Chapter - 2

Financial Inclusion and

Its Initiative
Indian economy has been increasing profligate and the GDP growth rate has be
an average of 8.8%, in the preceding 5 years foregoing the crisis. Despite a
succeeding go-slow, India’s GDP is stagnant rising at a reasonably fast stride.
The banking sector of India will, prerequisite to match up and around to the
necessities of profligate developing economy comprising the expected stepping
up in the recognition to the GDP ratio. Auxiliary to this is the demographic
dividend with its uncountable challenges and opening of opportunities, in
attendance there is a massive accountability and the opportunity for the Indian
banking sector going into the future.

Indifference of opinion, Banking can be well-defined as the business activity of

accepting, depositing and safeguarding money possessed by individuals and
entities, and then loaning out this money in direction to earning or gaining a
profit. Though, with the way of time, the activities concealed by banking
commerce have broadened and now various other benefits and services are also
presented by banks. The banking services now a day take account of issuance
of debit and credit cards, provided that harmless custody of valued items,
lockers, ATM services and online transfer of funds across the country / world
by RTGS and many more. The banks are in position to create and generate
money. It is healthy believed that banking plays a silent, hitherto critical part in
our day-to-day survives. The banks execute financial intermediation by
assembling savings and channelizing them into investments over and done with
maturity and risk transformations, thereby keeping the economy’s growth
engine revving.

Banking business has done marvels for the world economy. The simple
routine of accepting money deposits from savers and then advancing the same
money to borrowers, banking activity encourages the flow of money to
industrious use and investments. This in turn countenances the economy to
expand. In the absenteeism of banking business, savings would sit indolent in
our homes, the entrepreneurs would not be in a position to raise the money, and

49
dreams of ordinary people cannot be fulfilled like buying of home and car and
many others.

According to Indian banking company act, 1949,”Banking has been defined as

the accepting foe the purpose of lending of investment of deposit of money
from public repayable on demand or otherwise and withdraw able by cheques,
drafts, order or otherwise”.

A bank is a financial intermediary that admits deposits and channels those

deposits into lending activities, either one straightly by loaning or secondarily
through capital markets. A bank contacts customers that have capital deficits
and customers with capital surpluses.

The foundation for the banking sector resilience was laid with the outline of the
financial sector reforms in 1991 with concentration on prudential norms and
regulation and increased competition. These reforms ensued in a wide-ranging
renovation of the banking sector. The reforms had a foremost impact on the
inclusive proficiency and permanency of the banking system. In this new-
fangled world, banks are appealing with customers in very different ways.

NEED FOR FINANCIAL INCLUSION

Although witnessing sizeable advancement in financial sector reforms in India,

it is intimidating to note that just about half of the rural households still today
do not have any access to banking service from formal financial institution or
any source. Scarcely one-fourth of the rural families are assisted by banks.
Henceforth the most important assignment before banks is to fetch most of
those excluded, i.e. 75% of the rural households, under banking fold. But the
mission is not so stress-free since excluded populations are illiterate,
underprivileged and unorganized. They are also extent far and wide. The effort
is to improve their living standards by introducing innovative economic
activities with the help of banks, self-help group and local developmental
agencies. To start with, it is compulsory to cultivate a fair understanding of
their profile. There is a necessity for the formal financial system to look at

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snowballing financial literacy, financial education and financial counseling to
emphasis on financial inclusion and anguish amongst farmers. Banking sector
and financial market players would actively look at encouraging such programs
as a portion of their corporate social responsibility. Banks should organize
programs for their customers including farmers for counseling insignificant
mortgagors for making aware on the consequences of the loan, that how
interest rate is calculated, and so on, so that they are totally aware of its
features. There is an undoubtedly percentage of work requires to be ended in
this area.

Bank and Financial Services

Commercial banks play a very important starring role in the sustainable

development and economic growth of a nation like India. Indian economies in
wide-ranging and banking services in actual have ended speedy developments
in the recent past. Nevertheless, a sizeable segment of the populace, principally
the susceptible groups, such as weaker sections and low income groups, linger
to continue excluded from even the most basic openings and services provided
by the financial sector. To discourse the problem of financial exclusion in a
universal manner, it is indispensable to confirm that a variety of financial
services is available to each and every individual of the nation. Financial
Inclusion ought not to be realized as a social responsibility of the Governments
and the banking system, but it is a hypothetically viable business proposition
which provides financial services to the poor with opportunities to construct
savings make investments and get credit.

Financial inclusion has been defined by United Nations and Asian

Development Bank as under.

United Nations – “A financial sector that provides access for credit for all
bankable people and firms and saving and payment services to everyone.
Inclusive finance does not require that everyone is eligible to use each of
services but they should be able to choose them if desired”.

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Asian Development Bank “provision of broad range of financial services such
as deposits, loans, payment services, money transfer and insurance to poor and
low income house-holds and their micro enterprises

The financial services take account of the intact range –depositing,

withdrawing, savings, loaning, insurance, credit, payments etc. The financial
system has to deliver its purpose of transferring incomes from surplus to deficit
divisions but both deficit and surplus divisions are those with low-slung
incomes, poor background and unprivileged sections etc. Through delivering
these services, the intention is to advantage them to reduce the level of poverty
and improve the living standard. Consequently, the emphasis has only been on
delivering credit (called as micro credit) and has remained quite successful.
Parallel achievement has to be appreciated in other aspect of finance as well.
The annual policy Statement of April 2005, however identifying the
apprehensions in concern to the banking practices that incline to exclude rather
than fascinate gigantic segments of populace, admonished banks to appraisal
their surviving rehearses to support them with the objective of financial
inclusion. With a vision to succeeding the unprejudiced of larger financial
inclusion, all banks are counseled to make accessible a basic banking 'no-frills'
account either one with zero' or very low minimum balances in addition to
charges that would make such accounts reachable to massive fragments of
population. All banks are counseled to give widespread promotional to the
facility of such 'no-frills' account representing the facilities and charges in a
translucent manner. The current situation of Indian economy is increasing, and
the growth rate is more than many other developed countries, but the necessity
is a uniform growth; the condition of the poor people in our country should also
be improved at a faster rate. Agreeing to the RBI guidelines, Indian banks have
to implement financial inclusion policy to providing adequate financial services
to weaker section of society and mobilize their insignificant savings.

Financial institutions assemble savings, provide payment services, allocate

resources and transmute risk by pooling and repackaging it. In a competent

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financial system there will be extra savings and more funds will be allocated to
the productive sectors of the economy, in future will contribute to the economic
and sustainable development and the alleviation.

Bouquet of financial services provided by bank

Saving account and Insurance facility

overdraft facility and Retirement
saving

Emergency loan,
Housing loan,
Business livelihood Financial Fixed deposit and
Services Recurring account
facility deposit

Credit schemes
like GCC and KCC Financial
advisor
Remittance facility
(transfer of funds, DD, mail
transfer and others)

Source: Researcher Design

GROWTH AND ADVANCEMENT OF FINANCIAL INCLUSION

Growth in Outreach 1951-91

From the position established in 1951-52, commercial banks approached a long

mode with a considerable spread of 32,224 branches in rural and semi-urban
areas comprising68% of their entire outlets as on 31 March 1991. The
outstanding deposits of such branches at Rs.67,855 crore as on the similar date
organized round 35% of their total deposits, while loans outstanding at Rs.
43,797 crore included 36% of outstanding credit. The agricultural loans of the

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commercial banking system sum up Rs.16,687 crore and constituted 14% of
total advances in March 1991. The rural and semi-urban branches of
commercial banks enclosed 17.6 crore deposit accounts while the number of
loan accounts serviced aggregated 3.7 crore.

Growth during 1991-92 to 2003-04

The period since 1991-92 has seen an impartially rapid growth of credit to
agriculture. Obtainable data designate that the movement of credit to agriculture
by commercial banks and RRBs engaged together increased to Rs. 60,022 crore
in year 2003-04.This indicates a compounded annual growth rate of 22.2%. In
statement, as equated with commercial banks (including RRBs), the flow of
credit from the cooperative sector was considerably slower over this epoch. The
compounded yearly growth rate of credit intended for agriculture from
cooperative institutions existed only 13.7%. Additional, the percentage of
agriculture credit to over-all credit emanated down because of the rapid
progress in non-agriculture credit. The Government appropriated some most
important resourceful initiatives during the period to enhance agriculture
production and productivity through boosted credit flow and by way of building
agricultural infrastructure, principally irrigation and connectivity in rural areas.
Special Agricultural Credit Plan (SACP) was announced by RBI for Public
Sector Commercial Banks in 1994-95. The SHG – Bank Linkage Program was
taking place as a pilot project by NABARD in 1992. It led to the progression of
a set of RBI sanctioned guidelines to banks to facilitate SHGs to implement
with banks. To begin with there was deliberate progress in the program up to
1999 as only 32,995 groups were credit related during the period1992 to 1999.
Meanwhile at that moment the program has been growing promptly and the
increasing number of SHGs financed improved from 4.61 lakhs on 31 March
2002 to 10.73 lakhs on 31 March 2004 and additional to 29.25 lakh groups as
on 31 March 2007. Rural Infrastructure Development Fund (RIDF) was setup
in NABARD by Government of India during 1995-96 with an opening amount
of Rs.2000 crore, to quicken the accomplishment of on-going projects of rural

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substructure. Banks which did not fulfill the priority sector credit necessity and
agriculture credit mandate were obligatory to contribute to this Fund. The fund
has been held together every year with additional allocations in the Union
Budget. RBI ascended down its contribution to the Rural Credit funds with
NABARD to a perfunctory amount of Rs.1 crore per annum since 1993-94.
Though to enable NABARD to have realistically resilient influence for
accessing market funds, the share capital of NABARD was strengthened and
increased to Rs.2000 crore (paid up) from Rs.100crore at the time of its
formation in 1982. Assistances to improved share capital have come from
Government of India and RBI. By prudent funds management, the institution
has also built a strong base of reserves and has been using it in its business
operations judiciously to keep lending rates to rural financial institutions at
significantly lower than market costs.

