FINANCIAL INCLUSION AND RURAL CREDITIN INDIAN ECONOMY 2000-2010For the partial fulfillment of BBA (2011-2014)ofINVERTIS University, Bareilly

Submitted To: Submitted By: Mr. Rajeev BhandariIshpreet Singh BaggaInvertis University BBA 6THSEMCERTIFICATETO WHOM IT MAY CONCERN

It is to certify that I Narendra Singh student of MBA 4TH Semester in our institute has successfully completed her winter project entitled FINANCIAL INCLUSION AND RURAL CREDITING IN INDIAN ECONOMY for the partial fulfillment of degree of MASTER OF BUSINESS ADMINISTRATION.

ACKNOWLDGEMENT

I feel an immense pleasure in taking this opportunity to express my sincere indebtedness and deep gratitude towards Mr. RAJEEV BHANDARI who gave me full support and cooperation getting good understanding of the topic chosen. Further I express my sincerest thanks for their constant encouragement, meticulous, guidance constructive criticism and invaluable console throughout the conduct of study.

Narendra SinghMBA- IV- SEM.

LIST OF CONTENTS

Introduction of Financial System 5-8 History of Indian Banks 9-16 Introduction of Financial Inclusion 17-18 Review of literature 19-33 Financial Inclusion in Rural India 34 Financial Inclusion Trends 35 Financial Inclusion Policies 36-37 Objective 38 Research Methodology 39-43 Research Design 44-46 Data Presentation & Analysis 47-49 Findings 50 Suggestions & Recommendations 51 Bibliography 52 Conclusion 53

INTRODUCTION OF FINANCIAL SYSTEM

The word system in the term Financial System implies a set of complex andclosely connected or intermixed instructions, agents, practices, markets, transactions, claims and liabilities in the economy. Finance is the study of money, its nature, creation, behavior, regulations and administration. Therefore, Financial Systemincludes all those activities dealing in finance, organized into a system. Financialsystem plays a crucial role in the functioning of the economy because it allowstransfer of resources from savers to investors. The financial system consists offinancial institutions, financial markets, financial instruments and the services providedby the financial institutions. Figure 1.1 gives a birds overview of the financial systemof an economy.

As stated earlier, the financial system comprises of four major components. Thesecomponents are:

1) Financial Institutions2) Financial Markets3) Financial Instruments4) Financial Services

1) Financial Institutions: These are institutions which mobilise and transfer thesavings or funds from surplus units to deficit units. As can be seen from Figure 1.1these institutions can be classified into, Regulatory, Intermediaries, Non-intermediariesand Others.2) Financial Markets: This is a place or mechanism where funds or savings aretransferred from surplus units to deficit units. These markets can be broadly classifiedinto money markets and capital markets. Money market deals with short-term claimsor financial assets (less than a year) whereas capital markets deal with thosefinancial assets which have maturity period of more than a year3) Financial Instruments: As already stated, the commodities that are traded or Financial Systemdealt in a financial market are financial assets or securities or financial instruments.There is a variety of securities in the financial markets as the requirements of lendersand borrowers are varied. Financial assets represent a claim on the repayment ofprincipal at a future date and/or payment of a periodic or terminal sum in the form ofinterest or dividend.4) Financial Services: Financial services include the services offered by both typesof companies Asset Management Companies and Liability ManagementCompanies. The former include the leasing companies, mutual funds, merchantbankers, issue/portfolio managers. The latter comprises the bill discounting housesand acceptance houses. The financial services help not only to raise the requiredfunds but also ensure their efficient deployment.

BANKING SYSTEM

You know people earn money to meet their day-to-day expenses on food, clothing, education ofchildren, housing, etc. They also need money to meet future expenses on marriage, higher education of children, house building and other social functions. These are heavy expenses, which can be met if some money is saved out of the present income. Saving of money is also necessary for old age and ill health when it may not be possible for people to work and earn their living.The necessity of saving money was felt by people even in olden days. They used to hoard moneyin their homes. With this practice, savings were available for use whenever needed, but it alsoinvolved the risk of loss by theft, robbery and other accidents. Thus, people were in need of aplace where money could be saved safely and would be available when required. Banks aresuch places where people can deposit their savings with the assurance that they will be able towithdraw money from the deposits whenever required. People who wish to borrow money forbusiness and other purposes can also get loans from the banks at reasonable rate of interest.Bank is a lawful organisation, which accepts deposits that can be withdrawn ondemand. It also lends money to individuals and business houses that need it.

Banks also render many other useful services like collection of bills, payment of foreign bills,safe-keeping of jewellery and other valuable items, certifying the credit-worthiness of business,and so on.

Banks accept deposits from the general public as well as from the business community. Any onewho saves money for future can deposit his savings in a bank. Businessmen have income fromsales out of which they have to make payment for expenses. They can keep their earnings fromsales safely deposited in banks to meet their expenses from time to time. Banks give two assurances to the depositors a. Safety of deposit, andb. Withdrawal of deposit, whenever needed

On deposits, banks give interest, which adds to the original amount of deposit. It is a greatincentive to the depositor. It promotes saving habits among the public. On the basis of depositsbanks also grant loans and advances to farmers, traders and businessmen for productive purposes.

Thereby banks contribute to the economic development of the country and well being of thepeople in general. Banks also charge interest on loans. The rate of interest is generally higher than the rate of interest allowed on deposits. Banks also charge fees for the various other services, which they render to the business community and public in general. Interest received on loans and fees charged for services which exceed the interest allowed on deposits are the main sources of income for banks from which they meet their administrative expenses.

The activities carried on by banks are called banking activity. Banking as an activity involvesacceptance of deposits and lending or investment of money. It facilitates business activities byproviding money and certain services that help in exchange of goods and services. Therefore,banking is an important auxiliary to trade. It not only provides money for the production ofgoods and services but also facilitates their exchange between the buyer and seller.

