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in
 1 Introduction
Financial Inclusion encompasses providing financial services to underserved populations,
including those in remote areas. It goes beyond mere bank account opening and includes a
range of services such as savings, loans, insurance, and investment opportunities.

Benefits of Financial Inclusion

1. It leads to economic growth as savings of poor are mobilized and put to productive use.
2. It helps the poor stabilize their income and build some assets or savings.
3. It helps in increasing the financial literacy of the poor people.

As per another definition/scope, the financial inclusion may comprise of the following.

1.1 Are Subsidies part of Financial Inclusion?

The subsidies that we give to the farming sector, industries, etc. are not part of financial inclusion.
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 2 Definition as per United Nations
The United Nations defines the goals of financial inclusion as follows:

Access at a reasonable cost for all households to a full range of financial services, including savings
or deposit services, payment and transfer services, credit, and insurance. Sound and safe
institutions governed by clear regulation and industry performance standards. Financial and
institutional sustainability, to ensure continuity and certainty of investment; and Competition to
ensure choice and affordability for clients.
National Bank for Agriculture and Rural Development, and the UN aims to boost financial
inclusion among the poor by developing tailored financial products, raising awareness about
available services, and enhancing financial literacy, with a focus on empowering women.

3 Extent of Financial Inclusion

1. Government of India Population Census 2011,
2. CRISIL-Inclusix
3. IMF ‘Financial Access Survey’ Results.

Government of India Population Census 2011

As per census 2011, only 58.7% of households are availing banking services in the country and 65
per cent of adults across the country are excluded from the formal financial system

CRISIL Financial Inclusion Index (Inclusix)

In Feb 2018, CRISIL published a comprehensive

financial inclusion index (viz., Inclusix). The data
that was used to develop the index belonged to for
the year ended March 31, 2016.

For constructing the index, CRISIL identified FOUR

critical parameters of basic banking, Insurance and
micro-finance services shown below. Among these
Insurance Penetration was included for the First
time

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 The definition and significance of the parameters used is given below

Note: According to the CRISIL Inclusix index, financial inclusion rose from 50.1 in 2015 to 58 in
2016, as per the most recent report released in 2018. The level of Financial Inclusion is
categorized as below based on the Financial Inclusion Score

Key Points

1. Kerala is the Top State with the highest score on financial Inclusion Index
2. Manipur is at the bottom with the lowest score on financial Inclusion Index
3. There are 14 Districts in India with Financial Inclusion score of 100
4. Overall, India’s Financial Inclusion score is 58 on scale of 100

IMF ‘Financial Access Survey’ Results

The Financial Access Survey (FAS) is a survey which helps us know on access to and use of
financial services, including digital financial services and gender-disaggregated data. It covers 189
jurisdictions, with more than 100 data series and historical data from 2004. The 2023 edition
collects annual data on access to and use of financial services around the world. The database
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 contains indicators tracking the availability and use of financial products such as
deposit accounts, loans, and insurance policies etc.

Data with respect to India is Shown below

Two FAS indicators are adopted as part of the 2030 Sustainable Development Goals (SDGs):

1. The number of commercial bank branches per 100,000 adults; and

2. The number of automated teller machines (ATMs) per 100,000 adults

4 Causes of Not so Up to the Mark Financial Exclusion in India

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 5 Types of Financial Inclusion
1. Poor in Urban areas: These people are easy to be provided bank services because the only
challenge which we have to make them banked is financial illiteracy. Most of them do not
know the process or are hesitant to open ban accounts. If proper information and help is
given, they are ready to be bank
2. Poor in remote areas: The real problem is with respect to people in the remote areas. Not
only they are illiterate, but they also do not have any banks nearby. So even if you make them
literate, they cannot avail financial services till the time they are provided with the
infrastructure to do so. Banks are reluctant to do so because it is not profitable for them to
open branch in each and every village. That is where technology comes in. Through
technology even remote locations can be banked.

6 Financial Inclusion
6.1 Measures taken but not in Recent Past

1. Foundation of financial inclusion was done by Nationalisation of banks (1969 and 1980),
introducing Priority Sector Lending (PSL), Lead Bank Scheme, establishment of Regional
Rural Banks (RRBs-1975-76), Service Area Approach (1989), Self-Help Group Bank Linkage
Programme (1989-90), and setting up of Local Area Banks etc.
2. Introduction of Basic Saving Bank Deposit (BSBD) accounts: Account with common facilities
such as no minimum balance, deposit and withdrawal of cash at bank branch and ATMs,
receipt/ credit of money through electronic payment channels, facility of providing ATM
card
3. No- Frills Account: Such accounts in which 'NIL' or very minimum balance is needed to be
maintained as well as minimum charges are placed
4. Simplified KYC Norms: KYC for opening bank accounts was simplified to the extent possible.
a) Small Accounts: Small accounts can be opened on the basis of a self-attested photograph
and putting his/her signatures or thumb print in the presence of officials of the bank.
Such accounts have limitations regarding the aggregate credits (not more than Rupees
one lakh in a year), aggregate withdrawals (nor more than Rupees ten thousand in a
month) and balance in the accounts (not more than Rupees fifty thousand at any point of
time). These accounts would be valid normally for a period of twelve months.
b) Further, Aadhaar, the unique identification number allotted by the Unique Identification
Authority of India (UIDAI), Government of India was allowed to be used as one of the
eligible documents for meeting KYC requirement for opening a bank account.
5. Usage of information and communications technology (ICT) solutions to provide banking
services in rural areas through BC model
6. All domestic Scheduled Commercial Banks (SCBs) – both in the public sector and private
sector are needed to draw up board-approved Financial Inclusion Plans (FIPs) which need to
be submitted to the Reserve Bank and implemented over blocks of three years
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 7. Introduction of a general-purpose credit card (GCC) facility by Banks up to 25,000 (50%) at
their rural and semi-urban branches
8. Introduction of Kisan Credit cards (KCCs) Scheme where banks issue smart cards to the
farmers for providing timely and adequate credit support from single window banking
system for their farming needs
9. Under the Swabhimaan financial inclusion campaign, banking services in villages with
population more than 2,000 has been provided using various models and technologies
including branchless banking through BCs
10. Setting up of Ultra Small Branches: These comprises of a small area of 100-200 sq. feet
where the officer designated by the bank is available with a laptop on pre-determined days.
Mostly done in unbanked areas or villages with low population.
11. Financial Inclusion Fund: An exclusive fund viz., Financial Inclusion Fund (FIF) has been
created by RBI by merging Financial Inclusion Fund (FIF) and Financial Inclusion Technology
Fund (FITF) to support adoption of technology and capacity building with an initial corpus of
₹2000 crore. It will provide support for funding the setting up and operational cost for
running financial inclusion and Literacy Centers.
12. Assignment of Lead Bank Responsibility: The Lead Bank Scheme is a scheme which aims at
providing adequate banking and credit in rural areas through a ‘service area approach’, with
one bank assigned for one area. The assignment of lead bank responsibility to a designated
bank in every district is done by the Reserve Bank.