Improvements – Post 2003-04

Ever since 2003-04, there has been a substantial proliferation in the flow of
credit to agriculture through commercial banks. Expenditures have increased
from Rs. 52,441 crore in 2003-04 to Rs. 1, 16,447 crore in 2005-06, attainment
an annual growth of 43%every year. As envisioned in the Government of
India's strategy for “doubling of credit”, 95 lakh fresh farmers have been
brought under the institutional fold and 1,383 agri-clinics opened. Commercial
banks have also played a foremost role in the promotion of the SHG – bank
linkage program with more than 11.88 lakh groups being interrelated to banks
for provision of credit. Developments in the commercial banking system
include elimination of procedural and transactional blockages including
eradication of Service Area Approach, sinking margins, redefining over dues to
coincide with crop cycles, new debt restructuring policies, one time settlement
and relief measures for farmers indebted to non-institutional sources.

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Now 2004-2011

In November 2005, the RBI inquired banks to offer a basic banking ‘no-frills’
account with zero or low minimum balances and minimum charges to enlarge
the outreach to low income groups. In 2006, the RBI allowed banks to practice
the services of non-governmental organizations, microfinance institutions (but
not those registered as NBFCs), retired bank and government employees, ex-
servicemen, Section 25 companies, and other civil society organizations as
Business Correspondents (BCs) in providing financial and banking services.
RBI declared the working guidelines for mobile banking transactions in 2008.
November 2009, RBI further enlarged the opportunity of the BC model and
permitting the banks to charge “reasonable fees” from customers for using
services through the BCs, and improve their business prospect. Now December
2009, the RBI took immense steps on the road to financial inclusion by (a)
doing away with the necessity for a license for inaugural a bank branch in rural
areas and villages with populations below 50,000 and (b) by increasing the
regular limits used for mobile banking transactions from Rs. 5,000 to Rs 50,000
and permitting up to Rs 1,000 without end to end encryption. RBI has promote
and liberalized the Business facilitator (BF) model by approving ‘for profit’
companies to serve as BFs and subsequently by sanctioning cooperative banks
to custom the services of BC/BFs.

Banks play an imperative title role in mobilization and allocation of resources

in any nation. Rural people in India are facing difficulties in the inadequate
supply of financial services. The foremost source of borrowing to rural
households, particularly-low income households, has been the informal sector
like moneylenders. Informal sector advances loans at very high rates of interest;
the terms and conditions involved to such loans have given rise to an
extravagant structure of extortion of both economic and non-economic
conditions in rural populace in India.

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The entire process of financial inclusion will not be thinkable without the
contribution of banks. Banks are the key pillars of India’s financial system.
Public have enormous faith in banks. Share of bank deposits in the total
financial assets of households has been increasingly rising (presently at about
40%). Banks enjoy significant goodwill and access in the rural regions also.
There are 32600 branches in rural India (about 50% of total), and 14400 semi-
urban branches. Rural and semi-urban bank accounts constitute close to 60% in
terms of number of accounts. The banks will obligate to believe in the
practicability of this business opportunity, and not treat financial inclusion as an
obligation.

Table 2.1: Summary of households availing banking services in India

2001 2011

Areas Total no. of No. of % Total no. of No. of %

households households household households
availing availing
banking banking
services services

Rural 138271559 41639949 30% 167826730 91369805 54.4%

Urban 53692376 26590693 49.5% 78865937 53444983 67.8%

Total 191963935 68230642 35.5% 246692667 144814788 58.7%

Source: census of India and RBI

Steps towards accelerating the growth of financial Inclusion

1. Bank should encourage better communication between financial sector

and rural development staff to make sure that financial sector proficiency
is included on any rural project that has a finance constituent;

2. Bank with policy proficiency and guidance with governments should work
to;

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 a. Improve the transparency and efficiency of court systems and build up
land and property registries;

b. Eradicate government interest rate subsidies for agricultural lending;

c. Remove policy biases against the agricultural sector, e.g., price

controls on principal crops; and

d. Capitalize in communications, infrastructure, and services such as

health and education.

3. Enrich and optimally utilize existing infrastructure rather than generate

new and costly delivery mechanisms that might never be practicable.
Financial services designed for the poor possibly will be introduced
through existing agricultural development banks that meet basic
preconditions.

4. As a replacement for subsidizing interest rates to the end-clients, bank

would use grants to build institutional capability and promote innovation.
Bank should also repel political pressure to include targeted or subsidized
credit in agricultural projects.

5. Where applicable, bank with involvement in technical innovations might

help decrease the costs of operating in rural areas and improve services
provided to rural clients by introducing new technology like ATMs linked
to smart cards, and mobiles to peer group leaders. A vigilant cost-benefit
analysis of any technology and assessment of institutions’ information
systems ought to be accompanied prior to commitment.

6. Bank should offer flexible funding to financial institutions looking to

adapt or introduce new financial products, or to decrease delivery
transaction costs.

Inventive solutions are specifically needed to better fit the income and
investment series of agricultural activities. For example, essential non-
credit financial services include domestic and international money

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 transfers to help smooth seasonal income flows, and deposit services to
access in times of low income or high expenditure. Bank would also
discover ways to support financial institutions to construct on trader and
processor client knowledge and introduce more diverse and transparent
financial services for farmers.

GROWTH AND PERFORMANCE OF INDIAN COMMERCIAL BANKS

The low and unpredictable income of poor people makes it difficult for them to
bank with formal financial institutions. Likewise, national and international
banks have struggled to bargain a business case for reaching the world’s
poorest people given the expectations of their shareholders and the desire for
appropriate profit margins. As a consequence, poor people have fundamentally
discounted from financial institutions and vice versa. Savings rather than debt
can smooth irregular income patterns and meet basic household consumption
needs. Once a savings culture is established, some people go on to establish
small businesses (and more would do this if they received business skills
training and had access to higher amounts of capital). As group savings gather
over time, the security of the money can turn out to be a challenge and the need
for the safety of a formal financial institution come to be stronger. Savings
consequently offer a stable catalyst from which to begin the path to formal
financial inclusion.

Growth of Deposits in Indian Commercial Banks

One of the significant parameters of performance in commercial banks is

deposits. The bank accepts money as deposits from public and lends it to
public. In commercial banks there are two types of deposits that are: time
deposits and demand deposits. The time deposits can be further categorized into
3 classes namely, saving bank deposits, current deposits and short term and
long term deposits which are known as term deposits. Since deposits designate
the growth and development of a bank. There has been significant increase in
the deposit mobilization of commercial banks during 2010 to 2013.

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Table 2.2: Growth of deposit in Indian commercial bank

Category of bank Year 2010 Year 2011 Year 2012

Nationalized bank 24,16,267 29,46,100 33,86,497

State bank of 8,04,116 9,33,933 10,43,647

India

Associate banks 3,03,969 3,11,930 3,61,101

of SBI

Other public 1,67,667 1,80,486 2,10,493

sector bank

Total public sector 36,92,019 43,72,449 5,00,1743

bank

Total 22 private 8,22,801 10,02,759 11,74,587

banks
Source: RBI

Figure 2.1: Growth of deposit in Indian commercial bank

From the table 2.2 it is detected that the deposits in all banks have shown an
increasing trend. The public sector banks have increased their deposits from
INR 36, 92,019 crores to INR 50, 01,743 crores from 2010 to 2012. Similarly

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the private sector banks have increased their deposits from INR 8, 22,801
crores to INR 11, 74,587 crores during the period 2010 to 2012.

Growth of Total assets in Indian Commercial Banks

The commercial bank is also characterized by its cash on hand, bank balance
with other banks, with SBI and RBI and advances given to the public and other
banks. The advances include loans, overdrafts, etc. Bank assets include all its
investments, other non- banking assets like building, furniture, fixtures etc. The
total of all these assets of a bank is one of the important performance measures
for the stability and growth of a bank. All types of Indian commercial banks
reported an increasing trend in total assets during the periods 2009-2010 and
2011-2012.

Table 2.3: Growth of total assets in Indian commercial bank

Category of bank Year 2010 Year 2011 Year 2012

Nationalized bank 27,95,001 34,42,945 39,75,930

State bank of 10,53,414 1223736 13,35,519

India

Associate banks 35,886 37,3948 43,5695

of SBI

Other public 2,33,572 2,53,377 2,90,837

sector bank

Total public 44,40,871 52,94,006 6,06,37,982

sector bank

Total 22 private 8,22,801 10,02,759 11,74,587

banks
Source: RBI

From the table 2.3 it is detected that the nationalized banks have contributed
66% distribution of total assets. The associated banks of SBI contributed 22%
total assets in public sector banks. The all other public sector banks have

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contributed 12% of total assets. The nationalized banks have recorded
compound growth rates 23.18% in 2009-10 and 15.48% in 2011-12.

Growth of operating profit in Indian Commercial Banks

Operating profit is also well-known as gross profit. The operating profit can be
calculated as the total income minus total expenditure. The total income is
achieved through interest received on advances and loans, commission on over
drafts and other services and the interest earned on their assets etc. Ordinarily
the total income is calculated as interest earned income plus other income.
Correspondingly the total expenditure is the sum of interest expanded and other
expenditure. The total profit is one of the significant parameters for Indian
commercial banks. The gross profit will illustrate the financial health of the
bank. This operating profit is also an imperative factor for banks sustainability
in the market.

Table 2.4: Growth of operating profit

Category of bank Year 2010 Year 2011 Year 2012

Nationalized bank 49,298 62,919 72,501

State bank of India 18,321 25,336 31,574

Associate banks of 6,515 7,569 8,214

SBI

Other public sector 2,726 4,158 4,056

bank

Total public sector 76,861 99,981 1,16,344

bank

Total 22 private 29,173 32,831 38,348

bank
Source: RBI

From Table 2.4 it is detected that there is a growing trend in all types of
commercial banks with respect to the operating profit from 2010 to 2012. In all

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public sector banks the operating profit is increased from INR 76861crores in
2010 to INR 116344 crores in 2012.

