140301050136 igidr poor financial inclusion in rural areas of chhattisgarh

Poor Financial Inclusion in Rural Areas of Chhattisgarh: Causes andRemedies

Ms.Manjeet Kaur Bal, Faculty, TPIPRD, Raipur, ChhattisgarhMr. Neeraj Dewangan, Senior Consultant, Directorate Panchayat, Raipur, Chhattisgarh

Mr. Syed Parwez, Consultant, UNICEF, State Planning Commission, ChhattisgarhMr Deepak Biswas, Consultant, WASAN, Chhattisgarh

ABSTRACT

Financial access helps an economy to have a regular and sustained growth. It helps toproduce more, and distribute it fairly. Both consumers and producers benefit because theirwelfare and productivity are enhanced. Without access to credit the poor and underprivilegedare doubly damned—not only because they lose an option but also because their bargainingpower is weakened.

Financial inclusion is meant to include all those sections of the society, which aremainly out of the net of the financial institutions. In India, it can be traced to 1904 when co-operative movement started. A vast network of rural cooperative credit banks was initiated in1950s, followed by a drive to nationalize commercial banks in 1969. The strategy during the1970s and 1980s gave the leading role to nationalized banks. These were charged withloosening the grip of traditional moneylenders. The 1990s saw the partial deregulation ofinterest rates, increased competition and new microfinance approaches.

Despite this, the vast majority of India’s rural poor still do not have access to eitherformal finance or microfinance. With this background, this paper aims at examining theextent of financial inclusion of job card holders of MGNREGA in the rural areas of Raipur,the capital district of Chhattisgarh to understand the reasons behind the present status offinancial exclusion and factors responsible for this state of affair, with a view to identify thebarriers.Some remedial measures are also suggested. GIS mapping is used to show theoverview of the reach of financial inclusion in the area under study.

INTRODUCTION

“Access to financial markets is important for poor people. Like all economic agents, low-

income households and microenterprises can benefit from credit, savings, and insurance

services. Such services help to manage risk and to smooth consumption . . . and allow people

to take advantage of profitable business opportunities and increase their earnings potential.

But financial markets, because of their special features, often serve poor people badly . . .

Since poor people often have insufficient traditional forms of collateral (such as physical

assets) to offer, they are often excluded from traditional financial markets . . . transaction

costs are often high relative to the small loans typically demanded by poor people. And in

areas where population density is low, physical access to banking services can be very

difficult . . .”—World Bank, World Development Report 2000–2001

Financial inclusion is defined as the process of ensuring access to timely and adequate

credit and financial services by vulnerable groups at an affordable cost (Kamath, 2007).The

concept of financial inclusion in India can be traced back to the year 1904 when co-operative

movement took place in India. It gained momentum in 1969 when 14 major commercial

banks of the country were nationalized and lead bank scheme was introduced shortly

thereafter. Branches were opened in large numbers across the country and even in the areas

which were hitherto being neglected. Even after all these measures a sizable portion of the

population of the country could not be covered under formal banking system. In fact, there is

a severe gap in financial access which needs special attention. Studies have proved that lack

of inclusion or rather exclusion from the banking system results in a loss of considerable

proportion of the GDP. Thus, financial inclusion is not just a socio-political imperative but

also an economic one. Realising the gravity of the problem, Reserve Bank in its Mid Term

Review of Monetary Policy (2005-06), urged the banks to make financial inclusion as one of

their prime objectives.

Financial exclusion is broadly defined as the lack of access by certain segments of the

society to suitable, low-cost, fair and safe financial products and services from mainstream

providers. (Chattopadhyay, RBI 2011)Thus the essence of financial inclusion is to ensure that

a range of appropriate financial services is available to every individual and enable them to

understand and access those services. Apart from the regular form of financial intermediation,

it may include a basic no frills banking account for making and receiving payments, a savings

product suited to the pattern of cash flows of a poor household, money transfer facilities,

small loans and overdrafts for productive, personal and other purposes, insurance (life and

non-life), etc.