6.2 Financial Inclusion – Recent Measures

1. The National Centre for Financial Education (NCFE) and CBSE have collaborated to introduce
financial education workbooks for classes VI to X. These workbooks are part of the Money
Smart School Program (MSSP), encouraging schools to integrate financial literacy into their
curriculum. Developed jointly by NCFE and CBSE, the study material comprises five
workbooks for students in classes VI to X.
2. NCFE and the Reserve Bank are collaborating to integrate financial education workbooks into
state education board curricula by coordinating with various boards. Simultaneously, the RBI
has initiated the 'Financial Literacy' project aimed at spreading knowledge about central
banking and general banking concepts to diverse groups including schools, colleges, women,
rural and urban communities, defense personnel, and senior citizens
3. The Reserve Bank of India has prepared the framework for graded certification/training
programme for BCs. BCs with a good track record who would undergo advanced training and
receive certification shall be entrusted with more complex tasks such as handling/delivery of
financial products that go beyond deposits and remittances.
4. In order to have a tracking system of BCs, a framework for a Registry of BC agent covering
all BCs, both existing and new, has been created. The registry is intended to capture basic
details including the identity of a BC, location of fixed-point BCs and nature of operations
5. Licensing Focus on Rural Areas: RBI has mandated that any entity which is given new license
to open a bank have to open at least 25% branches in the rural areas
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 6. Establishing of Payment Banks: In August 2016, RBI has given 11 licenses for payment banks.
Payment banks will reach out to people in rural areas and help in financial inclusion.
A. A payment bank is a differentiated bank that will undertake only certain restricted
banking functions that the Banking Regulation Act of 1949 allows. These activities include
acceptance of deposits, payments and remittance services but cannot lend money.
Remittance is nothing but transferring money like a person in Delhi wants to send money
in a village in Uttar Pradesh
B. Most of the payment banks will use mobile as a mode of depositing and transferring the
money. So, using mobile one can transfer the money to other mobile of relative, transfer
the money to the bank, transfer the money to a retail shop. So, people in rural areas
would be able to transact using mobile
7. Small Finance Banks: In September 2016, RBI gave in-principle licenses to 10 entities to set up
so-called small finance banks in a move towards expanding access to financial services in rural
and semi-urban areas. Small finance banks will offer basic banking services, accepting deposits
and lending to unserved and underserved sections of society. They are required that large part
of their credits and loans portfolios should be given to low-income customers, small
businesses and other priority sectors like farmers and students.
8. Reserve Bank of India’s vision for 2020 is to open nearly 600 million new customers' accounts
and service them through a variety of channels by leveraging on IT. However, illiteracy and the
low-income savings and lack of bank branches in rural areas continue to be a roadblock to
financial inclusion in many states and there is inadequate legal and financial structure.
9. Opening of Minor Accounts: The banks can allow minor to open an account through his/her
guardian. Moreover, minors above 10 years of age are allowed to open and operate savings bank
account by themselves. Banks are free to decide on limits on amount in such saving account by
minors
10. Introduction of "Pradhan Mantri Jan-Dhan Yojana (PMJDY)" Scheme
11. Jan Dhan-Aadhar-Mobile (JAM) Trinity: The combination of Aadhaar, PMJDY, and a surge in
mobile communication has reshaped the way citizens access government services. As per the
estimates in March 2020, the total number of beneficiaries under Jan Dhan scheme have been
more than 380 million
12. Government Flagship Initiatives: These include the Pradhan Mantri Mudra Yojana, Stand-Up
India Scheme, Pradhan Mantri Jeevan Jyoti Bima Yojana, Pradhan Mantri Suraksha Bima Yojana,
and Atal Pension Yojana
13. Promotion of Digital Payments: With the bolstering of the Unified Payment Interface (UPI)
by NPCI, digital payments have become more secure. The Aadhar-enabled payment system
(AEPS) allows Aadhar-enabled bank accounts (AEBA) to be utilized conveniently at any time and
place through micro-ATMs. Additionally, offline transaction platforms like Unstructured
Supplementary Service Data (USSD) have enhanced accessibility to payment systems, enabling
mobile banking services without the need for internet, even on basic mobile handsets.

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 In January 2021, The Reserve Bank of India (RBI) has unveiled a composite Digital Payments Index
(DPI) to capture the extent of digitisation of payments across the country.

What is Digital Payment Index (DPI)?

The RBI has developed the RBI-DPI, a composite index to gauge the level of digitization in
payments nationwide. It encompasses multiple parameters, accurately reflecting the expansion
of various digital payment modes. This first-of-its-kind index contains five broad parameters
measuring the depth and reach of digital payments across different timeframes. Published semi-
annually since March 2021 with a 4-month lag, it comprises 28 indicators. Additionally, the RBI
urges all SLBCs to identify and ensure one district in their state is fully digitally enabled.

