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Bank nationalization in India marked a paradigm shift in the focus of banking as it was intended to shift the focus from class banking to mass banking. The rationale for creating Regional Rural Banks was also to take the banking services to poor people.  The branches of commercial banks and the RRBs have increased from 8321 in the year 1969 to 68,282 branches as at the end of March 2005. The average population per branch office has decreased from 64,000 to 16,000 during the same period. However, there are certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh, Jharkhand, West Bengal and a large number of North-Eastern states, where the average population per branch office continues to be quite high compared to the national average. As you would be aware, the new branch authorization policy of Reserve Bank encourages banks to open branches in these under banked states and the under banked areas in other states. The new policy also places a lot of emphasis on the efforts made by the Bank to achieve, inter alia, financial inclusion and other policy objectives.  


One of the benchmarks employed to assess the degree of reach of financial services to the population of the country, is the quantum of deposit accounts (current and savings) held as a ratio to the adult population. In the Indian context, taking into account the Census of 2001 (ignoring the incremental growth of population thereafter), the ratio of deposit accounts (data available as on March 31, 2004) to the total adult population was only 59% (details furnished in the table). Within the country, there is a wide variation  across states. For instance, the ratio for the state of Kerala is as high as 89% while Bihar is marked by a low coverage of 33%. In the North Eastern States like Nagaland and Manipur, the coverage was a meager 21% and 27%, respectively.  The Northern Region, comprising the states of Haryana, Chandigarh and Delhi, has a high coverage ratio of 84%. Compared to the developed world, the coverage of our financial services is quite low. For instance, as per a recent survey commissioned by British Bankers' Association, 92 to 94% of the population of UK has either current or savings bank account.

What is Financial Inclusion?

Financial inclusion is delivery of banking services at an affordable cost to the vast sections of disadvantaged and low income groups. Unrestrained access to public goods and services is the sine qua non of an open and efficient society. As banking services are in the nature of public good, it is essential that availability of banking and payment services to the entire population without discrimination is the prime objective of the public policy.


What is the scope of financial inclusion?

The scope of financial inclusion can be expanded in two ways.

(a)     through state-driven intervention by way of statutory enactments ( for instance the US example, the Community Reinvestment Act and making it a statutory right to have bank account in France).

(b)    through voluntary effort by the banking community itself for evolving various strategies to bring within the ambit of the banking sector the large strata of society.


When bankers do not give the desired attention to certain areas, the regulators have to step in to remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on financial inclusion.

In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a much wider perspective. Having a current account / savings account on its own, is not regarded as an accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and exclusion. At one extreme, it is possible to identify the ‘super-included’, i.e., those customers who are actively and persistently courted by the financial services industry, and who have at their disposal a wide range of financial services and products. At the other extreme, we may have the financially excluded, who are denied access to even the most basic of financial products. In between are those who use the banking services only for deposits and withdrawals of money. But these persons may have only restricted access to the financial system, and may not enjoy the flexibility of access offered to more affluent customers.


What are the consequences of Financial Exclusion?

Consequences of financial exclusion will vary depending on the nature and extent of services denied. It may lead to increased travel requirements, higher incidence of crime, general decline in investment, difficulties in gaining access to credit or getting credit from informal sources at exorbitant rates, and increased unemployment, etc. The small business may suffer due to loss of access to middle class and higher-income consumers, higher cash handling costs, delays in remittances of money. According to certain researches, financial exclusion can lead to social exclusion.

International experience in promoting financial inclusion

An interesting feature which emerges from the international practice is that the more developed the society is, the greater the thrust on empowerment of the common person and low income groups. It may be worthwhile to have a look at the international experience in tackling the problem of financial exclusion so that we can learn from the international experience.

The Financial Inclusion Task Force in UK has identified three priority areas for the purpose of financial inclusion,  viz., access to banking, access to affordable credit and access to free face-to-face money advice. UK has established a Financial Inclusion Fund to promote financial inclusion and assigned responsibility to banks and credit unions in removing financial exclusion. Basic bank no frills accounts have been introduced. An enhanced legislative environment for credit unions has been established, accompanied by tighter regulations to ensure greater protection for investors. A Post Office Card Account (POCA) has been created for those who are unable or unwilling to access a basic bank account. The concept of a Savings Gateway has been piloted. This offers those on low-income employment £1 from the state for every £1 they invest, up to a maximum of £25 per month. In addition the Community Finance Learning Initiatives (CFLIs) were also introduced with a view to promoting basic financial literacy among housing association tenants.


A civil rights law, namely Community Reinvestment Act (CRA) in the United States prohibits discrimination by banks against low and moderate income neighborhoods. The CRA imposes an affirmative and continuing obligations on banks to serve the needs for credit and banking services of all the communities in which they are chartered.  In fact, numerous studies conducted by Federal Reserve and Harvard University demonstrated that CRA lending is a win-win proposition and profitable to banks. In this context, it is also interesting to know the other initiative taken by a state in the United States. Apart from the CRA experiment, armed with the sanction of Banking Law, the State of New York Banking Department, with the objective of making available the low cost banking services to consumers, made mandatory that each banking institution shall offer basic banking account and in case of credit unions the basic share draft account, which is in the nature of low cost account with minimum facilities.  Some key features of the basic banking account are worth-mentioning here.