The access to finance helps an economy to have a regular and sustained growth. It

helps to produce more, and distribute it fairly. Both consumers and producers benefit because

their welfare and productivity are enhanced. Without access to credit, one of the important

opportunity—self employment—is shut off. As a result, the poor and underprivileged are

doubly damned—not only because they lose an option but also because their bargaining

power, when they work for those who have resources, is weakened. The access to credit

allows the individuals to obtain the resources necessary to carry out their ideas.(Priya Basu,

World Bank,2003)

India’s rural poor are overwhelmingly dependent on agriculture as their primary

source of income. The majority are marginal or small farmers, and the poorest households are

landless. The financial needs of India’s rural poor reflect their volatile, uncertain, and

irregular income and expenditure patterns of these households. (Priya Basu, World

Bank,2003)

The World Bank-NCAER Rural Finance Access Survey of 2003 indicates that while

rural families are predominantly multiple-income households, their two main sources of

income include the sale of agricultural products and wage labour. Irregular employment is the

most important source of income from wage labour. For households with more than one

source of income, agricultural income is the most important secondary source, with sales of

farm produce and dairy products being the most prominent.

The typical expenditure profile of the households is also of small, daily, or irregular

expenses incurred throughout the month. Moreover, the overwhelming majority of rural

households report having to deal with at least one unusual expense each year, which they are

forced to finance either from cash at home or through informal loans from family, friends, or

moneylenders.

. The poor need a wide range of financial services—from small advances to tide over

consumption needs to loans for investment purposes to long-term savings that help them

manage life-cycle needs.

India has a range of rural financial service providers, including formal sector financial

institutions at one end of the spectrum, informal providers (mostly moneylenders) at the other

end, and between these two extremes a number of semi-formal/microfinance providers.

Figure 1. Rural Financial Service Providers

In India, since the early national plans, successive governments have emphasized the

link between improving access to finance and reducing poverty. The need to improve

financial access for India’s poor motivated the establishment of a vast network of rural

cooperative credit banks in the 1950s, followed by a drive to nationalize commercial banks,

launched in 1969. This created thousands of new bank branches in rural areas across the

country. The strategy during the 1970s and 1980s gave the leading role to nationalized

(public sector) commercial banks. These were charged with loosening the grip of traditional

informal-sector moneylenders, sought to be brought about through the use of targeted low-

priced loans. The 1990s saw the partial deregulation of interest rates, increased competition

in the banking sector, and new microfinance approaches that combine the safety and

reliability of formal finance with the convenience and flexibility of informal finance. Access

to finance for the rural poor has improved somewhat over the past decades. But the vast

majority of India’s rural poor still do not have access to either formal finance or

RuralHouseholds

Formal ProvidersCommercial Banks

Regional Rural BanksCooperatives Banks

Insurance CompaniesMutual FundsPost Offices

Semi-formal ProvidersSHG—Bank linkageprogram Microfinanceinstitutions

Informal ProvidersMoneylendersTrade creditors

Local shopkeepers

microfinance. Informal-sector lenders thus retain a strong presence in rural India. (Priya

Basu, World Bank,2003)

Formal providers. In terms of their sheer size and spread of operations, formal-sector

financial institutions dominate the rural finance landscape:

• Commercial banks, mostly public sector banks (but also some private-sector banks) and

regional rural banks (RRBs) together have more than 32,000 rural branches.

• India also has a vast network of rural cooperative banks, with a three tiered structure at the

state, district, and village levels. There are some 14,000 branches of rural cooperative banks

and more than 98,000 grassroots retail outlets of Primary Agricultural Credit Societies

(PACS), which are used by the cooperative system as channels for fund flows.

• The post office system adds to the physical service point network of the country with more

than 154,000 post office branches handling more than 110 million money orders and

administering 114 m illion savings accounts.

Mutual funds and insurance companies have a moderate reach in rural areas, though

this is gradually increasing. (Priya Basu, World Bank, 2003)

The issue of financial inclusion has received large importance in India during the

recent year. India has invested considerable amount of resources in expanding its banking

network with the objective of reaching to the people. During the last 50 years huge

infrastructure has been created in banking sector. However this large infrastructure that has

penetrated even remote rural areas has been able to serve only a small part of potential

customers. While India is a very high growth path, almost at the two digit level majority of

people are out of the growth process. This is neither desirable nor sustainable for the nation.