The following image shows the performance of Digital Payment Index

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 14. Expansion of financial services in Rural and Semi-Urban Areas: Reserve Bank of India (RBI)
and National Bank for Agriculture and Rural Development (NABARD) have taken initiatives to
promote financial inclusion in rural areas. These include the opening of bank branches in remote
areas, Issuing Kisan Credit Cards (KCC), Linkage of self-help groups (SHGs) with banks, Increasing
the number of automated teller machines (ATMs), Business correspondents model of Banking,
etc.
15. Deepening of Digital Payments Ecosystem: With a view to expanding and deepening of digital
payments ecosystem in the country, the Reserve Bank advised all SLBCs/ UTLBCs in October 2019
to identify one district in their respective States/UTs and allot the same to a member bank having
a significant footprint. The allotted bank will endeavor to make the district 100 per cent digitally
enabled within one year.
16. National Strategy for Financial Education (NSFE)
The Reserve Bank of India (RBI) has released the National Strategy for Financial Education
(NSFE): 2020-2025 document for creating a financially aware and empowered India. It is the
second NSFE , the first one being released in 2013.
It has been prepared by the National Centre for Financial Education (NCFE) in consultation with
Financial Sector Regulators viz. RBI, Securities and Exchange Board of India (SEBI), Insurance
Regulatory and Development Authority of India (IRDAI), Pension Fund Regulatory and
Development Authority (PFRDA), etc. for creating a financially aware and empowered India.
NSFE has recommended a ‘5 C’ approach for dissemination of financial education in the
country:
• Content: Financial Literacy content for various sections of population.
• Capacity: Develop the capacity and ‘Code of Conduct’ for financial education providers.
• Community: Evolve community led approaches for disseminating financial literacy in a
sustainable manner.
• Communication : Use technology, media and innovative ways of communication for
dissemination of financial education messages.
• Collaboration : Streamline efforts of other stakeholders for financial literacy.
17. Financial Literacy Material
A. FAME Booklet: The Reserve Bank of India releases the FAME (Financial Awareness
Messages) booklet that intends to provide basic financial literacy messages for the
information of the public. This book Propagates relevant messages across the four themes
of Financial Competencies, Basic Banking, Digital Financial Literacy and Consumer
Protection.
B. Specific Books for Target Groups: The RBI has developed tailored financial literacy
content for five target groups' viz. Farmers, Small entrepreneurs, School children, Self
Help Groups and Senior Citizens that can be used by the trainers in financial literacy
programs.
C. ‘BE(A)WARE – Be Aware and Beware!’ - The booklet, BE(A)WARE aims to enhance public
awareness about financial frauds perpetrated on gullible customers while carrying out
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 digital payments and other financial transactions. It also mentions the general
precautions and the digital hygiene to be taken while carrying out various financial
transactions. It lays emphasis on the need for always keeping one’s personal information
confidential, being mindful of unknown calls / emails / messages, etc.
D. Centre for Financial Literacy - The CFL project has been conceptualised by the Reserve
Bank in 2017 as an innovative and participatory approach to financial literacy at the Block
level involving select banks and non-governmental organization (NGOs). Initially set up in
100 blocks on a pilot basis, the project is now being scaled up across the country to every
block in a phased manner by March 2024
18. Lending to Priority Sector: In terms of Reserve Bank's extant guidelines on lending to priority
sector, a target of 40 per cent of Adjusted Net Bank Credit (ANBC) or Credit Equivalent amount
of Off-Balance Sheet Exposures (OBE), whichever is higher, as on March 31 of the previous year,
has been mandated for lending to the priority sector such as agriculture, housing, education etc.

More detail on Priority Sector Lending shall be included later in the course.
Another important set of steps by RBI is to enable banks use of BC and BF models to provide
financial services in far flung areas of the country and coming up with NSFI.
19. Financial Inclusion Index - The Reserve Bank of India had constructed a composite Financial
Inclusion Index (FI-Index) to capture the extent of financial inclusion across the country. It
captures information on various aspects of financial inclusion in a single value ranging between
0 and 100, where 0 represents complete financial exclusion and 100 indicates full financial
inclusion.

It comprises three broad parameters (weights indicated in brackets) viz., Access (35%), Usage
(45%), and Quality (20%) with each of these consisting of various dimensions, which are
computed based on a number of indicators.
21. National Strategy for Financial Inclusion: This is one of the major steps in the promotion of
financial inclusion.

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 7 National Strategy for Financial Inclusion
The National Strategy for Financial Inclusion for India 2019-2024 has been prepared by RBI under
the aegis of the Financial Inclusion Advisory Committee and is based on the inputs and
suggestions from Government of India, other Financial Sector Regulators.

Financial Inclusion Strategy – Rationale

• Financial Inclusion Strategy seeks to

address the inherent barriers of access
to a gamut of financial products and
services. An inclusive financial system is
not only pro-growth but also pro-poor
with the potential to reduce income
inequality and poverty, promote social
cohesion and shared economic
development. Financial exclusion, on
the other hand, leaves the
disadvantaged and low- income
segments of society with no choice
other than informal options, making
them vulnerable to financial distress,
debt, and poverty.

National Strategy for Financial Inclusion- Objectives/Recommendations

Measurement of Progress of Financial Inclusion as Per NSFI 2019-2024

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 8 Financial Inclusion – BC and BF Models
8.1 Financial Inclusion –BF (Business Facilitator Model)
Under the 'Business Facilitator' model, banks may use intermediaries, such as below for
providing facilitation services
1. NGOs/farmers' Clubs,
2. Cooperatives
3. Community-based organizations
4. IT enabled rural outlets of corporate entities
5. Post offices,
6. Insurance agents
7. Well-functioning Panchayats
8. Village knowledge centers
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 9. Agri clinics/Agri business centers
10. Krishi Vigyan Kendra and KVIC/KVIB units,
The facilitation services by BFs can include the following.

1. Identification of borrowers and fitment of activities.

2. Collection and preliminary processing of loan applications including verification of primary
information/data.
3. Creating awareness about savings and other products and education and advice on
managing money and debt counselling.
4. Processing and submission of applications to banks.
5. Promotion and nurturing self-help groups/joint liability groups.
6. Post-sanction monitoring.
7. Follow-up for recovery.

