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28 A CONCEPTUAL STUDY ON EMPOWERING BELOW POVERTY LINE CITIZENSTHROUGH FINANCIAL INCLUSION WITH SPECIAL REFERENCE TO M.P.
Ruchi Kushwah
Assistant Professor, Medicaps University Dr. Simranjeet Kaur Sandhar
Associate Professor, Indore Institute of Management and Research Center Dr. Maneesh Kant Arya
Reader, Institute of Management Studies.
Abstract - India is one of the largest and fastest growing economies of the world, but what has been the most disturbing fact about its growth is that its growth has not only been uneven but also discrete. It has been uneven in the sense that there has been no uniformity in its growth performance and it has been discrete and disconnected with regard to growth and distribution of growth benefits to certain sectors of economy. And thus the need for inclusive growth comes in the picture of Indian economic development. However for attaining the objectives of inclusive growth there is a need for resources, 21and for resource generation and mobilization financial inclusion is required. It plays a very crucial role in the process of economic growth. Financial inclusion is the broad based delivery of banking and other financial services at affordable cost to the poorest sections of society. In India, financial inclusion emphasizes to include maximum number of people under formal financial systems. The most important part of financial services in a region is typically measured by number of people who have access to bank accounts. The present study investigates the drive to financial inclusion in the form of the growth in bank accounts of scheduled commercial banks and the changes in below poverty line population.
The present paper focuses on to understanding inclusive growth phenomenon its need and financial inclusion as an instrument to attain it with reference to its extent in Madhya Pradesh, India. The research has been done using secondary data source. Analysis of natural hierarchical grouping cluster is done considering parameters like GDP per capita, literacy rate, unemployment rate and index of financial inclusion (Johnson R.A. & Wichern D.W., 2000).
Keywords: Inclusive Growth, banking, financial inclusion, poverty, Empowerment.
1 INTRODUCTION
India is one of the largest and fastest growing economies of the world, but what has been the most disturbing fact about its growth is that its growth has not only been uneven but also discrete. It has been uneven in the sense that there has-been no uniformity in its growth performance and it has been discrete and disconnected with regard to growth and distribution of growth benefits to certain sectors of economy. The Indian economy, though achieved a high growth momentum during 2003-04 to 2007-08, could not bring down unemployment and poverty to tolerable levels. Further, a vast majority of the population remained outside the ambit of basic health and education facilities during this high growth phase.
In recent decades, economic and social inequalities have increased alongside high growth rates which have increased regional inequalities. Over 25% of Indians continue to live in abject poverty. As a
result, Inclusive growth has become a national policy objective of the Union Government. And thus the need for inclusive growth comes in the picture of Indian economic development. In context of Indian growth planning it is a relatively new terminology which got the attention of policy makers in the Eleventh Five Year Plan.
Inclusive growth as the literal meaning of the two words refers to both the pace and the pattern of the economic growth, it basically means, broad based, shared, and pro-poor growth. As per the Planning Commission of India “The term
“inclusive” should be seen as a process of including the excluded as agents whose participation is essential in the very design of the development process and not simply as welfare targets of development programmers.” In a simpler and wider sense it means that inclusive growth as a strategy of economic
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29 development should not only aim atequitable distribution of growth benefits but also at creating economic opportunities along with equal access to them for all. In the present paper an effort has been made to understand the inclusive growth phenomenon its need and financial inclusion as an instrument to attain it with reference to its extent in Indian States.
2 FINANCIAL INCLUSIONS
Financial inclusion is the delivery of financial services, including banking services and credit, at an affordable cost to the vast sections of disadvantaged and low-income groups who tend to be excluded. The various financial services include access to savings, loans, insurance, payments and remittance facilities offered by the formal financial system.
Rangarajan Committee (2008) viewed financial inclusion as “The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost”
Financial inclusion is defined as the availability and equality of opportunities to access financial services.
It refers to a process by which individuals and businesses can access appropriate, affordable, and timely financial products and services. These include banking, loan, equity, and insurance products.
In simpler terms financial inclusion is about including the excluded in the financial system of the country, and tonsure that their financial & social security needs are taken care of through appropriate financial service providers.
3 ROLE OF FINANCIAL INCLUSION Financial Inclusion is imperative for inclusive growth of India, with more than 25 % of its population living in abject poverty government’s onus towards their growth and development is huge, and inclusive finance is one such measure which if targeted and attained in right manner will provide an apt solution to the severe problems of poverty andunemployment.Providing access to financial services has significant potential to help lift the poor out of the cycle of
poverty. Financial inclusion promotes thrift and develops culture of saving and also enables efficient payment mechanism strengthening the resource base of the financial institution which benefits the economy as resources become available for efficient payment mechanism and allocation.