INTERNATIONAL INITIATIVES

It may be meaningful to have a glance at the international experience in

tackling the problem of financial exclusion, so that we can gain knowledge of
from the international experience. The Financial Inclusion Task Force in UK
(2005) has acknowledged three priority areas for the intention of financial
inclusion, viz., access to banking, access to affordable credit and access to free
face-to-face money advice. UK has established a Financial Inclusion Fund to
endorse financial inclusion and assigned responsibility and accountability to
banks and credit unions in promotion of financial inclusion. Basic bank no frills
accounts have also been introduced. An improved legislative atmosphere for
credit unions has been established, accompanied by tighter regulations to make
sure greater protection for investors. A Post Office Card Account (POCA) has
been twisted for individuals who are unable or disinclined or unwillingly to
access a basic bank account. The perception of a Savings Gateway has been
piloted. This offers individuals on low-income employment, £1 from the state
for every £1 they invest, up to a maximum of £25 per month. In adding together
the Community Finance Learning Initiatives (CFLI s) were also introduced
with a view to promoting basic financial literacy and financial education
amongst housing association tenants. A civil rights law, that is to say
Community Reinvestment Act (CRA) which comes in 1977 in the United
States prohibits discrimination and inequity by banks adjacent to low and
moderate income neighborhoods .The CRA imposes an assenting and ongoing
obligation on banks to serve up the needs for credit and banking services of all
the communities in which they are chartered. In effect, abundant studies
conducted by Federal Reserve and Harvard University confirmed that CRA
lending is a win-win proposition and profitable to banks. In this perspective, it
is furthermore interesting to know the additional initiative in use by a state in
the United States .separately from the CRA experiment, armed with the

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sanction of Banking Law, the State of New York Banking Department, with the
objective of making accessible the low cost banking and financial services to
consumers, set mandatory that each banking institution shall recommend basic
banking account and in case of credit unions the basic share draft account,
which is in the personality of low cost account with bare minimum facilities.
Latin American countries such as Peru and Bolivia have attempted to situate in
place a quantity of enabling regulatory environments for microfinance. In these
2 countries, speedy enlargement over the past seven years has integrated 6
million consumers in the recognized financial system.

In Mexico, beneficiaries improved savings and investment with more than 90%
of household started to use banking services (Casky et al, 2006). Brazilian
policymakers achieved universal coverage of over 5,500 municipalities by
enabling bank to employ retail agents. This new-fangled low-priced delivery
channel triggered spreading out of formal financial services to 12 million
consumers in only six years. The German Banker’s Association introduced a
voluntary code in 1996 providing for an ‘everyman’ current banking account
that facilitates indispensable banking transactions. In South Africa, a low cost
bank account called “MZANSI” was launched for financially excluded people
in 2004 by South African Banking Association. therefore it would be seen that
financial inclusion, more particularly when promoted in the context of
economic and social inclusion, can uplifts financial condition and improve the
standards of lives of the poor and disadvantaged.

INITIATIVES TAKEN BY GOVERNMENT OF INDIA

The Government of India from time to time pronounced a number of initiatives

and issued several instructions to the Reserve Bank of India for endorsing
financial inclusion in the country.

Committee on Financial Inclusion

The Government of India instituted a ‘Committee on Financial Inclusion’ in

June 2006 underneath the chairmanship of Dr. C. Rangarajan to look into the

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badly behaved exclusion of rural and weaker section from access to financial
services and setting guidelines for improving the level of financial inclusion in
the country. Constructed on the commendations of the Ad hoc Report of Dr.
Rangarajan Committee, the Government has created two funds viz., Financial
Inclusion Fund (FIF) for meeting the cost of developmental and promotional
interventions of financial inclusion and Financial Inclusion Technology Fund
(FITF) to encounter the cost of technology adoption.

High Level Committee on Financial Sector Reforms

The Planning Commission established a High Level Committee on Financial

Sector Reforms underneath the Chairmanship of Dr. Raghuram G. Rajan in
2007. Although its focus remained on recognizing emerging challenges in
meeting the financing needs of the Indian economy as a whole, numerous of its
recommendations also highlighted the need for and strategies for achieving
financial inclusion (FICCI, 2011).

Revival of Rural Co-operative Credit Institutions

Constructed on the recommendations of the Task Force on Revival of Rural

Co-operative Credit Institutions underneath the Chairmanship of Shri A.
Vaidyanathan and in discussion with State Governments, the Government of
India permitted a package for revitalization of the short-term rural co-operative
credit structure to strengthen the rural credit delivery system. The restoration
package for long-term rural co-operative credit structure has also been
announced.

The Mahatma Gandhi National Rural Employment Guarantee Scheme

(MGNREGS)

This scheme objective is to develop the livelihood of the rural people by

guaranteeing at least one hundred days of wage employment in a financial year
to a rural household whose adult members volunteer to do unskilled manual
work. As the payments are made through the bank/post office accounts, in
2010-11, nearly 10 crore bank/post office accounts have been opened .A CMF-

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IFMR study represents that the Andhra Pradesh state government has played a
foremost role in increasing access to formal savings accounts due to its concrete
effort to deliver all wages to participants in MGNREGS through formal saving
accounts.

Adoption of Electronic Benefit Transfer (EBT)

Implementing the recommendation of the Rangarajan Committee that the State

Governments would make payments under NREGA and Social Security
Payments through technology based solutions, the Government of India
pronounced numerous measures in this regards in the Union Budget 2008-09.
The Reserve Bank also advised the State Governments to discover the
possibility of steering/transferring government benefits electronically
(Electronic Benefit Transfer) through banks directly to the bank account of the
recipient by leveraging ICT based solution and deliver it at their doorstep, so it
reducing dependence on cash and depressing transaction costs. Road Map for
Providing Banking Services in Unbanked Villages with a Population of More
than 2000 after the announcement of this scheme in the Budget Speech of 2010-
11, banks were advised to draw up a road map to provide banking services in
every unbanked village having a population of over 2000 by March 2012. RBI
advised banks that such banking services need not necessarily be extended
through a bricks and mortar branch, but might also be provided through any of
ICT-based models. About 73,000 such unbanked villages were recognized and
apportioned to various banks through state-level bankers’ committees.

National Rural Livelihood Mission (NRLM)

National rural livelihood mission (NRLM) was established in June 2010 by the
Ministry of Rural Development (MoRD), it is modeled on the poverty
alleviation program being implemented in Andhra Pradesh under the name
Indira Kranti Patham (IKP).

The key approaches of NRLM are to

Instrument the program with greater prominence on federations of SHGs,

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Deliver flexibilities to states for designing unambiguous action plans for
alleviation of poverty,

Announce interest subsidy for encouraging repayments of loans and

arrange for multiple doses of credit,

Increase training and capability building efforts by setting up of skill

training institutes in each district,

Simplify market connections and,

Develop monitoring and evaluation method.

Swavalamban

A contributory pension scheme introduced on September 26, 2010 for workers

of unorganized and underprivileged sector. Under this scheme, the worker of
unorganized sector who contribute a sum of Rs.1000 to Rs.12000 per year in
their pension account during the financial year, the central government will
contribute a sum of Rs.1000 per annum.

Swabhiman

One of the battleship programmes of the UPA II government, Swabhiman,

which objectives are to provide branchless banking through use of technology,
was launched on 10th February, 2011. Under this scheme, banks are supposed to
provide basic services like deposits, withdrawals and remittances using the
services of Business Correspondents (BCs) or Business Facilitator (BF). The
advantage enables government subsidies and social security benefits to now be
directly accredited to the accounts of the recipients, who would be able to draw
the money from the Business Correspondents in their village itself.

Jan Dhan Yojna

Pradhan Mantri Jandhan Yojna was introduced on 15 August 2014with the

intentions of covering all the households in the country with banking facilities
and every household has a bank account and every person is able to use the
financial services delivered by the banks. Objective of jandhanyojna is”

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ensuring access to various financial services like availability of basic saving
bank account, access to need based credit, remittance facility, insurance and
pension to the excluded sections that is low section and weaker income group.”

Unique Identity Number (UID)/Aadhaar

In 2009, the Government of India founded Unique Identification Authority of

India (UIDAI) to provide a unique identity number of each and every resident
of country. The UID is to leverage existing technological links to bring out the
unbanked population and is actually promising bank accounts to the residents if
they point out their consent to open one. By providing identity proof of resident
the Aadhaar number has the potential of transforming the delivery device of
social welfare programmes by constructing them more inclusive and effective
in bringing out the intended recipients, who are currently let out due to their
lack of identification. Potentially, it would enable the government to shift from
indirect to direct benefits and help authenticate whether the intended receivers
actually receive the welfare benefits by using the biometric online
authentication services to be facilitated by the UIDAI (Khound, 2012).

Direct Cash Transfer (DBT)

The government started a new scheme, Direct Cash Transfer Scheme, from
January 1, 2013 to transfer 29 welfare programmes - generally linked to
scholarships and pensions for the old and disabled – functioned by different
ministries. In this the reimbursements or subsidies due are be transmitted to the
bank accounts of the ultimate recipients directly, taking benefit of the Aadhaar
scheme for electronic identification of all personages. In due course the scheme
will be extended to cover 42 benefits, and will asylum the whole country. Cash
transfer scheme will help in healthier targeting of subsidies and sinking delay in
delivery of benefits besides curbing wastages and leakages.

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INITIATIVES TAKEN BY THE RESERVE BANK OF INDIA AND
BANKS

The Reserve Bank of India (RBI), in its Annual Policy Statement of April 2005,
advised banks to appraisal their existing practices to align them with the
objective of attainment of financial inclusion. With a vision to attaining greater
financial inclusion, all banks were advised to make available a basic banking
‘no frills’ account that possibly will be operated with a zero (or very low)
balance at a responsibility that would make such accounts reachable to vast
sections of the inhabitants. In succeeding years, the Government of India and
RBI have taken various initiatives to spread out the reach of banking to those
outside the formal banking system. As per a report of the Department of
Financial Services (DoFS), some of the initiatives taken by the Government and
RBI are as follows:

(i) Opening of bank branches

(ii) Extension of the ATM network

(iii) Using the Business Correspondent Model to increase the outreach of the
banking sector; setting up Ultra Small Branches (USBs) through Business
Correspondent Agents (BCAs)

(iv) Each household to have at least one bank account; Direct Benefit Transfer
(DBT) through bank accounts.