It must be noted that these services are not intended to involve the conduct of banking
business by business facilitators. They are just facilitating the services but do not have authority
to conduct the activities by themselves. No approval is required from RBI for using the above
intermediaries for facilitation of the services

8.2 Financial Inclusion –BC (Business Correspondent Model)

Under the 'Business Correspondent' model the following can act as BCs

1. NGOs/MFIs set up under the Societies/Trust Acts

2. societies registered under the Mutually Aided Cooperative Societies Acts
3. NBFCs not accepting public deposits
4. Post offices
In addition to activities listed under the business facilitator model, the scope of activities to be
undertaken by the business correspondents will include:
1. disbursal of small value credit.
2. recovery of principal/collection of interest.
3. collection of small value deposits.
4. sale of micro-insurance/mutual fund products/pension products/other third-party products.
5. receipt and delivery of small value remittances/other payment instruments

An important different between BCs and BF is that BCs are permitted to carry out transactions
on behalf of the bank whereas BFs can refer clients, pursue client’s proposal and can facilitate
the transactions with the bank but cannot carry out transactions on the behalf of the bank.

Payment of commission/fees for engagement of business facilitators/correspondents: Banks

may pay a reasonable commission/fee to the business facilitators/correspondents, the rate and
quantum of which may be reviewed periodically. The agreement with the business
facilitators/correspondents should specifically prohibit them from charging any fee from the
customers directly for services rendered by them on behalf of the bank.

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 8.3 Other Terms and Conditions for Engagement of Business Facilitators and
Correspondents
Bank should make following arrangements with BF and BC to ensure that there is no reputational,
legal and operational risk faced by the bank

1. Suitable limits on cash holding by intermediaries, as also limits on individual customer

payments and receipts.
2. The requirement that the transactions are accounted for and reflected in the bank's books by
end of day or next working day.
3. All agreements/contracts with the customer shall clearly specify that the bank is responsible
to the customer for acts of omission and commission of the business
facilitator/correspondent.
In addition, bank should establish proper grievance redressal mechanism if any wrong is done
by BC or BF

1. Banks should constitute a grievance redressal machinery within the bank for redressing
complaints about services rendered by business correspondents and facilitators
2. The grievance redressal procedure of the bank and the time frame fixed for responding to
the complaints should be placed on the bank's website
3. If a complainant does not get satisfactory response from the bank within 60 days from the
date of his lodging the compliant, he will have the option to approach the office of the
Banking Ombudsman concerned for redressal of his grievance

9 Rural Self-Employment Training Institutes

RSETIs are Rural Self-Employment Training Institutes, an initiative of Ministry of Rural
Development (MoRD) to have dedicated infrastructure in each district of the country to impart
training and skill upgradation of rural youth geared towards entrepreneurship development.
RSETIs are managed by Banks with active co-operation from the Government of India and State
Government. RSETI concept is based on RUDSETI (Rural Development and Self-Employment
Training Institute), a society established jointly by three agencies i.e. Syndicate Bank, Canara Bank
and Sri Manjunatheswara Trust based at Ujiri in Karnataka. It proved to be successful and
government of India decided to establish this pan India

Objectives of RSETI are:

A. To have dedicated infrastructure in each district of the country to impart training and skill
upgradation of rural youth geared towards entrepreneurship development
B. Rural BPL (below poverty line) youth to be identified and trained
C. The trainings are often demand driven as per needs of economy
D. Assessment of candidate is done to decide area of training
E. The candidates are provided free training with food and accommodation

Once Training is completed

A. Support to be provided for assured credit linkage with banks
B. Certificates issued by an RSETI will be recognized by all banks for purposes of extending credit
to the trainees

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 Funding: Ministry of Rural Development provided one-time grant of 1 crore to the lead bank in
every area to set up one RSETI. Land for setting up of these institutes is provided for free by state
government. Banks can even operate these institutes on rented facility for a max. period of 3
years provided rent is not more than 10 lakhs
Infrastructure:
1. 2-3 classrooms with toilet facilities.
2. Two workshops, two dormitories with bath facilities.
3. Adequate physical infrastructure for training, administration, hostel, staff quarters etc.

Selection of Trainees & Batch Size:

1. At least 70% of the trainees should be from the rural BPL category.
2. An ideal size of a batch should be 25-30 candidates

Supervision:

1. A national level committee headed by Secretary, Ministry of Rural Development and a

state level sub committee will ensure working of these institutes in all the rural districts
of country
2. Local Advisory Committee at the institute level under the leadership of District
development manager of NABARD, Employment Exchange officer, heads of vocational
institutes will guide the RSEIT in realizing its objectives

10 Financial Inclusion – Role of Technology

The major reasons for people not opening accounts in
rural area are:
1. Cost of transport to nearest branch for the people
2. Loss of wages due to time spent on visiting the
common branch in the nearest city
3. Lack of bank branches in rural areas because of
financial feasibility

10.1 Internet Enabled Kiosks and PC’s

1. These are the most common forms of delivering
Financial Inclusion
2. These are small and self-operated IT-enabled centers that provide customers with
banking features such as cheque or cash deposit, internet banking, non-cash ATM
transactions and other enquiries
3. They are located in areas where most of the villagers visit daily like mandi etc.
4. They are also operational in regional languages

10.2 ATM’s
Everyone knows about ATM’s. They are part of our integral life. But in villages the ATM’s are
slightly different as per their needs and requirements
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 1. Micro ATM: Micro ATMs are handheld devices that function similarly to traditional ATMs
but are portable and more compact. They are commonly used by business
correspondents, who represent banks in rural areas, to provide banking services to
customers who are far from bank branches. These devices connect to bank servers via the
internet for real-time updates on transactions. While they are cost-effective compared to
traditional ATMs, they cannot provide cash "anytime" as they rely on the availability of
the business correspondent and may not be accessible outside of business hours.
2. Biometric ATM: Many of the people in rural area are illiterates. They do not use micro
ATM’s on account of PIN and Password related issues. Introduction of Biometric ATMs
enables the illiterate and semi-literate customers to avail ATM facilities on par with
literate customers. Under this, Thumb impression of the cardholder will be scanned and
transfer the same to central server as one-time measure. ATM dispenses cash and other
services only after verifying the thumb impression of the cardholder with that of
fingerprint available with the bank’s server.
3. Mobile ATM’s
a. Mobile ATMs are designed for providing ATM facility to the rural folk as well as other
customers. The Van would move to the pre-determined places on certain days. Opening
of accounts also can be undertaken during the visits to the rural areas. This can be used at
weekly mandis/markets effectively.
b. They are less costly as no permanent infrastructure is required and it can cover huge area
if it goes to one area on a particular day in week
c. Disadvantage is that it would not be available 24*7
Note: Micro ATM, Bio Metric ATM and Mobile ATM are not mutually exclusive. Micro and Mobile
ATM can also have biometric facilities. Micro ATM is also a mobile by nature.

