In this article, Rituraj Singh Bhati pursuing M.A, in Business Law from NUJS, Kolkata discusses Legal framework and regulations governing financial inclusion in India.

Financial inclusion refers to injection of financial, banking and other necessary facilities to the minor sector of the society which is deprived of the said facilities. The major factor of the financial inclusion is that the services provided under the head of financial inclusion should be affordable to the people belonging to low-income segment group. As it can be understood by the name, “financial inclusion” refers to every practice such as savings, credit, transfers etc. The financial inclusion is a basic need for sustainable growth of the country. The sustainable growth of the country is depended upon the stability of the lower income group of the country. More stable the lower income group of the country; the country is understood to be in a better flourishing state than the country whose lower income group society is not stable and growing. The motto of financial inclusion is to provide the services to the people who are deprived of such services and are unreached. Hence, banking is the key factor of the inclusion, as it tends to open branches in the remote sectors, rural areas and the backward areas of the country that are deprived of the ways to financially plan their income and save it up in the banks for further usage and also the credit of that saved amount with an ease, wherever and whenever required at utmost affordable costs. Whereas, the backward sector of the country is least aware about the financial literacy and this is the major factor hindering the steady as well as sustainable growth of the country. Sustainable development demands participation from a vast sector of the economy; in fact as much as sections of the society to perform. Pertaining to these lacunas, the government as well as the Reserve Bank of India planned and provided Automatic Teller Machines (ATM’s), internet banking, cashless cards (credit and debit cards) etc. to a vast number of population but still the most benefited sector out of these services is the urban population and the rural population still lacks general information about these facilities or on the other hand the rural and backward communities of the economy still prefer the ages old techniques of financial transactions due to lack of awareness, lack of education, lack of safety in the rural areas pertaining to these modern techniques.

The goal of the Financial Inclusion is to create a mass that is self-dependent and self-sustained people knowing enough and competent to take their own financial decisions which in turn allows maximal investments in government schemes, educational schemes, entrepreneurial projects, businesses, retirement plans, banking schemes, insurances; which in turn can benefit the mass at large and also can provide the economy a steady inflow which acts as a backbone of any healthy economy and ensures growth. The lack of supply in the inclusion sector pertains to the low demand from the zone where it desires the most to expand. People in rural zones do not prefer this type of banking services due to language barriers, typical and twisted procedures, non-availability of bank branches in the remote areas of the country, low income generation amongst the rural population, no steady income, financial illiteracy and numerous of such factors due to which there is no healthy demand of financial inclusion in the backward sections of the country and society.

Financial inclusion introduces the lower income group with the banking sector, which helps to protect the income of the people for the times they need it the most. It also safeguards the people from the independent and un-regulated money lenders who implement such rates of interests as regulated by them and also trouble the debtors with every means possible. The financial inclusion has helped put a stop on such practices by the money lenders as there are banks opening in remote areas of the country and the banks are allowing the backward areas of the country to attain loans on low, steady and government regulated interests.

The government as well as the Reserve Bank of India has undertaken various innovative steps to increase the demand of the Financial Inclusions is the rural areas by launching easy KYC(Know Your Customer) schemes, Kisan Credit Cards and special benefits on it only for farmers, buying of the produce on Special Supported Price by the Government, payments to the farmers re done directly to their bank accounts, subsidies are granted directly to the bank accounts, bank accounts are made necessary to obtain special benefits and schemes regulated by the government, use of bank information and ‘aadhar’ information of the fair price shops, linking of aadhar cards to the bank accounts to assure that the benefits are allocated to the right person, banks and governmental bodies now a days educate the rural people about their rights and benefits which are given to them by the government and what benefits they are missing out on by not having bank accounts, opening of bank accounts of small children to teach them about savings, Jan-Dhan accounts, handing of Gas subsidy directly to the bank accounts, Zero Balance accounts for people falling under Below Poverty Line, Adhar Scheme, payment to the people under Rural Employment Guarantee Scheme only by the way of bank accounts, payment of insurance claims are to be done directly to the bank account, any relief granted by the government id transferred directly to the banks, scholarships are transferred directly to students bank accounts, compulsory Bank Account for every salaried employee whether government employee or private employee etc. through these changes and schemes the government is trying to create a subtle demand or Financial Inclusion which can be in turn fulfilled.