Nevertheless, there is still a long way to go before the goalmouths of financial

inclusion are realized. Unreliable evidence advocates that many of the ‘no-
frills’ accounts opened by banks are untruthful dormant as low-income
households are commonly unenthusiastic to access their bank accounts; visiting
the nearest bank branch means not only expenditure on transport but also the
loss of a day’s wages.

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What are the expectations of the poor from the financial system?

Expectation are: low transaction costs, rapid and easy operability, minimum
paper work, security and safety of their money, the possibility of making
frequent deposits and remittances and having access to credit and other
products as and when required.

The chief barricades to financial inclusion in India are: (a) the poor
accessibility of banking services and (b) when accessible, the high costs
incurred by households to access such services.

Following initiatives are taken by RBI

No Frills Accounts or Basic Saving Bank Deposit Accounts (BSBD)

No frill account is one of the significant mainstays of financial inclusion. No

frill account renewed in BSBD with the numeral of additional facilities like
mobile banking, ATM cards etc. In November 2005, RBI contended the banks
to make available a basic banking ‘no frills’ account either with ‘nil’ or very
low minimum balances and charges with a view to make such accounts
reachable 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. Banks have also been recommended to
provide small overdrafts in such accounts. Regional Rural Banks have also
been recommended to allow limited overdraft facilities in ‘no frills’ accounts,
without any guarantee. All banks have counseled to give wide publicity to the
facility of such no frills account so as to ensure greater financial inclusion. The
number of BSBD accounts opened increased from 73.45 million in March 2010
to 182.06 million in March 2013.The low cost or free of cost account is
considered to be helpful in expanding the access of banking services,
particularly to the low income groups.

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Figure 2.2: Number of BSBD Accounts

Simplification/Relaxation on KYC Norms

Additional, ‘Know Your Customer’ norms have also been shortened to enable
the persons belonging to low-income groups, both in urban and rural area to
open the bank accounts with balance not exceeding Rs. 50000 and credit limits
not exceeding Rs. 100000 in a year without any procedural hassles. KYC norms
have also been reviewed to accommodate the UID card as well as the job card
issued by NREGA as ‘officially valid documents’ for opening small accounts.

General Credit Card (GCC) and Kisan Credit Card (KCC)

With an opinion to help the poor and the disadvantaged with access to easy
credit, banks were advised to issue general purpose credit card (GCC) parallel
to Kisan credit card (KCC) in the nature of surrounding credit up to Rs.25,000
without asserting on security or purpose at deregulated interest rates to bank
customers at their rural and semi-urban branches. Fifty percent of the GCC
loans are treated as part of the banks’ priority sector lending. The KCC scheme
was reviewed in May 2012 and all the banks were advised to issue smart cards
to all farmers. As on September 30, 2013 of all about 20.0 million operative

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cards, around 4.9 million were smart cards issued by public and private sector
banks (RBI annual report 2013-14).

Figure 2.3: Number of KCC and GCC Accounts

Opening of intermediate brick and mortar structure

For efficient and effective cash management, documentation, redress of

customer grievances and close supervision of BC operations, banks have been
recommended to open intermediate structures between the present base branch
and BC locations. This branch might be in the form of a low cost simple brick
and mortar structure comprising of minimum infrastructure such core banking
solution terminal linked to a pass book printer and a safe for cash holding for
operating larger customer transactions.

100% Financial Inclusion Drive

State-Level Bankers’ Committee (SLBC) conveners in all states have been

assigned the responsibility of reaching 100% financial inclusion in at least one
district in their area. The responsibility is given to the banks in the area for
ensuring that all those who want to have a bank account are provided with one
by allocating the villages to the different banks.

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Bank Credit to Micro, Small and Medium Enterprises (MSME)

MSME sector which has enormous employment potential of 59.7 million

persons over 26.1 million enterprises, is measured as an engine for economic
growth and promoting financial inclusion in rural areas. MSMEs chiefly
depend on bank credit for their operations.

Bank credit to MSME sector witnessed a CAGR of 31.4% during the period
March 2006 to March 2012. Of total credit to MSME, public sector banks
contributed the major share of 76%, while private sector banks accounted for
20.2% and foreign banks accounted for only 3.8% as on March 31, 2012.

Figure 2.4: Bank Credit to MSME

Business Facilitator (BF)/Business Correspondent (BC) Model

In January 2006, RBI had given authorization to banks to use of services of

NGOs/SHGs, micro-finance institutions (MFIs), Non-Banking Financial
Corporations not accepting public deposits, post offices and other civil society/
community based organizations act as a intermediaries in the form of its
business facilitators and business correspondents for a better outreach of
financial and banking services to the deprived and underprivileged sections of
the society to augment the customer base. It is to help in moving towards 100%
financial inclusion. Considering the high transaction cost and low profitability,

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the banks are increasingly relying on such mediators based on business
facilitator and business correspondent model to fund borrowers in rural areas.

The possibility of entities eligible to be involved as Business Correspondents or

Business Facilitator by the banks has been enlarged by RBI from time to time.
Banks have been allowed to engage retired bank employees, ex-servicemen and
government employees, individuals, individual public call office (PCO)
operators, agents of small savings schemes and insurance companies,
individuals who own petrol pumps, retired teachers and SHGs linked to banks
as BC by banks. With effect from September 2010, ‘for-profit’ corporate
entities have also been allowed to be engaged as BCs. Banks are also entering
into agreements with Indian Postal authorities for using the enormous network
of post offices as BCs, thereby increasing their outreach. The BC model allows
banks to do ‘cash in - cash out’ transactions at a location much closer to the
rural population, thus addressing ‘the last mile problem’. With a view to
ensuring the sustainability of the BC model, banks have been allowed to collect
reasonable service charges from the customer, in a transparent manner under a
Board-approved policy.

Simplified Branch Authorization/ATM Expansion

To address the issue of uneven spread of Bank branches, since December 2009,
domestic scheduled commercial banks (SCBs) are legalized to freely open
branches in inhabitants of less than 50,000 under general permission, subject to
reporting. Banks are also unrestricted from prior authorization for location of
ATMs. In the North Eastern States and Sikkim, domestic SCBs can now open
branches in rural, semi urban and urban centers without the need to take
permission from RBI in each case, subject to reporting.

Opening of Branches in Unbanked Rural Centre’s

To further step up the opening of branches in rural areas so as to improve

banking penetration and financial inclusion quickly, the need for opening of
more brick and mortar branches, besides the usage of BCs, was felt. Banks have

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been mandated to allocate at least 25 per cent of the total number of branches to
be opened during a year in unbanked rural. PSBs and RRBs have been insisted
to open more bank branches in North Eastern Region.

Use of Information Technology

Advanced IT technology provides a great inaugural to innovate at a much faster

pace and to generate new-fangled financial product; with the accessibility and
availability of financial services, that are directly interconnected to the
necessity of customers. Financial firms can join hands with Indian information
and communication technology industry to construct a technology –enabled
financial sector that can reach every corner and cranny of India, and even
across borders, to foster growth (Raghu Ram Ranjan 2012). Technology and
financial inclusion are the popular denomination in banking parleys in the
country. Financial inclusion is a major agenda for the Reserve Bank of India
(RBI). Without financial inclusion, banks cannot reach the un-banked. It is also
a foremost step towards increasing savings and succeeding balanced growth.
An objective of technology intervention is too broadly to reduce cost of doing
business, improves productivity and better manages business risk. Financial
services permit individuals and households to manage the risk and uncertainties
to save risk free, to invest in a business venture and to cope up unforeseen
expenses.

Financial inclusion initiatives principally aims to deliver financial services to

poor people at an affordable cost, creating latest technologies available to rural
areas is also perquisites for overall development of our country. Technology
has become the energetic force of improve in the modern world and has not
only changed the way we correspond, but has also altered economic structures.
ICT may be defined as technology that facilitates collection, transfer and
transformation of data and knowledge and increases productivity.

According to Leeladhar (2005), technology can be a very valued tool in

providing access and availability of banking products in remote areas. ATMs,

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cash dispensing machines can be modified suitably to make them user friendly
for people, who are uneducated, less educate or do not know English. The role
of technological innovations is much more important in bringing down the
dependency on informal sources. These technological advancements would
incorporate the features of informal agencies that attract the poor and can be
implemented in the formal agencies (ISED, 2006).

Identifying that technology has the potential to address the issues of outreach
and credit delivery in rural and remote areas in a sustainable manner, banks are
encouraged to make effective use of Information and Communication
Technology (ICT) to provide doorstep banking services (for making payments
to rural customers and receiving cash from them) through their BCs or others
where the accounts can be functioned by even illiterate customers by using bio-
metric smart cards and mobile hand electronic devices, thus confirming the
security of transactions and improving confidence in the banking system.
Technology, with its capability to shrink transaction cost, is answer to enabling
the large volume low ticket transaction that is at the epicenter of financial
inclusion. By collecting and processing large volume of data easily, technology
can also improve the superiority of financial decision making. Participation of
Information Technology is required not only for conduct rhythmic tasks at the
branches but also for sinking the cost of operations and for increased
effectiveness.

Mobile Banking

Easy access to public goods and services is essential in an open and impartial
society. Banking services have physical appearance of a public good. That’s
why availability or usage of banking services to the whole population without
discrimination is a foremost objective of public policy. In India, knowingly
large regions and populations are still unbanked/ under banked. Even though
the growth and development of the banking network over the past four decades,
a good-sized proportion of households (41.3%) do not have a bank account. As
per the Census 2011, only 54.4% of rural households had access to banking

76
services. Purely on grounds of equity, it is important that financial services are
made available at an affordable and approachable cost to those who are
currently excluded from the organized financial system. Large segments of our
individuals would have to be dependent to borrowing funds from informal
sources at high rates of interest. Borrowing apart, a host of other services would
become available to those who presently stand deprived of such services. In a
greater perspective, the enlargement of banking and insurance and reach of
financial services is energetic for the long-term sustainable development and
economic growth of the country. Banks works as intermediaries between
investors and savers, channeling savings into productive and fruitful
investment. Without outreach to outsized regions and segments of our general
population, the economy is deprived of capital that can build value and increase
the output of goods and services. So to advantage or to avail the financial
services to the excluded sector financial exclusion is the only solution.
Financial inclusion helps to reduce the gap between the rich and poor and
provide the basic banking services to every single citizen of country.

