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Financial Inclusion | Meaning, Process, Benefits, Initiatives & RBI's Policy on Financial Inclusion

Financial Inclusion

What is Financial Inclusion ?

Meaning of Financial Inclusion

The Committee on Financial Inclusion has defined financial inclusion as "the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost".

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.

Process of Financial Inclusion

Financial inclusion is to be undertaken in three steps:
  1. Providing access to financial products and services. 
  2. Availability of financial products and services in a fair and equitable manner.
  3. Credit counselling which includes providing sound services to arrest deterioration of income, re-structuring of debt solution to overcome debt burden, and improve money-management skills.

Benefits of Financial Inclusion

The benefits of financial inclusion are as follows : 

1) Creating a Platform for Inculcating the Habit to Save Money : 
The lower income category has been living under the constant shadow of financial duress mainly because of the absence of savings. The absence of savings makes them a vulnerable lot. Presence of banking services and products aims to provide a critical tool to inculcate the habit to save. Capital formation in the country is also expected to be boosted once financial inclusion measures materialize, as people move away from traditional modes of parking their savings in land, buildings, bullion, etc.

2) Providing Formal Credit Avenues : 
So far the un-banked population has been vulnerably dependent of informal channels of credit like family, friends and moneylenders. Availability of adequate and transparent credit from formal banking channels shall allow the entrepreneurial spirit of the masses to increase outputs and prosperity in the countryside. A classic example of what easy and affordable availability of credit can do for the poor is the micro-finance sector.

3) Plug Gaps and Leaks in Public Subsidies and Welfare Programmes : 
A considerable sum of money that is meant for the poorest of poor does not actually reach them. While this money meanders through large system of government bureaucracy much of it is widely believed to leak and is unable to reach the intended parties. Government is therefore, pushing for direct cash transfers to beneficiaries through their bank accounts rather than subsidizing products and making cash payments. This laudable effort is expected to reduce government's subsidy bill (as it shall save that part of the subsidy that is leaked) and provide relief only to the real beneficiaries. All these efforts require an efficient and affordable banking system that can reach out to all. Therefore, there has been a push for financial inclusion.

RBI Initiatives For Financial Inclusion

RBI's Policy on Financial Inclusion : When bankers do not give the desired attention to certain areas, the regulators have to step into remedy the situation. This is the reason why the Reserve Bank of India places a lot of emphasis on financial inclusion. 

1) No-Frills' Account :
In the Mid Term Review of the Policy (2005-06), RBI exhorted the banks, with a view to achieving greater financial inclusion, to make available a basic banking 'no frills' account either with NIL' or very minimum balances as well as charges that would make such accounts accessible 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. All banks are urged to give wide publicity to the facility of such to frills' account, so as to ensure greater financial inclusion.

2) Simplification of 'Know Your Customer (KYC)' Norms :
  • i) Banks are required to provide a choice of a 'no frills account where the minimum balance is nil or very small I but having restrictions on number of withdrawals, etc., to facilitate easy access to bank accounts. 
  • ii) Further, in order to ensure that persons belonging to low income group both in urban and rural areas do not face difficulty in opening the bank accounts due to the procedural hassles, the 'KYC procedure for opening accounts for those persons who intend to keep balances not exceeding rupees fifty thousand (50,000/-) in all their a accounts taken and the total credit in together and t expected to exceed rupees one lakh (1,00,000/-) i the accounts taken together is not in a year has been simplified to enable those belonging to low income groups without documents of identity and proof of residence to open banks accounts. In such cases banks can take introduction from an account holder on whom full KYC procedure has been completed and has had satisfactory transactions with the bank for at least six months. Photograph of the customer who proposes to open the account and his address need to be certified by the introducer.

3) Ensuring Reasonableness of Bank Charges : 
As the Reserve Bank has been receiving several representations from public about unreasonable service charges being levied by banks, the existing institutional mechanism in this regard is not adequate. Accordingly, and in order to ensure fair practices in banking services, the RB! has issued instructions to banks making it obligatory for them to display and continue to keep updated, in their offices/branches as also in their website, the details of various services charges in a format prescribed by it. The Reserve Bank has also decided to place details relating to service charges of individual banks for the most common services in its website.

