FINANCIAL INCLUSION

MEANING

Financial inclusion is the delivery of financial services at affordable costs to sections of disadvantaged and low income segments of society. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. It is argued that 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 public policy. The term "financial inclusion" has gained importance since the early 2000s. Financial inclusion is now a common objective for many central banks among the developing nations. The Committee on Financial Inclusion headed by Dr. Rangarajan has defined Financial Inclusion as "the process of ensuring access to financial services and Timely & adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. The Committee suggested several measures to accelerate the pace of financial inclusion. The various financial services include access to savings, Loan, insurance, payments and remittance facilities to the entire population Without discrimination of any type.

Steps to ensure Financial Inclusion 1. Opening No-frills SB accounts 2. Issuing General Purpose Credit Cards 3. Granting Overdraft facilities in SB accounts 4. Providing banking services at the door step of villagers through Smart Cards. Reserve Bank of India advised banks to provide banking outlet in villages. Banks decided to extend banking services to these allotted villages through Smart Card Banking with the use of Business Correspondents (BC). Smart Card Banking (SCB) Financial inclusion is just opposite of financial exclusion where people are deprived of banking services they are:Marginal Farmer for whom farming is a major livelihood activity suffered neglect by policy makers.

Landless Farmers who are unemployed

Self Employed

 Urban slum developers Migrants

Minorities Social excluded groups Senior citizens Women

Reasons for financial exclusion Remote, hilly & sparsely populated areas with poor infrastructure and difficult physical access

Lack of awareness, low income, social exclusion, illiteracy

Distance from bank branch, branch timings, cumbersome documentation/procedures, unsuitable

products, language, staff attitude reasons Higher transaction cost Ease of availability of informal credit

are

common

KYC documentary proof of identity/ address

RBIs contribution towards Financial Inclusion Liberalized branch expansion

1.

2. No-Frill Accounts 3. Overdraft in Saving Bank Accounts 4. Liberalized policy for ATM 5. Introducing technology products and services 6. pre-Paid cards, Mobile Banking etc. 7. Allowing RRBs / Co-operative banks to sell Insurance and Financial Products 8. Financial Literacy Program

9. Creation of Special Funds

Challenges Enrollment of large numbers Wide geographic spread High maintenance costs for accounts Small ticket size of transaction Illiteracy and use of vernacular Product & service pricing Trust and acceptance Lack of electricity

Poor telecommunications

4. The scope of financial inclusion

The scope of financial inclusion can be expanded in two ways. (a) through state-driven intervention by way of statutory enactments ( for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France). (b) through voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society. When bankers do not give the desired attention to certain areas, the regulators have to step in to remedy the

situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion.

In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a much wider perspective. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and exclusion. At one extreme, it is possible to identify the super-included, i.e., those customers who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products. At the other extreme, we may have the financially excluded, who are denied access to even the most basic of financial products. In between are those who use the banking services only for deposits and withdrawals of money. But these persons may have only restricted access to the

financial system, and may not enjoy the flexibility of access offered to more affluent customers.

Microfinance
Microfinance is the provision of financial services to lowincome clients or solidarity lending groups including consumers and the self-employed, who traditionally lack access to banking and related services. More broadly, it is a movement whose object is "a world in which as many poor and near-poor households as possible have permanent access to an appropriate range of high quality financial services, including not just credit but also savings, insurance, and fund transfers. Those who promote microfinance generally believe that such access will help poor people out of poverty. Microfinance is a broad category of services, which includes microcredit. Microcredit is provision of credit services to poor clients. Although microcredit is one of the aspects of microfinance, conflation of the two terms is endemic in public discourse. Critics often attack microcredit while referring to it indiscriminately as either 'microcredit' or 'microfinance'. Due to the broad range of microfinance services, it is difficult to assess impact, and very few studies have tried to assess its full impact

Financial Needs Of The People In developing economies and particularly in the rural areas, many activities that would be classified in the developed world as financial are not monetized: that is, money is not used to carry them out. Almost by definition, poor people have very little money. But circumstances often arise in their lives in which they need money or the things money can buy. In Stuart Rutherfords recent book The Poor and Their Money, he cites several types of needs:[ Lifecycle Needs: such as weddings, funerals, childbirth, education, homebuilding, widowhood, old age. Personal Emergencies: such as sickness, injury, unemployment, theft, harassment or death. Disasters: such as fires, floods, cyclones and manmade events like war or bulldozing of dwellings. Investment Opportunities: expanding a business, buying land or equipment, improving housing, securing a job (which often requires paying a large bribe), etc.

Poor people find creative and often collaborative ways to meet these needs, primarily through creating and exchanging different forms of non-cash value. Common substitutes for cash vary from country to country but typically include livestock, grains, jewelry, and precious metals.

