Chapter 2 Financial Exclusion

Chapter: 2
FINANCIAL EXCLUSION:
CONCEPTS, THEORETICAL UNDERPINNINGS
AND THE RESEARCH METHODOLOGY

2.1 Introduction
2.2 Defining Financial Exclusion
2.3 ‘Access’ v/s ‘Use’ of Financial Services
2.4 ‘Exclusion’ v/s ‘Access’
2.5 Active and Passive Exclusion
2.6 Unfair Exclusion and Unfair Inclusion
2.7 Individual Exclusion and Group Exclusion
2.8 Voluntary v/s Involuntary Exclusion
2.9 The Approach to Financial Access and Use
2.10 Theories of Financial Exclusion
2.11 Access Problem in Credit Markets: Supply and Demand Side Explanation
2.12 Historical Genesis of Financial Exclusion
2.13 Research Methodology: An Introduction
 

2.1 Introduction

This chapter discusses the concepts and theoretical underpinnings of the problem
of financial exclusion besides elaborating on the research methodology adopted in the
present study. Apart from this, this chapter also intends to provide the historical
evolution of exchange economy and finance to illustrate the importance that has been
growingly attached to the tool of finance in the present exchange system. This chapter
also elaborates on how finance becomes imperative for a socially controlled and
culturally rigid people like the tribes.

2.2 Defining Financial Exclusion

Defining financial exclusion is a very complex and difficult task as many

academicians have attempted to define it in divergent ways. One could categorize the
definitions under two heads: One is based on banking experts’ perceptions of defining
financial exclusion, and the second is based on how the pure and unbiased financial

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economists define it. The former form of definitions carries a very narrow but technical
meaning of financial exclusion that is the people having no bank account are considered
as financially excluded whereas the latter defines it from the perspective of an array of
financial services. Our study focuses on this latter form of definition. Nevertheless, a
detailed account of important definitions of financial exclusion is worthwhile as it helps
one to comprehend the broad meaning of this phenomenon.

If one attempts to trace out the origin of the term financial exclusion, it can be
seen that this term first came into the financial literature in 1993 to describe a situation
of limited physical access to banking services on account of bank closures (Sinclair,
McHardy, Dobbie, Lindsay, & Gillespie, 2009) . It means that in its original form
financial exclusion meant not the lack of access to financial products like banking and
insurance, which ameliorate the vulnerability of the people, but merely the lack of
geographical access to banks. Nevertheless, it was in 1999 the term financial exclusion
began to be used to designate the condition of not having access to mainstream financial
services (Kempson & Whyley, Kept out or Opted out?: Understanding and Combating
Financial Exclusion, 1999). Still, the concept of financial exclusion undergoes changes
as many writers both academicians and policy makers have been attempting to enrich
the literature on financial exclusion. According to the objective of their study, they
define financial exclusion in ways suitable to them. Nevertheless, it has been observed
that most of the writers have defined financial exclusion in narrow way, or in other
words, they have confined the scope of financial exclusion to not having bank accounts
as if are talking not about the larger and complex issue of financial exclusion rather the
very limited issue of banking exclusion. Notwithstanding this, it deserves to be
mentioned that having an account with the formal banking is the first step towards
financial inclusion although but it is not the last and the sole element of financial
inclusion.

Thus, it is obvious that the term financial exclusion has a broad range of
definitions. Research carried out and discussions held among experts lead us to propose
the following definition: Financial exclusion refers to a process whereby people
encounter difficulties accessing and/or using financial services and products in the
mainstream market that are appropriate to their needs and enable them to lead a normal
social life in society to which they belong. The above definition of financial exclusion

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obviously reveals that financial exclusion is the culmination of a long process of

inaccessibility that certain groups of people like the tribes in the present study face in
getting access to financial products. To put it in a simplified form, a person can be said
to be financial excluded if he or she does not possess either a saving account or a loan
account with a formal financial institution, most probably a banking institution.
However, this criterion of defining a person as financially excluded appears to be very
narrow, as it does not involve many other relevant dimensions of financial exclusion
like exclusion from insurance and pension system, which also help them to withstand
vulnerabilities. Financial exclusion is being viewed as a barrier towards accomplishing
the goal of financial inclusion. Viewing from that point, it appears that financial
exclusion ‘is a confluence of multiple barriers: lack of access, lack of physical and
social infrastructure, lack of understanding and knowledge, lack of technology, lack of
support, lack of confidence, among others’ (Rao, 2007). Breaking these barriers is the
key to achieve ‘financially inclusive growth’.

Unsurprisingly, financial exclusion appears to have been associated with social

and economic exclusion. Some definitions of financial exclusion appear to have
encompassed this association in a meaningful manner. Let us have a bird’s eye view of
such definitions. First, financial exclusion has been defined in the literature in the
context of the larger issue of social inclusion (or exclusion) in a society. Leyshon &
Thrift (1995) define financial exclusion as referring to those processes that serve to
prevent certain social groups (like the tribes in the present study) and individuals from
gaining access to the financial system. According to Sinclair (2001), financial exclusion
means the inability to access necessary financial services in an appropriate form. Mohan
(2006) opined ‘financial exclusion signifies the lack of access by certain segments of
society to appropriate, low-cost, fair, and safe financial products and services from
mainstream providers’. Similar views were expressed by Thorat (2008) that ‘by
financial inclusion we mean the provision of affordable financial services, (viz. access
to payments and remittance facilities, savings, loans and insurance services) by the
formal financial system to those who tend to be excluded’. Thus, almost all of these
definitions emphasise financial exclusion to be the manifestation of a much broader
issue of social exclusion of certain societal groups such as the poor and the
disadvantaged. For the purpose of this paper, we define financial exclusion as a process
that fails to ensure the ease of access, availability and usage of the formal financial

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system for all members of an economy. This definition emphasizes several dimensions
of financial exclusion, viz. accessibility, availability and usage of the financial services.
As highlighted by international commentators, financial exclusion is complex and
multidimensional and can come about because of a range of problems with access,
conditions, price, marketing or self-exclusion (Kempson, Whyley, Caskey, & Collard,
2000). These dimensions together build an inclusive financial system.

As banks are the gateway to most basic forms of financial services, financial
exclusion is often used as analogous to banking inclusion/exclusion. Those who are
excluded by the banks are often termed as “unbanked” (Russell, Maitre, & Donnelly,
2011). These are people without any form of transactional bank account. Associated
with this notion is the concept of “under banked”, i.e. those who have a bank account
but do not use it regularly or adequately to manage their money. These are also
sometimes referred to as “marginally banked”. The literature also points out that there
are gradations of financial exclusion. These range from those who are “hyper-included”
to those who are “unbanked” and have no access to mainstream financial services. In
between these extremes fall the under banked or the marginally banked (Kempson et al,
2000). Banking services have become progressively more important due to
financialization of social relationships i.e. social relations are increasingly expressed in
monetary terms (Gloukoviezoff, 2007). Consequently, the majority of consumers now
have a bank account. A proportion of the population, however, remains excluded from
banking and other financial services. In this way, financial exclusion is exclusion from
affordable and appropriate financial products, including bank accounts, current
accounts, credit, savings and insurance. Low-income consumers are at great risk of
financial exclusion and being financially excluded not only prevents people from
escaping from poverty, but can also result in people falling into poverty. Simply put,
financial exclusion is the inability to access necessary financial services in an
appropriate form. A number of aspects, or dimensions, of financial exclusion have been
identified which are described as follows (FSA, 2006).

1. Access Exclusion: sometimes access to financial services particularly banking

services may be restricted to some segments of population through the process
of risk assessment. Banks consider lending to these people as more risky, and
hence opening the door to such people is considered unwise for the banks.

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2. Condition Exclusion: Financial products come along with some conditions like
prescribing margin, which are discretionary for the financial official to decide.
Such conditions may turn out to be disastrous for the interest of the low income
and socially disadvantaged population. Because of these conditions attached
with financial products, people may find it futile to approach banks for getting
access to services.
3. Price Exclusion: The price of financial products mainly the interest rate that the
financial institutions charge may not be affordable to the people. Nevertheless,
this has been questioned by some works in India, which argue that most of the
needy borrowers are not sensitive to interest rate. If some have credit at interest
rates unaffordable to them due to compulsions, in future it is likely that they may
be drawn into abject debt trap, as they would find it difficult to make timely
repayment of the credit.
4. Marketing Exclusion: Today financial institutions adopt marketing strategies
aiming at credit worthy individuals. Financial products have been designed and
marketed in such a way they appeal most to the well-today segments of the
population. Thus, thanks to the marketing strategy of the profit-oriented
financial institutions, some people are effectively excluded.
5. Self-Exclusion: Most of the studies on financial exclusion have highlighted self-
exclusion as an important driving force of financial exclusion. People decide
themselves that there is no use in applying for financial products as they think
that the financial services providers would mercilessly refuse their request for
such things. They arrive at these conclusions because of their experiences with
the financial system.

2.2.1 Developing a working definition of Financial Exclusion

Having discussed a wide array of definitions pertaining to financial exclusion,

the next attempt is to develop a definition of financial exclusion that best serves the
purpose of this study. From the review of the above definition, it is obvious that finance
means an array of products, which enable the people to transfer resources from one
point of time to another point of time, or from one form to another form, or from one
location to another location so as to address different type of vulnerabilities that they are
likely to face. From an array of financial products, the study chooses only three viz.