The rural- urban divide is also glaring. The rural population is 83.3 crore,
(87.34 crore mobile subscriber in the country as on 30.6.2013)there are only
37,953 branches of scheduled commercial banks functional in these rural areas
as on 31.03.2013 – viz. a bank branch in rural India serves about 22,000
persons. On the other hand, the urban population of 37.7 crore (35.11 crore in
rural areas of the country as on 30.6.2013) is served by 64,390 branches – viz.
there is a branch for every 6000 persons in urban India. On the supply side, the
banks discover it uneconomic (and impractical) to operate a large number of
tiny accounts and micro transactions. Opening even a small branch involves
costs, and commercial banks may simply find this inexpensively non-viable.
The solution possibly will lie in technology-driven service delivery models.
Technology, nonetheless, has to be suitable from the point of view of
affordability, approachability, accessibility, security and confidentiality. Mobile
telephony possibly will be the answer to the problem. There are 87.34 crore

77
mobile connections in the country of which 35.11 crore are in the rural areas.
The fact that a huge number of mobile subscribers in rural areas do not have
access to banking facilities presents an opportunity for leveraging the mobile
telephone to attain the objective of financial inclusion.

As the penetration of mobile phones principally among low income people and
gigantic opportunities they afford in extending the banking outreach, RBI has
formulated guidelines on mobile banking. It has encouraged familiarizing
technology based products and services like prepaid cards/debit cards, mobile
banking. (The total tele-density in the country is 35.65 per cent in February
2009 – Rural 11.81%, Urban 83.66%). India is experiencing an explosion in the
use of mobile communication technology and this is a development that
banking sector can use it is an opportunity for the expansion of financial
services. Mobile phone services belong to all divisions of society spread across
metropolitan, towns and villages. Banks can take advantage of this expanded
reach of Tele communication if they provide services through this mode. These
hold substantial promises as delivery vehicle of the future.

As a strategy in India, banks have selected Mobile Banking and Smart Card
technology to accelerate pace of financial inclusion to common people. Mobile
Banking is a word used for performing account transactions, balance checks,
payments via mobile device such as mobile phone.

Inter-Ministerial Group (IMG) constituted by the Government of India to

submit a report and recommendations on the framework for delivery of basic
financial services using mobile phones. The framework suggested in the IMG
report has been accepted as the basis for delivery of basic financial services
using mobile technology in April2010. The IMG has advocated a framework in
which delivery communications and processes are shared by service providers.
It envisages the opening of mobile linked ‘no-frills’ accounts, which would be
operated using mobile phones. These accounts would be held by banks and the
money would be stored in the banks’ accounts and not in the users’ mobile
phones i.e. the loss of a user’s mobile phone/ SIM would not result in loss of

78
money. The customer would be capable to carry out following transactions -
cash deposit, cash withdrawal, balance enquiry, transfer of money from one
mobile- linked account to another, and transfer of money to a mobile-linked
account from a regular bank account and others.

Widespread use of mobile phones in emerging markets has created the

condition for large scale expansion of mobile financial services, which
empower organization to dramatically increase financial inclusion. Mobile
financial services (MFS) are self-possessed for explosive growth in emerging
market. Recent research conducted with the world bank Consultative Group to
Assist the Poor (CGAP) and the GSM Association(GSMA) trade group
indicates that not only that the unbanked poor wants to use financial services
but that they would use mobile devices to access them. The spread of MFS-
which include mobile payments, mobile money transfer, and mobile banking,
would be a boon for private enterprise and individuals. For consumers, access
to financial services sinks the transaction cost of sending and receiving
remittances, improves the safety and security of cash, and makes payment more
appropriate. By MFS persons will increasingly gain access to saving accounts,
credit insurance, and other services through their mobile phones. With over 900
million phones, the potential for mobile banking as a delivery channel for
financial services is a big opportunity in India. We have intentionally adopted
the bank-led model for mobile banking, to encourage the excluded individuals
to open an account and increase the level of financial inclusion program. The
key to cheap and universal payments and remittance will be if we can find a
safe way to allow funds to be freely transferred between bank accounts on
mobile wallets, as well as cashed out of mobile wallets’, through a much larger
and ubiquitous network of business correspondents. Nachiket Mor Committee
suggests creation of bank payment as a step towards this goal. Mobile banking
comprises the usage of a mobile phone or other mobile devices to conduct
banking transactions. As per the present guidelines of RBI, banks that are
licensed, supervised and have physical presence in India, are permitted to offer

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mobile banking services. Mobile banking policies in India goal to enable funds
transfer from an account in any bank to any other account in the same or any
other bank (inter-operability) on a real time basis irrespective of the mobile
network the customer has subscribed to. It is commanding that the process used
for mobile banking should be secure and should ensure confidentiality,
integrity, honesty, legitimacy and non-reputability. The provision of mobile
banking to the unbanked/ under-banked population could be the speediest way
to achieve the goal of financial inclusion. On the demand side, mobile banking
will make banking products and services affordable and instantly accessible. On
the supply side, mobile banking would be cost effective; it would save costs of
providing physical access and become a viable economic proposal for banks to
handle small value transactions made by low-income citizens.

Mobile banking enables

i) Customers to accomplish banking transaction using mobile phone like

balance enquiry, fund Transfers, deposit of money, bill payment and
others.

ii) Purchase goods over internet or phone delivery.

iii) Person to person fund transfers and many more.

Services offered through Mobile Banking

Account Information:

i) Balance Checks

ii) Mini statement and checking of account history

iii) Alerts on account activity or passing of set thresholds

iv) Monitoring of term deposits

v) Insurance Policy management

vi) Access to credit card statements

vii) Status on cheques, stop payment on cheques etc.

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viii) Access to loan statements

ix) Mutual funds/ equity statements

x) Pension plan management

Payment & Transfers:

i) Domestic and international fund transfer

ii) Micro payment handling

iii) Commercial payment processing

iv) Bill payment processing etc.

Investments:

i) Portfolio management services

ii) Real time stock quotes

iii) Personalized alerts and notifications on security prices

iv) Status of request for credit

v) Cheque book and card requests

vi) Exchange of data messages and email including complaint submission and

vii) Tracking ATM location

Stakeholders of the mobile banking in the present eco-system:

Stakeholders who have a significant role to play in mobile banking for financial
inclusion are the following:

(i) RBI: RBI has been pursuing the goal of financial inclusion as an essential
condition for sustaining equitable growth. RBI has introduced several measures
such as ‘no-frills’ accounts with simplified KYC norms, 100% financial
inclusion drive, the Business Correspondent (BC) model etc.

(ii) Banks: Banks deliver various types of financial services to customers.

These institutions are vital stakeholders as they are currently responsible for

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opening and maintaining ‘no-frills’ accounts. Bank is the parties which deliver
services and the customer is the party who takes the benefit of availing financial
services through banks.

(iii) TSPs (telecom service provider): The TSPs have a crucial role as the
wireless telephony infrastructure created by them can provide the
communication channel for mobile banking.

(iv) Legal resident: The individual is the utmost important stakeholder in the
entire system. Today, a citizen having a mobile phone and a bank account can
access different types of banking services (including inter-bank fund transfer) if
his bank has mobile banking infrastructure and his TSP allows him to access
the bank’s infrastructure through the TSP’s network resources. Mobile banking
would help to draw more and more of the currently unbanked/ under-banked
population into the banking folds. Individuals would be facilitated in
depositing, transferring and withdrawing money to and from remote locations
in the country at a vastly lower cost.

Mobile banking services can be deployed using any of the following

communication modes:
(i) Interactive Voice Response (IVR)
(ii) Short Messaging Service (SMS)
(iii) Wireless Access Protocol (WAP)
(iv) Stand-alone Mobile Application Clients (Mobile Apps)
(v) Using SIM tool Kit (STK Communication Channels for Mobile Banking
Service)
(vi) Unstructured Supplementary Service Data (USSD)

(1) IVR – Interactive Voice Response

IVR or Interactive Voice Response service operates through pre-specified

numbers that banks advertise to their customers. Customers make a call at the
IVR number and are usually greeted by a stored electronic message followed by
a menu of different options. Customers can choose options by pressing the

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corresponding number in their keypads, and are then read out the corresponding
information, mostly using a text to speech program.

(2) SMS – Short Messaging Service

SMS uses the popular text-messaging standard to enable mobile application

based banking. The way this works is that the customer requests for
information by sending an SMS containing a service command to a pre-
specified number. The bank responds with a reply SMS containing the specific
information. In a few instances even transaction-based services are made
available to the customer using SMS.SMS is popular because of

I. Easier to construct applications.

II. A popular intermediate to communicate.

III. Billing activities can be automated by right assimilation with operator’s

system.

(3) WAP – Wireless Access Protocol

WAP uses a perception similar to that used in Internet banking. Banks maintain
WAP sites which customer's access using a WAP friendly browser on their
mobile phones. WAP sites offer the familiar form based interface and can also
implement security quite effectively. The banks’ customers can have anytime,
anywhere access to a secure reliable service that allows them to access all
information and transaction centered services and also more multifaceted
transactions like trade in securities through their phone. A WAP based service
requires hosting a WAP gateway. Mobile Application users access the bank's
site through the WAP gateway to carry out transactions, much like Internet
users access a web portal for accessing the bank’s services. The actually forms
that go into a mobile application are stored on a WAP server, and served on
demand. The WAP Gateway forms an access point to the Internet from the
mobile network.

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(4) Stand-alone Mobile Application Clients

Standalone mobile applications are most appropriate to implement multifaceted

banking transactions like trading in securities. They can be customized
according to the user interface complexity supported by the mobile. In addition,
mobile applications enable the implementation of a very secure and reliable
channel of communication with end-to end encryption. One requirement of
mobile applications clients is that they require to be downloaded on the client
device before they can be used, which further requires the mobile device to
support one of the many development environments like J2ME or Qualcomm's
BREW. J2ME is fast becoming an industry standard to deploy mobile
applications and requires the mobile phone to support Java.

