CHAPTER – 1

INTRODUCTION

It is all-time to time Indian Government over and over again make its efforts
toward the inclusion of rural customer (investors) in an organized financial system.
This might not only provide a heavy amount of cash flow to improve the Indian
economy but it could also help the government to ease rural development by offering
diverse services like gas subsidies etc. Thus, the nomenclature of financial inclusion
varies due to diverse ruling parties, but the primary objective remains the same i.e., to
prosper the bottom of the pyramid of the financial market. It has been envisaged that
the growth of the economy would not only increase production but also provide the
capacity for absorbing the backlog of underemployment and unemployment a
sustainable proportion of the additional labor force. The solution to the problem of
unemployment and poverty that goes with it has to be found ultimately through a high
rate of overall economic growth. It is, therefore, necessary to have supplemental
programs for specific target groups/areas for income generation, employment
creation, and poverty alleviation. These have taken the form of a direct employment
program for providing various employment generation programs and schemes. These
programs and schemes are expected to create a durable asset for the community and
thus enhance further economic activities (Narshing, Subash 2014).

1.1 FINANCIAL INCLUSION AT GLOBAL SCENARIO

Financial inclusion means that individuals and businesses have access to
valuable and affordable financial products and services that meet their needs –
savings, credit and insurance, transactions, payments,– delivered in a responsible and
sustainable way. Being able to have access to a transaction account is a primary step
in the direction of broader financial inclusion since a transaction account allows
people to save money, and send and receive payments. A transaction account serves
as access to other financial services, which is why ensuring that people worldwide can
have access to a transaction account is the main focus of the World Bank Group.
Financial access facilitates day-to-day living and helps businesses plan and families
for everything from long-term goals to unforeseen emergencies. As accountholders,
the public are more likely to use other financial services, such as insurance and credit,

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to start and expand businesses, invest in education manage risk or health. Enormous
strides have been made toward financial inclusion and 1.2 billion adults in global have
gotten access to an account since 2011. Today, more than 69% of adults have an
account. Moving from access to account usage is the next step for the nation where
80% or more of the population have accounts (India, Thailand China, Kenya). These
countries focus on reforms, private sector innovation, and a push to open low-cost
accounts, including digitally-enabled payments and mobile. However, close to one-
third of adults are still unbanked, according to the latest Findex data. More than half
of unbanked people include women in poor households in rural and backward areas or
out of the workforce. The World Bank Group considers financial inclusion a key
enabler to decrease extreme poverty and enhance shared prosperity and has put
forward an ambitious global goal to attain Universal Financial Access by 2020.Since
2010, 55 countries have made commitments to financial inclusion, and more than 60
countries have either launched or are developing a national strategy. When countries
take a strategic approach and develop national financial inclusion strategies that bring
together financial regulators, competition and education ministries,
telecommunications, research shows that when countries introduce a national
financial inclusion strategy, they raise the pace and impact of reforms.
Countries that have achieved progress toward financial inclusion have:
 Policies delivered at scale, such as universal digital ID India and Aadhaar /
JDY accounts
 Leveraged government payments. (For instance, more than 35% of adults in
low-income countries receiving a government payment opened their first
account for this purpose.)
 Allowed mobile financial services to thrive. (For instance, in Sub-Saharan
Africa, mobile money account ownership increase from 12 to 21%).
 Introduce the latest business models, such as leveraging e-commerce data for
financial inclusion.
 Taking a strategic approach by developing a National Financial Inclusion
Strategy (NFIS) which brings together diverse stakeholders including
telecommunications, competition financial regulators, and education
ministries.
 Paying attention to and financial capability and consumer protection to
promote responsible, sustainable financial services.
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1.1.1 International Initiatives
The origins of the current approach to financial inclusion can be traced to the
United Nations initiatives, which described the major goals of inclusive finance as
access to a range of financial services including credit, insurance savings, remittance,
and other banking/payment services to all enterprises and ‘bankable’ households at a
reasonable cost. The Report of the Centre for Global Development Task Force on
Access to Financial Services (October 2009) has laid down the wide policy principles
for expanding financial access, with particular emphasis on the need for ensuring data
collection, monitoring, and evaluation. The G20 Toronto Summit (June 2010) had
described the “Principles for Innovative Financial Inclusion,” which serves as a guide
for policy and regulatory approaches aimed at fostering safe and sound adoption of
innovative, low-cost financial delivery models, helping provide conditions for fair
competition and a framework of incentives for the various insurance, bank, and non-
bank actors involved in the delivery of a complete range of quality and affordable
financial services.
The global financial crisis has brought the need for financial inclusion into the
main focus worldwide as it is believed that widespread incidence of financial
exclusion was one of the main factors that become the main cause of the financial
crisis. While the spread of financial inclusion is recognized through formal financial
institutions such as credit unions, post offices banks, or microfinance institutions, the
approach of keeping some all of these entities as support players, varies from country
to country.