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bank account, credit, and insurance. In the following sections on the extent of financial
exclusion, a detailed account of the exclusion of tribes from the pension system is also
illustrated. However, as tribes hold pension largely not because of demand for it but due
to supply side reasons, from the measurement of the degree of financial exclusion
pension has been omitted. There are many related concepts pertaining to the broader
issue of financial exclusion/inclusion. Now, the study intends to provide a brief account
of such concepts, which are deemed important for understanding the issue of financial
exclusion among the tribes.

2.3 ‘Access’ v/s ‘Use’ of Financial Services

While dealing with the issues of financial exclusion one must be conversant with
the distinction between two seemingly similar words viz. access and use. In a
straightforward commonsensical view, access is just conveying the same meaning of
“supply”, while the ‘use’ connotes both demand and supply (WB, 2008). A bank
existing in a locality ensures the availability of necessary financial products in that
locality. That means use is driven by both demand and supply. Alternatively, to use a
thing first we must have the demand for that thing, and then there must be a source to
supply the thing. The same is the case with finance as well. In the advanced economies
even, the wealthy customers, despite having accessing to all kinds of financial services,
may be inclined not to use such services.

2.4 ‘Exclusion’ v/s ‘Access’

Experts opine that instead of using the term financial ‘exclusion’, ‘access’ to
finance must be used in the context of developing countries. This is because access to
financial services is the preserve of a minute minority in low income countries whereas
in advanced industrial economies, most of the people have access to financial services
as the financial infrastructure is relatively well developed, and that means ‘access’ is not
a built in problem in such countries (Carbo, Gardner, & Molyneux, 2005). Nevertheless,
in advanced economies still some 4 to 6 percent of people are ‘excluded’ as they keep
themselves out of the financial framework. Putting it differently, exclusion is more
active whereas access is passive in the sense that in the case of the former, despite
having intention to be included in the financial system people are denied access due to
supply side bottlenecks and policy issues. It is to be noted here that the ‘percentage rate

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of access in poor countries is about equal to the percentage rate of excluded in the
advanced industrial economies’. Accepting this view we may argue that in Indian
context there is nothing wrong in using the word ‘exclusion’ as we have initiated supply
side interventions like offering no-frill accounts aiming at cent percent financial
inclusion. In simple parlance, ‘access’ is a supply side issue where as ‘exclusion’ can be
taken to be a demand side issue.

2.5 Active and Passive Exclusion

Exclusion of any kind can be active and passive. This distinction is immensely
useful when we search for the nature and causes of exclusionary process. Precisely the
significance of this distinction lies in identifying solutions to address the problem of
financial exclusion. As in the case of any form of exclusion, the above said matter turns
out to be equally relevant in the process of financial exclusion as well.

2.5.1 Active exclusion

Exclusion is said to be active when it happens not because of any process or the
interplay of variables working within the system. Active exclusion is the fall out of
deliberate attempts of the host communities and the systems working therein to
deliberately exclude someone from having access to what people inhibiting in that
system enjoys. History is flooded with the instances of such active exclusionary process.
Active exclusion does not require an in depth study to unearth the factors leading to it,
and the solution to such kind of exclusion can be swiftly taken by the government
through some legislative measures or government orders.

2.5.2 Passive Exclusion

Passive Exclusion on the other hand results from factors working within the
system (endogenous factors) and consequently it becomes pertinent to seek researchers’
assistance to enquire into the factors leading to the development of passive exclusion.
What distinguishes passive exclusion from active exclusion is that the former is not the
outcome of any deliberate attempts to exclude some categories of people from having
access to what they intend to. Such exclusion happens as an offshoot of policies
followed by government. Applying Sen’s views (Sen, 2000) on the distinction between

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active and passive exclusion to the context of finance, one could see that passive
financial exclusion, which is the fallout of policy induced decisions and behavioral
issues of the clients of the financial sector, needs to be cogitated. Nevertheless,
geographical desertification, which often happens following the closure of a bank
branch in a specific geographical area, can be resolved overnight with a direction to
retain the bank in the same locality.

2.6 Unfair Exclusion and Unfair Inclusion

It would be interesting to explore the distinction between unfair exclusion and

unfair Inclusion, which is contextually fitting especially in this study, and these two
concepts have assumed unquestionable place in the literature pertaining to social
exclusion in recent years (Sen, 2000). It is a general perception that people in a society
can have legitimate access to all type of rights being bestowed upon them by that
society either constituently, if it happens to be a democratic republic, or customarily.
Nevertheless, sometimes individuals forming a part of specified social group viz.
Scheduled Tribes and Scheduled Castes are denied the same equal access to all rights
and privileges, owing mainly to the social identities of these individual, then such a state
of affairs give rise to the issue of unfair exclusion.

On the other hand, unfair inclusion, albeit sounds as if inclusion has happened,
connotes a seemingly different but dangerous situation where individuals from the
above said social groups, may have gained access but on discriminative terms and
conditions most probably unsuitable to serve their basic interest. In the present context
of unraveling the extent and degree of financial exclusion of the socially and
economically disadvantaged, like the unfair exclusion, it is possible to place the concept
of unfair inclusion as well in a suitable way. A typical instance of ‘unfair inclusion’ is
banks’ attitude of denying different financial products to the holders of accounts. To
fulfill the target of financial inclusion, banks offer accounts to hitherto excluded, but
when the newly included people approach banks for many other products like credit, the
managers of banks may impose some discriminative restrictions in their own interest,
which may go against the interests of these customers.

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2.7 Individual Exclusion and Group Exclusion

This is another set of concepts frequently used in the context of studies relating
to exclusion particularly social exclusion, which may find some reflections in the
present study as well. As these concepts plainly sound their meanings, further
explanation seems to be unwarranted. What needs to be stated is that in the present
study, the researcher confronts with the case of group exclusion rather than individual
exclusion as the purpose is to study the problem of financial exclusion of the socially
and economically disadvantaged social groups, the Scheduled Tribes.

2.8 Voluntary v/s Involuntary Exclusion

If an individual decides himself or herself to be excluded from having access and

use of financial services, then such a condition is said to be voluntary exclusion
(Caskey, Duran, & Solo, 2006). This happens frequently in the case of old age
individual who may not access financial services despite having all avenues for it. It is a
case where they themselves decide not to have such services as they feel that they do
not want it despite being aware of the need of it. On the contrary, involuntary exclusion
is imposed on them by the system in which they live in.

2.9 The Approach to Financial Access and Use

One pertinent question arises at this juncture: What are the things to be included
under the label access to finance to judge whether or not a person has enough access to
financial services. World Bank (2008) has elaborated on four key areas of the access,
which can be taken as indicators of identifying whether a household or an individual is
included in the financial services or not. These are: 1.Transaction Banking, 2. Savings,
3. Credit, 4. Insurance.

2.9.1 Transaction Banking

Having bank account for transaction purpose is seen as a necessity in financially

developed nations. Transaction purpose covers payments made against purchasing
commodities in the market through cheque, or through credit/debit cards. Moreover,
bank accounts generally help a person to encash payments he gets in the form of cheque
or drafts. Utility bill payments also get easier if done through banks. Researches into the

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benefit of financial inclusion have revealed that with the help of having an account,
transaction costs can be reduced. Reduction in transaction cost will add to the pocket of
the households. Transaction account, which comes via inclusion in the banking system,
is said to be primary owing to the fact that it is a key to accessing saving and credit
facilities. Lack of it in fact disturbs market access in all forms. It is often found that
lack of transaction account makes things difficult and expensive for people and it
enhances the risk of poverty. The type of transactions that can be connected bank
account are: Receiving regular payment (for instance in India, payments in the
MGNREP have been made statutorily through Bank Accounts); converting cheques into
cash; storing money safely until it is withdrawn; paying for goods and services other
than in cash as it is less time consuming and more comfortable; paying bills
electronically; making remittances.

Having access to a banking account generally qualifies a household or individual

to be designated as financially included. Nevertheless, there are degrees of financial
inclusion depending on the facilities that they enjoy via having a banking account.
These degrees or gradations of financial inclusion are:

‘Unbanked’- people or household with a no bank account at all.

‘Marginally banked’- people with bank account but have no cheque-book and
other modern electronic payment and withdrawal facilities like Debit/Credit Cards. In
terms of the use of the bank products, marginally banked can also be those who have
these banking amenities but make little or no use of such facilities.

‘Fully banked”- this category enjoys all facilities being offered by the modern
banking system. They have access to all financial products and make the best use of
these facilities.

2.9.2 Saving Exclusion

The lack of access to a saving account in a bank or in a post office creates

enormous problems in the economic life of people. Inflation erodes the value of money.
If people are aware of the advantageous of saving with bank or investing in other
income earning assets, then they can be insulated largely from the adversaries of
inflationary tendencies. Saving exclusion is often considered as a consequence of the
lack of money to save due to the wide mismatch between income and expenditure

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mainly in the case of low-income households like the tribes. Lack of habit to save
money in bank because of the past negative experiences that they might have
encountered with the officials of the banks may compel the people to exclude
themselves from having saving accounts. Apart from this, it is seen that some people
may not have faith in the formal banking system, as they are illiterate or ignorant about
this.