Various Initiatives Undertaken for Financial Inclusion

Following steps are taken by banks to meet the goal of financial inclusion : 

1) In 1992, the SHG-bank linkage programme and in 1998, Kisan Credit Cards (KCCs) for providing credit to farmers were introduced by NABARD, with policy support from the RBI. Under the SHG-bank linkage programme, banks provide the resources, while the Non-Government Organisations (NGOs) act as agencies to organise the poor, build their capacities, and facilitate the process of empowering them. In 1998, those SHGS that were engaged in promoting the saving habits among their members were made eligible to open savings bank accounts.

2) In April 2005, "financial inclusion' was explicitly made as a major policy objective and in November 2005, banks were advised to make available a basic banking 'no frills' account with low or nil minimum balances through simplified Know-Your-Customer (KYC) procedures as well as charges to expand the outreach of such accounts to vast sections of the population. The KYC procedure for opening accounts was simplified for those accounts with balances not exceeding 150,000 and credit limits not exceeding 1,00,000 in a year.

3) In January 2006, the RBI permitted banks to utilise the services of NGOs/SHGs, MFIs (other than NBFCs) and other civil-society organisations, as intermediaries, for providing financial and banking services through the use of a Business Facilitator (BF) and Business Correspondent (BC) models. Banks use BFs for :
  • Identification of borrowers and fitment of activities.
  • Collection and preliminary processing of loan applications including verification of primary information/data.
  • Creating awareness about savings and other products and education and advice on managing money and debt counselling.
  • Processing and submission of applications to banks.
  • Promotion and nurturing self-help groups/joint-liability groups.
  • Post-sanction monitoring. 
  • Monitoring and hand-holding of self-help groups/joint-liability groups/credit groups/others.
  • Follow-up for recovery.

4) Based on the recommendations of the C. Rangarajan Committee Report on Financial Inclusion, the government has set-up two funds :

i) Financial Inclusion Fund (FIF) : 
It supports developmental and promotional activities for ensuring financial inclusion.

ii) Financial Inclusion Technology Fund (FITF) : 
It enhances investment in Information Communication Technology (ICT) for promoting financial inclusion.

Achievement of Financial Inclusion Plan of Banks 

Financial Inclusion in India Statistics :

Banks has adopted a structured and planned approach to financial inclusion with commitment at the highest levels, through preparation of Board approved Financial Inclusion Plans (FIPs). The first phase of FIPs was implemented over the period 2010-2013. The Reserve Bank has sought to use the FIPs as the basis for Fl initiatives at the bank level. RBI has put in place a structured, comprehensive monitoring mechanism for evaluating banks performance against their FIP plans. The progress made by banks under the FIPs for key parameters, during the three year period is as under :
  1. Nearly 2,68,000 banking outlets have been set up in villages as on March 13, as against 67,694 banking outlet in villages in March 2010.
  2. About 7400 rural branches opened during this period.
  3. Nearly 109 million Basic Savings Bank Deposit Accounts (BSBDAs) have been added, taking the total no. of BSBDAs to 182 million. Share of ICT based accounts have increased substantially - Percentage of ICT accounts to total BSBDAs has increased from 25% in March 10 to 45% in March 13.
  4. With the addition of nearly 9.48 million farm sector households during this period, 33.8 million households have been provided with small entrepreneurial credit as at the end of March 2013. 
  5. With the addition of nearly 2.25 million non farm sector households during this period, 3.6 million households have been provided with small entrepreneurial credit as at the end of March 2013. 
  6. About 4904 lakh transactions have been carried out in ICT based accounts through BCs during the three year period.
The number of banked centres in the country between 1991 and 2007 had actually come down (from 35,236 to 34,471). Second, the number of rural branches during the same period had also declined significantly (from 35,206 to 30,409). Against this backdrop, the progress made during 2010-13 is certainly remarkable.

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