1.2 FINANCIAL INCLUSION – NATIONAL INITIATIVES

Several countries across the world now look at financial inclusion as the
means for more comprehensive growth, wherein, each citizen of the nation can use
his/her earnings as a financial resource that they can put to work to develop their
future financial status and concurrently contribute to the nation’s progress.
Initiatives for financial inclusion have come from the governments, financial
regulators, and the banking industry. While the banking sector has taken numerous
steps to support financial inclusion. legislative measures have also been initiated in
some countries. In 1996, the German Bankers’ Association introduced a voluntary
code. The main motive of that code was to provide an everyman current banking

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account that facilitates basic banking transactions. In South Africa, in 2004, by the
South African Banking Association, a low-cost bank account called ‘Mzansi’ was
launched for financially excluded people. In 2005, in the United Kingdom, a
‘Financial Inclusion Task Force’ was constituted by the government to examine the
development of financial inclusion.
In India, the history of financial inclusion is actually older than the formal
adoption of the objective. The nationalization of banks, lead bank Scheme,
incorporation of Regional Rural Banks, Service Area Approach, and formation of
Self-Help Groups - all these were initiatives aimed at taking banking services to the
masses. The number of branches of bank multiplied 10-fold - from 8,000 in 1969,
when the first set of banks were nationalized, to 99,000 plus today. In spite of this
wide network of bank branches spread across the length and breadth of the nation,
banking has still not reached a huge section of the population. The extent of financial
exclusion is astonishing. Out of the 600,000 habitations in the nation, only about
36,000 plus had a commercial bank branch. Just about 40 % of the people across the
country have bank accounts. People having debit cards consist only 13% and those
having credit cards only 2% of the population.
The National Sample Survey data (2002 - 03) revealed that about 51% of
farmer households in the nation did not seek credit from either institutional or non-
institutional sources. A large number of rural households are still not covered by
banks. The proportion of the rural population who lack access to bank accounts is 40
percent, and this figure in India rises to over three-fifths in the eastern and north-
eastern regions. Accordingly, our main objective is to take banking to all excluded
sections of the society, rural and urban or in semi-urban. Since the year 2005, a more
focused and structured approach towards financial inclusion has been followed when
the Reserve Bank of India decided to implement policies to support financial
inclusion and urged the banking system to focus on this goal. The main focus of RBI
is to provide banking services to all the 600 thousand villages and meeting their
financial needs through basic products like savings, credit, and remittance. In the
wider context, of the agenda for inclusive growth, have been pursued through a multi-
agency approach. The Government of India in 2006 constituted a Committee on
Financial Inclusion, which made recommendations on the strategies for building an
inclusive financial sector and gave a national rural financial inclusion plan in India.

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The government of India has set up the Financial Stability and Development Council,
for financial Inclusion and financial Literacy issues. A high-level Financial Inclusion
Advisory Committee has been constituted by RBI to further strengthen the ongoing
financial inclusion agenda in India. Financial sector regulators including RBI are fully
committed to the Financial Inclusion Mission.
1.2.1 Financial Inclusion in India
Financial inclusion may be defined as the process of ensuring access to
financial services and adequate credit where needed by backward groups such as
weaker sections and low-income groups at a reasonable cost (The Committee on
Financial Inclusion, Chairman: Dr C. Rangarajan). On the other hand, financial
inclusion, broadly defined, refers to universal access to a wide range of financial
services at an affordable cost. These include banking products and financial services
such as insurance and equity products (The Committee on Financial Sector Reforms,
Chairman: Dr Raghuram G. Rajan). Financial inclusion develops a culture of savings
among the large segment of the rural population and plays a role in the process of
economic development of the society. Further, financial inclusion protects their
financial wealth and other resources in exigent circumstances by bringing low-income
groups within the perimeter of the formal banking sector. Financial inclusion also
mitigates the exploitation of weaker sections by the money lenders by facilitating easy
access to formal credit.
1.2.2 Reasons of Financial Exclusion
Consumers are not homogenous and the causes of exclusion are complex and
varied from consumer to consumer. In addition to this, the number of consumers
affected very much depends on the product sector. However, the Centre will focus its
efforts on two main target groups.
Financially excluded: a combination of low incomes and the economics of access in
retail financial services means that this group is not commercially feasible for
mainstream retail financial providers. On the other hand, consumers may face actual
exclusion because of a disability.
Underprovided: these are consumers who could manage to provide for their financial
needs but are not doing so due to demand and supply-side factors and barriers to
access.
 Environmental, market, and societal factors.

