A PROJECT REPORT ON

FINANCIAL INCLUSION

SANDEEP SINGH 11020941005

INTRODUCTION India is the third largest economy in the world on purchasing power parity (PPP) as per 2011 list by International Monetary Fund (IMF). In the economic survey 2012, the GDP growth of the country for 2013-14 is predicted to be 8.6 %. This rapid expansion is expected to continue as growth in the services and high technology manufacturing sector accelerates. Agriculture, which continues to support 60% of the population, has grown by mere 4.4% in 2010-11. In addition, the organized sector employment presently comprises less than 10% of the workforce, leaving the vast majority of the working population with irregular income streams. Notwithstanding the rapid increase in overall GDP and per capita income in recent years, a significant proportion of the population in both rural and urban areas still experiences difficulties in accessing the formal financial system. There is currently a perception that there are a large number of people, potential entrepreneurs, small enterprises and others, who may not have adequate access to the financial sector, which could lead to their marginalization and denial of opportunity to grow and prosper. FINANCIAL INCLUSION Financial Inclusion is the process of 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 mainstream institutional players. In advanced economies, Financial Inclusion is more about the knowledge of fair and transparent financial products and a focus on financial literacy. In emerging economies, it is a question of both access to financial products and knowledge about their fairness and transparency. EXTENT OF FINANCIAL EXCLUSION IN INDIA: Only 55 per cent of the population of India has deposit accounts and 9 per cent have credit accounts with banks. India has the highest number of households (145 million) excluded from Banking. There was only one bank branch per 14,000 people. 6 lakh villages in India, rural branches of SCBs including RRBs number 33,495. Only a little less than 20% of the population has any kind of life insurance and 9.6% of the population has nonlife insurance coverage. Just 18 per cent had debit cards and less than 2 per cent had credit cards.

CAUSES OF FINANCIAL EXCLUSION There are two causes of financial exclusion- Demand side barriers & supply side barriers. A. Demand side barriers:

1. Cultural factors - Women are often disadvantaged by credit requirements such as collateral since in most of the cases property is registered under their husbands name and they are to seek male guarantees to borrow. 2. Mistrust of financial institutions - The feeling that there is no point in applying for financial products because he/she expects to be refused as banks are not interested to look into their cause has led to self-exclusion for many of the low income groups. 3. Level of income - A higher share of population below the poverty line results in lower demand for financial services as the poor may not have savings to place as deposit in savings banks. 4. Financial literacy and skills capacity High information barriers, low awareness and limited literacy, particularly financial literacy, i.e., basic mathematics, business finance skills as well as lack of understanding often constrain demand for financial services. B. Supply side barriers: 1. Location constraints Absence of physical infrastructure in interior-most parts of the country leads to difficulties in accessing financial institutions (like banks, etc) resulting in a substantial proportion of households in rural and remote areas being kept outside the ambit of the formal financial system. 2. Real and perceived risk in lending - The perceived risk of lending to the poor is higher than the real risk, creating a supply barrier by triggering higher than necessary transactions costs due to stricter than needed prudential requirements. 3. Approaches and products - Generally, financial services tend to be concentrated in urban areas, allowing rural clients little access to services and information for making well grounded decisions. 4. Financial viability of MFIs - MFI practitioners encounters difficulties in having a double bottom line at the same time aiming to be profitable and stimulating local economic development.

FINANCIAL INCLUSION- STEPS TAKEN IN THE PAST: 1. 2. 3. 4. 5. 6. 7. Co-operative Movement Setting up of State Bank of India Nationalization of Banks Lead bank scheme Regional Rural Banks (RRBs) Service area approach Self Help Groups

REASONS FOR NOT BEING SUCCESSFUL: Though the Government took up a lot of steps to eradicate the problem of financial illiteracy and unawareness, still failed to accomplish the objectives, the few reasons for which are : 1. Absence of Banking Technology 2. Absence of reach and coverage

3. Absence of viable delivery mechanism 4. Rich have no compassion for poor. APPROACHES ADOPTED BY RBI FOR FINANCIAL INCLUSION: Achieving planned, sustained and structured Financial inclusion Technology: All Bank branches must be on Core Banking Solution (CBS). All Regional Rural Banks (RRBs) to be on CBS by September 2011. Multi-channel approach (Handheld devices, mobiles, cards, Micro-ATMs, Branches, Kiosks, etc.) Front-end devices transactions must be seamlessly integrated with the banks CBS. Villages will be covered by banking service either by the bank branch or business correspondent. Availability of the minimum following four products: A basic No-Frills banking account with overdraft facility A Remittance Product for Electronic Benefit Transfer and other remittances A Pure Savings Product, ideally a recurring deposit. Entrepreneurial Credit such as General Credit Card (GCC), Kisan Credit Card (KCC).

THINGS THAT HAS BEEN DONE SO FAR: ICT based Business Correspondent (BC) Model for low cost door step banking services in remote villages. Board approved Financial Inclusion Plans (FIPs) of banks for 3 years, starting April 2010. Roadmap to cover villages of above 2000 population by march 2012. Availability of minimum four banking products through ICT model has been ensured. Mandatory opening of 25% of new branches in unbanked rural centers. KYC documentation requirements significantly simplified for small accounts. Interest rates on advances totally deregulated.

FINANCIAL INCLUSION & FINANCIAL LITERACY: Financial Inclusion and Financial Literacy are twin pillars. While Financial Inclusion acts from supply side providing the financial services on what people demand, Financial Literacy stimulates the demand side i.e making people aware of what they can demand. A. Financial Literacy Demand Side: Financial literacy and credit counseling centers. Credit absorption capacity Knowledge of products Need for total product and services. B. Financial inclusion- supply side: Financial Markets, banks and services Appropriate design of products and services.

INITIATIVES TAKEN BY RBI IN PROMOTING THE FINANCIAL LITERACY: Persuading State Governments for including Financial Education in the school curriculum. Advising Banks to setup Financial Literacy & Credit Counseling Centers in all districts. RBI has conducted outreach activities across the country focusing on the twin objectives of financial inclusion and financial literacy in which the Top management like Governor/ Deputy Governors / Executive Directors of RBI directly participate. 160 remote unbanked villages selected by RBI for transformation into Model Villages characterized by 100% Financial Inclusion through ICT initiatives, leveraging on BCs. Project Financial Literacy- Publication of Comic Books, Setting up Multi-lingual Financial Education Website, Release of a Book titled I can do Financial Planning on Financial Education, Essay Writing Competition and other events. Organizing Town Hall Events and release of films on Financial Literacy.