2.9.3 Credit Exclusion

Credit is indispensable especially to those who find a negative mismatch

between their income and expenditures. Credit, undoubtedly, facilitates smoothing out
consumption and protects the households from unexpected income shocks that are likely
to be experienced mainly by the low-income households. It should be mentioned here
that National Sample Survey Organization defines and estimates the extent of financial
exclusion on the bases of the indebtedness to the formal banking system, that is, it
considers only those who have access to credit facilities as being financially included.
Of the various ways of financial exclusion credit exclusion assumes significance. In the
present study, the researcher deals extensively with the issue of credit exclusion of the
tribe households.

2.9.4 Insurance Exclusion

Insurance products are the inevitable forms of finance in the modern society.
Insurance serves when we face unexpected and unforeseen incidence in our life. Such
incidence if occurs can wipe out all earnings and savings that a person has made in his
lifetime. Hence, we need some protection against such mishap in our life. Insurance
products help us to transfer resources from a time of certain conditions to a time of
uncertain conditions. For instance, health insurance, which has been a popularized mode
of insurance nowadays, helps us to transfer resources from a period of good health
condition to a period of bad health. Most of the poor people find it difficult to break
their vicious circle of poverty in the event of them being affected by diseases. Insurance
products can be categorized into two parts: Mandatory insurance products and non-
mandatory insurance products. In the case of mandatory insurance products, for instance
vehicle insurance, their lack of access does not deserve to be studied. Hence, in the

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analysis of the extent of insurance exclusion of tribes, the study does not give much
attention to the mandatory insurance products.

2.10 Theories of Financial Exclusion

This section dwells into the efforts of providing a theoretical framework to

illustrate how financial exclusion is emanated and exacerbated in the process of
financial and economic development. Globally, current financial exclusion has stemmed
from the evolvement of a fragile financial foundation built on the sole objective of
making exorbitant profit through the adoption of new cost saving technical devices
(Automatic Teller Machines (ATM), Mobile Banking, and Internet Banking) by the
banking institutions. This is obviously different from the phenomenon of “exclusion”
that occurred in India in days immediately succeeding the attainment of independence
and the advent of Planning Process in 50s and early 60s, when the lack of branch
expansion was supposed to be the hurdle. In response to this state of affairs, in 1969 the
historic decision of nationalizing commercial banks was taken, and consequent up on
that the policy of branch expansion got a fillip, resulting in the spread of banks to the
hitherto “unbanked” places in India (Bera, 2009). Of course, one can hardly deny the
truth that in countries like India where fundamental bottlenecks are associated with
society and polity, the germination, and perpetuation of financial exclusion are
imminent. Hence, as far as the financial exclusion of tribes is concerned, these
fundamental factors deserve to be thoroughly looked into. Keeping this in mind, let us
now turn to two theories that explain the process of financial exclusion, as it appears, in
countries like India.

1. Free Market Model.

2. The Theory of Asymmetric Information.

2.10.1 Free Market Model

This model, technically labeled as the “Share holder Wealth Maximization

Model, hereafter abbreviated as SWMM, explains the process of financial exclusion at
the macro level. This model rests on the principle of projecting “Market” as the sole
panacea for all illness of an economy. It is argued that a deregulated economy (a market

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economy) has an inherent tendency to move closer to “Pareto Optimum”1. Intervention

by the policies of government will take away the economies from the path of attaining
growth accompanied by the removal of all type of imbalances.

In deregulated financial scenario, financial institutions indulge in stock market

operations to collect fund for their functions. Most of the leading financial institutions
encompassing banking institutions have embarked on placing their shares in the capital
market. Besides the new generation and private banks thronging on the capital market to
collect fund, nationalized commercial banks in India have also followed the suit, thanks
to policy change of government in favor of disinvestment. Consequently, the share
holding of government in most of the Public sector banks has come down to a level as
low as 51 percent (Table No.2.1). Owing to this, the pressure of making the institutions
worthy of stock market investment has in fact forced these institutions to abstain from
risky lending. At this juncture, one could find a paradox that whilst deregulation appears
to increase financial inclusion, the opposite, financial exclusion, seems to have surfaced
as a growing problem. The argument that deregulation should have resulted in financial
inclusion rather than financial exclusion rests on the principle that market driven
strategies always lead to the spawning of financial products. Nevertheless, the risks in
lending, efforts to abide by capital adequacy norms and the increasing pressure to be
more productively efficient conspire to force banks to focus more on certain groups,
rather than on customers in general, leading to the financial exclusion of non-valuable
customer groups including tribes. The inclusion of more valuable customer group even
at the cost of the exclusion of the underprivileged or the least valuable will immensely
enrich the value-added in SWM sense. Most of the new generation banks and private
banks seem to have been adopting this strategy. As Boyce (2000), summarizes the
process: ‘Customer valuation is shown to have become a means to increase shareholder
income and wealth, almost inevitable at the cost of further marginalizing the poor and
disadvantaged’.

The deregulation of the financial sector in force in India since the onset of neo-
liberal policies has in fact exacerbated financial exclusion (Chavan, 2008). Evidently,
financial exclusion is the result of the enhanced competition triggered by globalization

                                                             
1
“Pareto Optimum”, is a condition, which does not envisage an economic agent’s position being
deteriorated following the enhancement of the gain of other persons (Leach, 2004).

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and deregulation. The shift that the banking institutions have made to ‘valuable
customers’ in the pursuit of enhancing their ‘value addition’ can rightly be called as a
“strategic shift” which has been underway in banking operations world over.

Table 2.1 Share Holding of Govt. in Public Sector Banks in 2009

Name of the PSB Government shareholding in percent

Central Bank of India 80.20

Indian Bank 80.00

Bank of Maharashtra 76.77

Canara Bank 73.17

Oriental Bank of Commerce 51.09

Andhra Bank 51.55

Dena Bank 51.19

IDBI 52.67

Bank of Baroda 53.81

Vijaya Bank 53.87

UCO Bank 63.59

Syndicate Bank 66.47

Union Bank of India 55.43

Allahabad Bank 55.23

Corporation Bank 57.17

Punjab National Bank 57.80

Source: RBI Bulletin

This strategic shift has in fact led to a separation between lower income customers and
higher income customers mainly in the case of financial products to which they have
access. This separation has been intensified by a lot of other factors including
technological advancement that banks have gained in recent times, whereas these

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‘advancements’ appear to be not accessible to a large number of low income and

socially disadvantaged customers like the tribes.

2.10.2 The Theory of Asymmetric Information

One reason for financial exclusion is the lack of correct information about the
potential borrower and lender. At a time when information technology rules the world
of financial operation, financial exclusion, arising out of information asymmetry
assumes significance. The information happens to be asymmetric or imperfect when one
party to a product has more information than the other. When these conditions persist,
many problems surface, which may adversely affect economic exchanges of financial
products and in its culmination it can lead to the denial of financial products to some
groups of people. In addition, sometimes it is likely that the potential borrower may
misinform the lender, the banks, about their credit worthiness, which ultimately raises
the loan default rate, paving the way for an escalation of financial crisis, making the
financial institutions to be more vigilant in lending. This extra vigilance will finally end
up with the exclusion of more people, who would otherwise be included, from the
purview of financial network.

It is observed that institutional arrangements in the form of banks find it difficult

to break the barrier of information asymmetry especially in rural areas, which ultimately
tempt the buyers to seek financial products from informal sources. Informal sellers of
financial products like moneylenders, on the other hand, are quick in addressing the
problem of information barrier. Hence, the low or zero information cost coupled with
low transaction cost of the financial products being offered by the informal sellers of
financial products makes the lending operation cost-effective. Thus, perfect or near to
perfect information is the key to the successful and sustainable operation of a financial
system. This is because many of the credit contracts that happen in the financial sector
are of forward looking in nature2. This necessitates the identity and the intentions of the
buyers of financial products critical to the likelihood of the repayment. Things go wrong
when information pertaining to the borrowers is partially or false fully disclosed to the
prospective lender. If the borrower fails to live up to his agreement of making regular
repayments, then definitely the lenders (the Banks) may seek ways not to lend further to

                                                             
2
For a detailed analysis of the nature of financial market, see the Appendix 2.1

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such defaulters culminating into financial exclusion of the defaulters or the future
prospective borrowers howsoever they appear to be honest. Institutional mechanisms
have been put in place by the banks to mitigate or at least to minimize the impact of
asymmetric information.

Having thrown insight into the theoretical underpinnings of the problem of

financial exclusion with emphasis on the exclusion of the socially disadvantaged like
the tribes from the credit market, now we turn our attention to sketch the historical
evolution of the problem of financial exclusion.

