Financial Inclusion and Self Help Groups

(An Abstract)

S S Sangwan*

India in last 15 years has witnessed unprecedented growth in financial services, unfolded by

liberalization and globalization of financial services due to adoption of Information

Technology and unlocking of the regulatory framework. But alongside this positive

development there are evidences that the formal financial sector still excludes a large section

of population. As on March 2006, the saving accounts per 100 adult populations were 63 and

credit accounts were only 16 in all India (RBI, BSR 2006).

To empirically ascertain the determinants of financial inclusion, the state wise percentage

adults in terms of saving and credit accounts (dependant variable) were regressed with

independent variables like the branch density, level of income, literacy and adults covered

under SHGs.

The cross section data of 42 Regions/States/UTs for the year 2006 was used.

The estimated regression equations revealed that the branch density has positive and

significant coefficient with the percentage of adults having saving as well as credit accounts.

The coefficient of per capita income was also positive and significant in explaining

percentage of adult having saving accounts, though; this coefficient was not significant with

level of credit account. Perhaps, more eligibility of targeted sections under various credit

sponsored schemes by Central and State Governments from poorer states may have indirectly

influenced financial inclusion of in terms of credit accounts. Literacy percentage has

surprisingly negative relationship with both percentage of saving as well as credit accounts of

adults. It may be partly because of the higher literacy percentage of population below 18

years who are not eligible to open bank account and partly due to lack of financial education

among the educated ones. The empirical results substantiates that the person having low

income and less geographical access to bank e.g., agricultural labourers, marginal and small

farmers, migrant labourers, tribal and women may be excluded from the financial inclusion.

The variable of percentage of adult covered in SHGs has also positive association with the

level of financial inclusion especially in credit accounts. It suggests that SHGs can play

significant role in achieving the financial inclusion especially for women and low-income

families.

Financial Inclusion and Self Help Groups

S S Sangwan*

The cross-country data and evidence from specific policy experiments suggest that more-

developed financial systems are associated with lower inequality and lower financial

exclusion (Rakesh Mohan, November 2006, World Bank 2007). The impact through the

mechanism of financial markets may be more sustainable than the grants and subsidies.

Hence, if financial market frictions are not addressed, redistribution approach for equality

may have to be endlessly repeated, which could result in damaging incentives to work and

save (World Bank, op cit). The financial development and improved access to banking &

related services not only accelerate economic growth but also reduce income inequality and

poverty (HM Treasury 2007 and Sangwan, 2007). Without inclusive financial systems, the

financially excluded individuals and enterprises with promising opportunities are limited to

their own savings and earning.

India in last 15 years has witnessed unprecedented growth in financial services, unfolded by

liberalization and globalization of financial services due to adoption of Information

Technology and unlocking of the regulatory framework. The banking sector responded

quickly to the new technology; diversified in multiple services and thus the share of finance

& related services in the gross domestic product increased to about 14 per cent in 2006-07

from 11 per cent in 1991-92 (RBI, Annual Report 2006-07). But alongside this positive

development there are evidences that the formal financial sector is still excludes a large

section of population. As on March 2006, the saving accounts per 100 adult populations were

63 and credit accounts were only 16 in all India (RBI, BSR 2006). Reserve Bank of India

(RBI) and Government of India (GOI) are very much concerned about the financial exclusion

as expressed in various issues of Monthly Bulletins of RBI during 2006 & 2007 and Central

Budget of 2007-08(5,1). The purpose of this paper is to study the relevance of Self Help

Groups (SHGs) in achieving the financial inclusion in the background of initiatives taken so

far by RBI and GOI.

Objectives of the Paper

The broad objective of the paper is to study the scope of SHGs in expediting the financial

inclusion in big country like India. The specific coverage of the paper is as under.

i. To clarify the basic concepts related with financial inclusion, which has become

a buzzword in last two years.

ii. To study the extent of financial exclusion in different states of the country.

iii. To determine the barriers to financial inclusion through empirical analysis.

iv. The study the strength of SHG programme to achieve Financial Inclusion and

evolve a strategy to make use of the same.

What is Financial Inclusion?

