3 per cent) and the amount sanctioned (32. 5 per cent), followed by the central region with 22. 8 per cent of KCC issued and 23. 7 per cent of the amount sanctioned.
The eastern region was ranked third with 17. 2 per cent of cards issued, but was ranked fourth with 10. 2 per cent of the amount sanctioned. The northern region which was ranked fourth (12. 6 per cent) in terms of cards issued, was ranked third in terms of amount sanctioned (23. 6 per cent). The more developed western region, however, accounted for 9. 5 per cent of cards issued and 9. 2 per cent of amount sanctioned. The least developed north-eastern region accounted for 1. 6 per cent of cards issued and 0. 8 per cent of the amount sanctioned.
Government of India has launched a programme called ‘Bringing Green Revolution in Eastern India (BGREI)’ in the states of Assam, Bihar, Chhattisgarh, Jharkhand, Odisha, Eastern Uttar Pradesh and West Bengal, with a view to address the constraints limiting the productivity of rice based cropping systems. BGREI is expected to raise the demand for agriculture credit and accordingly, banks need to give a special thrust to issuing KCC in these states. Among institutions, the share of commercial banks was the highest in terms of the number of KCC issued (54. per cent) as well as amount sanctioned (69. 4 per cent). While the share of cooperative banks in terms of the number of KCC issued was higher (27. 7 per cent) than that of RRBs (17. 4 per cent), the share of RRBs (15. 8 per cent) was higher than that of cooperative banks (14. 8 per cent) in terms of amount sanctioned. It is, therefore, imperative that in order to achieve greater financial inclusion, there should be a focus on strengthening RRBs and the cooperative credit institutions.


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