2.11 Historical Genesis of Financial Exclusion

Well known is the fact that exclusion, in particular of certain groups of people
like the tribes from the main stream of social framework, surfaces on account of
divergent causes and, as such development literature is blessed with nomenclatures like
social exclusion, economic exclusion, financial exclusion and the like. All these forms
of exclusion, no matter howsoever they distinguish themselves from each other, boil
down to the single feeling that the excluded social groups are not taken along with the
mainstream, or the excluded are, by themselves, inclined not to be a part of the
mainstream society. Beneath all analytical concerns of any type of exclusion, one can
identify a number of underlying factors, which are rooted in the fundamental nature, and
working of the society or the economy in which the exclusion persists. Moreover, all
types of exclusion are intertwined with each other. Very often, one can hardly find the
beginning and the end of this intertwining process. For instance, social exclusion can
pave the way for economic exclusion and vice versa. Both of these can engender
financial exclusion, and at a later stage, one may find financial exclusion as
exacerbating the seeds of social and economic exclusion. How this vicious circle can be
broken with deliberate inclusionary techniques and instruments like access to finance,
credit, and empowerment of social groups like the tribes is an issue that deserves to be
probed.

At the outset it must be mentioned that exclusion has become popular and a
much disheartening thing today albeit it has been there all times throughout the history
of humankind. It needs to be borne in mind that the unprecedented policy attention that
has been paid to the problem of exclusion stems from the unrest spread all over the

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world following the overemphasis that the neo-liberal market driven policies have
gained in the policy space of democratic governments. Looking into the origin of the
social life of humanity, one can see the elements of exclusionary process in every walk
of life, underscoring the fact that exclusion is germane to the human community. From
the hunting man to the space man, one can easily peep into the structure and institutions
creating circumstances leading to the exclusion of some people who become the outliers
being denied of all fruits of development. Today’s exclusion of all kinds can at best be
considered as the culmination of the hitherto occurred and persisting exclusionary
processes viz. social and economic exclusion. Hence, a solution to the problem of
financial exclusion must have a historical perspective of how human society has
experimented with varied forms of exclusionary process over the years. This section
attempts to sail through the historical evolution of the exclusionary process.

2.11.1 The Hunting Society and Economic Exclusion

The very primitive form of society is the hunting society in which men used to
engage in the occupation of hunting animals and fishing. This was the society before
man came to know about the significance of agriculture and other allied primitive
activities. In a hunting society, the hunter mostly the well built shares his things among
the members of the community regardless of the relation he had with them. In this
sense, hunting was used to be done in order to satisfy the hunger needs of the population
of the community. This can be rightly called as “subsistence hunting” (Conklin, Laura,
& Graham, 1997). The hunter, having not acquainted with the process of keeping the
things for future consumption, might not have adopted any ways by which he could
store things and thereby exclude somebody from having a legitimate share of what he
would earn through hunting. In such a communal sharing framework which can be said
to be similar to the concept of a Need Based Economy (Kurien, 1995) exclusion, in the
fullest sense of the term, might not have crept into such an ancient need based
economic system. Nevertheless, as time passed, some hunting societies began to be
adopting some exclusive practices by not sharing the earnings equally or unequally
among the members of the society based on their needs.

As has been narrated earlier, a hunting society, where every member interest was
taken care of as far as the distribution is considered, is a society consisting of people
devoid of unbridled greed as is found in later societies where members would nurture

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the habit of keeping for future in anticipation of indulging in conspicuous consumption

and profiteering activity. Such societies built on the premises of materializing the
unbridled greed of somebody would slip into the process of keeping some people away
from tasting the share of what they ought to get legitimately from the activity they
perform. Here, one would notice a want based economy (Kurien, 1995) or a society
where some influencing members prioritize economic decisions so that they could have
their ambitions materialized at the cost of depriving others of their legitimate rights. The
alienation of tribes from their lands by the plainsmen is a fitting example to this, and
consequently as we see today tribes have become dispossessed of their land, which has
been cited to be an important reason for the economic and social backwardness of these
indigenous people. Largely the reasons for financial exclusion could also be observed in
this particular aspect.

It brings us the picture that hunting society had no system of ownership of assets,
and of course, due to that had no individualistic motive of keeping or accumulating
more. Sharing among the members based on each one’s need, not greed was probably
the guiding principle of such a society. Exclusion is alien to such a society. Moreover,
such a system is, and has been, never prone to any derailing because of the blocking of
the circular flow as it might happen in the case of a want based capitalist framework,
where exclusion to the zenith paves the way for the paucity of aggregate demand for
produced things, leading to over production and other associated chaos and social
unrest. Thus, it can be argued that exclusion is either an inbuilt component or a
byproduct of a Want Based System or a market driven economy.

2.11.2 River Based Settlement and Exclusion

It is obvious that men started settled life along the banks of the rivers, leading to
the origin of river based ancient civilizations. The settled life and the circumstances
around the place where they zeroed in consequently prompted them to cultivate
vegetables and the invention of fire added further taste to their vegetables (a former
version of value addition). The origin of cultivation culture might have triggered off a
chain of exchange process within members of the community. The place of an
individual in an exchange economy of this nature was used to be determined by the
quantity of things he or she could cultivate and process. Since, finance was apparently
absent, the asset of an economic agent was his physical labour power. Those who were

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reluctant to put labour power to work, or those who could not toil on land on account of
physical inability might have been excluded from the exchange economy. As there was
no mechanism to take care of such individuals then it might lead to their exclusion from
the society. These kinds of exclusionary process, which often happens not because of
the deliberate inactivity of the person involved, may be encapsulated as involuntary
exclusion.

The transformation, which the hunting society underwent from that of a lawless
hunting-based functioning to that of a cultivation-based society, heralds the beginning
of a sea change in the social and economic exchange functions of people. Hunting
society is a top-down society where the hunter earns and distributes things to other
members. This one side exchange is prominent in every sense in such a system.
Nevertheless, when people started encamping along the buds of the rivers, it fuelled the
need for joint endeavors in cropping and harvesting agricultural goods. Thus, every
member of the community or camp happened to be the earner or producer or at least a
part of the producer groups. This naturally made people capable of exchanging things in
a society. Thus, there came in what can be encrypted as an exchange economy where
exchange becomes intertwined as everyone has something to offer against something.
Evidently, exclusion of an individual from the exchange process was uncommon in such
a society, unless some non-economic reasons tended to force somebody voluntarily
exclude himself or herself from the mainstream economic process.

The growth of the exchange economy in both size and value necessitated the
invention of a medium for facilitating the easy and speedy exchange of goods and
services. Unknown about the possibility of using a thing like money or coins as we use
it today, people naturally began to put in place precious stones and metals as medium of
exchange. Obviously the reason for choosing precious metals as the medium of
exchange was their shortage of supply in relation to demand. (The market based value
determination where the paucity of a thing in relation to demand determines the value).
Thus in those times a thing like money derived its value not from utility but from
scarcity. The money had no features of being backed by legal sanctions, as there was
hardly any government in the formative stages of early civilizations.

The advent of currency and coins supported by established state governments

marked the beginning of an epoch in the history of exchange. The use of money

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underwent transformations and additions as the volume of trade and the complications
of exchange process enlarged. The role of money went beyond merely acting as a
medium of exchange to that of an instrument with which more wealth could be
amassed. The origin of money as finance capital brought with it an array of divergent
functions. While in an old monetized economy production of things could command
money, in the newly over monetized framework production no longer becomes a
necessity for a person to secure money. If one can have access to fiancé capital or
money or credit he can trigger off operations by which more wealth in the form of
money could be harnessed. Here, a person having no access to finance capital or money
will be at a disadvantage and he or she will have to struggle with social and economic
hazardous unless access to finance is ensured. Hence, it is apparent that in a highly
monetized economy as we have today access to finance is a prerequisite to prosper as
far as economic agents are concerned.

The evolution of money should be analyzed based on the evolution of exchange

economy. It is apparent that the nature of money changes as it assumes different roles.
As the medium of exchange function was the primary role a thing like money is
expected to play in early stages, the price of money (interest) did not deserve much
attention. Later money began to be assigned more proactive roles other than exchange
functions. The prominence that the money came to occupy in an exchange economy
might have tempted individuals to go in search for ways to garner more monetary
resources. The enviable role of money had attracted some price for it. Thus, interest
rates came in. Many in the ancient period considered charging interest as a sin. In this
context to get a vivid picture of how finance has become important in the modern
economy, it is indispensable to have a look at the evolution of the exchange economy
and finance. Through this, we intend to explain the fact that since finance is a key factor
to be reckoned with, any exclusion from the system of finance is tantamount to an
exclusion from the society, and such financial exclusion will result in more deprivation
of economic agents. Let us now turn to the evolution of the exchange economy and
finance for a deeper understanding of how access to finance becomes inevitable even
for the tribes in today’s economy.

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2.11.3 Exchange Economy and the Evolution of Finance

An overview of the evolution of the concept of money and finance over the years
in the broader framework of an exchange economy is indispensable for the analysis of
the process of financial exclusion of tribes. Such an in-depth study will help us to see
theoretically how money and finance have evaded the underprivileged sections of the
community from participating in, contributing to, and benefiting from the activities of
an exchange economy, resulting in their pauperization and concomitant exclusion from
the mainstream financial framework, which comprises of formal financial institutions
like banks. First, we shall go through the evolution of the exchange economy to
understand how this evolution has shaped the emergence of the problem of financial
exclusion.

