International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in FINANCIAL INCLUSION IN INDIA- “A CATALYST FOR SUSTAINABLE ECONOMIC GROWTH”

ANJUM UBAID SIDDIQUI

Aligarh Muslim University, Department of Business Administration Aligarh, Uttar Pradesh. India E-mail - [email protected]

Abstract - One of the biggest economic stories of our time is the reduction of poverty across the globe.A well developed financial system brings poor people into the mainstream of the economy and allows them to contribute actively towards personal economic growth. It has been rightly said by Franklin.D.Roosevelt “the test of our progress is not whether we add more to the abundance of those who have much, It is whether we provide enough for those who have little”.As the approach to12th five year plan (2012-2017) is faster, sustainable and more inclusive growth., the key to Inclusive growth is Financial Inclusion. It isemerging as the new paradigm of economic growth. Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. The main focus of financial inclusion is to draw the unbanked population into formal financial system so that they have the opportunity to acess financial services ranging from savings ,payments transfers to credit and insurance. Though our country's economy is growing steadily, still the growth is not inclusive with the economic condition of the people in rural areas worsening.There has been many formidable challenges associated with financial inclusion such as bringing the gap between the sections of the scociety which are financially excluded within the ambit of formal financial system,providing and strengthening credit delivery mechanism so as to invigorate economic growth.A nation can grow economically and socially if its weaker section can turn out to be financially independent. So an inclusive sectorshould not only serve the bankable clients, but also integrate the "unbankable"clients by making them "bankable".The present paper highlights the significance of financial inclusion in social and economic development of the society.The study focusses on the role of financial inclusion in strengthning India‟s position in relation to other country‟s economy and the efforts of RBI in achieving it.For analysing such facts, data has been compiled through secondary sources and articles. After analysing the facts and figures it has been concluded that financial inclusion plays a major role in driving away the poverty from the countrybut still there is a long road ahead to achieve the desired results . No doubt it is playing a significant role and is working in a positive direction.

Keywords: Financial Inclusion, ,NABARD ,No- frills account JEL Classification: G20, G21, G23

I. INTRODUCTION vast segment of the population, especially the underprivileged sections of the society , into the fold Financial Inclusion is critical to achieve inclusive of basic banking services. There are several factors growth which itself is a sine quo non for sustainable affecting access to formal banking system in any economic growth and development. By helping to country.They include culture, financial literacy, create a platform,for inculcating the habit of saving gender, income and assets, proof of money and providing formal credit avenues, financial identity,remoteness of residence, and so on. inclusion plug gaps and leaks in public subsidies and welfare programes. In the bargain, it ends up India was ahead of its times when it first ushered in unleashing the potential of vulnerable and Financial Inclusion by nationalising banks in mid marginalised section of economies. The aim of 1969 and then coming up with various policies to financial inclusion is to promote development and operationalise it.The track record is a mix of success generating employment for a vast majority of the and failures.The move resulted in economic spin-offs population especially in the rural areas. The process for poorer people specially in rural India .As a of financial inclusion consists of ensuring bank financial intermediary ,the banks possess a accounts to each household and offering their tremendous potential to act as an agent of change and inclusion in the banking system.Financial system ensure redistribution of weatlth. But it is disheartning exerts a first order impact onlong run economic to note that inspite of such efforts , the glass remains growth . The Reserve Bank of India has taken several half empty.The number of unbanked individuals-145 measures since Independence to improve access to million in India is largest in the world. Banking affordable financial services through system has failed to match up with the increase in financialeducation, leveraging technology and numbers – population per branch slid from 14,000 in generating awareness. 1991 to13503 in 2011 and to 12,921 in 2013. Only half (55%) of the people have deposit accounts. In the last few decades, despite making tremendous India‟s unmet demand formicrofinance remains the improvements in all the areas relating to financial highest in the world. Even though viability , profitability and competitiveness, there are institutions have expanded very fast in the last five concerns that banks have not been able to include years, they still cover only about one fifth of low-

Financial Inclusion in India- “A Catalyst for Sustainable Economic Growth”