(5) SIM application Tool Kit

SIM Application Toolkit (STK) is a customary of the GSM system which

enables the SIM to initiate actions which can be used for various value-added
services. The SIM Application Toolkit consists of a set of commands
programmed into the SIM card which define how the SIM should interact
directly with the outside world and initiates commands independently of the
handset and the network. This facilitates the SIM to build up an interactive
exchange between a network application and the end user and access or control
access to the network. STK has been deployed for many applications, often
where a menu-based approach is required, such as Mobile Banking.STK
ensures availability of application as and when customer buys a new SIM card.
Operator is closely associated with the mobile banking project and hence task
of delivery is easy.

(6) Unstructured Supplementary Service Data (USSD)

Unstructured Supplementary Service Data (USSD) is a protocol used by

cellular telephones to communicate with the service provider's computers.
USSD can be used for WAP browsing, prepaid callback service, location-based
content services, menu-based information services, and as part of configuring

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the phone on the network. USSD messages are up to 182 alphanumeric
characters in length. Unlike Short Message Service (SMS) messages, USSD
messages create a real-time connection during a USSD session. The connection
remains open, allowing a two-way exchange of a sequence of data. This makes
USSD more responsive than services that use SMS. Some payment methods
such as Shar Epay, SWAP Mobile in South Africa, Mobi pay in Spain, M-
PESA in Tanzania, and M Pay in Poland use USSD channels.

Near Field Communication (NFC) is a technology which is in its early stages.

NFC defines a short range wireless technology which enables communication
between devices over short range. Mobile Phone as device; Availability with
customer 24 x 7 Always on and always connected Telecom operators already
have sophisticated billing system and can deliver banking services independent
of banks.

Mobile banking for higher-end urban customers is more in the nature of a value
added service. They already have multiple ways of accessing bank accounts and
services like, bank branches in the locality, ATMs and Internet banking. Some
are familiar with the use of downloaded applications on their mobile phones.
They not only have access; technology has made that access easier, more
convenient and cheaper.

From a financial inclusion perspective, the target groups are those who
presently do not have access to banking services, or for whom such access is
unaffordable. These target groups are likely to be low-income, semi-literate and
with limited knowledge of technological applications. They would, though, be
mobile phone users who are able to read and understand simple menus and use
simple applications that are an integral part of the phone. To begin with, such
customers would select a mode for mobile banking which is user friendly, has a
low cost of operation (viz. cost per transaction) and doesn’t require any
noteworthy investment (viz. requirement of a high-end phone instrument).
Mobile linked no-frills accounts will be created by the banks for low income
group. The mobile linked no-frills accounts will have regular and periodic

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transaction limits. The basic financial transactions on these accounts (cash
deposit and withdrawal, credit customer’s mobile linked no-frills account, peer
to peer transfer & balance inquiry) can be implemented through a mobile based
m-PIN system using mobile banking POS or through a biometric based system
using micro ATMs of the BCs (or sub-agents of BCs). The recent RBI
guidelines on technology and security standards for mobile banking as well as
the guidelines for ensuring authenticity of the BCs are sufficient and will be
applicable to these mobile linked no-frills accounts.

In India, in spite of the high mobile density, it is also a reality that most of the
handsets are very basic ones and many of the mobile connection are prepaid
subscription. These are important constraints. The RBIs technical committee on
mobile banking has suggested others, the necessity for a standardized and
simplified procedure for registration/ authentication of customers for mobile
banking services, a consistent awareness programme to be put in place, the
adoption of common application platform across all banks to be delivered to the
customers independent of the handset being used, along with use of SMS and
USSD technology for providing necessary level of security for such transaction.
The Telecom Regulatory Authority of India (TRAI) has prescribed optimum
service parameters, as also a ceiling too charges for provision of USSD services
by telecom operators to the bank and their agents. We have a countless
opportunity for banks and telecom service providers to come together to deliver
mobile banking services of all kind in a unified and secure manner to their
consumers.

Financial Literacy

Financial literacy is the capability to understand finance. More precisely, it

refers to the set of skills and knowledge that allows an individual to make
informed and effective decisions through their understanding of finances.
Financial literacy is considered as an important adjunct for promoting financial
inclusion and ultimately financial stability and credit counselling. Financial
literacy denotes the ability to make knowledgeable judgments and to take

86
effective decisions concerning the usage and management of money. Financial
literacy is considered as an essential requirement for functioning, effectively in
present society and trends in retirement income policies, work patterns and
demography suggest its importance can only increase in the years ahead. When
it is talk about financial literacy, it is generally referring to a set of skills that
allow individuals to manage their money intelligently along with some
understanding of essential financial concepts, not least an appreciation of the
trade-off between risk and return. Financial literacy can sketchily be well-
defined as the capacity to have familiarity with and understanding of financial
market products, especially rewards and risks in order to make informed
selections. Viewed from this standpoint, financial literacy principally relates to
personal financial literacy to empower individuals to take effective and
operative actions, to improve overall well-being and avoid distress in matters
that are financial in nature. The need for financial literacy is felt in the
developed and the developing countries alike. Being educated financially also
enables individuals to better appreciate the thinkable contingencies and save in
an appropriate manner. It can enable consumers to become better shoppers,
allowing them to procure goods and services at lower cost. This process, in
turn, raises consumers real purchasing power and multiplies the opportunities
for them to consume, save, or invest. Financial Inclusion and Financial Literacy
need to go hand in hand to empower the common man to understand the needs
and benefits of the products and services offered by the formal financial
institutions. Financial inclusion as ensuring access to appropriate financial
products and services needed by all sections of the society in general and
vulnerable groups, such as weaker sections and low income groups in
particular, at an affordable cost, in a fair and transparent manner by regulated
mainstream institutional players. So, from the financial inclusion perspective, it
fundamentally involves two elements, one of access and the other of literacy.
The objective of financial literacy is to protect and defend the customer at the
bottom of the pyramid. It helps the customers to better recognize and manage

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financial risk and deal with difficulties of the market place and take advantage
of increased competition and high-quality in the financial sector.

RBI has launched a multilingual website (link ‘Financial Education’) in 13

Indian languages on all matters concerning banking and the common person in
June, 2007. Financial literacy programmes are being launched in each State
with the active involvement of the state government and SLBC. Financial
literacy in India is on the positive side now. Without financial literacy, financial
inclusion cannot be attained. Financial literacy creates awareness among every
single to take decision regarding the use of finance, availability of financial
services and others. Directly and indirectly financial literacy promotes saving
habits and generates employment opportunities’ and increases the rate of
economic growth. Financial literacy increases investment options among
individual and raises the effective and efficient use of finance.

Diagram shows how the knowledge of and availability of finance can help
to generate the employment opportunity and increases the rate of growth

Source: Resarcher Design

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Financial Literacy and Credit Counselling Centres (FLCCs)

Credit Counseling can be defined as 'counseling that explores the possibility of

repaying debts outside bankruptcy and educates the debtor about credit,
budgeting, and financial management'. It assists three purposes. First, it
observes the ways to solve current financial problems. Second, by educating
about the costs of misusing a credit, it improves financial management. Third,
it encourages the distressed people to access the formal financial system. Credit
counseling is a procedure in which the customers are educated about how to
avoid or reduce the incurring debts that cannot be repaid. This Centre’s are
expected to provide free financial education to people in urban and rural areas
on the various aspects of financial products and services. Credit counselors help
their clients to find realistic solutions to their problems and agree on
repayments that are achievable. Credit counseling is kept confidential and
trustworthy. Counseling services are normally offered free of cost or for a very
nominal charge, so that no additional burden is put on the already indebted
customer. As on March 2011, banks have reported setting up 225 credit
counseling centres in various States of the country. A model scheme on
financial literacy and credit counseling centres (FLCCs) was formulated and
communicated to all scheduled commercial banks and RRBs with the advice to
set up the centres as distinct entities maintaining an arm’s-length relationship
with the parent bank so that the FLCC’s services are available to even other
banks’ customers in the district. The process of financial literacy must start
from the school’s curriculum with the help of education department of
respective State Governments. The Government should allocate or distribute
more funds to improve the level of financial literacy. Financial literacy
programs require trained and qualified instructors. To be more actual, these
instructors or counselors must be available to the clients at the time of making
or constructing important financial decisions. Financial literacy has a futuristic
approach which is beneficial for individual as well as nation also. Financial
inclusion and financial literacy form two sides of a coin with inclusion

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activities giving the push and literacy programs creating the pull for financial
services. To achieve this financial literacy is very important and should be
made mandatory.

Table 2.5: Activities undertaken by financial literacy centers

Particulars During the year During the year

ended march ended march
2013 2014
No. of outdoor activities conducted 40,838 56,985
Outdoor activities-no. of person 1,733,198 3,178,425
participated
Indoor activities-no. of person 483,980 647,643
participated
Total no. of person participated 2,217,178 3,826,068
Source: rbi.org.in

Financial Inclusion Plan for Banks

In January 2010, RBI guided all public and private sector banks to submit a
Board approved three years Financial Inclusion Plan (FIP) starting April 2010
to achieve sustained, planned and structured financial inclusion. Banks were
instructed to integrate Board sanctioned FIPs with their business plans and to
include the criteria on financial inclusion as a parameter in the performance
evaluation of their staff. The implementation and execution of these plans is
being closely monitored by the Reserve Bank.