You may be aware that there are laws which regulate the banking activities in our country.Depositing money in banks and borrowing from banks are legal transactions. Banks are alsounder the control of government. Hence they enjoy the trust and confidence of people. Alsobanks depend a great deal on public confidence. Without public confidence banks cannot survive. HISTORY OF INDIAN BANKING

The English traders that came to India in the 17th century could not make much use of the indigenous bankers, owing to their ignorance of the language as well the inexperience indigenous people of the European trade. Therefore, the English Agency1 Houses in Calcutta and Bombay began to conduct banking business, besides their commercial business, based on unlimited liability. The Europeans with aptitude of commercial pursuit, who resigned from civil and military, organized these agency houses. A type of business organisation recognizable as managing agency took form in a period from 1834 to 1847. The primary concern of these agency houses was trade, but they branched out into banking as a sideline to facilitate the operations of their main business. The English agency houses, that began to serve as bankers to the East India Company had no capital of their own, and depended on deposits for their funds. They financed movements of crops, issued paper money and established joint stock banks. Earliest of these was Hindusthan Bank, established by one of the agency houses in Calcutta in 1770. Banking in India originated in the last decades of the 18th century. The first bank in India, though conservative, was established in 1786 in Calcutta by the name of bank of Bengal. Indian banking system, over the years has gone through various phases. For ease of study and understanding it can be broken into four phases

Early Phase (1786 to 1935)

Banking in India originated in the last decades of the 18th century. The first banks were The General Bank of India, which started in 1786, and the Bank of Hindustan, both of which are now defunct.

The oldest bank in existence in India is the State Bank of India, which originated in the Bank of Calcutta in June 1806, which almost immediately became the Bank of Bengal. This was one of the three presidency banks, the other two being the Bank of Bombay and the Bank of Madras, all three of which were established under charters from the British East India Company.

For many years the Presidency banks acted as quasi-central banks, as did their successors. The East India Company established Bank of Bengal, Bank of Bombay and Bank of Madras as independent units and called it Presidency Banks. The three banks merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India.

Foreign banks too started to arrive, particularly in Calcutta, in the 1860s. The ComptoiredEscompte de Paris opened a branch in Calcutta in 1860 and another in Bombay in 1862; branches in Madras and Pondichery, then a French colony, followed. HSBC established itself in Bengal in 1869. Calcutta was the most active trading port in India, mainly due to the trade of the British Empire, and so became a banking center.

Indian merchants in Calcutta established the Union Bank in 1839, but it failed in 1848 because of the economic crisis of 1848-49. The Allahabad Bank, established in 1865 and still functioning today, is the oldest Joint Stock bank in India.

Swadeshi Movement

The Swadeshi movement inspired local businessmen and political figures to found banks of and for the Indian community. A number of banks established then have survived to the present such as Bank of India, Corporation Bank, Indian Bank, Bank of Baroda, Canara Bank and Central Bank of India.

AmmembalSubba Rao Paifounded Canara Bank Hindu Permanent Fund in 1906. Central Bank of India was established in 1911 by Sir SorabjiPochkhanawalaand was the first commercial Indian bank completely owned and managed by Indians. In 1923, it acquired the Tata Industrial Bank.

The fervor of Swadeshi movement lead to establishing of many private banks in Dakshina Kannada and Udupi district which were unified earlier and known by the name South Canara (South Kanara ) district.

Four nationalized banks started in this district and also a leading private sector bank. Hence, undivided Dakshina Kannada district is known as "Cradle of Indian Banking".

Banks with Year of Start

Bank of Bengal 1809

Bank of Bombay 1840

Bank of Madras 1843

Allahabad Bank 1865

Punjab National Bank Ltd. 1894

Canara Bank 1906

Indian Bank 1907

Bank of Baroda 1908

Central Bank of India 1911

Bank of Mysore 1913

Union Bank if India 1922

Pre Nationalization Phase (1935 to 1969)

Organized banking in India is more than two centuries old. Until 1935 all, the banks were in private sector and were set up by individuals and/or industrial houses, which collected deposits from individuals and used them for their own purposes.In the absence of any regulatory framework, these private owners of banks were at liberty to use the funds in any manner, they deemed appropriate and resultantly, the bank failures were frequent.

For many years the Presidency banks acted as quasi-central banks, as did their successors. Bank of Bengal, Bank of Bombay and Bank of Madras merged in 1925 to form the Imperial Bank of India, which, upon India's independence, became the State Bank of India. Even though consolidation in banking was building trust among the investors but a central regulatory, authority was much needed. British Government in India passed many trade and commerce laws but acted little on regulating the banking industry.

Reserve Bank of India

Another breakthrough happened in this phase, which was Reserve Bank of India. The Reserve Bank of India was set up on the recommendations Royal Commission on Indian Currency and Finance4 also known as the Hilton-Young Commission. The commission submitted its report in the year 1926, though the bank was not set up for nine years. Reserve Bank of India (RBI) was created with the central task of maintaining monetary stability in India. The Government on December 20, 1934 issued a notification and on January 14, 1935, the RBI came into existence, though it was formally inaugurated only on April 1, 1935. Main functions of RBI were

1. Regulate the issue of banknotes 2. Maintain reserves with a view to securing monetary stability and 3. To operate the credit and currency system of the country to its advantage

The Bank began its operations by taking over from the Government the functions so far being performed by the Controller of Currency and from the Imperial Bank of India. Offices of the Banking Department were established in Calcutta, Bombay, Madras, Delhi and Rangoon. Burma (Myanmar) seceded from the Indian Union in 1937 but the Reserve Bank continued to act as the Central Bank for Burma until Japanese Occupation of Burma and later unto April 1947. After the partition of India, the Reserve Bank served as the central bank of Pakistan up to June 1948 when the State Bank of Pakistan commenced operations. Post Nationalization Phase (1969 to 1990)

I think nationalizationof banks in India was an important phenomenon. On July 19, 1969 - the erstwhile government of India nationalized 14 major private banks. Nationalization of bank in India was not new or happening first time. From 1955 to 1960, State Bank of India and other seven subsidiaries were nationalized under the SBI Act of 1955.