Financial inclusion broadly means 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. Since late nineties, the sophisticated and

competitive financial services enable access to a wide range of financial products and

opportunities to meet emerging credit needs. Realizing the importance of Financial Inclusion

even developed countries like the United Kingdom has been aggressively pursuing the same

since 1997 and set up a Task Force in 2005, which continuously monitors the progress and

advises the Government to expedite the programme. The Dependency and Indemnity

Compensation (DIC) Board of Directors in US approved on November 2, 2006 the

establishment of a DIC Advisory Committee on Economic Inclusion to advice the DIC for

expanding access to banking services for under served populations. The report of the Task

Force in March 2007 (HM Treasury) defines financial inclusion as the access to appropriate

financial services for every person for enabling him to :

i. Manage his money on day-to-day basis, effectively, securely and confidently;

ii. Plan for future and cope with financial pressure in short term with the help of long

term funds; and

iii. Deal effectively with financial distress like long term sickness, unemployment, or

family break down by availing money management advice and insurance.

The overall objective of these measures is to increase the people’s ability to manage their

money. However, financial inclusion is not only limited to opening of bank accounts but also

the banking education to make use of banking facilities and products to better manage their

money and capabilities.

Extent of Financial Exclusion in India

The coverage under financial inclusion is assessed in terms percentage of adults, having bank

accounts. The bank accounts may be all types of deposit and credit accounts but generally

only the saving accounts have been considered more realistic measure (Usha Thorat, July

2007 and Leeladhar, January 2006). A recent study (Mandira Sarma, 2007) has evolved a

concept of Index of Financial Inclusion (IFI) to make it more comprehensive indicator of

inclusion in an economy. The index is an amalgamation of three aspects of the financial

inclusion; penetration of the banking system, its availability to users and its actual usage.

Penetration is measured using data on number of bank accounts per 100 population, number

of bank branches per thousand population for availability and the size of bank credit and

deposits relative to the GDP to indicate usage1. In fact, saving account is the basic account

2 to

avail all types of banking services including credit facility and in view of limited scope of this

paper, FI is examined in terms geographical coverage and percentage of population having

saving bank accounts. Moreover, there are three types of banking agencies in India viz.,

Scheduled Commercial Banks (CBs) in public and private sectors, Regional Rural Banks and

Cooperative Banks. In most of the studies, the data of CBs in public sector has been used due

to its availability in the annual RBI publication, Basic Statistical Returns. This data may be

considered appropriate to a large extent as most of the emerging banking facilities & services

are available from these banks. The state-wise number of branches, total adult population and

their coverage under saving bank and credit accounts is given in table-1.

The table shows that as on 31 March 2006, percentage of adult population having saving

bank accounts is 63 for all India assuming that one person has only one account. Among the

regions, the FI is the lowest 42 per cent in the North Eastern Region and the maximum 86 per

cent in the Northern Region. The coefficient of variations is 55 per cent across states.

The States/Union Territories with FI less than the all India average in ascending order are

Manipur, Nagaland, Chatisgarh, Mizoram, Bihar, Orissa, Madhya Pradesh, Assam, Tripura,

Meghalaya, Arunachal Pradesh, Jharkhand, Rajasthan, West Bengal, Sikkim and Uttar

Pradesh: whereas Chandigarh, Goa, Delhi, Punjab, Pondichery, Uttranchal, Daman & Due,

Kerala, Haryana and Himachal Pradesh are having FI more than 20 per ecnt of all India

average. The other states mainly from Southern and Western Region have moderate FI equal

to the national average or upto 20 per cent higher. The inclusion in terms of credit accounts of

adults is 16 per cent for all India, varying from 8 per cent in the North Eastern Region to 29

per cent in the Southern Region. The coefficient of variations is 240 per cent across states.

There is no visible positive association between inclusion in terms of saving and credit

accounts viz., the ranks in saving and credit accounts of Chandigarh (1:28), Bihar (37: 15),

M.P (35:14), Goa (2:30), etc. The states with relatively lower per capita income have more

inclusion in terms of credit accounts, which may be due to more financing under Central and

state governments' subsidy schemes.