We also know that one of most important driving forces of growth is institutional finance.

Therefore it is now realised that unless all people of the society are brought under the ambit

of institutional finance, the benefit of high growth will not percolate down and by that

process majority of population will be deprived of the benefits of the high growth. Thus

financial inclusion is not only social politic imperative but also an economic one.

With a view to infuse transparency and enhancing the integrity of wage payment

under MGNREGA, and also to encourage savings among rural poor, schedule II of

MGNREGA Act has been amended to make wage disbursement to MGNREGA workers

through institutional accounts in Banks or Post Offices a statutory requirement(2010).

METHODOLOGY

Financial inclusion is meant to include all the sections of the society, who are mainly

out of the net of the financial institutions. Since it is difficult to cover all the sections of the

society in our paper, we have concentrated only on the rural sector because of its enormity on

the one hand and significance on the other.

The paper envisages to cover following objectives.

1. To find out availability and accessibility of financial institutions and services for rural

population.

2. To understand the reasons behind the status of financial exclusion and factors

responsible for it.

3. To explore how people save, borrow, make payments and manage skills.

4. To find out barriers to financial inclusion.

SAMPLE

1. The study was conducted in Arang block of Raipur District which constitutes 164

habitations. As rural areas are to be focused in the study hence the sample size is 0.1%

of total rural population (226445) according to 2001 census, i.e. 226.All the

respondents are job card holder under MGNREGA.

2. To represent the population in the sample, the male –female ratio, BPL and APL

population ratio and ratio of 15-24, 25-44, 45-59 and 60+ population was taken into

account(according to 2001 census) using stratified random sampling method. The

detailed distribution of sample is shown in SAMPLING document.

3. The Managers of all the banks in Arang block.

TOOLS FOR DATA COLLECTION

1. Interview Schedule for the households.

The Personal interviews were conducted by visiting the households with a prepared

structured questionnaire.

2. Interview schedule for the institutions.(Managers)

The Personal interviews were conducted by visiting the bank branches with a

prepared structured questionnaire.

RESULTS AND DISCUSSIONS

The number of formal bank branches available per Lakh populations is 2.5 in

Arang Block while the same for Raipur district as a whole is 10.3 which is 4 times that of

Arang block. This block is hardly 20 Km from Raipur. Another reason for this can be

attributed to location of most of the banks at Arang. This shows the skewed distribution of

formal banking institutions, which is largely concentrated in urban areas.

Status of Bank Accounts

Among the total respondents, 55% of them have accounts in the formal

institutions. In terms of gender among the account holderes 61% are male and remaining

39% are female. However, if it is classified into categories like Male- Female, APL- BPL,

educational level, occupational wise, the pattern of distribution of account is different from

usual expectations. Category wise distribution is shown in figure 2 A,B,C and D.

Fig 2 A. Account Holding BPL-APL with Male -Female

From figure 2 A it can be seen that the percentage of male and female account holders

of BPL group is higher than that of APL group.

15%

19%

33%

33%

0% 10% 20% 30% 40%

Female

Male

BPL

APL

8.33%

2.78%

2.78%

6.94%

11.11%

0.00%

1.39%

22.22%

0.00%

12.50%

18.06%

8.33%

1.39%

4.17%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Agriculture

Business

Housewife

Labour

Service

Student

Unemployed

Agriculture Business Housewife Labour Service Student UnemployedBPL 22.22% 0.00% 12.50% 18.06% 8.33% 1.39% 4.17%APL 8.33% 2.78% 2.78% 6.94% 11.11% 0.00% 1.39%

Account Holder (APL/BPL)

Fig. 2 B. Account Holding (Occupation wise)

From figure 2 B it is seen that the percentage of account holders in the occupation wise

category is again dominated by BPL households.