Despite of these efforts, some of which are carried out after 2002 the growth of financial Inclusion in India is quite sluggish. As per the stats provided by The Government of India 51.4% of the total population which is into farming is still deprived of accessing their formal credit; which shows the indebtedness of the economy at large. As per this rate the present situation of the general indebtedness have decreased which is a good sign in favour of the schemes and regulations passed by the government as well as Reserve Bank of India but it may be still lacking the quantum of growth India requires to keep on the pace of the rising economy.

Financial Inclusion in India – 2002

State/Region	Non-indebted Farmer Households		State/Region	Non-indebted Farmer Households
	Lakh	%		Lakh	%
Northern	53.21	48.7	West Bengal	34.53	49.9
Haryana	9.11	46.9	Central	158.29	58.4
Himachal Pradesh	6.03	66.6	Chhattisgarh	16.50	59.8
Jammu & Kashmir	6.43	68.2	Madhya Pradesh	31.09	49.2
Punjab	6.38	34.6	Uttar Pradesh	102.38	59.7
Rajasthan	25.26	47.6	Uttaranchal	8.32	92.8
North Eastern	28.36	80.4	Western	47.92	46.3
Arunachal Pradesh	1.15	94.1	Gujarat	18.20	48.1
Assam	20.51	81.9	Maharashtra	29.72	45.2
Manipur	1.61	75.2	Southern	44.11	27.3
Meghalaya	2.44	95.9	Andhra Pradesh	10.84	18.0
Mizoram	0.60	76.4	Karnataka	15.52	38.4
Nagaland	0.51	63.5	Kerala	7.82	35.6
Tripura	1.19	50.8	Tamil Nadu	9.93	25.5
Sikkim	0.36	61.2
Eastern	126.39	60.0
Bihar	47.42	67.0
Jharkhand	22.34	79.1
Orissa	22.09	52.2	All India	459.26	51.4[1]

Major changes in Financial Inclusion in India were seen from the year 2005 and onwards as the result of the fact findings of the Khan Committee, which was setup in 2004 by The Reserve Bank of India urging recommendations regarding the betterment of Financial Inclusions in the deeper parts of the country where the banking system had still not been established. As the result of the recommendations of the Committee many changes were brought into the inclusion system of the country which starred simplifying the procedure and availability of Banking Sources in rural and untouched parts of the country.

POLICIES UNDERTAKEN BY RBI

Basic Saving Bank Deposit (BSBD)

Reserve Bank of India advised all the nationalised banks to open accounts with Basic Saving Bank Deposits; meaning such type of accounts featuring basic saving and transacting features such as no minimum balance clause, cash deposit and withdrawal feature from the branches as well as ATM’s, credit/debit cards, access to electronic payments channels etc. This policy resulted in increased number of general accounts across the country. The rural population reacted positive to this policy as the accounts were featured with zero balance limit, ATM Cards were allotted; helping in easy transaction of money etc.

KYC Norms to be simplified

Reserve Bank of India directed the banks to simplify its norms to register a person as a customer of the bank for the sake of simplicity in process for opening a bank account especially for bank accounts to contain amount of Rs. 50,000/- and credit up to Rs. 1,00,000/-. A large proportion of the population of India is either financially illiterate or totally illiterate which caused difficulty in opening the account and filling the formalities required to be filled in form. The RBI directed the banks to accept Aadhar Card as a proof of identity as well as address of the customer.

Branch Authorization Policy simplified

For increasing the density of branches per capita in India the Reserve Bank of India authorised and gave liberty to the Scheduled Commercial Banks to open Branches in Tier-2 to Tier-6 cities/centres under the general permission as subjected to reporting of the newly opened branch or the branch to be opened. Further liberalizing the policy RBI authorised the domestic scheduled commercial banks to open its branches in tier-1 cities/centres upon general conditions subjected to specific conditions. This step resulted in increasing number of bank branches per capita; especially in tier-2 to tier-6 cities which largely includes rural areas.