Table-1: State-wise Deposits and Credit Accounts of Commercial Banks-March 2006 (No of A/C and Population in 000)

Account/00Adults Region / State / Union Territories

Number of

Bran ches

Popula tion Per Branch

Saving Accounts

Credit Account

s

Total Popula

tion

Adult Population (>19years) Saving

Deposit Credit

Northern Region 1,821 11224 58,584 9,247 132,676 67,822 86 14ı

Haryana 1,764 11952 9,157 1,434 21,083 11,308 81 13ı

Himachal Pradesh 820 7411 2,671 439 6,077 3,567 75 12ı

Jammu&Kashmir 873 11535 3,672 473 10,070 5,380 68 9ı

Punjab 2,824 8601 14,780 1,805 24,289 14,185 104 13ı

Rajasthan 3,512 16080 14,119 2,904 56,473 28,474 50 10ı

Chandigarh 244 3692 1,191 164 901 546 218 30ı

Delhi 1,784 7726 12,994 2,027 13,783 7,930 164 26ı

North-Eastern 1,949 19751 8,180 1,639 38,495 19,709 42 8ı

Arunachal Pradesh 69 15813 254 41 1,091 545 47 8ı

Assam 1,273 20926 5,993 1,031 26,638 14,074 43 7ı

Manipur 78 30624 250 66 2,389 1,222 20 5ı

Meghalaya 189 12201 503 122 2,306 1,088 46 11ı

Mizoram 80 11138 166 42 891 476 35 9ı

Nagaland 73 27242 239 55 1,989 996 24 6ı

Tripura 187 17065 775 282 3,191 1,784 43 16ı

Eastern Region 12,308 18493 54,716 10,967 227,613 122,136 45 9ı

Bihar 3,647 22725 14,543 2,866 82,879 40,934 36 7ı

Jharkhand 1,525 17646 6,818 1,283 26,909 13,737 50 9ı

Orissa 2,333 15734 8,246 2,864 36,707 21,065 39 14ı

Sikkim 56 9652 173 35 540 289 60 12ı

West Bengal 4,713 17021 24,788 3,899 80,221 45,897 54 8ı

Andaman 34 10478 149 20 356 214 70 9ı

Central Region 14,104 18131 71,717 12,270 255,713 129,317 55 9ı

Chhattisgarh 1,061 19600 3,846 802 20,796 11,209 34 7ı

Madhya Pradesh 3,563 16948 13,249 3,029 60,385 31,405 42 10ı

Uttar Pradesh 8,562 19394 50,882 7,811 166,053 82,230 62 9ı

Uttaranchal 918 9237 3,741 628 8,480 4,473 84 14ı

Western Region 10,996 13557 57,211 12,323 149,072 86,182 66 14ı

Goa 357 3765 1,693 178 1,344 891 190 20ı

Gujarat 3,840 13176 18,958 2,697 50,597 28,863 66 9ı

Maharashtra 6,771 14289 36,369 9,436 96,752 56,208 65 17ı

Dadra&Nagar Haveli 12 18371 101 7 220 123 82 6ı

Daman & Diu 16 9879 89 5 158 97 91 5ı

Southern Region 19,598 11401 93,010 38,989 223,445 135,574 69 29ı

Andhra Pradesh 5,578 13576 28,282 10,104 75,728 44,232 64 23ı

Karnataka 5,176 10188 22,101 7,669 52,734 30,623 72 25ı

Kerala 3,668 8680 16,495 6,227 31,839 20,560 80 30ı

Tamil Nadu 5,074 12241 25,491 14,840 62,111 39,511 65 38ı

Lakshadweep 10 6060 27 3 61 34 80 9ı

Pondichery 92 10585 615 146 974 614 100 24ı

ALL-INDIA 70,776 14,511 343,418 85,435 1,027,015 541,032 63 16ı Source: RBI, BSR 2006, Table No 1.20 and Leeladhar (RBI Bulletin January 2006) for adult Population.

Determinants of Financial Inclusion

Why do about 37 per cent adults in India do not use financial services? The states/regions

with low level of FI indicates that first major constraint may be less geographical or physical

access when clients are required to visit a branch or use an automated teller machine (ATM).

While an ideal measure would be the average distance from household and cost involved in

terms of fare and time to reach a branch/ATM. The next best or a crude indicator can be the

number of branches per sq. km area or per capita. The bank branches have already increased

from 8262 in 1969 to 69471 in 2006 bringing down the population per branch from 64 to 16

thousands. In terms of branches per 10000 sq. km, India has 215 as compared to 790 in

developed Spain and one each in underdeveloped Ethiopia and Botswana. However, in India,

there is wide variation in terms of population per branch of CBs across states with 3692/3748

in Chandigarh/Goa to 30624/22725 in Manipur/Bihar. Significance of this variable in FI is

empirically estimated in table-2. Besides, banks have minimum account-balance

requirements or fees that may be out of the reach of many potential users. RBI has removed

some of these constraints by giving directive to banks during 2005-06 for opening no-frills

accounts3. However, low level of income with more than 27 per cent of families below

poverty line may still remain a barrier as revealed in the regression equations ahead. The

relationship between per capita income and level of FI is also estimated in table-2. Lack of

awareness about banking education due to bankers’ market4 and illiteracy in large section of

population is another factor to be tackled. The bankers’ market restricts the banking

awareness even in educated people.