2.11.4 The C-C Economy

Economists from the time of Adam Smith have attempted to emphasis the role of
money as a medium of exchange, which is the primary and the most innocent role a
thing like money is expected to play. In a moneyless economy, like barter system, (C-C
Economy)3 where commodities are exchanged for commodities, exchange is supposed
to take place on a limited scale. In this C-C system, a thing like money or finance has
little role. In such a system the real sector dominates in the sense that if one has to be a
part of the exchange economy, he or she must toil on the land or on ‘capital’ to produce
something in real. A person having nothing in real form to exchange with has nothing to
do with a C-C exchange system. Thus, it is obvious that in such system it is unlikely
that a person is excluded from the exchange process just because of the fact that he or
she does not possess money or finance. Hence, the question of financial exclusion lies
outside the purview of the C-C Economy. However, such a system is beset with many
inconveniences as it requires the double coincidence of wants, and C-C economy does
not seem to be capable of keeping pace with the speed with which the real sector
progresses.

                                                             
3
  This is based on concepts referred by Prof.Oommen in a forward written for book Global Economic
Crisis: End of Growth Paradigms (Oommen, 2009).

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2.11.5 The C-M-C Economy

The difficulty which people had to encounter with C-C Economy naturally paved
the way for the coming up of a medium of exchange known as money. Thus came into
being the C-M-C economy, where commodities were produced and sold against money
and using that money people would purchase things, which they could not produce. The
major distinguishing element between a C-C economy and C-M-C economy lies in
respect of the fact that the latter is one, which considers Money as a medium of
exchange. Here, money is supposed not to do an important function that is, acting as a
store of value. However, besides being a medium of exchange, in this system, money
may act as a measure of value since while exchanging products for money, people may
think of whether the value of their products are equal to the value of money which they
get in return, or not. Likewise, when a person buys products, he or she appears to be
keen in ensuring that the value of the money offered is at least equal to the value of the
products they desire to purchase. Thus directly or indirectly in C-M-C economy money
plays the role of measure of value while it explicitly does act as a medium of exchange.
In C-M-C exchange system, it is obvious that still the real sector dominates. Money’s
role seems to be limited to that of facilitating exchange so that it oils the exchange
economy to enable it to undertake production on a large scale. It drives us to the
inference that only those economic agents who toil to produce are eligible to be a part of
the exchange economy because of the primary reason that if one wishes to have money,
he or she must have something to sell in the market against money, and of course using
that money so earned commodities can be bought. The implication is that here too
finance does not seem to be excluding anyone on the basis of any group identity or lack
of economic entitlements because the only one prerequisite to obtain money or finance
is to produce things in real form first, and then exchange it against money.

2.11.6 M-C-M* Economy

Quite different from C-M-C exchange system, another extended system

rendering priority to money has come into being in response to an array of
developments covering large scale production, technological innovation, growing
population and a lot other elements which are generally attributed to factors responsible
for the boom that has been witnessed in the global economy in recent times. This

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system, although very complex in its nature and functioning, can be encrypted in the
form M-C-M* exchange economy. As is evident, with this new money based exchange
economy, real sector has been relegated to a secondary importance, while money has
come to occupy a large position than ever before. The form of this economy clearly
reveals that only those having sufficient source of money or finance, or assets or skills,
can produce commodities to be a part of the exchange system. People in this system
borrow money by pledging their assets in the form of land, jewels, or house as security,
from different formal and informal sources. They put this money into the process of
production and sell the produced things in the market at profitable price. Thus they earn
more than from the market (M*) than what they usually spend as cost of producing the
commodity which is labeled as ‘M’ in the above form of relation. What is interesting to
note here is that under normal conditions we expect the theoretical outcome that M <
M*. If M* happens to be greater than M, and as is the case elsewhere, people will begin
to consider money or finance as very important. It is here money or finance becomes
very crucial in the new variant of the exchange economic system. Thus in this system,
the main prerequisite to be a part of the exchange economy is that one should have
money or finance. Since money or finance appears to be as important as the system
itself, the question of finance arises and consequently the question of financial exclusion
as well. The coming up of M-C-M* system has brought about revolutionary changes in
the structure of the exchange economies. It actually heralded the beginning of the
establishment of a number of formal and informal financial institutions spawning
financial products tailored to the needs of mostly the greedy people who actually do not
‘toil and trouble’ to create anything in real terms. Since these financial institutions,
mostly in private sector, thrive upon profit in a competitive economy with unfettered
individual freedom and inadequate government intervention, it is apparent that many
such institutions move after the credit worthy persons unless otherwise strictly directed
by the apex regulatory bodies that credit should be allotted to priority areas. Causing
threat to the existence of the real economy and its fundamentals, M-C-M* system is said
to have grown to that level where, today, the money market decoupled from the real
world exponentially expands to create more money M-M*-M**-M*** and so on. All
these boil down to the fact that when we use money as an instrument of accumulation
and store of value rather than as a medium of exchange, all problems pertaining to
finance or money crop up.

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Thus, it is obvious that unlike C-C and C-M-C exchange economies, the M-C-
M* exchange economy is much more prone to the phenomenon of financial exclusion,
which becomes acute unless addressed properly by the directive measures of the
government. As the M-C-M* exchange economy becomes more and more complex as
we see today, the problem of financial exclusion assumes varying dimensions. For
instance, the nature of financial exclusion in the pre and immediate post-independence
days, mostly geographical and institutional exclusion, seems to have disappeared now
and instead much more sophisticated ways have been put in place, which ultimately
pursue some socially, and economically disadvantaged social groups viz. STs to keep
themselves outside the reach of the mainstream financial system. In addition,
transformation from the ‘Brick-Mortar’ Financial Intermediation to the ATM, Mobile,
and Internet based intermediation has in fact alienated some segments of population
from accessing the services of financial institutions. Now, the researcher attempts to
provide a theoretical and historical explanation for the marginalization and
pauperization of tribes, which would be helpful for further analysis.

2.11.7 Pauperization and Marginalization of Tribes: A Historical and

Theoretical Look

In this section we intend to journey through the historical and theoretical

crossroads that meet with the narratives of how the tribes as a society has been excluded
in all spheres of life, not only in the realm of finance alone. This type of an elucidation
is highly warranted, as tribes are a peculiar community to whom probably the world of
finance and the need of comprehending about it may appear to be at odds with their
economic and social life. And this type of a narration would help one to critically asses
the hollowness involved in the strategy of financial inclusion by way of just opening
account in the name of the ‘unbanked’ especially the marginalized and weaker like the
tribes regardless of enquiring whether they need or not. Moreover, to explain the
problem of financial exclusion of tribes from the perspective of demand side, this
theoretical framework would be of immense use.

It is well known that certain segments of society particularly those who have
been flocked under one umbrella ‘the marginalized and weaker’ have always been
pulled to the periphery in the process of development, dispossessed of their traditional
entitlements like land, and disempowered by dismantling the production relations to

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which their skills were most fit once. They have been rendered hopeless, homeless,
landless, and footless by the changing paradigm of development strategy, which
ultimately fail to accommodate them constructively and fruitfully, culminating into their
deprivation. The story of tribes most fits to this reality as well. Hence, any attempt to
include them virtually into the edifice of the modern exchange economy and finance
through the seemingly easy way of financial inclusion has to be built on this
understanding.

In the very primitive form of society when men were leading a nomadic life,
owning nothing individually as everything was perceived to be common to all
(Common Property Resources (CPRs) as it is used today) the need of money, and
therefore the question of greed did not come up. As no one had anything explicitly
specific to him or her except the raw or unskilled labour power that was of course
embodied by birth, the perplexing question of ‘exclusion’ was altogether absent.
Nevertheless, this seemingly idealistic social and economic equilibrium that had existed
in those days gradually started evading with the advent of State (or a ruling class) giving
deed power to certain segments of population in return of tax proceeds, often belonging
to the upper caste in the social ladder. This made land a private property of somebody
who could rub their shoulders with the emerging ruling class. Thus, the hitherto
commonly held land assets were converted into exclusive private assets of those who
could grab it from the rulers, compelling others, the real cultivators, to bid adieu to their
common assets only to become hired or bonded workers. This, in course of time, led to
the emergence of a landless class leading to their dispossession of land assets, making
them the mere sellers of labor power in exchange of a part of yield that they would
create on ‘others’ land. Once the land more particularly the fertile land, the prime assets,
the traditional indispensable factor of production after labour, become a thing to be
possessed, those who had to remain devoid of land to cultivate on, freely and fearlessly,
became economically ‘excluded’ from the whole structure of production system and
relations thereof, and thus began the saga of exclusionary tendencies.

In the very crudest and simplest form of production function land, labour and
capital are the main factors of production. The advent of private ownership of property
had made the lower segments of society dispossessed of land, and thus as said earlier,
they had to continue as the landless labour class. Once the bonded system of labour or

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‘un-free labour’ got started, the labour class had to be dispossessed of their naturally
embodied labour power in the sense that they themselves got rid of their control over
their ‘labour’. Thus, a segment of population like the tribes devoid of any factors of
production, like land and control over labour naturally became marginalized and weaker
in all aspect of life viz. social, political, and economical. Faced with the lack of land,
and other assets they had to confine themselves within their own moorings, some might
have been inhabited in settlement colonies very close to forests and hills whereas some
started leading nomadic life. Using the ‘un free labour’, the landowners embarked on a
production process for market, thus creating a ‘surplus’, which allowed them to
accumulate more and more capital whereas the marginalized particularly the tribes were
producing for ‘self consumption, not for market. The ‘surplus’ which they (the
advantageous) would create was actually the ‘labour surplus’, which could be fetched
using the cheap labour made available though the system labour bondage.