61 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in income households and meet only one tenth of the strong agent of inclusive growth.” In developing credit needs of the poor. Less than 20% of the country like ours, Banks play an important role in population is covered by life insurance and less than mobilising savings and allocating it to meet the credit 10%by non-life insurance coverage. Only 28% of the needs of people. More studies have attempted to people have debit cards and a mere two per cent have analyze the role of commercial banks in financial credit cards. There are a100 million „no-frill‟ inclusion for sustainable development through accounts, or accounts with zero or minimum balance various development programmes and policies.An and small overdraft facilities, for poor people. Yet, attempt in this section has been made to review some 80–90% of these accounts are dormant, neither important research studies. Finance Minister Pranab operated by the account owners, nor pursued by Mukherjee (2010) said financial inclusion was a key bankers. Financial literacy levels are extremely low. determinant of sustainable and inclusive growth Recognising the importance of inclusive growth in which could bring out exceptional untapped potential India,efforts are being taken to make the financial of savings consumption and investment propensities system more inclusive.Various anti poverty of the poorer sections of society. ,employment generation and basic services Dr.K.C.Chakarvarthry,Deputy governer RBI,at the programme have been operational for decades in Financial Inclusion Conclave held by CNBC TV 18 India .The ongoing reforms attach great importance to (2013) explained the approach of RBI towards the removal of poverty and adressing the vast Financial Inclusion.The defining features of the variations across states and the rural urban divide. approach includes the adoption of bank led model for While it is a daunting challenge in size and scope, FI but have permitted non bank entities to partner financial inclusion is also a great social and business banks in its drive.RBI has encouraged banks to opportunity. Indepth financial inclusion through a leverage technology while keeping the cost of strong financial system,encourages expansion in providing financial services to the minimum.The market and competition for existing firms.Among the Central Bank has been advised to adopt innovative potential businesses that will benefit from more business models and delivery channels to their inclusion are business correspondents who can bring expand their efforts.There is a need on the part of simple banking services as wells insurance and even banks to develop new products and deliver models pension schemes to the poor. customized to the unique needs of financially Dr.Chakarbarthy,Deputy Governer RBI,at the excluded population both in rural and urban National Finance Conclave 2010 has mentioned that areas.Added to this the RBI Governer Financial inclusion is no longer a policy choice but a RaghuramRajan,in his first speech as the new policy compulsion today to tackle the emerging governer identified the technology of Mobile financial crises.The Report Committeeon Financial payments as a “game changer for financial sector and Inclusion headed by Dr.C.Rangarajan (2008) has a catalyst for Financial Inclusion .” observed that financialinclusion must be taken up in a Mandira Sarna (2008) in a paper on Financial mission mode and suggested the participation of all Inclusion and development has come up with a view the stakeholders and beneficiaries in bringing policy that socio economic fators like income changes and undertaking promotional initiatives for inequality,literacy and urbanisation are important achieving 100% financial inclusion in India. factors that have an effect on Financial Inclusion.Further physical infrastructure for II. LITERATURE REVIEW connectivity and information are also significantly associated with Financial Inclusion. She suggests that Financial Inclusion is an innovative concept.It is an the issue of financial Inclusion is a development equiliser that enables all Indians to contribute to priority policy in India and has evaluated it using economic growth and gain from it.It can be viewed as index of financial Inclusion . easy access to formal financial services and their George Muthoot ,CEO of Muthoot Finance (2014) usage by all members of the economy.Robust came up with empirical findings that Financial financial services boost economic growth by inclusion remains a distant dream for a majority of mobilising savings for productive use , allocating Indians. Even after 20 years of banking sector capital funds easily and managing risk.Access to privatization, today only 35% of the Indian financial servives builts social inclusion and population has formal bank accounts compared to an empowerment. Christine Lagarde,Managing Director average of 41% in developing economies. In a IMF,(2014) in her address to the International forum country where nearly 70% of the population lives in for Financial Inclusion has explained the merits of villages, a significant segment of about 6,50,000 financial inclusion being deeply rooted in villages do not have a single bank branch. empowerment.“Access to credit provides the linkage between economic opportunity and economic The Recent Nachikhet Mor report has highlighted outcome.By empowering individuals, specially the greater need of Financial Inclusion in Banking vulnerable section of the society,to cultivate Smriti Chand (2008) in an article relating to the role economic opportunities, financial inclusion can be of commercial banks in India has made a detailed

Financial Inclusion in India- “A Catalyst for Sustainable Economic Growth”