It was not a step taken at random or because of the whims of the leadership of the time, but reflected a process of struggle and political change which had made this an important demand of the people.

Nationalisation took place in two phases, with a first round in 1969 covering 14 banks followed by another in 1980 covering seven banks. Currently there are 27 nationalized commercial banks.

Modern Phase from 1991 till date

This is the phase of New Generation tech-savvy banks. This phase can be called as The Reforms Phase. Starting of the modern and current phase of Indian Banking is marked by two important events.

Narasimhan Committee

The Committee on Banking Sector Reforms Committee8 headed by Mr. M. Narasimhan, it is also known as Narasimhan Committee. The Committee, headed by former Reserve Bank of India governor M Narasimhan, was appointed by the United Front government to review the progress in banking sector reforms. The committee submitted its recommendations to union Finance Minister Yashwant Sinha in November of 1991.

Some of the recommendations offered by the committee are:

1. A reduction, phased over five years in the Statutory Liquidity Ratio (SLR) to 25 percent, synchronized with the planned contraction in Fiscal Deficit. 2. A progressive reduction in the Cash Reserve Ratio (CRR). 3. Gradual deregulation of interest rates. 4. All banks to attain Capita Adequacy 8% in a phased manner. 5. Banks to make substantial provisions for bad and doubtful debts. 6. Profitable and reputed banks be permitted to raise capital from the public. 7. Instituting an Assets Reconstruction Fund to which the bad and doubtful debts of banks and Financial Institutions could be transferred at a discount. 8. Facilitating the establishment of new private banks, subject to RBI norms. 9. Banks and financial institutions to classify their assets into four broad groups, viz, Standard, Sub-standard, Doubtful and Loss. 10. RBI to be primarily responsible for the regulation of the banking system. 11. Larger role for Securities Exchange Board of India (SEBI), particularly as a market regulator rather than as a controlling authority.

Economic Liberalization in India

The second major turning point in this phase was Economic Liberalization in India. After Independence in 1947, India adhered to socialist policies. The extensive regulation was sarcastically dubbed as the "License Raj".

The Government of India headed by Narasimha Rao decided to usher in several reforms that are collectively termed as liberalization in the Indian media with Manmohan Singh whom he appointed Finance Minister.

Dr. Manmohan Singh, an acclaimed economist, played a central role in implementing these reforms. New research suggests that the scope and pattern of these reforms in India's foreign investment and external trade sectors followed the Chinese experience with external economic reforms.

INTRODUCTION OF FINANCIAL INCLUSION

Financial inclusion has indeed far reaching positive consequences, which can facilitate manypeople to come out of the abject poverty conditions. It is widely believed that financialinclusion provides formal identity, access to payments system and deposit insurance, andmany other financial services. Universally, it is accepted that the objective of financialinclusion is to extend the scope of activities of the organized financial system to includewithin its ambit the people with low incomes.

In India, there is a need for coordinated action amongst the banks, the government andrelated agencies to facilitate access to bank accounts to the financially excluded. In view ofthe need for further financial deepening in the country in order to boost economicdevelopment, there is a dire need for expanding financial inclusion. By expanding financialinclusion, inclusive growth can be attained by achieving equity. The policy makers havealready initiated some positive measures aimed at expanding financial inclusion. However, theefforts are opined by many as not commensurate with the magnitude of the issue. There isalso a need on the part of the academicians and researchers to study the issue of financialinclusion with a comprehensive approach in order to highlight its need and importance.

The recent developments in banking technology have transformed banking from the traditional brick-and-mortar infrastructure like staffed branches to a system supplemented by other channels like automated teller machines (ATM), credit/debit cards, internet banking, online money transfers, etc. The moot point, however, is that access to such technology is restricted only to certain segments of the society. Indeed, some trends, such as increasingly sophisticated customer segmentation technology allowing, for example, more accurate targeting of sections of the market have led to restricted access to financial services for some groups. There is a growing divide, with an increased range of personal finance options for a segment of high and upper middle income population and a significantly large section of the population who lack access to even the most basic banking services. This is termed financial exclusion. These people, particularly, those living on low incomes, cannot access mainstream financial products such as bank accounts, credit, remittances and payment services, financial advisory services, insurance facilities, etc.

Deliberations on the subject of Financial Inclusion contributed to a consensus that merely having a bank account may not be a good indicator of financial inclusion. Further, indebtedness as quantified in the NSSO 59th round (2003) may not also be a reflective indicator. The ideal definition should look at people who want to access financial services but are denied the same. If genuine claimants for credit and financial services are denied the same, then that is a case of exclusion. As this aspect would raise the issue of credit worthiness or bankability, it is also necessary to dwell upon what could be done to make the claimants of institutional credit bankable or creditworthy. This would require re-engineering of existing financial products or delivery systems and making them more in tune with the expectations and absorptive capacity of the intended clientele. Based on the above consideration, a broad working definition of financial inclusion could be as under:

Financial inclusion may be defined as the process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost.

The essence of financial inclusion is in trying to ensure that a range of appropriate financial services is available to every individual and enabling 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. While financial inclusion, in the narrow sense, may be achieved to some extent by offering any one of these services, the objective of Comprehensive Financial Inclusion would be to provide a holistic set of services encompassing all of the above.

LITERATURE REVIEW

Financial inclusion, of late, has become the buzzword in academic research, public policymeetings and seminars drawing wider attention in view of its important role in aidingeconomic development of the resource poor developing economies. In the Indian scenario, theterm financial inclusion is popular in financial circles, especially after the Reserve Bank ofIndia (RBI) announced a series of measures in its credit policy for 2006-07 to include manyof the hitherto excluded groups in the banking net.

