Understanding Financial Inclusion and Exclusion

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An Introduction

Financial Inclusion is progressively being perceived as a key driver of the overall development. Access to the formal fund can help in job creation, diminish unemployment due to financial reasons, and it can also result in an increment in human capital.

Without satisfactory access to formal Financial Institutions, people and firms are forced to depend on informal sources to meet their monetary needs. At a large-scale, more prominent financial inclusion can bolster comprehensive development for all. 

The Concept of Financial Inclusion

Financial inclusion, in simple words, is the process to tackle financial exclusion.
The process of developing, implementing, and monitoring the activities that are focused on providing formal and mainstream financial services and adequate credit when required from formal sources, to the section of society, which does not have access to it, is known as financial inclusion.

If we talk about India, the first efforts of financial inclusion and can be traced back to the 1970s, this was the time when the nationalization of many private banks was prevalent.

Despite the initial efforts, the arena of financial inclusion remained shunned. Real attention was given to this issue only after 2005 when the Reserve Bank of India (RBI), in its annual policy statement of 2005-06 mentioned the importance and relevance of financial inclusion in India. 

RBI asked banks to reach to the masses and offer bank services to the most internal and underdeveloped areas. RBI was worried that financial exclusion is affecting the economic growth at the bottom of the pyramid. 

As a measure to stop this RBI also started persuading banks to keep financial inclusion as an important business objective.

As far as policymaking is considered financial inclusion entered this frame on a priority basis only after the recommendation of the Rangarajan Committee in 2008.

All the stakeholders of the bank were also interested in this concept because the ultimate objective of this initiative was to connect more people in the banking system, which meant the expansion of operations and healthy business growth. 

This expansion of the financial operations in the country that was proposed included the introduction of a marginalized section of society to a variety of products like a basic savings account and microcredit. 

The Operations of the microfinance firms around the globe were evidence that if good products are introduced to the people who take most of their credit from the informal sector like moneylenders and pay a very high amount of interest, can prove to be worthy customers of the bank.

Financial inclusion received another boost in 2010. Financial Inclusion became an integral part of the business in the banking industry. In 2010 RBI advised all the commercial banks to submit a three-year financial inclusion plan. These plans were to target the Unbanked rural population.


Financial inclusion is considered as one of the most important factors in the development and well-being of any society. 

Lack of proper financial ecosystem is deemed as one of the main reasons for poverty. In Indian society, particularly in rural areas, where farming is one of the major sources of livelihood, due to the unavailability of proper sources of credit, farmers tend to borrow money from informal sources such as local landlords, etc. 

The government has no control over these informal sources and as a result, they often exploit poor people and the whole situation has a very bad impact on the overall productivity of the Agriculture sector. This is why we need financial inclusion; it seems to be the perfect solution. 

According to the 2011 census, 61.5% of the Indian population is dependent on farming. A significant number of farmers are below the poverty line - close to 35%. Almost all of them face financial issues due to a lack of proper financial institutions. 

These issues can be effectively solved by financial inclusion. Focusing on the financial inclusion of farmers can help in pulling a large chunk of the population out of poverty. 

The amount of evidence is increasing regarding how financial inclusion can prove to be a major factor in multiplying the overall economic output and contributing towards a much equal and even society.

Financial Inclusion can prove helpful in solving many other issues like gender equality as well. If women will be financially independent then they will have greater control and autonomy in their life and this will result in a more independent society and they will be enabled to avoid the exploitation.

Its importance can be understood by the fact that Financial Inclusion is also a part of the United Nations' sustainable development goals. 

It may not be a direct part of the agenda but 7 out of 17 sustainable development goals see financial inclusion as a deciding factor in achieving sustainable development worldwide by improving the quality of lives of poor and marginalized sections of the society. 

The Concept of Financial Exclusion

To understand the major problems that are encountered while implementing financial inclusion we must understand the concept of financial exclusion. 

The phrase “financial exclusion” in this sense can be traced back to 1993, used by Andrew Leyshon of the University of Nottingham and Nigel Thrift who were talking about the limited access to the banking services.

Again in 1999, Professor Elaine Kempson and Claire Whyley from the University of Bristol used this term to define it as a situation in which people do not have access to the mainstream financial system.

If we try to understand Financial exclusion in the Indian context then, The Report of the financial inclusion in January 2008 by C Rangarajan, Financial exclusion has explained as the phenomenon of the inability to access financial services by a section of the society.

In most cases, this section of the society consists of people from socially backward backgrounds and people with low income who don’t have access to basic financial services such as bank account, credit, insurance, etc.

The Condition of Financial Exclusion in India and Globally

Financial inclusion and Financial exclusion, both the concepts have a lot to do with the overall development, i.e. the social and the economic development of the place that we are considering to evaluate. 

The World Bank surveyed more than 145 economies around the world and they found that almost 45% of adults do not have a bank account and they lack access to formal and mainstream financial services. It was also found that around 54.7% have a bank account and for females, this figure stands at 46.3%. 

This report says that only 20.9% of adults use their bank accounts to receive wages and only 22.4% of adults used their bank accounts to save money. As of 2017, the total unbanked population in India stood near to 191 Million, which happens to be a huge chunk of the overall population.

Also, we can see that majority of the unbanked and financially excluded population belong to three geographical locations-South-East Asia, South America, and Africa. All of these geographical regions consist of countries with low economic and social development.

Written by - Chandan Kumar

Edited by - Rudransh Khurana

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