62 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in analysis of the development of Commercial banks in services and new delivery mechanisms, which would India in the light of reorientation of banking policy, fulfill the requirements of the poorest. credit planning,resource mobilization and capital formation for the regional development and III. NEED FOR THE STUDY economic growth. Choubey, B.N. (1983) has evaluated that Commercial Banks have failed to fill As the implementation of 12th five year plan of the serious gap and deficiencies in farm credit, which sustainable and inclusive growth is in progress ,the the RRBs could manage to do. Choubey emphasized economy is in a phase of rapidly rising income, rural that the National Bank for Agriculture and Rural and urban, arising from an expansion of economic Development (NABARD), would be required to pay activities,thereby ,riding on the growth momentum. special attention to the depoliticisation of the All of these developments suggest that the demand agricultural credit and government credit agencies. for financial services, both for savings as well as He suggested that NABARD might help the production purposes, will be increasing at a higher agricultural and rural sector in raising their rate and there will be many new entrants in need of productivity at reasonable faster rate. NABARD financial services who have not hitherto been served. (1999) remarked that inspite of having a wide Financial inclusion as a topic has attracted global network of rural bank branches and specific poverty attention in the recent past. It has been a core alleviation programmes helping in generating self objective of many developing countries since last employment through various credit schemes, a very decade, as many research findings correlate the direct large number of the poorest of the poor continued to link between Financial exclusion and poverty remain outside the fold of the formal banking prevailing in developing nations.For our own country systems.Nonetheless,It has come up with various where almost 70 percent of population lives in the initiatives towards financial literacy,which in the rural areas and engages in agriculture and allied long run will be a major factor towards attaining activities, financial inclusion assumes paramount Financial Inclusion . Gundannavar, V.R. (1992) has importance indeed, and is an utmost necessity for a highlighted the role of banks in implementing social country where a large number of the world‟s highest banking schemes to keep pace with changing social poverty stricken population resides.There is a need to needs. He has suggested concessional lending rates to review the concept, implementation and results of this priority sector and has opposed any move towards process. reduction of interest rate on commercial lending to nullify the adverse effect on priority sector Mikhanji IV. RESEARCH METHODOLOGY Ramji(2009) in a working paper from Centre for microfinance has highlighted the role of Micro The objective of the paper is to explore significance financing (SHGs) on the rural credit delivery system of Financial Inclusion, to analyse its implementation in the district of Gulbarga with example of successful policy and its current statusin the Indian Economy. projects in the different parts of the Karnataka. He The secondary data has been used from various has suggested for active participation of banks and sources to analyze the role of Reserve Bank and Govt other development agencies to promote micro of India in promoting Financial Inclusion. The financing in large scale to accelerate the pace of rural descriptive and empirical studies are used to analyze development. Rangarajan, C. (1996) has identified role of RBI in achieving full financial inclusion in major factors which would have impact over financial India by 2017. Special references of some articles has inclusion, including progressive de-regulation of been also used to find out the need, scope, and recent interest rates, a diversified competitive market place, projects in this direction in India.The secondary market determined exchange rate mechanism and source include ,RBI website,Articles and Journals technological progress. He suggested the banks to related to Financial Inclusion. provide credit to agriculture and allied sector as a part of priority lending. Beck & De la Torre, (2006) V. FINDINGS & DISCUSSION financial inclusion suggested that the no. of people in a given area with acess to financial services is the 5.1. Why Financial Inclusion? measuring stick for breath of financial services and Financial Inclusion helps the society and the thereby,financial inclusion. economy to generate positive externalities It leads to increase in savings ,investment and thereby,spurs the Ansari.S.A (2007) in a study reveals that reaching the processes of economic growth.It provides a platform poorest and whose credit requirements were very for inculcating the habit of savings specially to the small, frequent and unpredictable, was found to be lower income category that has been constantly living difficult. Further, the emphasis was on providing under the shadow of financial distress.Presence of credit rather than financial products and services banking services works as a roadmap for savings including savings, insurance, etc. Therefore, need was habit. Availibility of timely adequate and transparent felt for alternative policies, systems and procedures, credit from formal banking channels will allow the savings and loans products, other complementary entrepreneurial spirit of the masses to increase

Financial Inclusion in India- “A Catalyst for Sustainable Economic Growth”