Rangarajan Committee (2008) on financial inclusion stated that: Financial inclusion maybe defined as the process of ensuring access to financial services and timely and adequatecredit where needed by vulnerable groups such as weaker sections and low income groups atan affordable cost. The financial services include the entire gamut of savings, loans,insurance, credit, payments, etc. The financial system is expected to provide its function oftransferring resources from surplus to deficit units, but both deficit and surplus units are thosewith low incomes, poor background, etc. By providing these services, the aim is to help themcome out of poverty.

Indian Institute of Banking & Finance (IIBF) opines, Financial inclusion is delivery ofbanking services at an affordable cost (no frills accounts,) to the vast sections ofdisadvantaged and low income group. Unrestrained access to public goods and services is thesine qua non of an open and efficient society.

A perusal of literature on finance and economic development reveals that the earliertheories of development concentrated on labor, capital, institutions, etc., as the factors forgrowth and development. There have been numerous researches analyzing how financialsystems help in developing economies. A great deal of consistency exists among economistsregarding financial development prompting economic growth. Many theories have establishedthat, financial development creates favorable conditions for growth through either a supplyleadingor a demand-following channel. According to Rajan and Zingales (2003),development of the financial system contributes to economic growth.Empirical evidence time and again emphasizes the relationship between finance andgrowth. According to the works of King and Levine (1993) and Levine and Zervos (1998),at the cross-country level, evidence indicates that various measures of financial development(including assets of the financial intermediaries, liquid liabilities of financial institutions,domestic credit to private sector, stock and bond market capitalization) are robustly andpositively related to economic growth. Other studies also establish a positive relationshipbetween financial development and growth at the industry level, like the one by Rajan andZingales (1998). The topical endogenous growth literature structured on learning by doingprocesses, allocates a special role to finance (Aghion and Hewitt, 1998 and 2005). Theresearchers so far have not only looked at how finance facilitates economic activity, but alsosocial aspects like poverty, hunger, etc. The consensus is that finance promotes economicgrowth, but the magnitude of impact differs.

Indian economy in general and banking services in particular have made rapid strides inthe recent past. Developing nations, like India have immensely benefited from theglobalizing economy. Wealth has been pouring into the country as investments. Wealthhas been also generated by Indian companies from global trade. This has directly affected the lives of many citizens in our country. For many, there has been a dramatic increase in the disposable income. The savings, consumption and investment patterns have changed in the past few years. This has meant that there has been an increase in demand for many financial services from different financial firms. An increasing financially aware middle class have realized the importance of financial services. Banks have streamlined and rationalized themselves to meet up with the changing demands of the people.

However, not all the reforms in the financial services sector have still been able to bringin the other half of Indias population who are un-banked. There are many reasons thatare obvious for this kind of financial exclusion. The new surge in the economy has notyet percolated into the lower strata of the society. It is easy to blame the capitalist growth for this sort of income disparities; however, the inefficiencies and the inadequacies of thegovernment and its policies are equally at fault for lack of reduction in poverty.

Most of the un-banked or financially excluded population of India lives in rural areas;nevertheless there is also a significant amount of the urban population of India who facethe same situation even with easy access to banks. Many of the financially excluded inthese areas are illiterates earning a meagre income just enough to sustain their dailyneeds. For such people, banking still remains an unknown phenomena or an elitist affair.It is easier for them to keep their money at their house or with some money lenders andeasily make immediate purchases (which make up most of their expenditure) rather than to follow the cumbersome process at banks. By making them financially inclusive we are making their financial position less volatile. At the same time, we are treating them on an equal par with other members of the population so that they wouldnt be denied of access to a basic service such as banking.

Financial Inclusion Present Scenario in India: An AnalysisMeasures of the Extent of Financial Inclusion

One common measure of financial inclusion that is by and large accepted universally is thepercentage of adult population having bank accounts. According to the available data on thenumber of savings banks, we note that on an all-India basis 59% of adult population has bankaccounts. In other words, 41% of the population is unbanked. In rural areas, the coverage isfound to be 39% as against 60% in urban areas. The unbanked population is largely observedin the northeastern and eastern regions.

Table 2 illustrates that rural and semi-urban offices constitute a majority of the commercialbank offices in India. Rural bank offices as a percent of total have increased from 22 in 1969to 45 in 2005. It is observed that the share of deposits and credit in rural and semi-urban areasis on the decline. In contrast, the share in metropolitan areas is rising. Further, it can be noticedthat the share of credit is lower than that of deposits in all regions, except metropolitan,implying that resources get intermediated in metropolitan areas.

The number of savings accounts as percent of number of households is considered to bea better indicator of banking penetration than other deposit accounts as percent of numberof households. It was 137 in rural areas and 244 in the urban areas on the eve of reforms in1991 (Table 3). By 2005, notwithstanding the reforms, the differential continues to be similar.In the case of number of credit accounts, the situation has deteriorated further for ruralhouseholds, while showing significant improvement in the urban areas, corroborating the verysignificant increase in retail credit.

Table 4 illustrates the level of financial inclusion in India through region-wise statistics.Region-wise population coverage per bank branch office in India is presented in Table 4. Interms of financial broadening, the scope for improvement remains. Since 1991, population perbank office has increased in rural areas from 13,462 in 1991 to 16,650 in 2005 and, asexpected, declined in the urban areas from 14,484 to 13,619 over the same period.Northeastern, eastern and central regions in India have higher population per office than theall-India average and it has increased significantly in the rural areas in 2005 as compared to1991. It is noticeable from the table that southern, western and northern regions havepopulation coverage below the national average. All the other regions in the country havecoverage well above the national average calling for urgent improvement in the coverage ofthe population. However, in both rural and urban areas there has been a distinct progress inthe coverage of the population by the bank branch offices.