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  Consumers are increasingly becoming expected to use the financial services
industry for the future or protect themselves against risk. These trends may
increase the risk that the needs of weaker consumers are not met or consumers
fail to make enough provision for various reasons.
 Similarly, government and regulatory policy can have consequences on
consumers unintentionally contributing to the financial exclusion or making it
difficult for consumers to provide for themselves.
 On the other hand, financial services companies are adopting increasingly
complicated techniques to segment consumers into different groups according
to profitability or risk. This can lead to more consumers being priced out of
the market or deprived of access to products and services.
 Individual factors
 It includes income levels and other individual factors such as disability.
Income levels and affordability are among the main contributory factors to the
current levels of financial exclusion. Lower income Consumers may simply
not be able to afford financial services.
1.2.3 Financial Inclusion Initiatives
Advised all banks to open (BSBD) basic saving bank deposit accounts with
minimum common facilities such as no minimum balance, receipt/ credit of money
through electronic payment channels deposit and withdrawal of cash at bank branch
and ATMs, facility of providing ATM card.
Relaxed and simplified KYC norms to facilitate easy opening of bank
accounts, especially for small accounts with balances not more than Rs. 50,000 and
aggregate credits in the accounts, not more than Rs. 1 lakh a year Besides, banks are
allowed to use Aadhaar Card as proof of both address and identity.
Simplified Branch Authorization Policy, to address the matter of uneven
spread bank branches, domestic schedule commercial banks SCBs are permitted to
freely open branches in Tier 2 to Tier 6 centers with a population of less than 1 lakh.
In the North-Eastern States and Sikkim, domestic SCBs can freely open branches
without having any permission from the Reserve Bank of India.
Compulsory Requirement of Opening bank Branches in Un-banked Villages
and backward areas, banks are advised to allocate at least 25% of the total number of
branches to be opened during the year in un-banked (Tier 5 and Tier 6) rural areas.

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 Opening of mortar structure and intermediate brick, for effective,
documentation, cash management, redressal of customer grievances and banks have
been advised to open intermediate structures between Business Correspondent (BC)
locations and the present base branch. This branch could be in the form of a low-cost
simple brick and mortar structure consisting of minimum infrastructure such as a core
banking solution terminal connected to a passbook printer.
Public sector and private sector banks had been directed to submit board
approved 3-year Financial Inclusion Plan starting from April 2010. These policies aim
at keeping self-set targets in respect of BCs employed, rural brick and mortar
branches opened, BSBD accounts opened, coverage of un-banked villages with a
population above 2000, as well as below 2000, Kisan Credit Cards (KCCs), General
Credit Cards (GCCs) issued, and others. RBI has been monitoring these plans on a
monthly basis.
In June 2012, revised guidelines were issued on Financial Literacy Centers
(FLCs). Accordingly, it was advised that FLCs and all the rural branches of scheduled
commercial banks should expand financial literacy efforts through the conduct of
outdoor Financial Literacy Camps at least once a month, to facilitate financial
inclusion through the provision of two essentials, i.e., easy ‘Financial Access’ and
‘Financial Literacy’.
Financial inclusion is internationally considered a critical indicator of the
development and well-being of society. Inclusive banking began, in spirit, with the
nationalization of banks in 1969 and 1980 in India, the real push on financial
inclusion came in 2005 when the Reserve Bank of India highlighted its significance in
its annual policy statement of 2005-06. It urged banks to work towards reaching out to
the masses, offering banking services down to the surrounding area. The worrying
fact was the mass exclusion of the public from the formal banking system that stuck
economic growth at the bottom of the pyramid. Then onwards RBI began to influence
banks to include FI as a business objective. Globally, financial inclusion is considered
a critical indicator of the development and well-being of society. Financial inclusion
as a policy initiative entered the banking lexicon only after the recommendations of
the Rangarajan Committee in 2008. One of the main objectives of financial inclusion
is to pull the poor community out of the net of exploitative moneylenders. Despite
such emphasis, the penetration of banking services was initially mostly restricted to
urban areas and major cities, after which they started spreading to the hinterland.