The land owning class with abundance capital cornered chiefly through the
exploitation of labour and other social space they had by virtue of their elite social and
economic position, started acquiring additional labour skills, which would meet the
requirements of the labour market. On the other hand, the disadvantaged sections had to
contend themselves with the traditional skills as they had no choice for better education
and skill up gradation. Consequently, they found their innate skills unsuitable to the
changing labour market, forcing them to remain in the traditional sectors of employment
offering low wages. Moreover, the method of production and the natural resources,
which made such production possible, began to be replaced by the modern production
methods requiring sophisticated skills. Thus, this marginalized segment of population
started facing these kinds of labour market impediments, putting their life at stake. The
growing deforestation coupled with draconian forest laws thwarted their traditional
source of livelihood making them impoverished in all aspects. The privatization of the
common property resources following the liberalization policies in fact added fuel to
this problem.

Now, coming to the realm of finance, or putting it broadly, the financial market,
we know that there are two groups of agents or participants: the Surplus group and the
Deficit group. The former has income left after consumption to save whereas the latter
finds expenditure exceeding income and reason to borrow. Nevertheless, those coming

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under the deficit group have skills, or putting it rightly, may have entrepreneurial
aptitude to invest, and hence they seek credit for productive purposes. In addition to
that, they have creditworthiness to demand credit from the financial market. Thus, in the
financial market one segment of society, the advantageous group, thanks to their
resourcefulness (backed mainly by land ownership) and skillfulness, enter as both
surplus group and deficit group. They act as surplus group as they have more wealth to
be parted with the banks and other financial institutions to fetch interest income, and to
gain out of ups and downs in the economic activities (Capital market operations). They
act as deficit group as they have demand for credit to invest in productive proposes, and
their credit demand is worthy of being met by the financial entities as it is backed by
creditworthiness in the eyes of such entities.

On the other hand, as far as the disadvantages segments like the tribes are
concerned, generally, they never act as the surplus group as they have no ‘surplus’ since
they struggle to survive, and they produce, if they do so, only for domestic
consumption, and not for market. Nor do they demand credit, as they have no skills to
invest or produce, and if they demand credit, it is unlikely that the demand is met by the
above said financial entities, as they (the disadvantageous group) are credit unworthy in
the eyes of such entities. Moreover, financial sector constitutes a part of tertiary sector.
Since the disadvantaged marginalized people like the tribes, due to their poor
resourcefulness (lack of land and other assets) and skillfulness, still confines themselves
mostly to the primary sector activities, it can hardly be expected that they involve
constructively in the financial sector. All these substantiate the fact that for the
disadvantageous marginalized people like the tribes their ‘inclusion’ into the realm of
finance is not something which stem from their urge to be included into the system,
rather their inclusion is something which the external force desires to accomplish
seemingly for their vested interests. Because of this credit unworthiness from the point
of view of formal credit suppliers, the low-income marginalized people find informal
sources as the last resort to meet their credit demands.

Thus, it is obvious that the root cause of the problem of financial exclusion that
the disadvantageous marginalized people like tribes confront with lies in their social and
economic exclusion, which they have been experiencing ever since the system of the
ownership of private property (especially land) came into being. The ownership of land

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coupled with the capability to acquire and sharpen skills through education made a
segment of people advantageous in every sense whereas the landless adorned with poor
and unfit skills became the disadvantageous group, and this backwardness has got
reflected in their exclusion from the financial system as well (Figures 2.1 and 2.2).

Figure 2.1 The Case of Advantageous Group

Capability to 
Acquisition of Skill 
Ownership of Land  generate surplus , 
and Access to 
(the main Assets) production for 
Labour Market
market

Act as suppliers of  Accumulation of 
credit and demand  Capital and capacity 
Better prospects of 
credit of high  to save, engage 
Financial Inclusion
volume backed by  more in tertairy 
credit worthiness sector  

Figure 2.2 The case disadvantageous marginalized section

Doest not generate 
Dispossession of  Traditional Skills, 
surplus, production 
Land (the main  unfit to changing 
is for self 
Assets) labour market
consumption

Bad prospects of  Never accumulate, 
demands small 
financial  noting to save,  
informal credit for 
inclusion/engulfs in  confined to priamry 
unproductive things. 
financial exclusion sector activities
 

Having said this, it does not mean that the marginalized groups as tribes do not
want to use money, the primary form of finance. In an evolving exchange economy,
which uses cash in every sphere of transaction, the tribes as a society can no keep itself
away from the monetized exchange system since tribes are not self sufficient in every
respect. They need to transact with the ‘outer world’ for many things, and hence the use
of money or cash is quite indispensable for them. Looking in that way, the marginalized
as the tribes have also become a part of the monetized economy, although they have not
been experiencing the process of financialization as it happens in the case of the general
population.

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2.11.8 Strategies to address the problem of Financial Exclusion

Now it would be pertinent to look into various strategies that have been
suggested to address the problem of exclusion in general and financial exclusion in
particular. First, we shall have a peep into the three financial development theories,
which establish the relation between the development of the financial system and the
economic development.

2.11.8.1 The Theory of Active or Supply Leading Financial Development

This theory articulates that equipping people with all apparatus of financial
instruments is the key to tackle the problem of financial exclusion. Once adequate
financial needs people are legitimately met by the financial system, then they will start
earning other economic entitlements, and this economic empowerment of the people
will in course reinforce financial development. The wide scale branch expansion of
major commercial banks in India since 1969 was in line with the preposition of this
theory. Recent financial inclusion strategies are based on the spirit of this theory. The
following figure illustrates the theory of Active Financial Development.

Development of the
Establishment of Providing financial economy and the Reinforcing financial
financial institutions products and economic development more
financial inclusion empowerment of financial
people.  innovations.

2.11.8.2 The Theory of Passive or Demand Following Financial Development

This theory states that economic development and economic empowerment of

people paves the way for financial development. It is argued that when the people are
actively involved in economic activities generating employment and income, the
demand for various kinds of financial products arises. This generation of demand for
financial products will act as stimuli for the establishment of financial intuitions.
Because of this stress on demand that this approach has come to be alternatively known
as the Demand Following Financial Development. The financial inclusion brought
about by this path of financial development will be sustainable in nature compared to
the Supply Leading Financial Development. The mushroom growth of informal
financial entities in the rural areas of our country can be cited as a best example of how

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the need forces the people to go in for credit at any price from whatever sources
available to them. The entire argument contained in this approach can be illustrated with
the help of the following figure.

Economic Establishment of Reinforcing

Generating demand
Development and Financial Institutions economic
for financial
the empowerment of and Financial development
products
people Inclusion

2.11.8.3 The Theory of Intertwining Financial Development

This theory argues that it is wrong to say that either financial development or
economic development precedes each other. The theory articulates that sometimes-
financial development may lead to economic development and vice versa. Hence, it is
difficult to point out where the process ends or starts. It can happen in both ways. The
following figure captures the entire argument of this approach without any ambiguity.

Economic Establishment of
Development and Generating demand Financial Institutions Providing financial
the empowerment of for financial and Financial products and
people products Inclusion financial inclusion

Establishment of Economic
Providing financial Financial Institutions Generating demand Development and
products and and Financial for financial the empowerment of
financial inclusion Inclusion products people

Now we present two theories, which are predominant in the realm of sociology
in the analysis of the process of social exclusion. Since 1990s, the increasing popularity

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 63
Chapter 2 Financial Exclusion

of the concept of social exclusion among the sociologist has led to attempts to identify
the multi-difficulties faced by the socially disadvantaged groups and to suggest
measures to help the socially disadvantaged to overcome difficulties (Abrahamson,
1997). Differences surfaced among the sociologists regarding the nature of solutions to
be adopted to attain social inclusion. These divergent views led to two widely quoted
discourse of social exclusion: The Social Integrationist Approach and the Redistributive
Approach (Levitas, 2006). These approaches bear relevance to the problem of financial
exclusion as well. Below, an attempt is made to relate these approaches to the problem
of financial exclusion.

2.11.8.4 The Integrationist Approach to Financial Inclusion

The crux of this approach hovers around the whole dynamics of the Labor
Market. This approach suggests that to wipe out the presence of financial exclusion we
must provide the people with the opportunities to participate in the paid work in the
labor market. Interestingly, this approach defines the concept of social exclusion in a
different fashion that exclusion is nothing but exclusion from the paid work in the job
market and hence it prescribes integration through paid work as the better panacea to
solve the problem of exclusion. For instance, this approach endeavors to address the
problem of the exclusion of the disabled from the labor market through the process of
equipping them with different skills, which are seemed suitable to enable them to enter
into the labor market. To clean the education system, this approach argues that the
system of education must be linked to the needs of the job market. In short, the social
integrationists discourse supports a well-integrated society through paid work and relies
heavily on the private market to find a lasting solution to the problem of financial
exclusion. It is known that workers do not produce all that they need. Instead, they
exchange their labor power in the labor market for other products, which they could buy
via the medium of money they are supposed to get from the labor market against the
labor power they sell. Here money in broader sense finance plays a vital role in
connecting the labour market with the product market, increasing the size of the product
market, and facilitating capital accumulation.

