Answer:

♤ Financial inclusion is envisaged to enormously empower the poor through low cost banking services and credit, at an affordable cost to the vast sections of disadvantaged and low-income groups.

♤ In India, more than 40 per cent of households avail no banking service at all. The ratio of total bank credit outstanding to GDP is only about 57 per cent as against over 140 per cent in East Asia and Pacific. Insurance premia account for less than 1 per cent of GDP, which is only about a third of the international average.

♤ Owing to difficulties in accessing formal sources of credit, poor individuals and small and macro enterprises usually rely on local moneylenders, who charge exhorbitant interest rates and hence they are unable to come out of their poverty trap. Access to low cost financial services allows the poor to save money outside the house safely, prevents concentration of economic power with a few individuals.

♤ Among the key financial services that are of great relevance here are risk management or risk mitigation services vis-à-vis economic shocks. Such shocks may be an income shock due to adverse weather conditions or natural disasters, or an expenditure shock due to health emergencies or accidents, leading to a high level of unexpected expenditure. This aspect of financial inclusion is of vital importance in providing economic security to individuals and families.

♤ Financial services will help in getting easy credit for the small businesses and farmers in agriculture as well. It affects the extent of entrepreneurship and of competition. Though financing of first time entrepreneurs is risky but it a must for inclusive growth. Similarly growth in agriculture will be more of inclusive nature.

♤ Govt is increasingly relying on banking services e.g. direct cash benefits and insurances products etc., to provide benefits to the disadvantaged sections under various schemes. This helps in better monitoring of schemes and ensures that there are less leakages of money. These efforts will only bring fruit if people are financially inclusive.

♤ Issues:

i. Often people do not have proof of identity to represent themselves formally to get into the financial system.

ii. Govt. banks have limited capacity and private banks are not willing to expand their branches in rural areas.

iii. People lack awareness and access to the sources of information.

iv. Microfinance institutions have exploited the rural masses e.g. chit fund scams

or other financial frauds in rural areas.

v. High transactions costs relative to size of accounts are also the main reason for low banking coverage and this is compounded by high risk perception of banks, in part because of lack of insurance.

vi. Agriculture and other forms of MSMEs are particularly ill-served and the situation has in fact deteriorated in some ways over the last two decades because of problems afflicting the cooperative banking sector.

vii. Reaching out to the illiterate people or people who can handle only the regional languages is also difficult without developing a suitable communication mode.

♤ The promotion of financial inclusion can be done in two major ways:

1. by expanding the role of the formal financial system, including banking.

2. through the growth of micro-finance institutions in rural and urban areas.

♤ Expansion of banking infrastructure, opening new branches, zero-frills bank accounts, banking correspondents(BCs) (use of services of intermediaries in providing financial and banking services through the use of Business Facilitators (BFs) and Business Correspondents (BCs), setting up of ultra small branches etc. are a few of the modalities under financial inclusion strategies of the govt.