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Financial inclusion thus became an integral part of the business domain of banks, with
the Reserve Bank of India advising all public and private sector banks to submit a
board-approved, three-year FI plan starting from April 2010. These plans broadly
included self-set targets in terms of brick-and-mortar branches in backward areas,
clearly indicating coverage of unbanked villages with a population of more than
2,000 and those with a population below 2,000; deployment of business
correspondents and use of electronic/kiosk modes for provision of financial services,
the opening of no-frills accounts, etc. For the dispensation of credit, Kisan Credit
Cards (KCCs), General Credit Cards (GCC), and other products designed to cater to
the financially excluded segments were introduced. Such accelerated microcredit was
part of the priority sector lending schemes of banks in India.
Besides this, RuPay – an Indian domestic debit card – was introduced on
March 26, 2012 by the National Payments Corporation of India (NPCI). It has been a
game-changer in creating better digital infrastructure and enabled faster penetration of
debit card culture in the nation. ‘Swabhimaan’ – a financial security program was also
launched by the Central Government to ensure banking facilities inhabitation with a
population above 2000 by March 2012. This nationwide program on financial
inclusion was launched in February 2011 with its focus on bringing the deprived
sections of the society into the banking network to ensure that the benefits of
economic growth reach everyone at all levels.
The biggest change came with the existence of ‘Pradhan Mantri Jan Dhan
Yojana (PMJDY)’ in August 2014. PMJDY has been designed to ensure accelerated
access to various financial services like basic savings bank accounts, affordable, need-
based credit, remittances facilities, and pension and insurance for excluded sections.
Such deep penetration at an affordable cost can only be possible with the effective use
of technology. However, the banking ecosystem operating on core banking mode, and
the ability of NPCI to the scale-up issue of Rupay debit cards has enabled effective
implementation of PMJDY. As a result of this, the number of new savings accounts
opened by the banking system has been phenomenal under the scheme. Added to the
ongoing financial inclusion schemes, financial literacy, and digital literacy campaigns
of banks were closely monitored by RBI. Financial inclusion got renewed thrust with
the launch of PMJDY because apex forums of RBI and Ministry of Finance
monitored its focus. This has added a new dimension to the progress of financial
inclusion by opening bank accounts on a large scale on a mission mode. The benefit

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of such mass accretion to the customer base is expected to provide a huge benefit to
consumers and banks in the coming years.
The initial target was to open bank accounts amounting to 7.5 crores by
January 2015 but most of the banks have over achieved the target and have been able
to open more than 13 crore bank accounts within the stipulated deadline. PMJDY is a
technology-based financial inclusion program implemented by the Government of
India. Unlike other financial inclusion programs, the objective of this scheme is not to
cover the rural population only. It covers both rural as well as urban populations. The
push-based strategy helped to move things ahead. The main challenges faced by the
previous programs were to keep the accounts active. To deal with this issue the
government has decided to link the transfer of various direct benefit social welfare
schemes with the Jan Dhan accounts. As the target is not to cover any particular
geographical area, the system can capture households who do not have bank accounts
or access to any kind of financial services. The wide application of technology like
mobile banking facilities, RuPay debit card, and e-KYC also helped the process to go
smoothly (M.R. Pani, 2017).
On January 20, 2015 this scheme entered into Guinness's Book of World
records setting a new record for 'The most bank accounts opened in one week'.
The balance in Jan Dhan’s accounts rose by more than 270 billion between
November 9, 2016 and November 23, 2016. In total, 1.9 million householders have
availed of the overdraft facility of 2.56 billion by May 2016. Uttar Pradesh and West
Bengal have got 25% of the total deposits under the scheme, whereas Kerala and Goa
became the first states in the country to provide one basic bank account to every
household.
The total number of account holders stood at 294.8 million, including 176.1
million account holders from rural and semi-urban bank branches. A total of 227
million RuPay cards have been issued by the National Payments Corporation of India
till August 2017. The number of deposits rose to 656.97 billion by August 2017.
Under this scheme, financial literacy program that aims to take financial
literacy up to the village level is provided for a better understanding of the whole
mechanism. The Mission also envisages the extension of Direct Benefit Transfer
under various Government Schemes through bank accounts of the recipients. The
Kisan Credit Cards are also being linked with the RuPay card platform. Micro
insurance to the people, and unorganized sector Pension schemes like Swavalamban
through the (BCs) have also been included for the second phase of the program.