Compulsory opening of branches in Un-banked Villages

Reserve Bank of India directed the banks to compulsorily open 25% of the total number of its branches opened in a year in tier-5 and tier-6 centres which generally consists of villages. This step resulted in increased branches in rural areas which further resulted in increasing the number of people connected to accounts for regular transactions.

Establishment of Financial Literacy Centres

Reserve Bank of India revised the guidelines in 2012 which stated opening of Financial Literacy Centres which should conduct Financial Literacy Campaigns once a month in rural areas and if possible more than once. Though one campaign a month is compulsory. Through these campaigns the banks make it definite that people are well educated about their rights and duties related to banking regulations and encourage them to opt for financial inclusion services.

Licensing of new banks

Reserve Bank of India has started licencing new banks for properly implementing the Financial Inclusion scheme throughout the country. This new licencing emphasises upon new and innovative business models targeting rural and those areas which are still out of reach of banking sectors.

Kisan Credit Cards

Government of India and Reserve Bank of India have with collaborated directions started issuing Kisan Credit Cards to farmers of the country. The scheme was started in 1998-99 and till date numerous of farmers are equipped with kisan credit cards which are issued keeping in mind the necessities and benefits of farmers.

Rural Infrastructural Development

National Bank for Agriculture and Rural Development (NABARD) provides loans and deputes amounts to the state governments for the development of infrastructure, agriculture sectors, rural connectivity and social frontiers. These loans have been gradually increasing with every financial year.

Cheap e-commerce transactions

Government has initiated e-commerce sites and mobile apps to encourage banking transactions rather than cash transactions which result in regulated and easy money transfer which can be accessed anytime and anywhere.

Establishment of Financial Stability and Development Council

The government established this regulation body upon recommendations of Raghuram Rajan committee in 2008. The council looks after and nurtures the financial regulations and acts as well as macro prudential regulations which refer to the regulations to be enacted in rural or tier- 5 & 6 centres. The committee was the first of the regulatory bodies to look after the rules and regulations regarding the financial inclusion which is the major demand for the economy to grow at this rising rates. The council looks after the maintenance of financial stability, financial literacy amongst the rural class of the economy, development of the financial sector at root levels as well as inter regulatory coordination for a stable and easy to use financial prudent.

Relaxation in provisions of Prevention of Money Laundering Act

The Government revised some of the provisions of the Prevention of Money Laundering Act and relaxed some of its provisions for the special class of the economy which were rightly benefitted by the changed provisions. The provisions were relaxed to increase the bank in flow and financial transactions through a channelized route i.e. through a bank. Some provisions were relaxed for better and fluent transactions whereas some other provisions were also revised keeping in mind the availability and accessibility of the bank accounts and services. The change in these provisions provided an easy way and relaxed regulations to open small accounts with basic amenities and features to all. The revision allowed the banks to easily and hassle freely provide ATM cards to the account users, instant opening of small savings accounts, increased transaction limit through e-banking or cards etc.

Pradhan Mantri Jan Dhan Yojna

This is the most recent advancement to encourage financial inclusion in India by our Present Prime Minister Shri Narendra Modi, launched on 15^th of August 2014 on his first Independence Day speech further enabling the financial prudence and independence of citizen of India. The yojna (scheme) was launched with a goal to provide the banking facilities to all, at all times. This universal availability of banking solutions would, in turn, help the economy to grow at a better pace as the transactions through a channel recognized by the government will increase and increase with a rapid speed. This will also let the government track the movement of the money which will help in curtailing the flow of black money in the economy which slowly degrades the economy by stealing and converting the white money into cash which is totally tax exempted as it is out of notice of the authorities and regulatory bodies.