Table 4 offers further clarity providing a break-up of the deposit accounts. Both the depositand credit accounts are lower in rural households than urban households. Further, an attempthas been made in Table 4 to capture the progress of the number of savings accounts per 100population during the period 1991-2005 in different regions in India. The relevant progressin the case of rural and urban areas of the different regions is also presented. Northeasternregion calls for an immediate attention to improve the banking facilities as the coverage isvery poor. While the southern, western and northern regions have coverage below the nationallevel, the other regions have coverage above the national average. The national average itselfis quite high compared to that of other advanced economies.

In understanding the extent of financial inclusion, it is imperative in the Indian context,to know the coverage of population by bank offices in both rural and urban areas. It can beelucidated that there has not been much significant progress in terms of coverage during theperiod 1991-2005. Southern, western and northern regions have higher coverage in terms ofnumber of deposit (savings) accounts per population of 100 than the all-India coverage. Theother regions again fall behind in this aspect. Number of credit accounts opened perpopulation of 100 is also an important indicator of the extent of financial inclusion.Accordingly, we find that except in southern region, in all other regions the extent of creditdelivery is very poor. The extent of financial exclusion in Indian states in captured in Table 5.

Further, the rise in the number of credit accounts per population has not been significantdespite the fact that there has been increase in the number of bank branches right across allthe regions of the country. Even in the case of the southern region, where the coverage isdistinctly high compared to all other regions, the increase during the period 1991-2005 wasnot encouraging. During the period 1991-2005, only in western and southern regions therehas been a significant improvement in the coverage of credit accounts. In the southern regionthere has been a growth of 129% in the urban areas, while it showed a negative growth(6.6%) in case of rural areas. Similar is the case in the western region. While it experienceda growth of 154% in urban areas, it showed a negative growth (32%) in rural areas. Evenin other regions, negative growth was observed in rural areas.

On an analysis of the region-wise distribution of the bank offices, credit and deposit ratiosit is apparent that the population per office has increased in the rural areas of all the regions,while in urban areas the population per bank office has declined in all the regions, exceptthe western region. In spite of the increase in financial deepening in the urban regions, thenumber of savings accounts per 100 persons has declined in all regions. Contrastingly, in therural areas, the number of savings accounts per 100 persons has increased in northeastern,central and southern regions, indicating that banks in these rural areas have led to more financial inclusion than their counterparts in other rural regions and all urban regions. In termsof number of credit accounts per 100 persons, the scenario is no different with the figurefalling in all regions, except urban areas of southern and western regions in India.

Analysis Based on the Performance of Rural Credit

Banking system in India needs to adjust to the realities in the rural sector. There is evidencethat they are finding it difficult to do so. It is generally believed that agricultural credit tototal GDP declines as the ratio of agricultural GDP to total GDP declines. However, this is notobserved from the data (Table 6). Even though the data reveal that agriculture credit as a ratioof total credit has been rising in the recent years, it is still below the level of 1970s (see alsoTable 7 for agricultural GDP).

Even though the share of agriculture in overall GDP has declined from around 33.1% in1980s to 20.8% during 2000-06, the fall in the proportion of population dependent on thissector has been restricted (Table 7).

A majority of the workforce in India is still dependent on agriculture, even as the GDPgrowth due to agriculture is marginally above the population growth rate, in contrast to astrong growth rate in the non-agricultural sector. Select Macroeconomic Indicators for Indiaare furnished in Table 8.

Analysis Based on the Coverage of Farmer Households

In the following section, an attempt is made to analyze the extent of financial inclusionbased on the coverage of farmer households based on different social groups. It is evident fromTable 9 that 51.4% of farmer households are non-indebted and it is more pronounced in thecase of Scheduled Tribes (STs).

In the case of the STs farmer households, out of 119.24 lakh households, 75.94 lakhhouseholds are non-indebted and that constitute about 63.69%. In case of Scheduled Castes (SCs),out of total 155.93 lakh households, 77.6 lakh households are non-indebted, i.e., about49.77%. However in the case of Other Backward Classes (OBCs) farmer households, out of370.43 lakh households, 179.96 lakh households are non-indebted, constituting 48.58%. Inthe case of other farmer households, out of 247.9 lakh households, 125.76 lakh householdsare non-indebted, constituting about 50.73%. In total, out of 893.5 lakh farmer households,459.26 lakh households, constituting about 51.4%, are non-indebted.

Analysis on the Basis of Coverage of Farmer Households Based on LandHoldings

Further, analysis of coverage of farmer households is also attempted based on the size of theirland holdings. From Table 10 it can be seen that the proportion of non indebtedness is quiteobvious in the case of marginal farmers whose land holding is less than 1 ha.

While the extent of non-indebtedness is highest in the case of marginal farmers (70.6%),it is lowest in the case of large farmers (0.6%). In the case of medium farmers it is 3.2% and8.5% in the case of semi-medium farmers. However, in the case of small farmers it is 17.1%(see Figure 3).

Findings of the Study

Spatial Distribution of Banking Services: Even after often emphasized policy interventionby the government and the concerted efforts of RBI and the public sector banks and asignificant increase in the number of bank offices in the rural areas, the coverage was notadequate for the large population living in the rural areas. For a population of 70%, only 45%of bank offices provide the financial services.

Number of Bank Accounts (Deposit and Credit) of Households: Even in the case of thenumber of households having bank accounts, there is a vast bias in favor of urban areas. Forthe rural households which constitute about 70% of population the percentage of number ofhouseholds having deposit accounts is 181.8, while it is 335.4 in the case of urban households, which constitute only 30% of the population. Similarly, in case of credit linkage, it is 32.2% in the case of rural households and 50.2% in case of urban households. This indicates that there is a need for further broadening of the bank services in the rural areas.It is also worth mentioning that a similar result was obtained from the study by Agarwal(2008), who made illustrative analysis of the distribution of bank offices in India and alsothe extent of financial deepening in India.

Regional Distribution of Banking Services: The analysis brings to the fore that there hasbeen uneven distribution of the banking services in terms of population coverage perbank office in the six regions of the country, viz., northern, northeastern, eastern, central,western and southern. For an equitable growth in all the regions of the country, there is a need for addressing the banking needs of the northeastern, eastern and central regions of thecountry.