Integration with the labour market can be a best way to tackle the problem of
financial exclusion as well. This is because once people are engaged in paid jobs in the
labour market, the income generating from such paid works will definitely force them to

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 64
Chapter 2 Financial Exclusion

demand various financial products and thereby leading to their effective financial
inclusion. The Mahatma Gandhi National Rural Employment Guarantee Programme
(MGNREGP), which has been successfully implemented in India, is a fitting example of
how integration with the labor market can be a weapon for financial inclusion. Under
this programme, every beneficiary that is the laborer will have to open an account with
any nationalized bank for getting his or her wages regularly. The wage is disbursed
through accounts. Here, so long as a person continues to work under the above said
programme, he will have to be in constant touch with the banks, which will cultivate
banking habit in that person. In this study, we will try to unearth the impact that has
been made by this programme to douse the flames of financial exclusion among the
tribal households.

Notwithstanding the bright side of this approach, critics argue that it has too
many drawbacks viz. obscuring the inequality between the paid workers, overlooking
the gender inequality in the labor market and ignoring the values of unpaid works such
as taking care of the children in the family (Levitas, 2006). Critics question the
suitability of the labor market in generating employment for the people with learning
difficulties.

2.11.8.5 The Redistributive Approach to Financial Inclusion

This approach argues that the product and labor market are prone to creating
inequality leading to the exclusion of those who cannot fall in line with the parameters
of market. This approach is built on the premise that lack of endowments to participate
in the customary life of society is the cause of exclusion. The creation of a just society
rerouting the movement of resources from the “abundant” hands to the “scarce” hands
appears to be the solution to tackle exclusion, and hence active interventionist policies
through the arms of tax reforms, expansion of benefit systems, reduction of earning
differentials, financial recognition of unpaid works, introduction of minimum wages and
minimum income for those who are unable to participate in the job market are called for
to address the problem of exclusion (Chau & Hu, 2002). This view associated with
equitable society challenges the problems of inequality created by the product and labor
market.

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 65
Chapter 2 Financial Exclusion

In addressing the problem of financial exclusion, the application of the elements

of this approach could be found in many endeavors being adopted by the government.
For instance, nationalized banks in India adopt the practice of offering loans at
subsidized rate of the interest to the low-income people, agriculturists, and petty traders,
SCs and STs. This subsidization of loan falls in line with the redistributionist discourse.
The difference between these two approaches lies in the division of responsibilities
between the government and the market (labour market) in handling the problem of
social exclusion. Both approaches recognize the difficulty that the disadvantaged groups
face in their run up to be integrated into the mainstream of the society. The
redistributionist argues that the market cannot create jobs for them as the market stands
for those who are fit to work. Hence, they request the government to help them achieve
a decent standard of living independent of the job market. The integrationists, on the
other hand, question the government’s ability to provide training to improve the
employability of these people.

2.12 Research Methodology: An Introduction

Research ‘methodology’, in sum and substance, means the entire process,

approaches, and perspectives involved in undertaking a research work (Stacey, 1969).
This chapter details out the methodology adopted to study the financial exclusion of
tribes in the study area. The different sources of gathering relevant secondary data for
the study and the process of collecting primary data from the tribal respondents are
elaborated on this chapter. Apart from these, the issues involved in selecting the sample
for the study, processing and analyzing the data, and the way of conducting Focus
Group Discussion among the selected respondents from each tribal group to gauge more
into the issues, need to be discussed in this chapter.

As it is well known, there is a dearth of information on the access and use of

finance by the marginalized and weaker sections like the tribes across the world. The
same is the case with India and Kerala too. One question that deserves to be answered is
the rationale for taking Kerala as the base for the study. The following explanations
suffice to answer this question:

• Kerala has been hailed for its affirmative actions in building social infrastructure
like education and health resulting in the accomplishment of high standard of

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 66
Chapter 2 Financial Exclusion

life that her people enjoy which is undeniably at par with what persists in some
of the most developed destinations in the world like Canada and America.
• The social movements that the State has witnessed over the years has led to a
significant improvement in the economic and social well being of many of the
marginalized and weaker section like tribes in Kerala.
• Tribe in Kerala unlike in many parts of the country is comparatively more
exposed to the elements of modernization and her tribal world has been
relatively a monetized economy. The question of financial exclusion can be
engaged only with such a community, which has been relatively more exposed
to the use of cash or money.

The next pertinent question is, why has Wayanad been chosen for conducting the study?
The following explanations may well substantiate the rationale for taking Wayanad as
the study area.

• The reason for taking Wayanad as the area of focus for collecting the primary
data is that among different districts in the State of Kerala, the concentration of
tribes is more in Wayanad. This is evident from the fact that the ratio of tribal
population to the total district population is high in the districts of Wayanad.
• Wayanad is a relatively less developed district in the State of Kerala. Many
tribal development programmes have been implemented in this district. Hence, it
would be of much interest to look into what has happened to the tribes of these
districts in respect of financial exclusion.

2.12.1 The Research Design

Developing an appropriate research design is indispensable for social science

research. This is because the outcome of the research work entirely relies on how the
researcher shapes the appropriate research design for the study. Many research
methodologies are there in social science research viz. descriptive research, explanatory
research, experimental research, explorative research, and evaluative research. The
present study is a combination of descriptive and explanatory research. The aim of
descriptive research is to understand the frequency with which certain explanatory
features of a population occurs (Black, 1999). Descriptive research is of two genres:
One is Cross Sectional and the other is Longitudinal of which the former describes a

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 67
Chapter 2 Financial Exclusion

population at a given time whereas the latter describes the data pertaining to a
population at different periods in time. The present study is a Cross Sectional
Descriptive research. Apart from this, the present work is explanatory as well in the
sense that it goes deep into the question of ‘why is it going’ and tries to test hypothesis
on different aspects that influence the process of financial exclusion of the tribe
households like the level of educational attainment by the tribes, income and gender of
the tribes.

2.12.2 Research Methods

Two types of methods are generally followed in social science research: the
Quantitative Methods and the Qualitative Methods. The former is applied when the
study requires precise data on variables that need to be expressed in quantitative terms
to explain a particular phenomena whereas the latter is employed to interpret things in
words rather than in data, and to shed more light on various dimension of the research
problem (Miller, 1983). In studies pertaining to social groups like the tribes, in which
care has to be given to the anthropological dimension as well, it is better to apply both
methods in a judicious manner. This is because since tribes are socially backward and
functionally illiterate in many respects, eliciting quantitative data from them may not
always be possible in all aspects. In addition, if data is furnished from such groups on
issues that come under the study, the reliability needs to be ensured. Moreover, while
researching into issue on tribes it is necessary that the researcher must mingle with the
tribes so that accurate information can be obtained which is possible only with the help
of qualitative research. On the other hand, in the case of quantitative research as is well
known often the researcher appears to be a mere spectator once the questionnaire is
handed over to the respondent or the researcher’s job ends with the process of interview.
Quantitative method of collecting data thus gives insufficient scope for investigating
into tribal issue in a better way.

Many issues of tribes are interconnected with the culture and social organization
of the tribal system. To go deep into this complex aspects one has to rely on the
qualitative research methods like Focus Group Discussion and the Case Study Methods.
Using quantitative methods, it is easy to arrive at relationship and association among
economic variables but it is quite uneasy to establish the underlying factors responsible

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 68
Chapter 2 Financial Exclusion

for such associations. It is here the qualitative research comes for rescue, by using
which it is possible to unearth the factors leading to the relationship between economic
variables (Remenyi, 1998). Thus, qualitative research coupled with quantitative research
is imperative for studying the tribal issues. Because of these reasons, the present study
employs quantitative investigation involving mainly data collection, analysis, and Focus
Group Discussion (qualitative too) for the research work. This method of combining
two or more methods in research endeavors is known as ‘triangulation’ (Creswell,
2003). In this study, both primary and secondary data have been employed. Primary
data is collected through the interview method and the secondary data have been
collected from various sources, which are elaborated in the succeeding sections.

2.12.3 Data Collection and Survey

The present study makes use of the survey method applying a pre-structured and
pre-tested interview schedule for the collection of primary data from the respondents
(the tribes). The face-to-face interview technique was used in the data collection
process. This is an effective method in the sense that since the same set of questions is
put to each respondent it is easy to arrive at inferences and generalization based on the
data analysis. The interview method is applied as most of the tribes being not
conversant with filling the schedule may find it difficult to complete the process of
furnishing the data. The researcher has tried the best to do away with the possibility of
involving any bias while filling the schedule based on the responses of the interviewee.
The interview schedule consisted of closed-ended questions since they can be applied
without any direct confrontation with the respondents. In addition, it is easy to elicit
responses using the closed-ended questions as response alternatives are provided in the
schedule (Oppenheim, 2000). The interview schedule was pre-tested with a small
sample before the actual survey began.

2.12.4 The Sampling Process

The population relevant for the study and the process of choosing the sample for
the collection of primary data are discussed in this section.