Table 2.6: Facility–wise progress under FIP of all banks (including RRBs)

END MARCH
2010 2011 2012 2013
A. OVERDRAFT
FACILITY
No. of BSBD A/c(million) 73.46 104.76 138.50 182.07
Of which OD availed 0.18 0.61 2.71 3.95
(mln)

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 Amount of OD facility 0.16 0.26 1.68 1.55
availed (in billion)

Per A/c OD amount 555 426 399 392

(in billion)
B. KCC ISSUED
No.(million) 24.31 27.11 30.24 33.79
Amount (in billion) 1240.07 1600.05 2068.39 2622.98
Amount per KCC 51010 59020 68399 77625
(in billion)
C. GCC ISSUED
No.(million) 1.39 1.70 2.11 3.63
Amount(in billion) 35.11 35.07 41.84 76.34
Amount per GCC 25258 20629 19829.38 21030.30
(in billion)
Source: Compiled from RBI annual report 2012-13

Priority Sector Lending

To alleviate the emergent perception of inadequate flow of credit to the

traditionally preferred sub-sectors of the priority sector such as agriculture and
small scale industries because of the expanded eligible sectors for treatment as
‘priority sector’ in the post reform period, RBI issued revised guidelines on the
priority sector in April 2007 and restricted its coverage to advances and loans
to highly employment demanding sectors such as agriculture, small scale
enterprises, retail trade, educational loans, micro-finance and low cost housing.
Auxiliary, to give an impulse to microfinance, the same was considered under
priority sector lending and lending to SHGs was brought under the weaker
sections of the priority sector. Banks have been guided to provide adequate
incentives to their branches for financing the Self-help groups.

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Special Package for North Eastern States

• To develop banking penetration in the North-East, particularly in

unbanked blocks, the Reserve Bank has introduced Special Dispensation
Scheme under which RBI will fund the capital and running costs for five
years provided the concerned state government is willing to make
available necessary premises and put in place appropriate security.

• To overcome network connectivity issues in the North Eastern states,

RBI launched the Satellite Connectivity Scheme in 2009 to provide 100
per cent subsidy to bank branches in North Eastern Region subject to a
maximum of Rs. 12,000 per month or the actual expenditure, whichever
is less subject to condition that the branches would offer services of
electronic fund transfer free of charges to their customers..

• Public Sector Banks and Regional Rural Banks have been emphasized to
open more bank branches in North Eastern Region. The Ministry of
Finance (MoF) is observing progress periodically and encouraging
banks through the State Level Banker’s Committee (SLBC) mechanism
to provide bank branches or/and branchless banking facilities in these
unbanked blocks.

• RBI has conducted 21 outreach programs, three each in all North East
states to convert those villages into Model villages giving focus on four
areas, i.e., one account per household, one credit to eligible borrower in
the village, no shortage of notes and coins and banking grievances
redressed mechanism in place.

• In every state a Task Force has been formed to look into suitable
technology and innovative e-payment products to reduce transaction
costs and provide alternative mode for accessing banking and payment
services for every segment of the society.

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It can be said that a multi-pronged strategy has been adopted in India to
promote financial inclusion. However, its success will depend on how all the
stakeholders are adopting these measures. For example, although no-frills
accounts are supposed to be provided along with overdraft facility, it has been
found that most of the banks have not only shown their disinterest in creating
awareness in this regard but also restricted the use of overdraft facility.
Therefore, it is of utmost important that all the initiatives are adopted in its true
spirit.

Regional rural banks

Rural banking in banking started since the establishment of banking sector in

India. Regional rural banks set up after nationalization of banks in 1969 when
importance moved to provide more credit to weaker section. Regional rural
banks were established under the provision of an ordinance promulgated on 6
September 1975 and RRB Act, 1976 with an objective to ensure sufficient and
appropriate institutional credit for agricultural and other rural sector.

Regional Rural Banks are homegrown level banking organizations operating in

different States of India. They have been created with a view to serve primarily
the rural areas of India with basic banking and financial services. Nevertheless,
RRB's may have branches set up for urban operations and their area of
operation may include urban areas too. The admission of commercial banks in
the field of agriculture finance and rural areas mainly concentrated big farmers
and did not pay due attention to meet needs of small/marginal farmers (who
constituted nearly 62 per cent of land holding) and other weaker section of the
society. It was therefore realized by Govt. of India to construct a separate
institutional frame work to provide basic financial services or credit and other
banking facilities to small/marginal farmers, agricultural labourers, rural
artisans and small entrepreneurs in rural areas. Regional Rural Banks were
therefore established in October 1975 initially in those districts where co-
operative banks were pathetic and operations of commercial banks were near to
the ground to supplement efforts of exiting credit institutions.

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The main purpose of RRB's is to mobilize financial resources from rural /
semi-urban areas and grant loans and advances mostly to small and marginal
farmers, agricultural laborers and rural artisans. The area of operation of RRBs
is limited to the area as notified by Government of India covering one or more
districts in the State. RRB's also perform a variety of different functions. RRB's
perform numerous functions in following heads

• Providing banking facilities to rural and semi-urban areas.

• Carrying out government operations like disbursement of wages of

MGNREGA workers, distribution of pensions etc.

• Providing Banking facilities like locker facilities, debit and credit cards.

The Regional Rural Banks (RRBs) aimed at providing credit and other facilities
to the small and marginal farmers, agricultural labourers, artisans and small
entrepreneurs in rural areas.

The RRB Act, 1986, empowers the Central Government to establish in a State
or Union Territory one or more RRBs when any sponsor bank makes such a
request. The sponsor bank assists the RRB in many ways by subscribing to its
share capital, by helping in its establishment, by supporting in recruitment and
training of its cadre, and in overall providing such managerial and financial
assistance required by the RRB. The RRB performs its functions within the
limits as quantified by government statement. It can have its branches at any
place as notified by the government.

Role of Regional Rural Banks

Regional Rural Banks have been in existence for around three decades in the
Indian financial scene.

Commencement of regional rural banks (RRBs) can be seen as a unique

experiment as well as experience in improving the efficiency of rural credit
delivery instrument in India. With joint shareholding by Central Government,
the concerned State Government and the sponsoring bank in the proportion of

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50:15:35, an effort was made to integrate commercial banking within the broad
policy thrust towards social banking keeping in view the local individualities.

Over the years, the RRBs, which are often viewed as the small man’s bank,
have taken deep roots and have become a sort of attached part of the rural credit
structure . They have played an important role in rural institutional financing in
terms of geographical coverage, customer’s outreach and business volume as
also involvement to development of the rural economy. A remarkable feature
of their performance over the past three decades has been the massive
expansion of their retail network in rural areas.

Growth of RRBs – Potential Role in Financial Inclusion

From a modest beginning of 6 RRBs with 17 branches covering 12 districts in

December 1975, the numbers have grown into 196 RRBs with 14,446 branches
working in 518 districts across the country in March 2004. RRBs have a large
branch network in the rural area forming around 43 per cent of the total rural
branches of commercial banks. The rural coordination of RRBs is forbidding
with rural and semi urban branches instituting over 97 per cent of their branch
network. The growth in the branch network has allowed the RRBs to expand
banking activities in the unbanked areas and mobilize rural savings. The
instruction of promoting banking with a rural focus, nonetheless, would be a
continuing phenomenon only when the financial health of RRBs is sound.

Till the birth of RRBs in India, Commercial Banks and Co-operative Banks
were rendered services to the rural public. But despite such outsized network of
bank branches, the credit needs of the rural population in India were quite
inadequate. Regional Rural Banks in India have attained remarkable growth in
relation of number of banks and its wide braches which is shown in the below.
It is understood from the table 2.7 that the number of RRBs decreased from 196
in the year 2001-02 to 86 in 2008-09. This was due to the amalgamation that
took place in the year 2005- 2006, covering 525 districts with a network of
14,494 branches. However, the number of branches has been significantly

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increased from 14,390 in 2001-02 to 15,181 in 2008-09. The increase over the
period was 1.05 times.

Table 2.7: Growth of Regional Rural Banks in India

Year No. of RRB No. of Branches

2001-02 196 14390
2003-04 196 14446
2005-06 94 14494
2007-08 90 14761
2008-09 86 15181
2011-12 82 16909
2012-13 64 17856
Source: Central Statistical Information Department, NABARD, June-14

Post-merger RRBs symbolize a powerful instrument for financial inclusion.

Their outreach vis-à-vis other scheduled commercial banks particularly in
regions and across population groups facing the brunt of financial exclusion are
impressive. With merger infusing the much needed financial strength in RRBs
coupled with the local feel and familiarity they command, RRBs are in a unique
position to play a decisive role in financial inclusion.

Rural Bank Network: In Rural areas, RRBs account for nearly 20% of the
total offices of all commercial banks and 95% of these banks are in rural and
semi-urban areas.

Man Power: 91 percent of total work force in RRBs is posted in rural and semi
urban areas compared to 38 percent of other scheduled commercial banks.
Although RRBs share 25 percent of work force in rural and semi urban areas in
India, Manpower of RRBs constitute 7 percent of the total man power of
scheduled commercial banks

Mobilization of deposits: RRBs account for 12 percent of all deposit accounts

and meager 3.5 percent of deposit amounts of scheduled commercial banks.
Though, in rural areas RRBs share in deposit accounts is a significant 31

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percent and 19 percent in deposit amounts. This shows that average deposit
amount is lower in RRBs than commercial banks.

Credit disbursed: RRBs account for 18 percent of loan accounts of all

commercial banks and 3 percent in loans outstanding. In rural areas share of
RRBs in loan accounts is 38 percent and 21 percent in total credit outstanding
in rural areas, implying thereby they better reach to small borrowers. This is
significant from the point of future role of RRBs in Financial Inclusion as rural
branches are closer and more active in extending. Outreach to remote and
interior villages. Banks have set up Financial Literacy and Credit Counseling
Centers (FLCC) to create awareness to all the people. Keeping in view, the
importance of RRBs, GOI has taken a decision to cover all the districts of the
county by RRBs. The Sponsor banks have to draw action plan to cover all
branches of RRBs under Centralized Banking Solution.

Self-help group

Self-help groups are straightforward to defeat exploitation, generate confidence

for the monetary self-reliance of rural people, predominantly among women
who are mostly undetectable in the social structure. These groups enable them
to draw closer together for common objective and gain strength from each other
to defeat with exploitation, which they are facing. Self-help group encounter the
credit needs of the poor by joining sensitivity, flexibility and responsiveness of
the informal credit system with the strength of technical and administrative
capabilities and financial resources of the formal credit institution. Self-help
group develop the mutual trust between the rural people and bankers. In
Rajasthan, there are approximately 1.5 lakh self-help groups of women.
Department of women and child development has promoted about 50% of these
groups. Other government departments under developmental schemes like
SGSY, Watershed Development etc., have organized another 20-25% group.
NGOs have promoted remaining 25-30% groups. One of the important issue
before SHG movement in Rajasthan is of quality of the groups. Because
whatever may be the prime purpose of the groups (‘women empowerment’ or

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‘access to micro finance’), a strong/ good quality group is essential. About 40%
SHGs have been able to take loan from Banks, about 70% of SHGs are located
on 30% of the districts, enormous number of poor are still beyond the reach of
SHGs and formal financial institutions, Microfinance is limited to micro credit
and to some extent thrift. SHGs are ascertaining to be the most effective
instruments for financial inclusion. The objectives of the SHG program are to
alleviate poverty, increase sustainability, reduce vulnerability, and improve
capacity building and help the weaker sections build assets. SHG in good
number appeared in the rural economy due to promotional efforts made by
NABARD.