Estimated Equations

The empirical evidence of impact of branch density, level of income and literacy on financial

inclusion in terms of saving and credit accounts was estimated with the following regression

equation.

Y = a+bX1+cX2+dX3

Where Y = the percentage of adults with saving or credit accounts

X1= the per capita income, X2= the population per branch, X3= literacy percentage

The cross section data of Regions/States/UTs for the year 2006 with 42 observations in all, in

terms the percentage of adults’ saving or credit accounts were taken as a dependent variables.

The population and literacy data of 2001 Census as given in table-I was used to work out

branch density and awareness. The ranks of percentage adults’ bank account, per capita

income and literacy were computed in ascending order, i.e. 1 to 9 while the ranks of

population per branch were computed in descending order, i.e. 9 to 1 to use in estimating the

relationships. The estimated equations are given in table -2.

Table-2: Regression Equation for Explaining the Financial Exclusion

Sr

No Dependent

Variable Constant Per Capita

income Branch

Density Percentage

Literacy Degree of

Freedom R2

1 Saving accounts Of Adults

2.891

(0.466) 0.533

(4.376) 0.657

(5.660) -0.337

(-2.751) 38 0.76

2 Credit accounts

Of Adults 8.360

(0.854) O.377

(1.980) 0.397

(2.197) -0.226

(-1.183) 38 0.35

3 Saving accounts

Of Adults* 1.521

(0.288) 0.336

(2.523) 0.695

(6.560) -0.117

(-0.918) 33 0.83

4 Credit accounts of Adults*

2.414 (0.313)

-0.046 (-0.238)

0.611 (3.963)

O.210 (1.134)

33 0.58

* After taking out smaller states/UTs with high literacy but low branch density and per capita income viz., Mizoram, Andaman and Nicobar, Daman & Diu and Nagar Haveli. Figures in brackets are t values.

The equation (1) in table-2 shows that higher per capita income and geographical access have

positive and significant regression coefficients with accounts, though literacy has a

significant negative coefficient. To ascertain the reasons for negative impact of literacy, the

equation (3) was again estimated by excluding 5 smaller states/UTs viz., Mizoram,

Lakshadweep, Andaman & Nicobar, Daman Due & Nagar Haveli with high literacy and low

percentage of saving accounts. This equation again substantiates positive significant impact

of per capita income and branch density and negative but insignificant relationship with

literacy. Moreover, the coefficient of determination level of explanation of the regression

increased from 76 per cent in equation (1) to 83 per cent equation (3), indicating that these

three variables explain opening of saving account to the extent 83 per cent and the rest may

be due to other factors.

The FI in terms of credit accounts is explained by these variables to the extent of 35 per cent

only when data of all the states/UT are taken in equation (2). In this equation, the branch

density and per capita income have positive impact, though former is more significant. The

literacy turned out to be negative in credit inclusion too, though relation is insignificant. On

excluding data of five smaller states as above, the variations were explained to the extent of

58 per cent with the branch density having the highest positive impact, followed by literacy

and per capita income has a insignificant negative relationship. It brings out that increase in

banking network is the most important variable followed by per capita income for enhancing

saving as well as credit inclusion. The negative relation of literacy indicates that mare literal

education without blending with financial education is not significant. The value of constant

in equations of credit inclusion indicates that the other variables like extent of eligibility

under government sponsored schemes, infrastructure, law & order etc., may also be important

in increasing credit accounts.

Who are excluded?

Above have brought out the persons having low income and less geographical access to

banks are likely to excluded from the financial inclusion. Such persons may be mostly the

families of land-less agricultural laborers, marginal farmers, oral lessees, migrant laborers

and the educationally and economically deprived groups like tribal and women. Of the total

deposit accounts as 31 March 2006, women accounts are just 23 per cent at all India varying

widely across regions. The RBI web site of Raju and Money Kumar (2007) and directive to

banks for setting banking counseling centers will help in increasing financial literacy and

implanting policy initiatives taken by the RBI in last 2/3 years.