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 The Pradhan Mantri Jan Dhan Yojana has a structured monitoring mechanism
from the central to the district level. The PMJDY scheme is different from the
Swabhimaan scheme of financial inclusion.
Table 1.1: Major Difference between Pradhan Mantri Jan Dhan Yojana and
Swabhimaan Scheme
Swabhimaan PMJDY
Villages with population greater than Focus on household; Sub Service Area (SSA)
2000 covered; thus limited geographical for coverage of the whole country.
coverage
Only rural Both rural and urban
Bank Mitr (Business correspondent) was Fixed point Bank Mitr (Business correspondent)
visiting on fixed days only in each SSA comprising of 1000-1500
households (3 to 4 villages on an average) to
visit other villages in the SSA on fixed days
Offline accounts opening - Technology Only online accounts in CBS of the bank
lock-in with the vendor
Focus on account opening and large Account opening to be integrated with DBT,
number of accounts remained dormant credit, insurance and pension
Inter-operability of accounts was not Inter-operability through RuPay Debit Card,
there AEPS etc.
No use of mobile banking Mobile wallet and USSD based mobile banking
to be utilized
Cumbersome KYC formalities Simplified KYC/e-KYC in place as per RBI
guidelines
No guidelines on the remuneration of the Minimum remuneration of the Bank Mitr
Bank Mitr (Business correspondent). (Business correspondent) to be ` 5000/- (Fixed +
Banks went generally with corporate Variable)
BCs who used to be least expensive to
them
A recent RBI survey finds that 47% of Viability and sustainability of Bank Mitr
Bank Mitr are untraceable (Business Correspondent) is identified as a
critical component
Monitoring left to banks Financial inclusion campaign in Mission Mode
with structured monitoring mechanism at
Centre, State and District level
Financial literacy had no focus The rural branches of banks to have a dedicated
Financial Literacy Cell
No active involvement of states / districts State level and District level monitoring
committees to be set up
No brand visibility of the Programe and Brand visibility for the programe and Bank Mitr
Bank Mitr (Business correspondent) (Business correspondent) proposed
Providing credit facilities was not OD limit after satisfactory operations / credit
encouraged history of 6 months
No grievance redressal mechanism Grievance redressal at the SLBC level in
respective states
Source: http://www.mindmapcharts.com

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 The scheme has been criticized by an opposition that this scheme has created
unnecessary work-burden on the public-sector banks. It has been claimed that poor
people deserve food more than bank accounts and financial security. Further, these
accounts have not yet added considerable profits to Public banks. According to the
experts, offers like free insurance, zero balance, and overdraft facility would result in
duplication. Many individuals who already have bank accounts may have had
accounts created for themselves, lured by the insurance covers and overdraft and other
facilities. As per the scheme, very few people are eligible to get life insurance worth
₹30,000 with a validity of just five years. The claimed overdraft facility has been
completely left upon the banks. As per the notice of the government, only those
people would get the overdraft facility whose transaction record has satisfactory
operations in their account for some time.
Besides, while the Indian Government was actively attempting to promote
financial inclusion through Jan Dhan scheme, the RBI, permitted banks to charge
customers for conducting ATM transactions beyond a certain number of times per
month. This effectively prohibited people from easily accessing their own savings and
discouraged them from using formal banking channels.
1.2.4 Conclusion
India has made an improvement in financial inclusion in the past few years.
However, financial inclusion is not one time effort, it is an ongoing process. It is a
very big project that needs concerted and team efforts from all the stake holders such
as financial institutions, public sector, private sector, the regulators, Government and
community at large. So GOI launched a comprehensive plan of financial inclusion
called PMJDY end task of the scheme providing social benefit schemes like pension,
micro insurance and other banking facilities to every citizen of India.

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