10.3 Biometric Handheld device

Biometric Handheld device is also a combination of Micro ATM and Biometric ATM. In these
micro-ATM’s which are handheld devices comes with a feature of biometric authentication and
hence called Biometric Handheld device

10.4 Financial Inclusion using Mobile Telephones

Mobile phones can be used in two ways

1. Mobile banking:
a. Mobile banking refers to the availability of platforms that allow users to access
financial services (transfers, payments, receipts or investment) from mobile devices.
We can access them through a regular internet browser, or a mobile application
especially designed for this kind of services.
b. Even SMS through mobile can tell you about your transaction
c. It is like a normal online banking where you need to enter your username/password
etc. to make a transaction
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 2. Mobile Payments: Refers to the process of using mobile devices to pay for a product or
service from any place
a. By sending a message SMS
b. By using PPI (Prepaid Payment Instruments) based on mobile Apps like PayTM
c. By using one of the payment banks like Vodafone M-pesa or Airtel Money
d. By using Unified Payment Interface (UPI)
3. USSD based Mobile Banking: The mobile banking has been used mostly by people having
smartphones and poor people not having smart phones could not use this banking on
mobile facility for many years. The answer to this problem is the USSD based mobile
banking. One can dial the *99# and one can do all those things which are available to a
person with smartphone and 3G data

What is USSD?

The codes which directly communicate with the server of Telecom Company are called

as the USSD. The meaning or full form of the USSD is unstructured supplementary

service data
How is USSD Used in Banking? As USSD code connects to the telecom operator’s server,
it also connects to bank’s server. Hence, it gives you access to your bank account and
performs some transaction. The entry to your bank account is given on the basis of
registered mobile number. Thus, you must use registered mobile number to dial the USSD
code. A special number *99# is fixed to access the banking services. This number works
across the banks. This system of banking transaction is termed as the NUUP
More about NUUP
NUUP stands for National Unified USSD Platform. It is an innovative service developed by
NPCI and launched by the Indian government in 2014. The service allows the banks and
telecom service providers to work together seamlessly. The services of NUUP are based
on the USSD method
4. NFC
Near-field communication (NFC) is a set of
communication protocols that enable two
electronic devices, one of which is usually a
portable device such as a smartphone, to
establish communication by bringing them
within 4 cm (2 in) of each other. NFC devices
are used in contactless payment systems like
payment from a mobile to the merchant

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 10.5 Smart Cards and POS
Smart card is nothing but the cards which stores information about the customer and its
transaction details.

a. It looks like a normal debit or credit card but is

more than that. It stores information i.e.
fingerprint and the photo of the customer.
b. To use it’s plugged in the hand-held device to do
the transaction and customers face and fingerprint
is matched with those on the card to do the
authentication. So, in this case no internet is
required as information on the card is matched
with that of customer during each transaction.
c. Cash is taken or given to the customer and
transaction is recorded on POS (hand-held device)
and the smart card
d. Later the POS is connected to Bank servers when internet is available to transfer the
transaction details
e. History of the transaction details is also stored on the smart card to be referred in future
f. The disadvantage is that there is a risk of customer withdrawing more money than the
balance in the account as during transaction no real-time matching is done between
money to be withdrawn and actual balance

11 Other Technological Developments in the Banking Area

There are some other technological developments in the banking area which are not necessarily
only for Financial Inclusion but can used as a measure for Financial Inclusion. These developments
are given below

1. CBS: CBS is networking of branches, which enables customers to operate their accounts
and avail of banking services from any branch of the Bank on CBS network, regardless of
where the customer maintains his/her account. The customer is no more the customer of
a Branch as he becomes the Bank’s customer. Thus, CBS is a step towards enhancing,
customer convenience through, any-where, anytime Banking. It is important to leverage
on to this technological advancement to look at areas beyond CBS that can help in not
just delivering quality and efficient services to customers but also generating and
managing information effectively
2. White Label ATM’s: RBI reviewed the extant policy on ATMs and it was decided to permit
non-banks to set up, own and operate ATMs to accelerate the growth and penetration of
ATMs in the country. Such ATMs will be in the nature of White Label ATMs (WLA) and
would provide ATM services to customers of all banks. Non-bank entities proposing to set

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 up WLAs have to make an application to RBI for seeking authorization under the Payment
and Settlement Systems Act 2007

12 Global Emphasis on Financial Inclusion

Many initiatives have been taken at Global level for the Financial Inclusion of the Unbanked
world. We are going to discuss some of these here in this section

1. Financial Inclusion as enabler for sustainable development goals

2. Commitment by G20
3. Commitment by World Bank
4. Global Findex database by world bank
5. Alliance for Financial Inclusion

12.1 Sustainable Development Goals

Financial inclusion has been identified as an enabler for 8 of the 17 Sustainable Development
Goals.

1. SDG1, on eradicating poverty

2. SDG 2 on ending hunger, achieving food security, and promoting sustainable agriculture
3. SDG 3 on profiting health and well-being
4. SDG 5 on achieving gender equality and economic empowerment of women
5. SDG 8 on promoting economic growth and jobs
6. SDG 9 on supporting industry, innovation, and infrastructure
7. SDG 10 on reducing inequality.
8. SDG 17 on strengthening the means of implementation there is an implicit role for
greater financial inclusion through greater savings mobilization for investment and
consumption that can spur growth.