Measuring access to finance is seemingly difficult because of very nature of reveal preference choice of an individual towards financial services. In less developed countries it has been widely practiced that the majority amount of finance is not percolated to people who have the actual need of it. Financial inclusion is the availability of banking services at affordable costs to the disadvantages section of population.
Financial inclusion emphasizes access of a host of financial services, which includes savings, loans, insurance, credit etc that are supposed to help the poor people out of poverty. The most important part of financial services in a region is typically measured by number of people who have access to bank accounts (Beck
& De la Torre, 2006; Littlefield et al, 2006). This is because bank accounts enables people to perform important financial functions like access to savings schemes, access to credit, taking loan, insurance, money transfer etc. Thus, bank accounts determine access to many other financial services (Mohan, 2006).
Internationally, having current or saving accounts on its own is not regarded as an exact indicator of financial inclusion.
Indeveloped countries, financial inclusion are generally related to the issues about social exclusion and welfare. In India, the basic concept of financial inclusion is the percentage of adult population having bank accounts. Only 41 per cent of adult populations do not have access to banking services. The coverage of financial services in terms of banks accounts are 39 per cent for rural areas, and 60 per cent for urban areas.
The reasons behind the dismal number of bank accounts are twofold: One can be addressed from the demand side and the other has its origin from the supply side.
Prevailing inequality is the fundamental reason for lower growth in bank accounts in India. People working in the unorganized sectors or even in the
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30 agricultural sector do not havesustainable as well as surplus level of income so that they can even think of about opening a bank account. Another reason behind the low demand for organized financial services in the rural area is the lack of investment opportunity in rural India.
From the supplier point of view, directed credit is always considered as a leakage to the banking business. Further, people struggling to meet their both ends do not have any mortgage holding so that they can proceed for loan from organized financial systems. The supply side disturbance can be solved with the help of active government policy, even within a short span of time. However, the demand side problems are acute and chronic in nature. It requires structural change of the economy.
4 THE SUSTAINABLE DEVELOPMENT GOALS AND FINANCIAL INCLUSION Financial inclusion will act as a catalyst for not just economic growth but also eradication of poverty. It will also help in achieving the Sustainable Development Goals (SDGs) set by the United Nations (UN).6 But financial inclusion does not merely mean an individual having access to a bank account. It means ensuring that individuals have full access to affordable and useful financial services and products so that they can fulfill their needs in terms of payments/ transactions/ wealth management, leading to:
• More savings
• Greater access to credit
• Reduced income inequality
• Availing insurance easily
Diagram 1: Financial Inclusion a with SDGS
Source: The UN’s SDG report
Diagram 2: Sustainable Development Goals
5 NEED FOR INCLUSIVE GROWTH India needs inclusive growth in order to attain rapid and disciplined growth.
Inclusive growth is necessary for sustainable development and equitable distribution of wealth and prosperity.
Achieving inclusive growth is important ands one of the biggest challenges for India. The challenge is to take the levels of growth to all section of the society and to all parts of the country. Rapid growth in the rural economy, sustainable urban growth, infrastructure development, reforms in education, health, ensuring future energy needs, a healthy public- private partnership, intent to secure inclusivity, making all sections of society equal stakeholders in growth, and above all good governance will ensure that India achieves what it deserves. The main thrust areas for need of inclusive growth can be summarized as below:
Removal of poverty and unemployment
Removal of income inequalities
Agricultural Development
Reduction in regional disparity
For social sector development
Protecting environment
However for attaining the objectives of inclusive growth there is a need for resources, and for resource generation and mobilization financial inclusion is required. It plays a very crucial role in the process of economic growth. Financial inclusion through appropriate financial services can solve the problem of resource availability, mobilization and allocation particularly for those who do not have any access to such resources. Thus in the current paper an effort is made to study
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31 the role of financial inclusion in inclusivegrowth.
Pours are typically more vulnerable to financial exclusion this is simply because their major problems arise from the need for finances. The formal banking services, by exploiting economies of scale and making judicious use of targeted subsidies may reduce or remove market imperfections and facilitate financial inclusion of the poor, ultimately leading to higher incomes. The access to financial services by pours would lead to their consumption smoothing and investments in health, education and income generating activities, thus expanding growth opportunities for them.
Inclusive growth if targeted systematically may lead to financial stability, asset building and economic mobility and empowerment of the low income group people. Thus if we are talking about inclusive growth with stability, it is not possible without financialinclusion.However one need to understand that inclusive finance is a long run phenomenon which cannot be achieved overnight, especially with regard to developing country like India where the access to financial products is constrained by several factors such as lack of awareness, unaffordability, high transaction costs, and inconvenient, inflexible and low quality of products. In the further section of the paper we will try to find out the extent of financial inclusion in India.
