What Is Financial Inclusion: Chillibreeze Writer

What is Financial Inclusion
chillibreeze writer — Sreela Manoj
Financial inclusion is the availability of banking services at an affordable cost to

disadvantaged and low-income groups. In India the basic concept of financial inclusion is
having a saving or current account with any bank. In reality it includes loans, insurance
services and much more.
The first-ever Index of Financial Inclusion to find out the extent of reach of banking services
among 100 countries, India has been ranked 50. Only 34% of Indian individuals have access
to or receive banking services. In order to increase this number the Reserve Bank of India had
the Government of India take innovative steps. One of the reasons for opening new branches
of Regional Rural Banks was to make sure that the banking service is accessible to the poor.
With the directive from RBI, our banks are now offering “No Frill” Accounts to low income
groups. These accounts either have a low minimum or nil balance with some restriction in
transactions. The individual bank has the authority to decide whether the account should have
zero or minimum balance. With the combined effort of financial institutions, six million new
‘No Frill’ accounts were opened in the period between March 2006-2007. Banks are now
considering FI as a business opportunity in an overall environment that facilitates growth.
The main reason for financial exclusion is the lack of a regular or substantial income. In most
of the cases people with low income do not qualify for a loan. The proximity of the financial
service is another fact. The loss is not only the transportation cost but also the loss of daily
wages for a low income individual. Most of the excluded consumers are not aware of the
bank’s products, which are beneficial for them. Getting money for their financial
requirements from a local money lender is easier than getting a loan from the bank. Most of
the banks need collateral for their loans. It is very difficult for a low income individual to find
collateral for a bank loan. Moreover, banks give more importance to meeting their financial
targets. So they focus on larger accounts. It is not profitable for banks to provide small loans
and make a profit.
Financial inclusion mainly focuses on the poor who do not have formal financial institutional
support and getting them out of the clutches of local money lenders. As a first step towards
this, some of our banks have now come forward with general purpose credit cards and artisan
credit cards which offer collateral-free small loans. The RBI has simplified the KYC (Know
your customer) norms for opening a ‘No frill’ account. This will help the low income
individual to open a ‘No Frill’ account without identity proof and address proof.
In such cases banks can take the individual’s introduction from an existing customer whose
full KYC norm procedure has been completed. And the introducer must have a satisfactory
transaction with the bank for at least 6 months. This simplified procedure is available to those
who intend to keep a balance not exceeding Rs.50,000 in all accounts taken together. With
this facility we can channel the untapped, considerable amount of money from the low
income group to the formal economy. Banks are now permitted to utilize the service of
NGOs, SHGs and other civil society organizations as intermediaries in providing financial
and banking services through the use of business facilitator and business correspondent
models.
Self Help Groups are playing a very important role in the process of financial inclusion.
SHGs are usually groups of women who get together and pool money from their savings and
lend money among them. Usually they are working with the support of an NGO. The SHG is
given loans against the group members’ guarantee. Peer pressure within the group helps in
improving recoveries. Through SHGs nearly 40 million households are linking with the
banks. Micro finance is another tool which links low income groups to the banks.
Yet, banks are fighting to fulfill the Financial Inclusion dream. The main reason is that the
products designed by the banks are not satisfying the low income families. The provision of
uncomplicated, small, affordable products will help to bring the low income families into the
formal financial sector. Banks have limitations to reach directly to the low income
consumers. Correspondents can be considered to be an excellent channel which banks can use
to distribute their product information. Educating the consumers about the financial benefits
and products of banks which are beneficial to low income groups will be a great step to tap
their potential.
Banks are now using new technologies like mobile phones to reach low income consumers. It
is possible that the telephone providers themselves will start basic banking services like
savings and payments. Indian telecom consumers have few links to financial institutions. So
without much difficulty telecom providers can win the battle with banks. Banks should
therefore be proactive about transferring this technology into an opportunity.
The Indian Government has a long history of working to expand financial inclusion.
Nationalization of the major private sector banks in 1969 was a big step. In 1975 GOI
established RRBs with the same aim. It encouraged branch expansion of bank branches
especially in rural areas. The RBI guidelines to banks shows that 40% of their net bank credit
should be lent to the priority sector. This mainly consists of agriculture, small scale
industries, retail trade etc. More than 80% of our population depends directly or indirectly on
agriculture. So 18% of net bank credit should go to agriculture lending. Recent simplification
of KYC norms are another milestone.
Financial inclusion is a great step to alleviate poverty in India. But to achieve this, the
government should provide a less perspective environment in which banks are free to pursue
the innovations necessary to reach low income consumers and still make a profit. Financial
service providers should learn more about the consumers and new business models to reach
them.
In India Financial inclusion will be good business ground in which the majority of her people
will decide the winners and losers.
Financial Inclusion and Postal Banking:

New Research Paper
by postfi on June 7, 2010
Out of 1.5 billion users of postal financial services in the world, only 400 millions are holders
of a postal (bank) account, 300 millions of which located in developing or emerging
countries. As of today, more than 2 billion adults remain un-banked, mostly in developing
and emerging countries, although under-banked citizens are also a concern in more advanced
economies. Have Posts started to bridge this financial access divide that often exists between
better and less well-off populations? Our paper suggests this has become the case in an
increasing number of developing and emerging countries. They are following a path
historically initiated and recently highlighted in the activities of some postal operators in
today’s high income economies.
The incentives to do so are powerful for the Posts in an environment where structural
declines in mail volumes have weakened the economic viability of traditional postal business
models around the world during the last decade. The recent global economic and financial
crisis (2007-9) has further deteriorated the conditions in mail markets, with postal operators
losing up to 20% of their mail traffic during this two-year economic downturn, and
forecasting losses of 30% over the next decade that could leave the industry with large excess
capacities.

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What is Financial Inclusion

chillibreeze writer — Sreela Manoj

Financial inclusion is the availability of banking services at an affordable cost to

Financial Inclusion and Postal Banking:

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