Measures for Financial Inclusion in India

Indirectly financial inclusion of low income people in terms of credit accounts has taken

place through various government sponsored credit schemes like Small /marginal Farmers

Development Agencies in early 70’s, Integrated Rural Development programme (IRDP)

since 1978 to 1999 and Survodya Gramin Savarojgar Yozna (SGSY) since 1999. The Kisan

Credit Card (KCC) is another big success in linking farmers with banks. Artisan Card and

General Purpose Credit Card (GCC) are the latest schemes to link low-income people with

banks. One common weakness of these credit schemes has been the absence of saving/current

account in general and taking a loan from banks has been one time life event for majority of

such borrowers. Whether it can be termed as financial inclusion as defined above and lead to

an economic inclusion on sustainable basis?

As regards, saving accounts, the policy initiative from Government and RBI were lacking till

the highlights of the task force on FI in UK (op cit). Since 2005, the important initiatives for

financial inclusion by RBI and Central Govt. are as under :

i. RBI in its 2005-06 Credit Policy issued guidelines to make available an improved

basic banking ‘no frills’ account with nil or very minimum balances and charges with

a view to achieving greater financial inclusion. Further, in order to minimize difficulty

in opening the bank accounts due to the procedural hassles, the Know Your Customer

(KYC) procedure for opening accounts has been simplified for low-income persons.

a. Recently, RBI advised all CBs and RRBs to provide a

General Purpose Credit Card up to Rs.25, 000 in the nature of revolving credit

facility at their rural and semi urban branches.

iii. An Internal Group set up by RBI on micro finance (Khan Committee), recommended

to permit banks to use micro finance institutions as business facilitators and

correspondents to enable banks to increase their outreach and ensure greater financial

inclusion.

iv. In the Budget Speech in February 2007, the FM of Central Government announced

setting up of two funds of Rs 5000 million each viz., Financial Inclusion Fund with

NABARD and Financial Inclusion Technology Fund. Their utilisation is yet to start.

As brought in the empirical analysis, the branch network and banking education are the most

important variable especially for credit inclusion, and further, women are the least included in

terms of even saving accounts. Therefore any bank-linked approach like self-help groups/

micro finance institutions, which adds to the existing, banking network with focus on women,

can play a pivotal role in financial inclusion. The World Bank Report on South Asia (2007)

highlights that the micro finance groups since 2000 have come up in big way in India and the

programme has focus on women as discussed ahead.

SHG Approach and Financial Inclusion

As an innovative credit channel, the Self Help Group (SHG) approach was introduced in

1992, to link poor people with bank credit. Under this programme, about 40 million rural

families have been linked with banks up to March 2007 (NABARD). The distinguishing

feature of this approach as compared to other sponsored credit schemes is the learning the

management of own money by the poor before availing bank loan. Moreover, the SHG

approach (not SGSY) does not involve any subsidy; hence, it is sustainable with its own

strength. A number of studies have found that SHG approach reduces the transaction cost for

banks and loan availing cost of borrowers. In financing SHGs, the requirement of collateral

by banks has been replaced by peer group pressure and hence this approach has enabled

social and economic inclusion of women by waiving the requirement of collateral. Some

important highlights of SHG- achievements in India are as under.

i. Upto March 2007, 2.925 millions SHGs & about 40.95 million families have been linked

with bank credit.

ii. Of the total SHGs, women groups are 86 per cent.

iii. During 2006-07, 0.686 million SHG linked with banks.

iv. During 2006-07 loan amount of Rs 664.3 million disbursed to SHGs.

v. Average Bank Loan per SHG is Rs 61000.

vi. Upto March 2007, Bank loan of Rs 180000 million provided to SHGs.

The state-wise outreach of the SHG programme in India is given in Table-3.