»the initial deposit amount required to open the account shall  not exceed US $ 25
»the minimum balance, including any average balance, required to maintain such account shall not exceed US $ 0.10
»the charge for periodic cycle for the maintenance of such accounts to be declared up front
»the minimum number of withdrawal transactions which may be made during any periodic cycle at no charge to the account holder must at least be eight
»a withdrawal shall be deemed to be made when recorded on the books of the account holder’s banking institution
»except, as provided below, an account holder shall not be restricted as to the number of deposits which may be made to the account without incurring any additional charge
»the banking institution may charge account holders for transactions at electronic facilities which are not operated by the account holder’s banking institution as well as other fees and charges for specific banking services which are not covered under the basic banking account scheme
»every periodic statement issued for the basic banking account should invariably cover on it or by way of separate communiqué maximum number of withdrawals permitted during each periodic cycle without additional charge and the consequences of exceeding such maximum and the fee if any,    for the use of electronic facilities which are not operated by the account holder’s banking institution.

An interesting feature of basic banking account scheme is the element of transparency i.e. the banking institution should, prior to opening the account, furnish a written disclosure to the account holder describing the main features of the scheme i.e. the initial deposit amount required to open the account, minimum balance to be maintained, charge per periodic cycle for use of such account, maximum number of withdrawal transactions without any additional charge and other charges imposed on transactions for availing electronic facility not operated by the account holder’s banking institution, etc.

What is the current status of financial inclusion?

The following map shows the current status of financial inclusion at a country-wide level, based on a survey of 140,000 families conducted by CMIE. As expected, it varies dramatically by region.

According to this survey, Himachal Pradesh is the most financially included state (45% have bank accounts), whereas Bihar is the least financially included state (only 10% have bank accounts).
32% of the urban population has bank accounts, as opposed to only 18% in rural areas. Even within rural areas, 28% of men have bank accounts as opposed to only 6% of women.
As per the Finance Minister’s budget speech this year, all villages in excess of 2000 people must have access to banking facilities. Ministry of Finance and RBI have allocated these villages amongst banks. Banks have been given targets to cover their allocated villages by March 2012.


What is Aadhaar?


Aadhaar is a 12-digit unique number which the Unique Identification Authority of India (UIDAI) will issue for all residents. The number will be stored in a centralised database and linked to the basic demographics and biometric information – photograph, ten fingerprints and iris – of each individual. The details of the data fields and verification procedures are available here.

Aadhaar will be:

Easily verifiable in an online, cost-effective way

Unique and robust enough to eliminate the large number of duplicate and fake identities in government and private databases

A random number generated, devoid of any classification based on caste, creed, religion and geography

Why Aadhaar?

Aadhaar-based identification will have two unique features:

Universality, which is ensured because Aadhaar will over time be recognised and accepted across the country and across all service providers.

Every resident's entitlement to the number.

The number will consequently form the basic, universal identity infrastructure over which Registrars and Agencies across the country can build their identity-based applications.

Unique Identification of India (UIDAI) will build partnerships with various Registrars across the country to enrol residents for the number. Such Registrars may include state governments, state Public Sector Units (PSUs), banks, telecom companies, etc. These Registrars may in turn partner with enrolling agencies to enrol residents into Aadhaar.

Aadhaar will ensure increased trust between public and private agencies and residents. Once residents enrol for Aadhaar, service providers will no longer face the problem of performing repeated Know Your Customer (KYC) checks before providing services. They would no longer have to deny services to residents without identification documents. Residents would also be spared the trouble of repeatedly proving identity through documents each time they wish to access services such as obtaining a bank account, passport, or driving license etc.

By providing a clear proof of identity, Aadhaar will empower poor and underprivileged residents in accessing services such as the formal banking system and give them the opportunity to easily avail various other services provided by the Government and the private sector. The centralised technology infrastructure of the UIDAI will enable 'anytime, anywhere, anyhow' authentication. Aadhaar will thus give migrants mobility of identity. Aadhaar authentication can be done both offline and online, online authentication through a cell phone or land line connection will allow residents to verify their identity remotely. Remotely, online Aadhaar-linked identity verification will give poor and rural residents the same flexibility that urban non-poor residents presently have in verifying their identity and accessing services such as banking and retail. Aadhaar will also demand proper verification prior to enrolment, while ensuring inclusion. Existing identity databases in India are fraught with problems of fraud and duplicate or ghost beneficiaries. To prevent these problems from seeping into the Aadhaar database, the UIDAI plans to enrol residents into its database with proper verification of their demographic and biometric information. This will ensure that the data collected is clean from the beginning of the program. However, much of the poor and under-privileged population lack identity documents and Aadhaar may be the first form of identification they will have access to. The UIDAI will ensure that its Know Your Resident (KYR) standards do not become a barrier for enrolling the poor and has accordingly developed an Introducer system for residents who lack documentation. Through this system, authorised individuals ('Introducers') who already have an Aadhaar, can introduce residents who don't have any identification documents, enabling them to receive their Aadhaar.

Who can get an Aadhaar?

An individual who is a resident in India and satisfies the verification process laid down by the UIDAI can get an Aadhaar.


How to get an Aadhaar?

The process to get an Aadhaar will be circulated by the local media upon which residents need to go to the nearest Enrolment Camp to register for an Aadhaar. The resident primarily needs to carry certain documents which will be specified in the media advertisement.

Upon registering for Aadhaar, residents will go through a biometric scanning of ten fingerprints and iris. They will then be photographed and given an enrolment number upon completion. Depending on the enrolment agency, residents will be issued an Aadhaar number within 20 to 30 days.

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