6 EXTENT OF FINANCIAL INCLUSION IN INDIA
Several countries across the globe now look at financial inclusion as the means for a more comprehensive growth, wherein, each citizen of the country is able to use his/her earnings as a financial resource that they can put to work to improve their future financial status and simultaneously contribute to the nation’s progress.
Financial inclusion has always been accorded high importance by the Reserve Bank and Government of India toad the inclusive growth process for the economy, the history of financial inclusion in India is actually much older than the formal adoption of the objective. The nationalization of banks, Lead Bank Scheme, incorporation of Regional Rural Banks, Service Area Approach and formation of Self-Help Groups - all these were initiatives aimed at taking banking services to the masses. The brick and mortar infrastructure expanded; the number of bank branches multiplied ten- fold - from 8,000+ in 1969, when the first set of banks were nationalized, to 99,000+
today.
Sedan Kumar Chattopadhyay in a working paper for RBI on Financial Inclusion in India: A case-study of Wes Bengal, August 2011, has developed an index of financial inclusion (IFI), which is able to capture information on several aspects of financial inclusion in one single number (IFI). In this, he considered three basic dimensions of an inclusive financial system – banking penetration (BP), availability of the banking services (BS) and usage of the banking system(BU).
Below given data in Table-1 shows the State-wise Index of Financial Inclusion, GDP per capita, literacy rate and rate of unemployment in the different states of India.
On the basis of IFI developed it can be clearly identified that which are the states where there is need for increasing banking penetration (BP) such as Assam, Nagaland, Manipur, Madhya Pradesh, Bihar, etc., as well as the states where there is need for increasing availability of banking services and need to push usage of banking system.
Moreover it’s felt that there is need of a comprehensive financial inclusion plan for Madhya Pradesh, India as a whole along with region specific inclusion plans targeting its typical requirements based on its existing level of financial inclusion.
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32 Table 1 State-Wise Index of Financial InclusionSource:*- Financial Inclusion in India: A Case-Study of West Bengal, 2011**- Census-2011 From the data given in the above table it
is quiet evident that the states which have high to medium degree of financial inclusion also account for literacy rates and GDP per capita (per annum) higher than the country’s average i.e.74.04 % &
Rs.60,603 respectively, Andhra Pradesh being the only exceptional state to be with medium degree of financial inclusion with literacy rate 67.7 %, less than the country’s average .
However in order to find out the group linkages the author has employed cluster analysis of few selected states on the basis of parameters such as GDP per capita(annual), literacy rate, Unemployment rate and Index of Financial Inclusion of the states (developed by Sedan Kumar
Chattopadhyay) Below given is the Average linkage between the various groups formed on the basis of above said parameters and the Dendrogram analysis for the same.
7 LITERATURE REVIEW
Levine (1997) empirically tested the neo- classical view and finds that countries with larger banks and more active stock markets grow faster over subsequent decades even after controlling for many other factors underlying economic growth.
Equally important is access to finance by all segments of the society (Levine 1997, Paned and Burgess 2003).
Finance can also play a positive role in poverty reduction. A well developed financial system accessible to all reduces
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33 information and transaction costs,influence saving rates, investment decisions, technological innovation, and long-run growth rates (Beck et al. 2009).
Evidences from Binswanger and Chandler (1995) and Paned and Burgess (2003) suggest that Indian rural branch expansion program significantly lowered rural poverty, and increased non- agricultural employment.
A key objective in development economics is to work out ways to lift people out of poverty. Access to finance has-been seen as a critical factor in enabling people to transform their production and employment activities and to exit poverty (Again and Bolton 1997, Bannered 2001, Bannered and Newman 1993, Paned and Burgess 2003, Yens 1999).
In recent years, financial inclusion has assumed public policy relevance.
Many countries like India (Government of India 2008) and the United Kingdom (UK) (2006) and International organizations like the United Nations (2006), World Bank (2008, 2009) have set up task force/committees to understand financial inclusion and to improve its scope. These studies throw light on various aspects of financial inclusion.
However, the measurement aspect of financial inclusion has, so far, not extensively been covered by these reports.
For India, being a very well diversified economy and society, it is imperative to give adequate attention to measurement of financial inclusion. There are few scholars who have attempted to measure some aspects of financial inclusion.
Hoonah (2007) estimated the fraction of the adult population using formal financial intermediaries using the information on number of banking and MFI accounts for more than 160 countries, and then correlated with inequality (GiniCoefficient) and poverty.