Table-3 : State-wise cumulative credit linked SHGs as on 31 March

Sr No

States 2005 2006 2007 % age to total in 2007

%age adults covered under

SHGs

1 Andhra Pradesh 492927 587,238 683,619 23 21.64 2 Tamil Nadu 220698 312,778 400,477 14 14.19 3 Karnataka 163,198 224,928 317,636 11 14.52 4 Orissa 123,256 180,896 234,451 8 15.58 5 Maharashtra 71,146 131,470 225,856 8 5.63 6 Uttar Pradesh 119,648 161,911 198,587 7 3.38 7 West Bengal 92,698 136,251 181,563 6 5.54 8 Rajasthan 60,006 98,171 137,837 5 6.78 9 Kerala 60,809 86,988 117,913 4 8.03

10 Assam 31,234 56,449 81,454 3 8.10 11 Bihar 28,015 46,221 72,339 2 2.47 12 MadhyaPradesh 45,105 57,125 70,912 2 3.16 13 Gujarat 24,712 34,160 43,572 1 2.11 14 Chhattisgarh 18,569 31,291 41,703 1 5.21 15 Jharkhand 21,531 30,819 37,317 1 3.80 16 HimachalPradesh 17,798 22,920 27,799 1 10.91 17 Uttarakhand 14,043 17,588 21,527 1 6.74 18 Sub-total 1,591,350 2,199,616 2,873,035 98 7.78 19 All India 1,591,350 2,238,786 29,24,786 100 7.57

Note: The percentage adults covered was worked out by taking adults population in Table-1

The table shows that outreach of the programme is the maximum in southern states, which

account for 52 per cent of the total SHGs in India and it may be one of the reasons for higher

FI in terms of saving as well as credit accounts in this region. To test this hypothesis, at the

first stage correlation was computed between the percentage of adults covered under SHGs5

and saving and credit accounts per 100 adults respectively. In this exercise, the states with

less than one per cent of adults covered by SHGs and the regional level data were excluded.

The correlation coefficients were 0.417 and 0.596 in case of saving and credit accounts

respectively.

In the second stage, the percentage of adults covered under SHGs was taken as another

variable along with the earlier three variables in table-2. With the four independent variables

the equations with reduced number of observations are as given in Table-4.

No Dependent

Variable Constant Per Capita

Income Branches

Density Percentage

Literacy %age of adults

covered in SHGs Degrees of

Freedom R2

1 Saving accounts

of Adults 4.032

(0.609)

0.419

(2.133)

0.623

(3.519)

-0.311

(-1.637)

0.226

(1.095)

20 0.70

2 Credit accounts

of Adults 1.646

(0.205)

O.227

(.957)

0.490

(2.289)

-0.142

(-.617)

0.644

(2.589)

20 0.62

The table-4 shows coefficients of %age of adults covered in SHGs is positive in the equations

with dependent variable as either the saving accounts or credit accounts indicating positive

impact of SHGs on financial inclusion, though not significant with saving accounts which

points towards need for further enrichment of the SHGs with financial education.

So far, the SHGs with dominance of women (86 %) and the poor sections of the population

are linked with bank through one or another facilitator. The banking education is the

philosophy of SHG approach and hence it is apt to the objectives of FI. However, all the

members may not be having the individual saving accounts due to lack of awareness about

benefits of bank account and the constraints like illiteracy, higher cost in accessing the

branch/ATM, no surplus to pay initial deposits as indicated earlier in our empirical results

from the cross section data of states. The Central and State governments can contribute in

minimizing some of these constraints by providing initial matching grant for opening saving

account and technological support to access through mobile phones and increasing number of

rural ATMs in government establishment like post offices, schools and hospitals. The

objective of providing at least one touch points for banking operations can be achieved with

support of government for initial capital investment, banks and community organizations like

NGOs & SHGs which have focus on financial inclusion of low-income population.

Conclusions

The paper brings out that as on March 2006, the financial inclusion of adults above 19 years

of age is 63 per cent in terms of saving accounts and 16 percent in terms of credit accounts.

The multiple regression equations estimated with cross section data of States revealed that the

branch density has positive and significant coefficient with the percentage of adults having

saving as well as credit accounts. The coefficient of per capita income was also positive and

significant in explaining percentage of adult having saving accounts, though; this coefficient

was not significant with level of credit account. Perhaps, more eligibility of targeted sections

under various credit sponsored schemes by Central and State Governments from poorer states

may have indirectly influenced financial inclusion of in terms of credit accounts. Literacy

percentage has surprisingly negative relationship with both percentage of saving as well as

credit accounts of adults. It may be partly because of the higher literacy percentage of

population below 18 years who are not eligible to open bank account and partly due to lack of

financial education among the educated ones. The empirical results substantiates that the

person having low income and less geographical access to bank e.g., agricultural labourers,

marginal and small farmers, migrant labourers, tribal and women may be excluded from the

financial inclusion. The multiple regression equations were also estimated by including

percentage of adult covered in SHGs, the variable has positive association with the level of

financial inclusion especially in credit accounts. It suggests that SHGs can play significant

role in achieving the financial inclusion especially for women and low-income families.