The major benefits provided by the scheme are:

1. Basic Savings Accounts: General savings accounts with zero balance limit (no frill accounts) and an overdraft facility of Rs. 5000/-.
2. “RuPay” Debit Card: A debit card available on easy terms and covering a term insurance of Rs. 1,00,000/- as accidental damage fund inbuilt with the card.
3. “RuPay” Kisan Card: A credit card specially built keeping in mind the needs of financial transaction as by the farmer community of the country. The card embeds inbuilt crop insurance subjected to notification which helps the farmers in case of crop damage and the card is also allowed to make more free transactions than a normal commercial card.
4. Micro Finance: The scheme provides micro finance or the household utilities and betterment of infrastructure in Rural Areas as well as Semi Rural areas. The finance is available on businesses as well as crops and building bathrooms with subsidy.

The scheme was launched as a national priority.

Gaps and Lacunas

The financial inclusion in India though growing gradually is still insufficient as compared to the size and complexity of the nation. Financial inclusion is a concept new to the context of India arising in the late 60’s but gaining a steady and sustainable growth since 2005 onwards; things have changed after 2005 and the government of India as well as Reserve Bank of India have undertaken various steps to conquer the weak inclusion in the rural parts of the country. Despite of certain good and favourable changes recommended by distinct committees since a decade, pure implication of the recommendations advised was not possible in such a vast terrain and this further makes it typical and difficult for the people of rural background to connect with the schemes and regulations launched for their sole benefit.

Some of the major drawbacks in the line of Financial Inclusion in India are as follows:

No codified context

The government of India as well as The Reserve Bank of India has launched numerous schemes benefiting and advocating the motive of financial inclusion in the country and have also taken measures to educate people and institutions about the importance of the sectors of inclusion but still have lacked in creating and implementing a codified and written context on the reference. By making the rules and regulations rigid and written, the goal of financial inclusion can be achieved with a steady and sustainable way. The regulations passed by the different committees are not to be found in a single place and that makes it difficult for the authorities and officers working in the financial sectors to follow the regulations and avoid the conflict and clash between different regulations passed by different notifications.

Suitability

The suitability of the regulations and rules are quit rigid and universal across the country; whereas with such a vast terrain of the country in context the schemes should be handed over to the states to apply, procure and implement as per the conditions and the needs of the areas to be encountered and covered under the schemes. The universality of the regulations makes them a little less benefiting to the context of the sector or the zone where it is applied.

Awareness

Though directing the banks to conduct councils and camps one a month in rural districts; the efforts are not resulting in the way they should. People of maximum states are unaware by the working of the banks and where there is unawareness for the banks there is no point in talking of the benefits to the public. The public should be made aware and educated about the schemes provided for their benefits in very simple way and in regional languages. It is seen that the authorities whom the work of the awareness of the schemes is given are negligent towards the work and often do not explain the proper benefit of the schemes and quite often it is also seen that the people hired by the government for the promotions of these schemes in rural areas are themselves un-educated and un-aware about the benefits and disadvantages of the schemes. India is ranked the lowest in the Asia-Pacific region amongst the 16 countries. For a country so rapidly growing this result matters and is unacceptable for a hinder less and steady growth of the economy as well as population.

Conclusion

The following steps are necessary for the betterment of financial inclusion.

1. Further expansion of the bank networks whether through branches, through ATM’s, through Kiosks etc.
2. Focus of the Banks on credit rather than saving accounts opening. India has surpassed the barrier of the savings accounts, the govt. and the RBI should emphasize upon the expansion to the credit facilities to the rural parts of the country.
3. To set the “priority sectors” such as weaker section of the economy, farmers, as the lending targets in next few years.
4. Provide a codified ceiling to the interest rate; putting barriers to the allowance of interest rate to be provided and to be collected in context of loans.
5. To allow different business models in the banking sectors which are driven as per the work schedule rather than a full proof profit schedule.

The government has realised that the financial inclusion is not something which we just need it is the need of the hour. Every sector whether low or high of the country needs to grow at the same pace, which is still a long seen prospect, as growth cannot be said to be complete if only the highs get higher.

[1] Government of India (2008).