Page 27 - DCOM208_BANKING_THEORY_AND_PRACTICE

Banking Theory and Practice

Notes and other civil society organizations as intermediaries for providing financial and banking
services. These intermediaries could be used as business facilitators or business correspondents
by commercial banks. The period of economic reforms has witnessed the key catalytic role
played by banks in the achievement of high growth in the Indian economy. While the benefits
of growth due to reforms, have concentrated in the hands of those already served by the formal
financial system, a large section of the rural poor still does not have access to the formal banking
channel. Further, the backward regions of the country, too, lack basic financial infrastructure.

Notes An essential prerequisite for inclusive and sustainable growth is capital formation
through credit and financial services.
Therefore, access to a well-functioning financial system, by creating equal opportunities, enables
economically and socially excluded people to integrate better into the economy, so as to actively
contribute to development and protect themselves against economic shocks (RBI, 2008). The
bank asked the commercial banks in different regions to start a 100% financial inclusion campaign
on a pilot basis. As a result of the campaign, states or union territories like Puducherry, Himachal
Pradesh and Kerala announced 100% financial inclusion in all their districts. Reserve Bank of
India’s vision for 2020 is to open nearly 600 million new customers’ accounts and service them
through a variety of channels by leveraging on IT. However, illiteracy and the low income
savings and lack of bank branches in rural areas continue to be a roadblock to financial inclusion
in many states and there is inadequate legal and financial structure.
The Reserve Bank of India (RBI) has, therefore, formulated the policy of financial inclusion with
a view to provide banking services at an affordable cost to the disadvantaged and low-income
groups. The RBI has observed that out of 600,000 habitations in the country, only about 5 percent
have a commercial bank branch. Also only about 57 percent of the population across the country
has bank account (savings), and this ratio is much lower in the North-Eastern states. Further, 13
percent of the population has debit cards and 2 percent has credit cards. India has a significantly
low level of financial penetration compared with OECD countries (RBI, 2010). Further, while the
access to bank branches in India fares better than that of China and Indonesia it is worse off when
compared with Malaysia and Thailand. However, in terms of financial access through ATMs,
India fares poorly compared to select Asian peer group countries (RBI, 2010). In view of the poor
level of financial inclusion in India, RBI has accorded topmost policy priority to financial inclusion,
by advising commercial banks, to formulate specific Board approved Financial Inclusion Plans
(FIP) and to act on them on a mission mode. Banks were also advised by RBI to provide banking
services in every village having a population of over 2000 by 31st March 2012, through bank
branches as well as through various ICT-based models including through Business
Correspondents (BCs).
In India, RBI has initiated several measures to achieve greater financial inclusion, such as
facilitating no-frills accounts and GCCs for small deposits and credit. Some of these steps are:

1. Opening of no-frills accounts: Basic banking no-frills account is with nil or very low
minimum balance as well as charges that make such accounts accessible to vast sections of
the population. Banks have been advised to provide small overdrafts in such accounts.
2. Relaxation on know-your-customer (KYC) norms: KYC requirements for opening bank
accounts were relaxed for small accounts in August 2005; thereby simplifying procedures
by stipulating that introduction by an account holder who has been subjected to the full
KYC drill would suffice for opening such accounts. The banks were also permitted to take
any evidence as to the identity and address of the customer to their satisfaction. It has now

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