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 69
Chapter 2 Financial Exclusion

2.12.4.1 Population and the Sample Frame for the study

The population relevant for the present study refers to ‘the aggregate of all cases
that conform’ to the purpose of the study (Gillham, 2000). In the present study, the term
population or universe is meant to mean all the tribe households that fall under the
revenue administrative boundary of the districts of Wayanad in Kerala. The researcher
chooses the sample frame from the relevant population for the study. It needs to be
borne in mind that the sample frame is not the sample. Sample frame is the list of units
that form a part of the population from which the researcher has to choose the sample.
In the present study sample frame is the tribal settlement colonies that the researcher
chooses for the study. To choose the sample frame and the sample for this study the
researcher has used the Probability Proportionate to Size sampling techniques (PPS
method). This is a form of cluster method of sampling which the researchers usually
apply to the anthropologically related studies. The following section elaborates on the
selection of sample using the PPS.

2.12.4.2 Procedure of sample selection using Probability Proportionate to Size

Sampling

 In this sampling first, a list of panchyat and the total number of tribe households
(only from selected tribe communities viz. Paniya, Adiya, Kuruma and Kurichya) that
come under each panchayt is prepared (see column A in the Appendix 2.2). Then we
calculate the cumulative frequency distribution for the panchayats (column B). The last
number in this column gives us the total number of these tribe households in the
Wayanad district (it is 29397). After this, we decide that 10 panchyats are to be selected
for choosing 500 sample households units. Then, we divide the total household by the
number of panchyats to be visited, that is 10. The result 2940 (round figure) is the
Sampling Interval (SI). Now, we choose a number between 1 and 2940 as the Random
Start (RS). In this procedure, we have chosen 1506 as the RS. The panchyat
corresponding to the cumulative frequency in which the RS is included is selected as the
first panchyat. Here, we take Noolppuzha Panchyat, as the first one since the RS, 1506,
is included in the cumulative frequency, which corresponds to this panchyat. Then we
add RS with SI to get the second panchayat that is here Pullpally. Then we add RS with

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 70
Chapter 2 Financial Exclusion

2 x SI to get the third Panchyat. Continuing this process, we have selected the following
panchyats from which sample is to be collected.

Table 2.2 Panchayat Chosen for Collecting Sample

And the Distribution of Tribe Population
Panchyat Paniya Adiya Kuruma Kurichya Total
Noolppuzha 1058 0 920 1 1979
Pullppally
748 174 341 8 1271
Padinjarethara
466 173 639
Mananthavady
508 700 2 425 1635
Mooppainadu
174 1 32 9 216
Kaniyambatta
674 293 270 1237
Nenmeni
1020 664 3 1687
Thornadu
500 656 1156
Kottathara
554 624 1178
Thirunelly
382 1196 3 365 1946

Source: Compiled and Extracted from Data on Tribes by KILA (2008)

The next step is to decide the size of sample to be chosen for each tribe
community from each of these panchyat. Since we have to choose 500 samples from
these 10 panchyats we decide to collect 50 samples from each panhyat, and out of this
50 sample, households of each community have been chosen based on the proportion of
that community in the total tribe households of that panchyat (See Appendix. 2.3 for
detailed table). Based on this the number of sample that have been collected from each
panchayat is given as follows.

The next step in the sampling process is to choose the Settlements colony from
which sample households are to be selected. For this, with the help of tribal promoters
the researcher identified settlement colonies of each community in a panchyat from
which sample is to be chosen. After this, the researcher employed simple random
sampling method using the table of random numbers to choose the households for
conducting the face-to-face interview with the tribe households (Miller, 1983). The
sample sizes for each communities are worthy of conducting this study since it is
universally accepted that a sample size of more than 30 would be a good estimator of
the population (Jessen, 1978).

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 71
Chapter 2 Financial Exclusion

Table 2.3 Sample Chosen for Collecting Data

Panchyat Paniya Adiya Kuruma Kurichya Total
Noolppuzha
27 0 23 0 50
Pullppally
29 7 13 0 50
Padinjarethara
36 0 0 14 50
Mananthavady
16 21 0 13 50
Mooppainadu
40 0 7 2 50
Kaniyambatta
27 0 12 11 50
Nenmeni
30 0 20 0 50
Thornadu
22 0 0 28 50
Kottathara
24 0 0 26 50
Thirunelly
10 31 0 9 50
Total
261 59 76 104 500
Percentage in the total
Sample 0.52 0.12 0.15 0.21 1.00

2.12.4.3 Pilot Survey

Pilot survey is necessary as it helps the researcher to verify whether the unit of
the sample responds to the survey or not. It is also required to see whether the objective
based analysis of the data can be done with the present interview schedule or not.
Moreover, in the case of studies pertaining to tribes pilot surveys are indispensable, as
the researcher may not know in advance, as to how the tribe responds to the survey. For
the present study the pilot survey was undertaken in the month of October 2011 in four
settlement colonies each belonging to one tribe community. Convenience sampling
method was used to take sample for conducting the Pilot Survey. Before putting the
interview schedule for pilot survey, discussions were held with the tribal officers,
learned tribe members, tribal promoters, banking officials and all other stakeholders in
tribal development to elicit their opinion as to how the questions would be designed to
realize the objective of the study. Taking advice from them, the interview schedule was
drafted and redrafted before they were put for pilot survey. The experiences from the
pilot survey also enabled the researcher to make necessary changes in the strategy of
interviewing the tribes. The visits made to the survey fields and the discussion with the
tribe men especially the youths had helped the researcher to establish a rapport with the

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 72
Chapter 2 Financial Exclusion

tribes even before the actual survey took off. The researcher took the help of tribal
promoters wherever necessary to communicate with the tribes.

2.12.4.4 The Period of Actual Survey

The actual survey was conducted between November 2011 to April 2012.
Continuous interaction with the tribes had made the data collection easy towards the end
of the survey period. The cooperation of the tribe officials and the promoters was of
immense help to the researcher. The researcher had the opportunity to taste the tribal
food on certain days of heavy schedule, as shops were not available in some interior
places. The researcher covered kilometers to reach settlement colonies.

2.12.5 Analyzing the Data

The collected responses from the units of sample in the form codes and values
were put to statistical software for analysis. Descriptive and inferential statistics were
done with the help of the software. Descriptive statistics as mean, medium, standard
deviation, and range were calculated wherever they deemed essential for the analysis.
With the use of descriptive, it is possible to find out the central tendency and measures
of dispersion of the data collected on different variables. Chi-Square test for
independence, the one-way Analysis of Variance (ANOVA) are the other statistical tests
that this study has used.

Chi-Square Test for Independence: This test is used to understand whether two
categorical variables are associated or not. This type of analysis is of immense use in
analysis on data relating to different aspect of tribes in our study. The standard equation
for the Chi-Square Test for independence is given as:

Χ2 = ∑ (0-E)/E
Where “O” is observed frequencies
And
“E” is Expected frequencies.

One Way Analysis of Variance (ANOVA): This is employed in cases where

more than two variables are to be compared with their mean scores. This is known as
One-Way as it measures the impact of one independent variable on the dependent
variable. It is of extensive use in social science research (Gaur & Gaur, 2010). In this

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 73
Chapter 2 Financial Exclusion

study, it is used to understand whether there is any difference among tribe communities
with regard to the mean income, expenditure and the like.

2.12.6 Qualitative Methods

As discussed above qualitative methods of research have to be adopted to

unearth all aspect of the problem of financial exclusion among the tribes under this
study. Focus Group Discussion and Case Studies are two popular qualitative research
methods being applied by the social scientists (Creswell, 2003).

2.12.6.1 Focus Group Discussion

The present study employs FGDs to understand the reasons for financial
exclusion among the tribe households with emphasis on unearthing the factors tempting
the tribes to exclude themselves from seeking financial products when the service
providers make them available. FGDs were conducted separately for all the four tribal
communities under this study. In each FGD, the researcher ensured that 8 to 12
members participated in the discussion (Stewart, Shamdasani, & Rock, 2007). The
participants were chosen in such a way that they were not related with each other. The
participants for FGD were selected from the sample from which quantitative data were
collected. After explaining the need for conducting FGD, the researcher started probing
into reasons for exclusion by asking first general questions and then moving on to
specific issues. In FGD, the research applied Funnel Approach to Questioning, which
begins with broad questions followed by more narrow questions on issues relating to the
purpose for which the FGD is undertaken (Stewart, Shamdasani, & Rock, 2007). The
researcher chose to use this method, as it is the appropriate method for topics that are
sensitive like the issue of the financial exclusion of tribes. Along with the Funnel
Approach, the researcher also used the Inverted funnel sequence method of questioning
where first closed ended questions are asked followed by increasingly more open-ended
questions (Marshall & Rossman, 2006). The purpose of this method is to motivate the
participants in FGD to talk more freely about the problems that they face and their
opinion on how they are excluded from having basic financial products.

Before we plunge into the analysis of primary data collected adopting the above
narrated research design, it is pertinent to get an understanding of the problem of
financial exclusion in India based on the secondary data. The next chapter endeavors
into this task.

Financial Exclusion among the Scheduled Tribes: A Study of Wayanad District in Kerala 74
Chapter 2 Financial Exclusion

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