12.2 Commitment by G20

The G20 committed to advance financial inclusion worldwide and reaffirmed its commitment
to implement the G20 High-Level Principles for Digital Financial Inclusion which are as follows

• Promote Digital Financial Inclusion

• Track Digital Financial Inclusion
• Protection of Consumers and regulatory framework
• Digital Financial Literacy

12.3 Commitment by World bank

The World Bank Group plays a critical role in advancing financial inclusion in the world since it
can leverage its financial sector expertise, country engagement and dialogue, financing and risk-

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 sharing instruments, unique datasets and research capacity, and influence with standard-setting
bodies and the G20

It has two institution-wide specific initiatives to promote financial access and inclusion

1. Universal Financial Access (UFA) by 2020: In 2015, the World Bank Group committed to
extending access to financial services to 1 billion adults through the Universal Financial
Access 2020 initiative, which envisions that adults worldwide will be able to have access
to a transaction account to store money, send or receive payments. While the UFA2020
initiative focuses on 25 countries where 73% of all financially excluded people live, world
bank is working with some 80 countries to advance financial access and inclusion.
2. Financial Sector Assessment Programs (FSAPs): As governments and standard-setting
bodies started prioritizing financial access, financial inclusion topics have become
prevalent in FSAPs, which are assessments the World Bank and the IMF developed to help
strengthen countries’ overall financial systems and cover a range financial sector issue.

12.4 Global Findex

The Global Findex database by world bank is the world’s most comprehensive data set on how
adults save, borrow, make payments, and manage risk. Launched with funding from the Bill &
Melinda Gates Foundation, the database has been published every three years since 2011. The
data are collected in partnership with Gallup, Inc., through nationally representative surveys of
more than 150,000 adults in over 140 economies.

The 2021 edition, based on nationally representative surveys of about 128,000 adults in 123
economies during the COVID-19 pandemic, contains updated indicators on access to and use of
formal and informal financial services and digital payments, and offers insights into the behaviors
that enable financial resilience. The data also identify gaps in access to and usage of financial
services by women and poor adults
Key Findings
• Account ownership has reached 76 percent of adults—and 71 percent of adults in developing
economies (Account ownership around the world increased by 50 percent in the 10 years
spanning 2011 to 2021, from 51 percent of adults to 76 percent of adults)
• In India, account ownership more than doubled in the past decade, from 35 percent in 2011
to 78 percent in 2021. This outcome stemmed in part from an Indian government policy
launched in 2014 that leveraged biometric identification cards to boost account ownership
among unbanked adults.
• The growth or decline of the gender gap (in account ownership) adheres to different patterns,
depending on the economy. In India, due to various measures, the gender gap reduced from
17 percentage points in 2011 to insignificant in 2021.

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 12.5 Alliance for Financial Inclusion
The Alliance for Financial Inclusion (AFI) is a network of policymakers headquartered in Kuala
Lumpur, Malaysia, with a mission to promote inclusive financial policies in developing nations,
aiming to lift 2.5 billion citizens out of poverty. Founded in 2008 with funding from the Bill &
Melinda Gates Foundation, AFI facilitates peer-to-peer learning among policymakers, focusing on
various areas including consumer protection, mobile financial services, and agent banking. In
2010, AFI was nominated by the Group of 20 as one of three implementing partners for the Global
Partnership for Financial Inclusion, enabling it to bring innovative policies from developing
countries to the G20 forum and assist non-G20 nations in participating in GPFI initiatives.

In 2011, AFI members collectively adopted the Maya Declaration, a statement of intent to
make financial inclusion a centerpiece of national efforts for poverty reduction and economic
stability. Some of the key Principles of Maya Declaration are
1. Recognize the critical importance of financial inclusion to empowering and transforming the
lives of all our people
2. Reaffirm the value of peer-to-peer knowledge exchange for the design and implementation
of innovative financial inclusion policy solutions
3. Commitment towards achieving Financial Inclusion

13 Challenges to Financial Inclusion

• Non-Universal Access to Bank Accounts: A significant portion of adults in India and China
lack formal banking access due to the sheer size of the population.
• Digital Divide: Despite having a large number of internet users, half of India's population
lacks internet access, posing a barrier to the adoption of digital financial services.
• Inadequate Infrastructure: Limited physical infrastructure, transportation options, and
insufficiently trained staff in rural and remote areas hinder access to financial services.
• Socio-Cultural Barriers: Cultural beliefs and values in certain segments of the population
result in a lack of trust and favorable attitudes towards formal financial services,
• Payment Infrastructure: The majority of retail payment products are operated by NPCI,
necessitating more market players to encourage innovation, competition, and reduce
concentration risk in the retail payment system.

14 Introduction to Microfinance
Despite decades of bank nationalization and expansion, a significant portion of India's population
remains outside the formal financial system. The government aimed to extend coverage by
offering targeted low-cost loans, particularly to the poor, to reduce reliance on the informal
sector's high-interest rates. Rural cooperative banks and regional rural banks were established
to serve the financial needs of rural communities. Additionally, commercial banks were
mandated to allocate 40 percent of credit to priority sectors. However, in pursuit of meeting
quantitative targets, banks neglected the qualitative aspects of lending, leading to high loan

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 defaults and a perception that the poor were not creditworthy. Transaction costs associated with
servicing small loans and perceived risks further hindered financial inclusion efforts.
Consequently, lending to the poor became more of a social obligation than a viable commercial
activity for banks, widening the gap between credit demand and supply in rural areas.
Microfinance emerged as an alternative delivery mechanism to address the financial needs of
the excluded population, particularly in rural areas.

15 Definition of Microfinance:

Microfinance is a holistic concept- it includes not only micro-credit but also support services such
as savings, insurance, payments, market and technical assistance, and capacity building. The
clients of microfinance are landless laborers engaged in agriculture, mining and construction;
self-employed in non-farm activities; small and marginal farmers; rural artisans and weavers; self-
employed in urban informal sector; and women.

15.1 NGOs and SHGs:

15.2 NGOs
NGO is a voluntary organization established to undertake social intermediation like organizing
SHGs of micro-entrepreneurs and entrusting them to banks for credit linkage or financial
intermediation, like borrowing bulk funds from banks for on-lending to SHGs. NGOs are the
promoters of the concept of SHGs.