Fig 2 C. Account Holding (Education)

010203040506070

63 59

Having Account ( %)

8.33%

2.78%

2.78%

6.94%

11.11%

0.00%

1.39%

22.22%

0.00%

12.50%

18.06%

8.33%

1.39%

4.17%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Agriculture

Business

Housewife

Labour

Service

Student

Unemployed







59

43 4155

Having Account ( %)

Illiterate

Elementary

High School

Secondary & above

Total

8.33%

2.78%

2.78%

6.94%

11.11%

0.00%

1.39%

22.22%

0.00%

12.50%

18.06%

8.33%

1.39%

4.17%

0.00% 5.00% 10.00% 15.00% 20.00% 25.00%

Agriculture

Business

Housewife

Labour

Service

Student

Unemployed







Illiterate

Elementary

High School

Secondary & above

Figure 2 C shows that among the account holders 63% households are illiterate. This rate

decreases as we move above the educational ladder.

Fig. 2 D Reason of Bank Account

From the above figure it is indicated that the major account holders belong to BPL

group which is beneficiary of the various government schemes such as MGNREGA, pensions

and NRLM etc. This clearly reflects that in all three categories mentioned above the

education, occupation and cultural factors have no direct role to play in the financial

inclusion of the rural households. It is only because of the government schemes where

opening of accounts is mandatory to get the benefits of the schemes.

Another important indicator that reflects the same conclusion is the frequency of

money deposition in the account in a given month. The operating frequency of the bank

account by the account holder is shown in figure 3 A and B.

1.39%

5.56%

9.72%

13.89%

2.78%

5.56%

5.56%

29.17%

12.50%

13.89%

0.00% 10.00% 20.00% 30.00% 40.00%

CoreBanking/Savings

Loan

MGNREGA

Payments/Pension/…

safety of money

Fig 3 A. Transactions (Deposit)

As high as 63% of the respondents have not deposited money even once and only

14% have done it more than 5 times. This shows the lack of saving attitude or the lack of

availability of money.

As far as withdrawal of money is concerned the frequency is bit higher in this case.

Fig 3 B. Transactions (Withdrawal)

About 58% of total respondents have withdrawn money from the account 3 or more than 3

times, meaning the need for money is high but the availability is low.

0

10

20

30

40

50

60

70

0 1

63

8

No. of times Money Deposited (%)

05

101520253035

0 1

32

10

No. Of times Money Withdrawn (%)









2 3 4 5 Morethan 5

0 18 6

14


0

1

2

3

4

5

More than 5

2 3 4 5 Morethan 5

10

1

13

7

1721


0

1

2

3

4

5

More than 5










More than 5


More than 5

The second important aspect of financial inclusion is availability of borrowing

facility and its accessibility converting to facility availing. Of all the respondents 0nly 28%

have availed the borrowing facility and among them 84% have preferred the non-formal

sources and only 16% have used formal ones.

Fig 4 Loan Source

The reasons cited by the respondent for preferring non formal sources is easy

accessibility, flexible mode of repayment, no or less paper work and perceived complication

at formal institutions.

Bankers View

This analysis will be incomplete unless the bankers view and the views of the rural

households are included in this paper. The bank officials give the following reasons, not

exhaustive, for not opening the accounts in the bank by rural households.

1. Proper ID and address proof is not produced.

2. The technical terms like subsidy, deductions etc are not understood by them and they

think that they are being cheated.

3. Some fake companies attract them by promising to give good returns in the rural areas

they poor household become victims of such companies and lose money to them.

4. Communication problem.

5. Procedural difficulties like filling up forms etc.

84%





Fig 4 Loan Source




Bankers View











16%

84%

LOAN SOURCE

FORMAL

INFORMAL





Fig 4 Loan Source




Bankers View











FORMAL

INFORMAL

Against this the rural households put forth the following reasons:

1. Lengthy procedure

2. Communication too technical to understand.

3. Problem of attitude and behaviour of bank employees.

4. Lack of time to explain by bank officials.

Both bank officials and rural households have their guanine reasons for the weak

relationship between them. And ultimately it leads to financial exclusion of the people of

rural sectors in spite of banking facilities.

CONCLUSION

It is observed from the study that the achievement of the financial inclusion in the

Chhattisgarh is not significant. Although some improvement in some respect of some

parameter might have taken place, this is not sufficient to conclude that financial inclusion

has taken place in the State/districts/blocks of Chhattisgarh.