No Frills Account 'No Frills 'account is a basic banking account. Such account requires either nil minimumbalance or very low minimum balance. Charges applicable to such accounts are low. Services available to such account is limited. In what can be described as a watershed Annual Policy Statement, the RBI in 2005-06 called upon Indian banks to design a no frills account a no precondition, low minimumbalance maintenance account with simplified KYC (Know Your Customer) norms. To understand the ramifications and the sheer magnitude of possibilities, think of the image of a daily wage earner owning a deposit account in a bank. The idea is to have a level playing field in its absolute meaning. Low income groups having no access to formal banking systems can well be brought under the umbrella of credit & savings key factors which form the basis of the idea of financial inclusion. While there is no shortage of credit programs, the equally important savings

aspect can rightly be dubbed as the forgotten half of microfinance. No frills savings accounts appear capable, at least on paper, to cater to the small and also irregular income flows of the poor. The no-frills savings bank account introduced by several commercial banks a few months ago had all the potential to revolutionise India's rural agricultural economy, as well as usher in the banking habit amongst a large number of the less privileged population. However, the product was lost among a myriad of financial offerings and most banks have shown little verve and vitality in marketing it. No frills account: Eligibility: Pensioners, agriculture laborers, employees of unorganized sector, member of SHG, self-employed person, students, rural folk etc. Not eligible-Institutions, organization, NRI, bank staff zero minimum balance requirement i.e. you can maintain this account without any minimum or average balance requirement. Features & Benefits :

Internet Banking and Phone Banking facility each available Keep track of your account with Free quarterly statements. You also have an option to receive EStatement. Simplified KYC norms As part of Know Your Customer (KYC) principle, RBI has issued several guidelines relating to identification of depositors and advised the banks to putin place systems and procedures to help control financial frauds, identify money laundering and suspicious activities, and for scrutiny/monitoring of large value cash transactions. Instructions have also been issued by the RBI from time to time advising banks to be vigilant while opening accounts for new customers to prevent misuse of the banking system for perpetration of frauds. Gists of the past circulars issued on the subjects under reference are listed in the Annexure. Taking into account recent developments, both domestic and international, it has been decided to reiterate and consolidate the extant instructions on KYC norms and cash transactions. The following guidelines reinforce our earlier instructions on the subject with a view to safeguarding banks from being unwittingly used for the transfer or deposit of funds derived from

criminal activity (both in respect of deposit and borrowal accounts), or for financing of terrorism. The guidelines are also applicable to foreign currency accounts/transactions

KYC norms deter rural clients

Another reason is Know Your Client (KYC) norms where every account holder has to disclose relevant detail like photo identity, address proof, PAN card above a certain amount, etc. For rural people it is very difficult to provide these details as a number of them are not literate especially not in English and documents are generally maintained in English. If a rural person does not have his own residence, it is a tedious job to prove his address. In that case, the person prefers not to come to the bank and goes to the local moneylender who does not ask for such documentation

Simplified KYC Norms

Opening of account is an Herculean task for common man since it warrants to fulfill KYC norms i.e. submission of address proof and identity proof, where as majority of rural/urban poor do not possess them. To facilitate persons belonging to low income group both in urban/ rural areas, RBI introduced simplified norms (with out documentary proof) to open accounts for those persons who intend to keep balances not exceeding Rs.50000/- in all their accounts taken together and the total credit in all the accounts taken together is not expected to exceed Rs.100000/- in a year. However, these accounts requires introduction of existing KYC complaint account holder. Photograph and address of the customer who proposes to open the account need to be certified by the introducer. Opening No frills accounts with simplified KYC norms is only the first step in building the relationship which would require sustained efforts on the part of Banks and Customers to achieve the objective of Financial Inclusion. However, in rural areas customers cannot be expected to come to branches in view of opportunity cost and Time and hence banks will have to reach out through a variety of technology driven delivery channels such as Micro ATMs, Biometric ATMs, Mobile ATMs, Smart Cards, UID number, Mobile Banking, Post offices, e-seva etc.

Technology for financial inclusion

Extremely large target population current Banking systems service merely 33% of total population Customer profile different Very low Literacy levels and Awareness Business Processes need reengineering Existing processes cannot produce desired results Independent Delivery Agencies Deployment of Business correspondents/ Facilitators

Latest trends in Technology

Cost-effective state-of-the-art technologies are available today

Capture Customer details and facilitate Unique Identification Provide non-repudiable and userfriendly authentication mechanism Ensure reliable connectivity upto the last mile Offer Financial products tailored for the target group Support comprehensive Credit Information System Support use of multimedia and innovative User Interfaces Work in rural environmental conditions Low Capital and Maintenance costs