___________________________________________________________________________

Footnotes

1. A value index of financial inclusion (IFI) between 0.6 and 1 indicates a high level of financial

inclusion; scores between 0.4-0.6 indicate a medium level of inclusion while all scores below 0.4

indicate a low level of inclusion. In a group of 55 countries with three dimensional data, six countries

viz., Spain, Austria. Belgium. have scores above 0.6, another seven countries have scores between 0.4-

0.6 and the remaining 42 have scores below 0.4. India ranks 30 with a score 0.153. (Mandira Sarma

(2007), Index of Financial inclusion. Indian Council of Research on International Economic Relations,

December)

2. A basic account allows you draw money for your own personal use and pay bills that may arise. The

bank may offer debit card but overdraft and cheque facilities are generally denied for basic account due

to limited balance requirements.

3. During 2005-06, the RBI issued guidelines to make available a basic banking ‘no frills’ account with

nil or very minimum balances as well as charges with a view to achieving greater financial inclusion.

The KYC norms have also been relaxed for these accounts with balances not exceeding Rs. 50,000 and

credits in the accounts not exceeding rupees Rs.1, 00,000 in a year. A number of banks have since

come out with schemes for such ‘no frills’ account facility. For eligibility of such accounts some banks

put income criterion (e.g. upto Rs 5000 by SBI and no such limit ICICI bank).

4. Bankers’ market is still prevailing in India. A majority of borrowers never read the various conditions

or ask clarifications from the banker due to fear of denial of the loan. There are still hidden costs in

terms of processing fee/ demand of various unwarranted documents from the borrower.

5. Percentage of Adults covered under SHGs was worked with average 14 adults per SHG

References

1. Government of India (2007), “ Budget 2007-08, Budget speech, February,”

2. HM Treasury(2007),“Financial Inclusion: The Way Forward,” London March

3. House of Commons (2006), “The Role of Government, FSA and Financial

Capabilities,” First Report of session 2006-07, 21 November 2006

4. Mitra Rona (2006), Financial Inclusion: Meeting The Challenge”, People’s

Democracy, April 22 & 29, 2007 available at www.pd.cpim.org 18.

5. National Conference on Financial Inclusion and beyond,

www.micrifinancegateway.org

6. Reserve Bank of India, “Speeches published on Financial Inclusion and Related

Topics in its following, Monthly Bulletins during 2006 and 2007

i. July (2007), Financial Inclusion -The Indian Experience by Usha Thorat

ii. December (2006), Financial Inclusion and Sustainable Development: Role of

IT and Intermediaries, Address to Annual Bankers Conference at Hydrabad on

November 4 by Usha Thorat

iii. December (2006), Inclusive Growth: Role of Financial Education, Address to

Annual Bankers Conference at Hydrabad on November 4 by Gopinath Shyamala

iv. November (2006), “Economic Growth, Financial Deepening and Financial

Inclusion, Address to Annual Banker Conference at Hydrabad on November 3

by Rakesh Mohan.

v. October (2006), Role of Financial Education: The Indian case by RV Reddy,

Address to the International conference on Financial Education by OECD and

Pension Fund Regulatory and Development Authority at Delhi on September 21.

vi. February (2006), “Financial Inclusion and Millennium Development

Goals,” Address at the 4th Programme on Human Development and State

Finance at CAB Pune on January 6 by Usha Thorat.

vii. January (2006), Taking Banking Services to the Common Man -Financial

Inclusion, Commemorative lecture at the Fed Bank Hormis Memorial

foundation at Ernakulam on December 2, 2005 by Leela Dhar.

7. World Bank (2007), “Finance for All: Policy and Pitfalls in Expanding Access,”

Policy Research Report, http//go worldBank.org/4YSZ5KS6CO

8. Word Bank Report (2007), Micro finance in South Asia –Towards Financial Inclusion

for the Poor,’ http://worldbank.org

* Dr S. S. Sangwan, GM, NABARD Date : 10 Feb 2008

Address : 5150/2, MHC, Manimajra , Chandigarh- 160 101