The study was undertaken to examine the extent of financial inclusion in the Arang

block of Raipur district of Chhattisgarh State. It is observed from the study that although

there has been an improvement in outreach activity in the banking sector, achievement is not

significant. Two major areas of the FI have been studied that is credit and debit status of the

rural areas. Survey was conducted in 6 villages of the block to gauge the financial inclusion

in rural areas, the results of the survey revealed that 37% of the respondents feel that they do

not have sufficient money to open accounts. Among the account holders 63% of the

respondents have not deposited money even once because of lack of money. It is also

revealed that 84% of the respondents have borrowed money from informal systems. These

findings indicates, though for a specific region not very prominent representative of the

whole rural populace of the state, private money lenders Means moneylenders are still a

dominant source of rural finance despite wide presence of banks in rural areas.

In fact, the main reasons for financial exclusion, from the demand side are lack of

awareness, low income, poverty and illiteracy; and from the supply side is distance from

branch, branch timings, cumbersome documentation and procedures, unsuitable products,

language, staff attitudes, etc. Due to all these procedural hassles people feel it easier to take

money from informal credit sources, but it results in compromised standard of living,

higher costs, and increased exposure to unethical and unregulated providers and

vulnerability to uninsured risks.

Thus financial inclusion does not mean merely opening of saving bank account

but signifies creation of awareness about the financial products, education and advice on

money management, offering debt counselling, etc. by banks. Every society should ensure

easy access to public goods. Therefore, banking service being a public good should also be

aimed at providing service to the entire population.

In nutshell, it is observed that although various measures have been undertaken for

financial inclusion, the success are not found to be noteworthy. However, only supply side

factor is not responsible for the financial exclusion. Demand side factor are also equally

responsible. Thus, there is a need to solve both of these problems with the help of appropriate

policies. Banks should look at financial inclusion, both business opportunity and as social

responsibility. Apart from formal banking institutions the role of self-help group women and

microfinance instrument (MFIs) is also important to improve financial inclusion. However,

some regulatory procedure for MFIs may have to be involved in consultation with MFIs,

consumers and the government. Political interference in the financial system should be

avoided in order to maintain viability for the formal financial institutions. The risk elements

of small and marginal farmers and vulnerable groups have to be taken into account in framing

policies for financial inclusion. Banking correspondent (BC) model has to be made more

effective, by involving more local people. Proper BC model can take care of problems of

supply and demand factors to a great extent. In fact, providing the banking services is not

sufficient. Many rural people are still not aware of banking products and they are reluctant to

take the advantage of banking facilities. Therefore, financial literacy among the rural people

is important. This apart, because of various formalities involved in availing loans etc. they are

scared of going to bank and hence fall back to moneylenders. But since BC will be recruited

from the local people they will feel comfortable to solve these problems. Above all, whole

hearted effort is called for from all sections of the society, viz., banks, beneficiaries and

regulators in order to make financial inclusion more meaningful and effective.

REFERENCE

1. Khaki, Audil Rashid and Prof Sangmi Moi-ud-din (2012), Financial Inclusion in

Jammu and Kashmir: A Study on Bankers Initiatives, Journal of Arts, Science &

Commerce, Vol.III, Issue-4(2), October, pp 115-123

2. Rangappa, K.B., Bai, Miss Renuka, Sandesh, A.S. (2005) SHG Bank Linkage

Programme and Financial Inclusion: Rural HH Study in Devangiri District of

Karnataka

3. Sharma, M (2008), Index of Financial Inclusion, Working Paper no. 215, ICRIER

4. Basu, B.H.(1999): Econometrics, second (revised) edition, Berlin et al: Springer, 189-

201

5. World Bank, World Development Report 2000–200.

6. Chattopadhyay, Sadhan Kumar (2011), Financial Inclusion in India:A case-study of

West Bengal, RBI Working Paper Series;WPS(DERP): 8/11

7. Dermirgue-kunt, Asli and Klapper Leora (2012), Measuring Financial Inclusion: The

Global Findex Database, Research Support Team, World Bank, Policy Research

Working paper 6025

8. MGNREGA Circular for financial dated 04/03/2010

140301050136 igidr poor financial inclusion in rural areas of chhattisgarh

Documents

Transcript of 140301050136 igidr poor financial inclusion in rural areas of chhattisgarh