Sarma (2008) developed an Index for financial inclusion using aggregate banking variables like number of account, number of bank branches and total credit and deposit as proportion of GDP for 55 countries.
Mehrotra et al. (2009) also built up an index for financial inclusion using similar kind of aggregate indicators like number of rural offices, number of rural
deposit accounts, volume of rural deposit and credit from banking data for sixteen major states of India. Moreover, World Bank (2018) provides a composite measure of access to financial services, that is, the percentage of adult population that has an account with a financial intermediary for 51 countries. While World Bank (2019) in Banking the Poor analyzed the association between access to banking services, as measured by the number of bank accounts per thousand adults in each country, and several other factors like transactions offered at banks, or required by banks, and regulations adopted by country authorities that may affect banking access for 45 countries.
Beck et al. (2009) discusses about the availability of copious amount of data on many aspects of the financial system, but systematic indicators of inclusiveness of financial sector are lacking.
Bengal (2011), has examined the extent of financial inclusion in West Bengal. According to the study there has been an improvement in outreach activity in the banking sector, but the achievement is not significant. An index of financial inclusion (IFI) has been developed in the study using data on three dimensions of financial inclusion viz- banking penetration (BP), availability of the banking services (BS) and usage of the banking system (BU). The paper provides comparable picture between different states on the basis of IFI rankings.
The present paper focuses onto financial inclusion as an instrument for attaining inclusive growth- in context of India, for which a fair deal of effort has been taken to understand the extent of financial inclusion in India as a whole and states as its part.
7.1 Objectives of the Paper
The Specific Objectives of the Research Paper are as Follows
• To study & understand the meaning and need for inclusive growth.
• To study the role of financial inclusion in inclusive growth.
• To know the extent of financial exclusion/inclusion in India.
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34• To understand the extent of diversity in Indian states with regard to financial inclusion.
8 RESEARCH METHODOLOGIES
THE STUDY tries to highlight concept and Literature of Financial Inclusion in Madhya Pradesh, an Indian State.
The Data has been collected from extensive desk research through E- library, different available published articles, journals, books, internet, magazines, and seminar papers and the world-wide web.
Data Collection: secondary data has been collected for the study. The research has been done using secondary data source. Analysis of natural hierarchical grouping cluster is done considering parameters like GDP per capita, literacy rate, unemployment rate and index of financial inclusion (Johnson R.A. &
Wichern D.W., 2000).
8.1 Observations
• It is noticed that the states with highest financial inclusion not only account for high GDP per capita and Literacy rate but also for high rate of unemployment.
• Moreover it is found that Madhya Pradesh is one such exceptional state where the GDP per capita &
literacy rate is higher than the country’s average and the rate of unemployment is also quite low but the financial inclusion of this states considerably low.
• It is also observed from the analysis that the states with low GDP per capita necessarily accounts for low financial inclusion.
• However the association of financial inclusion with the rate of literacy is not found.
• Broadly it can be concluded that there is no significant association between the rate of financial inclusion and unemployment, as the states with highest extent of financial inclusion demonstrate high rate of unemployment, which needs to be studied & analyzed further.
9 CONCLUSIONS
Financial inclusion in India is an ignited issue involving the new concepts and
ideology with a considerable scope for development of better products, technologies and models. Inclusive growth attainment depends a great deal on equitable distribution of growth opportunities and benefits and financial inclusion is one of the most crucial opportunities which need to be equitably distributed in the country in order to attain comprehensive growth. It needs to be understood by the state that in order to bring orderly growth, order needs to be developed with regard to inclusive finance. The percentage of financial inclusion in the different states of the country varies differently. For instance Kerala, Maharashtra and Karnataka accounts for higher rate of financial inclusion but the states such as Gujarat, Manipur, Assam, Bihar, Uttar Pradesh, and Madhya Pradesh, etc stand poorly on the grounds of financial inclusion.
Undoubtedly the issue of expanding the geographical and demographic reach poses challenges from the viability/sustainability perspectives and appropriate business models are still evolving and various delivery mechanisms are being experimented with by the various government agencies at the central and state level. But somewhere the efforts taken are not good enough to encounter this staggering issue of financial exclusion.
Financial literacy and level of awareness continue to remain an issue with regard to usage of financial services/products. It calls for coordination of all the stakeholders like sect oral regulators, banks, governments, civil societies, NGOs, etc. to achieve the objective of financial inclusion.
Challenges of financial exclusion are faced by most of the states of the country and in order to solve it states have to develop its own customized solutions drawing upon its own experiences and features and those of its peers across the country.
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