15.3 SHGs
An SHG is a registered or unregistered group of 10-20 members, who have a relatively
homogeneous, social and economic background and have voluntarily come together to save
small amounts regularly to a common fund and to meet their emergency needs on mutual-help
basis. This common fund may not be enough to lend to its members and hence, it seeks an
external funding from banks to support the income-generating activities. The formation of SHGs
reduces the transaction cost for both the lenders as well as borrowers. Moreover, groups have
reliable information about their members and group guarantees can replace collateral. It is
cheaper to deal with a group than with individuals. Many SHGs have women as their members

Microfinance is used by SHGs to meet the survival needs, meet working-capital requirements

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 15.3.1 SHGs Group Formation Guidelines
1. Normally, the number of members in a group should not exceed twenty; otherwise,
registration becomes compulsory.
2. Generally, a self-help group may consist of ten to twenty persons. However, in difficult
areas like deserts, hills, and areas with scattered and sparse population and in case of
economically weaker and/or physically disabled persons, this number may be from five
to twenty
3. Generally, all members of the group should belong to families below the poverty line.
However, if necessary, a maximum of twenty per cent and in exceptional cases, where
essentially required, up to a maximum of thirty per cent of the members in a group may
be taken from families marginally above the poverty line living contiguously with BPL
(Below Poverty Line)families and if they are acceptable to the BPL members of the group
4. The BPL families must actively participate in the management and decision making, which
should not ordinarily be entirely in the hands of APL (Above Poverty Line) families.
5. Further, APL members of the Self-Help group shall not become office bearers (Group
Leader, Assistant Group Leader or Treasurer) of the group
6. The group shall not consist of more than one member from the same family. A person
should not be a member of more than one group
7. The group corpus fund should be used to advance loans to the members. The group
should develop financial management norms covering the loan sanction procedure,
repayment schedule and interest rates. The group should be able to prioritise the loan
applications, fix repayment schedules, fix an appropriate rate of interest for the loans
advanced and closely monitor the repayment of the loan instalments from the loanee.
RBI and NABARD has left it up on SHG to decide upon these matters
8. The members in the group meetings should take all the loaning decisions through a
participatory decision-making process.
9. The group should operate a group account preferably in their service area bank branch,
to deposit the balance amounts left with the groups after disbursing loans to its members
10. The group should maintain simple basic records such as minutes book, attendance
register, loan ledger, general ledger, cash book, bank passbook and individual passbooks
15.3.2 Functions of SHGs
1. Meeting: The group should meet regularly; ideally, the meetings should be weekly or at
least monthly.
2. Fixed day for meetings: The group should have a fixed day or date for the meetings
3. Common place: The group should fix a common place to conduct the meetings
4. Savings: Savings should be deposited by all the members in the meeting itself. No interest
will be paid to the members for their money with the group. The members will not be
encouraged to adjust their savings amount against their loan due to the group
5. Resolution from the SHG: The SHG has to pass a resolution in the group meeting, signed
by all members, indicating their decision to open SB A/c with the bank. This resolution is
filed with the bank
6. Authorization from the SHG: The SHG should authorize at least three members, any two
of whom, to jointly operate upon their account. The resolution along with the filled in
application form duly introduced by the promoter may be filed with the bank branch.

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 SHGs is the largest microfinance program in the world, in terms of client base and outreach. The
SHGs which follow ‘Panchsutras’ viz.
1. Conduct of regular group meetings
2. Regular savings within the group
3. Internal lending based on the demand of members
4. Timely repayment of loan
5. Maintenance of proper books of accounts are considered to be of good quality and over years
have proved themselves to be good customers of Banks.

16 Microfinance Delivery Mechanism:

In India, microfinance operates through following approaches:
1. Conventional weaker-section lending by banks
2. Banking system through the SHGs under SHG-Bank Linkage Programme (SHG-BLP).
3. Micro Finance Institutions (MFIs) lending through individual and group approach.

16.1 Conventional Weaker-section Lending by Banks

1. The cooperative banks and the regional rural banks were set up specifically to cater to the
needs of both rural as well as urban poor.
2. The commercial banks --- both the private sector and the public sector lend loans for
agricultural as well as other allied activities as part of the PSL (priority sector lending)
mandated by RBI. The success of many MFIs and the SHG-Bank Linkage programme has
motivated many private-sector banks and foreign banks to actively participate in
microfinance.

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 16.2 SHG-Bank Linkage Programme

The program, launched by NABARD in February 1992 with RBI support, aimed initially to promote
and finance 500 Self-Help Groups (SHGs) nationwide. These groups encouraged pooling savings
to provide small interest-bearing loans to members. Later, bank credit was made accessible to
these groups to enhance their lending capacity. Following the pilot phase, RBI formed a Working
Group chaired by Shri S.K. Kalia, then Managing Director of NABARD, in November 1994. The
group included NGO representatives, academics, consultants, and bankers to study SHGs and
NGOs' functions for expanding and deepening their role in rural development.

The Working Group had recommended:

• Linking of SHGs with the banks is a cost effective, transparent and flexible approach to
improve the accessibility of credit from the formal banking system to the unreached rural
poor, which can solve the twin problems faced by the banks, viz recovery of loans in the
rural areas and the high transaction cost in dealing with small borrowers at frequent
intervals.
• Banks should treat the linkage programme as a business opportunity and they may design
area specific and group specific loan packages considering inter alia the potential, local
needs, available talent/skills etc.

The RBI accepted most of the recommendations and advised the banks to consider lending to the
SHGs as part of their main stream rural-credit operations
The SHG-Bank Linkage Programme is a partnership model between three agencies, namely, the
SHGs, banks and the NGOs. NABARD operates 3 models under this program. They are:
i. Model I: NABARD-Bank-SHG Under this model, SHGs are formed and financed by banks.
There is no NGO intervention. NABARD supports banks and banks in turn, support SHGs.
ii. Model II: NABARD-Bank-SHG (with NGO as a facilitating agency) Under this model, the
NGOs will promote SHGs and link them with banks. SHGs formed by NGOs are directly
financed by banks.