63 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in outputs and prosperity in the country.For equitable 5.3. Financial Inclusion Status In India growth in all sections of the society, leading to India‟s Financial inclusion strategy has evolved over reduction of disparities in terms of income and time ,encompassing poverty schemes and reducing savings ,the policy of financial inclusion can serve as reginal imbalances,gender gap and regional a boom for a developing nation like India . divide.The status of financial inclusion in India has 5.2. India’s road to Financial Inclusion been assessed by various committees interms of The apex bank has been making concerted efforts to people‟s access to banking and insurance services. promote Financial Inclusion as one of the important The process of financial inclusion in India can national objectives of the country.Over the last few broadly be classified into three phases. During the decades the focus has been on expanding the reach of First Phase (1960-1990), the focus was on channeling banks and non banking institutions to rural areas with of credit to the neglectedsectors and weaker sections an emphasis on delivery of financial services .India‟s of the economy. Second Phase (1990-2005) focused financial policies allowspoor to open „no frills‟ bank mainly on strengthening the financial institutions as account and endeavours to take banking to the partof financial sector reforms. Financial inclusion in doorsteps of customers .This involves ease of setting this phase was encouraged mainly by theintroduction bank branches and ATMs and enabling banking of Self- Help Group (SHG)-bank linkage programme transactions through local banking agents at the in the early 1990s andKisan Credit Cards (KCCs) for ground level.The local banking agents can be the providing credit to farmers. Third Phase microfinance institutions ,retired servicemen (2005onwards), the „financial inclusion‟ was etc.SMART cards and various microfinance explicitly made as a policy objective and thrust wason programmes aim to reach poor people at the providing safe facility of savings deposits through „no doorsteps.Apart from commercial banks and domestic frills‟ accounts ,branch expansion and deposit banks ,financial services are provided by NBFC‟s expansion. The big push towards financial inclusion ,postal banks and insurance companies . In the recent in India has emanated from the Pradhan Mantri times ,India has taken initiative to tackle the massive JanDhan Yojana (PMJDY) in August 2014 and the „Know your customer „drive by allocating a Unique Jan Dhan Aadhaar Mobile (JAM) trinity articulated in Identification Number (ADHAAR) based on the Government‟s Economic Survey 2014-15 as well biometrics identifier to every resident of as the special thrust on financial inclusion by the India.Through this move the KYC norms have been Financial Stability and Development Council (FSDC) liberalisedwhich was a major hurdle for population that includes a Technical Group for dedicated living in rural areas. India‟s microfinance programme attention to this issue. Thus, the inclusion drive has is the worlds largest and seen as a panacea for gone beyond the confines of various financial poverty reductionand development by the policy regulators and assumed the character of a broader makers.To be fair, the microfinance programme national development policy goal. CRISILInclusix is characterized by much acclaimed SHG-bank linkage India‟s most comprehensive index for measuring the programme ,does have a strong economic objective of progress of financial inclusion in the country, down raising income levels and improving living standards to the district-level. The index uses parameters that of poor people. The SHG-bank linkage programme focus only on the 'number of people' whose lives have was launched by National Bank for Agriculture and been touched by various financial services, rather Rural Development (NABARD) in 1992, with policy than on the 'amounts' deposited or loaned. Given support from the Reserve Bank, to facilitate collective below is CRISIL INCLUSIX INDEX (flowchart of decision making by the poor and provide „door step‟ the relationship between various parameters and banking. Financial Inclusion.)

Financial Inclusion in India- “A Catalyst for Sustainable Economic Growth”

64 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in Source: CRISIL (Rating, Research & Risk Advisory).

Source: RBI website

Source: RBI website Not only deposit account penetration, but also cent, the rate of growth was higher for rural and semi- commercial bank credit accounts and amount urban areas. Even credit growth was more evenly outstanding has improved, especially in rural and distributed around the mean, with a particular tilt semi-urban areas towards rural and semi-urban areas. During 2006-2015, while the number of credit accounts of SCBs increased at a CAGR of 6.0 per

Source:RBI website

Financial Inclusion in India- “A Catalyst for Sustainable Economic Growth”