Ratio of Direct Agricultural Credit to Agricultural GDP, Total GDP and Total Credit: Even though the falling share of agricultural GDP as a proportion of total GDP has been a pointof concern in the recent years, the analysis reveals that in spite of the rise in the agri-creditas a ratio of total credit it is still below the level of 1970s.

Contribution of Agriculture in GDP: The analysis reveals that there has been a continuousdownslide in the contribution of agriculture to the GDP. While it was 42.8% in the 1970s,it receded down to 21.9% in the period 2001-06. This is indeed a point of concern. A similarsort of opinion has also been put forward by Mohan (2006), who has stated that majority ofthe workforce are still dependent on agriculture, while the GDP growth due to agriculture isonly marginally above the rate of growth of the population, in contrast to a high growth ratein the non-agricultural sector.

Coverage of Farmer Households: The analysis points out that a very large number of farmerhouseholds are excluded from the financial services. About 51.4% of the farmer householdsare non-indebted and the extent of non-indebtedness is a great cause of concern particularlyin the case of STs (63.69%). This calls for provision of banking services to all the socialgroups in an equitable manner in order to achieve social and economic equity in the country.

Coverage of Small and Marginal Farmers: The study finds that a whopping 70.6% of themarginal farmer households are non-indebted and are badly in need of financial services. Italso reveals that the financial inclusion among the farmer households has so far been able toserve only the large and medium farmers and has completely neglected the marginal and smallfarmers.

Financial inclusion in rural India

The responsibility of meeting the credit needs in the rural areas of India was entrusted primarily with the cooperative sector and later to the commercial banks. One of the major objectives of the nationalization of major commercial banks in 1969/1980 was to improve the flow of formal institutional credit to rural households. Although these measures were ambitious and laudable, bank credit did not reach the poor people in adequate quantum. The financial sector reforms begun in 1992 have been systematically moving away from the social objective of the banking sector. The formal financial sector in India is shifting its focus from mass banking to super-class banking.Though banking sector has witnessed tremendous changes in recentperiods in terms of technological advancements, internet banking, online money transfers, etc, financial exclusion is a reality. It is in this context that the term financial inclusion gains importance and it is definedas the process of ensuring access to financial services and timely and adequate credit needed by vulnerablegroups such as weaker sections and low income groups at an affordable cost. In countries with a large ruralpopulation like India, financial exclusion has a geographic and social dimension.

Geographic exclusion isexposed through inaccessibility; distances and lack of proper infrastructure. Building an inclusive financialsector has gained growing global recognition bringing to the fore the need for development strategies that touchall lives, instead of a select few. The overall strategy for financial inclusion, especially amongst the poor anddisadvantaged segments of the population should comprise ways and means to effect improvements within the existing formal credit delivery mechanism, as well as an evolution of new models for extending outreach, and a leverage on technology solutions to facilitate large scale inclusion. Only two to five percent of the 500 million poorest households in the world have access to institutional credit. Of which, women receive a disproportionately small share of credit from formal banking institutions. The Womens Self Help Group movement is bringing about a profound transformation in rural areas of India. Microfinance Institutions (MFIs)play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor.Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clientele. The present paper deals with how the mechanism of microfinance can enable the financial inclusion of hitherto excluded population, especially the women, into the formal financial sector.

Financial inclusion trends

There has been significant but uneven progress toward financial inclusion around the world in recent years. Some of these steps have been driven by market-friendly policies that will be presented in more detail in a later section.

Some countries in Asia, such as India and Indonesia, have a long tradition of emphasizing access to finance.15At the regional level, these policy priorities have paid off: 25 percent of households living on less than $2 a day now have access to formal or semiformal financial services, compared to 4050 percent of the population as a whole. Other success stories include: Mongolia: a successful turnaround of a state bank increased the number of deposit accounts by over 1.4 million since 2006, now reaching 62 percent of households. Philippines: mobile phone banking has expanded to serve to 4 million clients since 2002. India: access to credit among the poor is up from 7 percent in 2004 to 205 percent in 2009, as the microfinance sector added 9.9 million clients. Bangladesh: 46 million new microcredit clients have been added since 2006; financial services have reached about 55 percent of poor households, substantially expanding access to savings. Viet Nam: 2.1 million new microfinance clients have been added since 2006. In contrast, access in Peoples Republic of China (PRC) appears to have declined since the reforms of the rural cooperatives. Also, Indias poor have little access to deposits: no frills accounts have increased to over 28 million, but studies show that many of these are barely used. Particularly in Asia, the poor are often served by public banks or nonbank entities, including nongovernmental organizations (NGOs), with private sector banks playing a smaller role. Key examples of these public banks and nonbank entities include: Pakistan: Post Savings Bank, with 3.6 million accounts in 2006. India: post offices, with 60.8 million savings accounts as of March 2007. Bangladesh: Rural Development Board, with 4.7 million active borrowers in 2007. Viet Nam: Bank for Agriculture and Rural Development, with 10 million farmer clients in 2007, and Bank for Social Policy, with 6.79 million active borrowers in 2008. Thailand: Government Savings Bank, with 36 million accounts in 2006. Sri Lanka: state banks, which were used by 72 percent households by the end of 2006. However, despite this outreach, service quality is inferior, and most institutions depend on subsidies. Furthermore, as shown in Figure 2, despite remarkable improvements in India and Bangladesh, an estimated 535 million people in these two countries still are excluded from financial services. Table 1 shows how countries in Asia sort out by their level of financial inclusion

Financial inclusion policies

The financial sector is prone to market failure and, therefore, is generally heavily regulated. The low-income segment is particularly plagued by information asymmetries as participants on the demand side often lack a track record or collateral to pacify lenders concerns. In addition, lenders lack experience in new markets at the bottom of the pyramid and face adjustment costs regarding business processes. At the same time, the limited size of both individual transactions and the overall market pose challenges to suppliers that need to recover fixed costs. However, once the pioneers of the microfinance revolution demonstrated tangible market opportunities, substantial business model innovation has expanded the access possibilities frontier.34More recently, technological innovation has dramatically lowered the fixed costs of reaching the low-income segment and attracted a broader range of new suppliers.