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 iii. Model III: NABARD-Bank-NGO-SHG (with NGO as the financial intermediary) Under this
model funds flow from NABARD to banks and from banks to NGOs. The SHGs are financed
by banks through NGOs. Under this model III some conditions need to be fulfilled
A. NGO is registered under the Society/Company/Partnership/Cooperative act
B. Audited balance sheet for three years for NGO
C. Provision in the by-laws of NGO to borrow for SHG activities
D. Resolution to borrow from bank
E. A statement of credit required by SHGs

16.2.1 RBI Guidelines on SHG-Bank Linkage Program

1. Part of Planning Process of Bank: Credit to SHGs need to part of planning process of the
bank in the state credit plan, district credit plan, block credit plan and so on. No specific
targets are defined for this
2. Margins and Norms: As per guidelines by NABARD, the credit to SHG shall be given in
between 1:1 to 1:4 ratio. In case of matured SHGs the ratio may be increased beyond this.
3. Presence of Defaulters in SHGs: The default by any of the members of SHG should not be
a roadblock in giving credit to SHG as a group entity.
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 16.3 Microfinance Institutions (MFIs):

The MFIs can be classified into the following 3 categories based on their legal structure:

16.3.1 Other MFIs

i. SHG Federations: An SHG Federation is a democratic body formed by SHGs, belonging to a
certain geographical area, to represent their common cause to policy making bodies and
facilitate a linkage between SHGs and other agencies. These are registered mostly as
charitable societies. These are formed at two levels--- cluster/village level federations and
block/district level federations.
ii. Apex MFIs: Rashtriya Mahila Kosh(RMK), the Friends of Women's World Banking(FWWB),
Ahmedabad; and Rashtriya Gramin Vikas Nidhi, Guwahati; are the apex MFIs. These
institutions provide indirect support services to MFIs. They are also referred to as wholesale
MFIs. They help their members to build capacity, design and implement new products, grant
capital, offer a loan guarantee to encourage banks to wholesale funds and undertake policy
initiatives.
iii. Association of MFIs: Sa-Dhan is the designated national association of Community
Development Finance Institutions. It plays a crucial role in increasing capacities, affecting the
evolution and development of best practices, increasing the number of service providers and
contributing to improving the policy and operational context for microfinance in India.
The NABARD and the SIDBI are the apex-microfinance service providers. NABARD is the
promoter and regulator of the SHG-BLP. The SIDBI launched the SIDBI Foundation in 1999, to
provide financial and non-financial services to MFIs and facilitate their development into
financially viable activities.

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 16.3.2 Credit Lending Methodologies in MFIs
The major credit-lending models of various MFIs are:
1. Direct lending to individuals organized in joint-liability groups. The Joint liability groups are
discussed later in this section
2. Lending to SHGs
3. Lending to SHG Federations
What are Joint Liability Groups?
Joint Liability Group is a concept established in India in 2014 by the rural development agency
National Bank for Agriculture and Rural Development (NABARD) to provide institutional credit to
small farmers. It is a group of 4-10 people of same village/locality of homogenous nature and of
same Socio-Economic Background who mutually come together to form a group for availing loan
from a bank without any collateral.
Difference between JLG and SHG models of Microfinance
1. SHG model is mainly used by banks for lending. NABARD promote SHG-Bank linkage while JLG
lending is mainly used by MFIs.
2. SHGs have group size of 10-20 members while JLG have smaller group size of 5-10 members.
3. SHGs are more formal structure as compared to JLG. SHG has positions defined like secretary,
treasurer which acts as an interface of all SHG members with the financial institutions. All
members of JLG have to directly interact with financial institutions themselves.
4. SHG members make regular savings and deposit it with the financial institution. Lending to
SHGs is based upon the amount of savings that SHG has in the bank account. Generally, loan
amount is 5 times the amount of savings. JLG model is mainly used for lending only irrespective
of savings.
5. In case of SHG lending is done on the name of SHG not individuals i.e. group lending is done
while in case of JLGs lending is done to individual members though all members are guarantor of
each other. SHG members generally undertake same activity and work together while JLG
members invest loan amount for different purposes.

16.4 Assistance to SHG under PMRY (Pradhan Mantri Rozgar Yojna)

Self-Help Groups (SHGs) are considered for assistance under PMRY provided

1. Educated unemployed youth volunteer to form SHG to set up self-employed ventures

2. A Self-Help Group may consist of 5 to 20 educated unemployed youth
3. No upper ceiling on loan.
4. Required margin money contribution (i.e. subsidy and margin to be equal to twenty per
cent of the project cost) should be brought in by the SHG collectively
5. The exemption limit for obtaining collateral security will be Rs. 5 lakh per borrowing
account for projects under the Industry Sector. Exemption from collateral will be limited
to an amount of Rs. 1 lakh per member of SHG for projects under service and business
sectors

17 Role and Importance of Microfinance

1. Credit to Rural Poor: -Microfinance brings institutionalized credit to rural communities,
reducing reliance on non-institutional sources and fostering economic and social stability.

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 2. Poverty Alleviation:-Microfinance aids poverty alleviation by creating employment
opportunities, enhancing entrepreneurial skills, and boosting income levels,
3. Women Empowerment: - Microfinance empowers women by facilitating their access to
financial and economic resources, leading to greater economic and social security.
4. Economic Growth: -Microfinance contributes to economic growth by increasing
production, boosting GDP, and fostering sustainable economic development.
5. Mobilization of Savings: -Microfinance fosters savings habits among the poor, making
them bankable and facilitating the mobilization of financial resources
6. Development of Skills: -Microfinance supports the development of entrepreneurial skills
among rural communities through training and support from self-help groups
7. Mutual Help and Co-operation: -Microfinance promotes mutual aid and cooperation
among members of self-help groups, facilitating collective economic interests

18 Issues in Microfinance Sector: -

• Funding Issue: The growth of microfinance is hindered by limited access to public deposits,
which are stable and cost-effective compared to other funding sources like bank credit or
donor funds.
• Regulatory Issue: In India, the Task Force on Regulation of Microfinance was of the view that
since SHGs do not access public savings, there is no need for specific regulation for these
entities. As the deposit taking NBFCs are already regulated by RBI, any MFI desirous of
accessing public savings should evolve into a deposit taking NBFC and get itself registered
under the relevant statutes. All other MFIs should subject themselves to their own Self-
Regulatory Organisations (SROs).

18.1 Positive Impact of Microfinance: -

• Financial services can be provided to the poor at commercial rates.
• It is a powerful vehicle in the upward and socio-economic transition of the poor.
• It empowers women by enabling them to become the economic agents of change.

18.2 Negative Impact of Microfinance: -

• Competition to secure ad retain the clients by many MFIs may again lead to indebtedness
• There is lack of transparency and absence of governance structure

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