Microfinance Channel

According to Tripathy (2012), the inherent restrictions or limitations of the

formal and informal financial institution in delivering financial services to the
needy and poor have led to the emergence and extension of Microfinance
programs in the developing domain including India. Microfinance programs
combine the safety and reliability of formal finance with the opportuneness and
flexibility of informal finance.

Developers and development consultants has been encouraging the provision of

microfinance to reduce the gap between the demand and supply for rural credit
facilities because of its encouraging impact on household welfare and poverty
alleviation. In India, the microfinance movement started with the introduction
of an SHG-bank linkage program in the early 1990s said by (Tripathy, 2012).

Microfinance is well-defined as provision of saving, credit and other financial

services and products of very minor amount to the poor in rural, semi-urban or
urban areas for supporting or empowering them to raise their level of income
and develop living standards. Microfinance is considered as the natural vehicle
for endorsing financial inclusion as its penetrative outreach enables it to expand
credit facilities to the poorest of the poor, the uncompromising and assetless
poor, in remote and unbanked regions. Since numerous of MFIs operate in a

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limited geographical area, they have a greater understanding of the issues
specific to the rural poor, enjoy greater satisfactoriness and acceptability
amongst the rural poor and have flexibility in operations providing a level of
comfort to their customers (Rangarajan Committee, 2008).

Microfinance is categorized by low cost of loans and a high degree of

repayment. The thrust of the microfinance initiative is to organize the poor into
small and cohesive self-help groups (SHGs) and channelize both production
and consumption credit in multiple doses. Microfinance involvements are
expected to increase the consumption of banking habits which is necessary for
economic and sustainable development as well as self-reliance. Even though,
there are numerous models of microfinance which are prevailing in India, two,
the SHG-Bank Linkage Program (SBLP) and Microfinance Institutions (MFIs)
– Bank Linkage program are the most prominent. Under SBLP, financing banks
extend services like savings and credit to the groups directly while other
stakeholders like NABARD, banks, NGOs, government, insurance providers,
etc. extend support services including organization and development of groups,
capacity enhancement of their members, etc. In MFI model, lending to SHG
members is done through microfinance institutions.

NABARD INITIATIVES

National Bank for Agriculture and Rural Development (NABARD) is an

apex development bank in India having headquarters based
in Mumbai (Maharashtra) and other branches are all over the country. It was
established on 12 July 1982 by a special act by the parliament and its main
focus was to uplift rural India by increasing the credit flow for elevation of
agriculture & rural non-farm sector. NABARD is active in
developing financial inclusion policy and is a member of the Alliance for
Financial Inclusion.

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SHG-Bank Linkage Model (SBLP) A NABARD Initiative

Among the various model of micro finance prevailing in India, the SHG-Bank
Linkages Model is the most prominent one. SHG-Bank linkage program was
started by NABARD in 1992 to link the poor with formal financial system.
Primarily started as a pilot project to connect 500 SHGs with banks wherein the
banks will provide access to the group members for their savings on regular
basis while also providing credit to the group to encounter the emerging credit
requirements of its members in proportion to the savings of the group, the
program has become one of the most cost effective and fastest growing micro
finance initiatives in the world, enabling 97 million poor household’s access to
banking system (NABARD, 2011).

The SHG-Bank Linkage Program has been recognized as an effective or

operative tool for inclusive growth by extending various financial services to
the excluded category of poor households. According to Tripathy (2012), the
linkage program combines the flexibility, sensitivity and responsiveness of the
informal credit system with the technical and administrative capabilities and
financial resources of formal financial sector. This method of financing relies
seriously on the collective strength of the poor supported by their effective
social mobilization, which contributes to an inclusive empowering process at
the end-beneficiary level. SHG signifies an exceptional approach of financial
intermediation. The method combines access to low cost financial services with
a progression of self-management and development for SHG members.
Generally, SHGs are informal association of up to 20 individuals, shaped and
supported commonly by NGOs or government agencies, who save small
amount recurrently and then interconnected to bank. The group borrows from
the bank using their groups saving and group guarantee as the collateral. The
program has grown exponentially during the last two decades and over 9.7
crore rural households have now access to regular savings through 74.26 lakh
SHGs linked to different banks, of which around 48 lakh are credit linked.
Nearly 12 lakh SHGs were extended fresh loans to the extent of over Rs. 14500

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crore during 2010-11 with total loan outstanding to SHGs reaching over Rs.
31,220 crore. More than 80 per cent beneficiaries of this program are women
(NABARD, 2011). NABARD (2011) estimated that 53.4 per cent of the total
households are members of SHG-Bank linkage program. The Rajasthan
microfinance initiative was launched by the Trusts in March 2003 to
demonstrate the working of self-sustaining community based microfinance
programs. The initiative focuses on using microfinance to strengthen
livelihoods, and reduce the vulnerabilities of the marginalized peoples in this
region. Obtainability of financial services especially of credit services to poor is
one of the major ingredients for poverty alleviation and for inclusive growth.
Banks are still to reach out to poor in large numbers and as a result ‘poor’
mainly depend on informal sources like moneylenders where they take credit at
higher rates. Despite the huge success of the linkage program, the area of
concern remains the spread of linkage program in India which has been uneven
with southern states accounting for the major chunk of credit linkages.
Nevertheless, the situation has started improving with other regions also
showing growth trends in this movement.

Induction of SHG-2:

NABARD has recently acknowledged SHG’s inadequate outreach in many

regions in recent years, delays in opening of savings accounts and disbursement
of loans, and non-approval of repeat loans even when first loans are repaid on
time. This has encouraged NABARD to formulate a strategy to regenerate the
SHG movement leading with the introduction of SHG-2 model. While the most
important function of the SHG-2 model continues to be the advancement or
promotion of savings-led credit product, some additional features have been
added such as:

o Voluntary savings separately from compulsory savings

o Agreeing the approval of a cash credit / overdraft system of

lending for SHGs for a longer operational tenure,

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 o Graduating selected members of the group that have
entrepreneurship potential into a joint liability groups for
borrowing larger amounts,

o Improving risk mitigation, systems by bringing in third party

audit,

o Strengthening the self –monitoring mechanism, and

o Building second tier institution.

Women SHGs Development Fund:

The Union Budget 2011-2012 has proposed to set up a “Women’s SHG’s

Development Fund” with a corpus of Rs. 500 crore. The Government of India
created this fund to empower women and promote their SHGs and it is operated
by NABARD through its two major microfinance funds- Financial Inclusion
Fund (FIF) and the Financial Inclusion Technology Fund (FITF). The FIF
primarily supports capacity building inputs to service providers, resource a
centre, training institutes, financial institutions as well as promoting and
nurturing SHGs. Similarly, FITF promotes technology innovation and solutions
as well as research relating to technological interventions for financial
inclusion.

ITC’s e-Choupal

ITC’s e-Choupal infrastructure with a mission to strength the Farm Sector

Development through Public-Private partnership enables even small and
marginal farmers, who have no access to formal market, to receive relevant
knowledge and agricultural extension services. The Farmers Club program
promoted by NABARD and executed by banks, aims to bring together the
farmers to facilitate accessing of credit and others. ITC is planning to upscale
the e-choupal initiative, the possibility of collaborating with ITC to provide
such infrastructure to about 77,000 Farmers Clubs, could be explored. The
synergy from such collaboration could result in sustainable financial inclusion
(Chakrabarthy, 2012)

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Performance of banks under FIP up to March 31, 2014 is:

i) The number of banking outlets has gone up to nearly 3, 84,000. Out of

these, 1, 15,350 banking outlets were opened during 2013-14.

ii) Nearly 5,300 rural branches were opened during the last one year. Out of
these, nearly 4,600 branches were opened in unbanked rural centres.

iii) Nearly 33,500 BC outlets were opened in urban locations during the year
taking the total number of BC outlets in urban locations to 60,730 as at the
end of March 2014.

iv) More than 60 million basic savings bank deposit accounts (BSBDAs)
were added during the last year taking the total number of BSBDAs to 243
million.

v) With the addition of 6.2 million small farm sector credits during 2013-14,
there are 40 million such accounts as on March 31, 2014.

vi) With the addition of 3.8 million small non-farm sector credits during
2013-14, there are 7.4 million such accounts as on March 31, 2014.

vii) Nearly 328 million transactions were carried out in BC-ICT accounts
during the last year as compared to 250 million transactions during 2012-
13.

The Chapter attempted to sketch out the initiatives taken by the Government of
India and the Reserve Bank ever since Independence. So, the major task for the
banks is to include all the excluded section of the society under banking fold.
So there is a need for the formal financial system to look at increasing financial
literacy and financial counseling to focus on financial inclusion. Though a
quantity of the initiatives towards financial inclusion in India in progress before
Independence, the efforts have intensified since late 1960s. After 2005,
‘financial inclusion’ was clearly prepared as a foremost policy objective with
renewed prominence on the objectives of bringing financially excluded people
within the banking fold.

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The performance of RRBs in India enhanced in the post-merger period. Even
though number of RRBs decreased, the network of branch has been increased.
During post-merger period, in attendance has been increased number of districts
covered by the RRBs. Total capital funds have been increased enormously after
amalgamation took place in the year 2005-06. A multi-pronged strategy has
been adopted in India to promote financial inclusion. As Financial Inclusion is a
fundamental component of the inclusive growth envisaged for the sustainable
development of the economy, both public and private sectors are functioning in
cycle to pull the strengths and constrain for financial inclusion.

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