Policies are a key complement to private sector innovation through regulatory frameworks, public ownership, the provision of market infrastructure, and measures that lower demand-side barriers. Regulatory frameworks determine the set of institutions that are allowed to enter, shape the scope of available services, and affect institutions cost of doing business.

Prudential regulation is critical to enable financial intermediation and facilitate domestic resource mobilization and financial institution growth while simultaneously protecting savers. Furthermore, public ownership has frequently expanded outreach into segments that were considered beyond the scope of commercial approaches. Secured lending frameworks and public credit registries facilitate transactions despite asymmetric information. Finally, the low education level of poor clients suggests a need for consumer protection and financial education policies. Policymakers have struggled to accompany rapid innovation. They have been particularly successful where they facilitated experimentation within regulatory frameworks that carefully limited the potential risks. In some cases, policymakers have even taken the lead in introducing new solutions to the market through regulatory or legislative measures or direct participation in the market.

The rapid pace of innovation has substantially increased the complexity of policymaking. On the one hand, this calls for a rethinking of policy principles with respect to financial inclusion.35On the other hand, there is substantial scope for stepping up peer-to-peer advice as innovative solutions are being generated by developing country regulators.

To capture and compare emerging policy trends in developing countries, the German GesellschaftfrTechnischeZusammenarbeit or GTZ (German Technical Cooperation) assessed thirty-five policy solutions geared toward promoting financial inclusion across ten countries.

OBJECTIVE OF THE STUDY

1. To study the Financial Inclusion in Rural Indiaa) To study the Bank penetrationb) To study the account statusc) To study the saving pattern

RESEARCH METHODOLOGY

A broad definition of research is given by Martyn Shuttleworth - "In the broadest sense of the word, the definition of research includes any gathering of data, information and facts for the advancement of knowledge."Another definition of research is given by Creswell who states - "Research is a process of steps used to collect and analyze information to increase our understanding of a topic or issue". It consists of three steps: Pose a question, collect data to answer the question, and present an answer to the question.[Research is often conducted using the hourglass model structure of research.The hourglass model starts with a broad spectrum for research, focusing in on the required information through the method of the project (like the neck of the hourglass), then expands the research in the form of discussion and results. The major steps in conducting research are: Identification of research problem Literature review Specifying the purpose of research Determine specific research questions or hypotheses Data collection Analyzing and interpreting the data Reporting and evaluating research

Generally, research is understood to follow a certain structural process. Though step order may vary depending on the subject matter and researcher, the following steps are usually part of most formal research, both basic and applied:1. Observations and Formation of the topic: Consists of the subject area of ones interest and following that subject area to conduct subject related research. The subject area should not berandomly chosen since it requires reading a vast amount of literature on the topic to determine the gap in the literature the researcher intends to narrow. A keen interest in the chosen subject area is advisable. The research will have to be justified by linking its importance to already existing knowledge about the topic.

2. Hypothesis: A testable prediction which designates the relationship between two or more variables.

3. Conceptual definition: Description of a concept by relating it to other concepts.

4. Operational definition: Details in regards to defining the variables and how they will be measured/assessed in the study.

5. Gathering of data: Consists of identifying a population and selecting samples, gathering information from and/or about these samples by using specific research instruments. The instruments used for data collection must be valid and reliable.

6. Analysis of data: Involves breaking down the individual pieces of data in order to draw conclusions about it.

7. Data Interpretation: This can be represented through tables, figures and pictures, and then described in words.

8. Test, revising of hypothesis

9. Conclusion, reiteration if necessary

A common misconception is that a hypothesis will be proven. Generally a hypothesis is used to make predictions that can be tested by observing the outcome of an experiment. If the outcome is inconsistent with the hypothesis, then the hypothesis is rejected .However, if the outcome is consistent with the hypothesis, the experiment is said to support the hypothesis. This careful language is used because researchers recognize that alternative hypotheses may also be consistent with the observations. In this sense, a hypothesis can never be proven, but rather only supported by surviving rounds of scientific testing and, eventually, becoming widely thought of as true.A useful hypothesis allows prediction and within the accuracy of observation of the time, the prediction will be verified. As the accuracy of observation improves with time, the hypothesis may no longer provide an accurate prediction. In this case a new hypothesis will arise to challenge the old, and to the extent that the new hypothesis makes more accurate predictions than the old, the new will supplant it. Researchers can also use a null hypothesis, which state no relationship or difference between the independent or dependent variables. A null hypothesis uses a sample of all possible people to make a conclusion about the population.The goal of the research process is to produce new knowledge or deepen understanding of a topic or issue. This process takes three main forms (although, as previously discussed, the boundaries between them may be obscure): Exploratory research, which helps to identify and define a problem or question. Constructive research, which tests theories and proposes solutions to a problem or question. Empirical research, which tests the feasibility of a solution using empirical evidence.

The research room at the New York Public Library, an example of secondary research in progress. There are two major types of research design: qualitative research and quantitative research. Researchers choose qualitative or quantitative methods according to the nature of the research topic they want to investigate and the research questions they aim to answer:

Maurice Hilleman is credited with saving more lives than any other scientist of the 20th century.

Qualitative researchUnderstanding of human behavior and the reasons that govern such behavior. Asking a broad question and collecting data in the form of words, images, video etc that is analyzed searching for themes. This type of research aims to investigate a question without attempting to quantifiably measure variables or look to potential relationships between variables. It is viewed as more restrictive in testing hypotheses because it can be expensive and time consuming, and typically limited to a single set of research subjects. Qualitative research is often used as a method of exploratory research as a basis for later quantitative research hypotheses. Qualitative research is linked with the philosophical and theoretical stance of social constructionism.