65 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in Apart from the regulatory thrust on branch expansion, their economic and social well being . Setting up in order to provide basic banking services to the financial literacy centers and credit counseling at marginalised sections of society, banks were advised pilot basis, launching a financial literacy campaign to open „no-frills‟ accounts, which were subsequently etc. are some initiatives currently under way of labelled as Basic Saving Bank Deposit Accounts furthering Financial Inclusion. (BSBDA). In the past five and a half years, these BSBD accounts have risen more than six-fold (450 Perhaps,it is important here ,to focus on why can‟t million accounts) Source :RBI website and nearly Financial Inclusion happen on its own .Like any other half of these accounts were opened through Business product why can‟t it find a market of its own and Correspondents (BCs) what are the factors that hamper its performance and growth ? The reason being; the high cost ,behavioural From the above tables it is clear that RBI‟s concerted aspect of rural population and the demand side factors efforts since 2005,has led to a manifold increase in affecting Financial Inclusion.The Government and the financial inclusion indicators be it in terms of RBI takes several measures to encourage financial branch penetration, account density or even credit and services to the excluded sector ,but very little focus is deposit numbersspread across length and breadth of there on the demand factors of financial the country which indicates a growth in the financial inclusion.From the demand side ,lack of service structure of our country.Mobile telephony as a awareness,insufficient documentation,high low-cost vehicle of communication and Aadhaar as transaction cost and procedural bottlenecks continue unique biometric identifier have expanded rapidly. to act as deterrent in the whole process. Despite This will also aid focused and targeted distribution of banking expansion, improvement in financial benefits to the intended recipients, so as to improve performance, greater competition and diversification the efficacy of distribution and minimise leakages. of ownership of banks,leading to both enhanced Notwithstanding these positives, several challenges efficiency and systematic resilience in the banking remain to be addressed. It remains an unfinished sector, existing banking practices tend to exclude agenda untill now. rather than attract vast sections of population.Lack of emphasis on these important factors indicate a serious Latest figures from RBI indicate that there are over gap between the initiatives and implementation of the 120,000 business correspondents employed, which is Government and RBI, in its Financial Inclusion not a large number in context of the number of policies. banked villages. However, the regulator has been continously taking several initiatives to make The study points out towards few critical areas for financial inclusion high on the agenda of Indian further research. Firstly, given the large transaction banking in the recent years and has striven to ensure a costs involved in using bank accounts it is important balance between equity and efficiency considerations to explore other alternatives which could improve so that financial inclusion is furthered ,while not access to formal finance for financially compromising on the financial health and the lending excluded.Secondly,the feasibility of mobile payment capacities of the banks. technology as a facilitator of Financial inclusion should be studied in detail keeping in mind the ever In order to spearhead efforts towards greater growing Indian population and penetration of mobiles Financial Inclusion, RBI has constituted a Financial in remote areas. Thirdly mere opening of „no frills‟ Inclusion Advisory Committee (FIAC) under the account is not the solution, it is worthwhile to look chairmanship of Deputy Governer from RBI.The more profoundly at the nature and frequency of collective Expertise of the members is expected to be transactions in these accounts. leveraged to explore viable and sustainable banking services for every strata of the economy . On the basis of above discussions and findings we can conclude that the cumulative effect of a large CONCLUSION swathe of the population being effectively excluded from access to formal financial services carries both Inclusive growth is possible through proper private and social costs, and ultimately undermines mechanism which channelizes all the resources from economic growth and development. Obviously, this top to bottom.In achieving inclusive growth in India, can be of no help in the efforts to reduce poverty, Financial Inclusion will play a vital role and help the which explains why the Government and RBI have nation to drive away not only rural poverty but also been taking an increasing interest in promoting urban poverty . It has enough scope for economic financial inclusion. Financial Inclusion in India growth, raising living standard of people, equality having started off well ,has proceeded on a bumpy etc.We should ensure that all of us are collectively and uneven road.For standing out on a global willing to walk that extra mile to ensure that our platform,India has to look upon this issue on a fellow countrymen get easy access to Financial broader frame.There is a long way ahead but system and are able to leverage this access to improve

Proceedings of ISER 93rd International Conference, Boston, USA, 14th-15th December 2017 66 International Journal of Management and Applied Science, ISSN: 2394-7926 Volume-4, Issue-2, Feb.-2018 http://iraj.in nevertheless,it is definitely working on a positive benefit preventing the leaks and gaps in side. Government schemes.  To improve the access of the poor to banking, RECOMMENDATIONS banks need to open branches to provide low-cost intermediation with simple structures,least  Banking system has pogressed fast enough and procedural hassels and minimum infrastructure more important the realization that the poor is for operating small customer transactions. bankable has arrived .India has build on its robust banking system, technological REFERENCES strides,entrepreneurship,inclusive development agenda to achieve levels of economic growth.Our [1] Ansari S A (2007) Micro Finance in India.Asian Econ Rev 49(2): 327-36. strength lies in the fact that this achievement can [2] Beck, T., Demirguc - Kunt, A. & Levine, R. (2007) be captilised upon provided the programmes and „„Finance, Inequality and the Poor‟‟, Journal of Banking policies of RBI and Govt. of India should be and Finance, 28, 423-442. implemented in a proper manner . 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