Quantitative researchSystematic empirical investigation of quantitative properties and phenomena and their relationships. Asking a narrow question and collecting numerical data to analyze utilizing statistical methods. The quantitative research designs are experimental, correlational, and survey (or descriptive).Statistics derived from quantitative research can be used to establish the existence of associative or causal relationships between variables. Quantitative research is linked with the philosophical and theoretical stance of positivism.The Quantitative data collection methods rely on random sampling and structured data collection instruments that fit diverse experiences into predetermined response categories. These methods produce results that are easy to summarize, compare, and generalize. Quantitative research is concerned with testing hypotheses derived from theory and/or being able to estimate the size of a phenomenon of interest. Depending on the research question, participants may be randomly assigned to different treatments (this is the only way that a quantitative study can be considered a true experiment). If this is not feasible, the researcher may collect data on participant and situational characteristics in order to statistically control for their influence on the dependent, or outcome, variable. If the intent is to generalize from the research participants to a larger population, the researcher will employ probability sampling to select participants.In either qualitative or quantitative research, the researcher(s) may collect primary or secondary data. Primary data is data collected specifically for the research, such as through interviews or questionnaires. Secondary data is data that already exists, such as census data, which can be re-used for the research. It is good ethical research practice to use secondary data wherever possible.Mixed-method research, i.e. research that includes qualitative and quantitative elements, using both primary and secondary data, is becoming more common.Research Methods VS Research MethodologyResearch methods are all those methods or techniques that are used for conducting research such as various data collection methods, different types of sampling etc. On the other hand, research methodology refers to the different steps that are followed by the researchers in conducting research along with the logic behind them.A Researcher should not only know the different research methods but also the methodology behind them.

Research DesignA research Design is a complete scheme or programme of the research. It includes an outline of what the investigator will do from research problem formulation to final analysis of data. Thus, we can say research design includes the following:

a) Clear Statement of research problem.b) Technique to be used for collecting data.c) The target population to be studied.d) Methods to be used in processing and analysis of data.e) Sources & Methods of Data collection

Secondary DataSecondary data means that are already available that is they refer to the data, which have already been collected and analyzed by someone else for its own use and later the same data is used by a different user or person.It is based on secondary source of information.The source of data is called secondary because this data have already been collected, tabulated and presented in some form by someone else for some purpose.Data may be primary for one agency, may be secondary for the other and vice-versa.For Example, the number of deaths and birth registered by a government office clerk constitute Primary data while the same be secondary data for a student doing demographic research.

ADVANTAGES and DISADVANTAGES OF SECONDARY DATA

ADVANTAGES It is economical-The amount of money spent in acquiring secondary data is generally less than that needed to obtain primary data. The various secondary data from libraries can be obtained at no cost. Quickness-Secondary data is instant since it already exists and merely needs to be discovered. Thus the time in collecting secondary data is largely search time and usually requires few hours or few days.

DISADVANTAGES Relevance- The data may not fit into the needs of current investigation. It may not be related to the area of present enquiry or it may pertain to some other period of time. In case of secondary data the researcher has no control over the data that is collected since it is being collected by someone else. Therefore, the accuracy and reliability of the collected data can be questioned.

COLLECTION OF SECONDARY DATA:

These are already available i.e. they refer to the data which have already been collected and analyzed by someone else. Secondary data may either be published or unpublished data. Published Data: The various sources of published data are:1. Published Thesis-There are a number of students engaged in research work at different universities/institutions of the country.2. Government Reports- Most of the government organisations, departments of central, state and local governments publish regularly the statistical data on a number of subjects. for example, ministry of agriculture and irrigation publishes monthly report on Agriculture Situation in India.3. International Reports: This includes official publications of international bodies like IMF, UNESCO, WHO, etc.4. Newspapers and Journals of repute, both local and international.5. Official publications of RBI, and other Banks, LIC, Trade Unions, Stock Exchange, Chambers of Commerce, etc.6. Bye product of Administration-The data collected by different administrative departments as their routine work. For example, death, birth registration.7. Commissions Reports: The state and central governments appoint a number of committees and commissions for the purpose of some enquiry. The reports of such commissions and committees are submitted and published after a specific period.

Unpublished Data:The various sources of unpublished data are:- Unpublished findings of certain inquiry committees. Unpublished thesis submitted to a university for the award of Ph.D. Degree. Unpublished material found with Trade Associations, Labour Organisations and Chambers of Commerce.

METHODOLOGY Research is common parlance refers to search for knowledge. In fact research is an art of scientific investigation or it can be defined as a systemized effort to gain new knowledge.DATA SOURCESecondary data being the main source for the research was collected by the government reports, newspapers, journals, and other published data websites.DATA PRESENTATION AND ANALYSIS

FINDINGS

Number of Branches Open from 2000-2010 (In 2000 the branches Open is about 32673)2000 to 2005= (-706) 319672005 to 2010= (352) 32320

Number of accounts open from 2000-2010Current Account:-3652887Saving Account:-96143912Term Account: - (-1493955)

Number of amount saved from 2000-2010 in LakhsCurrent Account:-1956592Saving Account:-16715233Term Account:-11848028

SUGGESTIONS & RECOMMENDATIONS

More banking outlets should be open.

Bank should provide financial education and awareness to rural people.

Bank should provide employment assistance/entrepreneurial guidance and support to the rural people.

BIBLIOGRAPHY www.google.com

www.rbi.com

www.rural.nic.in

Conclusion

Finance is the lubricant, which oils the wheels of development. All economies rely upon theintermediary function of finance to transfer resources from savers to investors. In market economies, this function is performed by commercial banks, financial institutions and capital markets. In many developing countries, capital markets are at a rudimentary stage, and commercial banks are reluctant to lend to the poor largely because of the lack of collateral and high transaction costs. The poor would borrow relatively small amounts, and the processing and supervision of lending to them would consume administrative costs disproportionate to the amount of lending.

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