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VSRD-IJBMR, Vol. 1 (4), 2011, 232-244 

Enhancing Financial Inclusion: An Overview 

of the Catalytic Role of MFIs in India 

1 K. Sudesh Kr.* and 2 Sadananda Sahoo 

The purpose of this paper is to examine the role of micro finance in the empowerment of people and the 

realisation of financial inclusion in India. With increasing demand for rural finance, and the inadequacies of 

formal sources, the MFIs have immense opportunities in the new avatar of micro credit in India. However, in the 

light of recent experiences and the need for qualitative growth, we suggest that MFIs should be managed with 

better scrutiny in terms of finance and technology as well as social responsibility. This is of utmost importance 

in order to upgrade MFIs from thrift and credit institutions to capacity-building and livelihood- sustaining 

associations of people. The paper examines the promise of microfinance (credit plus services) in the inclusion 

(access) of excluded and to analyse the impact of the microfinance on the social and economic welfare of the 

poor households. 

Keywords: Financial Inclusion, Microfinance, Inclusive Growth, Self-Help Groups, Mfis. 

1. INTRODUCTION 

Poverty eradication and empowerment of the poor has been on the priority agenda of both central and state 

government, beginning with First Five Year Plan in 1951. About 238 million people in India live below the 

poverty line with the per capita income of less than one dollar per day (NSSO,2004-05,61 st round) 1 . The policy 

makers and practitioners got reflected in the successive five-year plans, which had the objectives of ‘growth 

with equity’ and ‘social justice’. The economists, however, realized that rapid growth did not bring about 

‘trickle down’ effect, particularly so in rural areas. This realization led to the restructuring of institutions and 

schematic lending to facilitate better accessibility of credit for the underprivileged. Thus, initiatives in this 

regard were taken by building an institutional framework through nationalization of banks, creation of regional 

rural banks. Moreover, despite decades of aid, communities and families appear to be increasingly fractured, 

1 Assistant Professor, Department of Management & Accounting, Gaytri Bidya Parisad PG College, Vishakhapatnam, 

Andhra Pradesh, INDIA. 2 Senior Lecturer, Department of Management Studies, Gandhi Institute of Management Studies, 

Gunupur, Orissa, INDIA. *Correspondence : sksudesh394@gmail.com

K. Sudesh Kumar et. al / VSRD International Journal of Business & Management Research Vol. 1 (4), 2011 

offering a fragile foundation on which to build (Morduch, 1999) 2 . 

Amid the distressed news, enthusiasm is building about a set of unusual financial institutions prospering in 

distant corners of the country. The hope is that much poverty can be alleviated and the economic and social 

structures can be transformed fundamentally by providing financial services to low income households. These 

institutions, united under the banner of “microfinance”, share a commitment to serving clients that have been 

excluded from the formal banking sector . 

Banking data reveal that credit exclusion is severe in 139 districts of the country. In these districts, only 10 per 

cent or less out of 100 persons have access to credit from the fact that the exclusion is large, there is also a wide 

variation across regions, social groups and asset holdings. The poorer the group, the greater is the exclusion 

(Rangarajan, 2007) 3 . The results of the All-India Debt and Investment Survey of 2002, also indicate that the 

share of the non-institutional sources, in the total credit of the cultivator households, had increased from 30.6 

percent in 1991 to 38.9 percent in 2002 (Karmakar, 2002) 4 . Further, a Rural Finance Access Survey 2003, 

conducted by the World Bank and NCAER, revealed that 79 per cent of the rural households has no access to 

credit from formal sources (Basu, 2005) 5 . Hence, the tasks of microfinance are the promotion of greater 

financial inclusion and in the process improve the social and economic welfare of the poor. 

In this backdrop, the paper examines the promise of microfinance (credit plus services) in the inclusion (access) 

of excluded and to analyse the impact of the “credit plus services”( also called as the “integrated approach” or 

“maximalist approach” in microfinance) on the social and economic welfare of the poor households. 

Thus, important challenge facing the banking sector is to extend financial services to all sections of society. Like 

others, the poor need a range of financial services that are convenient, flexible, and affordable and not just loans. 

At this juncture the introduction on “financial inclusion” comes from the recognition that this can serve the 

interests of both society and the banking system. As a complementary to this, micro-finance1 can work as a 

powerful tool to fight poverty became the effective approach of financial inclusion. With the new philosophy 

and policies pertaining to micro credit, micro finance institutions (MFIs) such as Self Help Groups (SHGs) have 

emerged and they now have a strong footing in the developing countries such as Bangladesh, India etc. 

2. FINANCIAL INCLUSION FOR INCLUSIVE GROWTH 

Financial exclusion is a common phenomenon in rural areas. A large number of small and marginal farmers, 

agricultural labourers and rural artisans are still excluded from wide range of financial services. The challenges 

of achieving more inclusive growth can be met by a policy that encourages easier and affordable access to 

financial services. Financial inclusion may be define d 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 . 

2.1. Approaches of Financial Inclusion 

According to C. Rangarajan there are six approaches in the system of Financial Inclusion, they are, as follows. 

� First, credit to the farmer households is one of the important elements of financial inclusion among them 

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providing credit to the marginal and sub marginal farmers as well as other small borrowers is crucial to the 

need of he hour. 

� Second, rural branches must go beyond providing credit and extend a helping hand in terms of advice on a 

wide variety of matters relating to agriculture. 

� Third, in district where population per branch is much higher than the national average. Commercial banks 

may be encouraged to open the branches. 

� Fourth, there is need for the simplification of the procedures in relation to granting of loans to small 

borrowers. 

� Fifth, the further strengthening the SHG-Bank Linkage Programme (BLP), as it has proved to be an 

effective way of providing credit to very small borrowers. 

� Sixth, the business facilitator and correspondent model needs to be effectively implemented. 

2.2. Indebtedness As An Indicator Of Inclusion 

Indebtedness to formal sources of credit is an indicator of access to credit. Compared to earlier periods, access 

to formal credit declined for cultivator households during 1991-2002 (Table -1). Post bank nationalization, 

considerable increase took place in the share of institutional sources in cultivators’ debt from about 32 per cent 

in 1971 to 66 per cent in 1991. However, the trend saw a reversal during the 1990s and the share declined to 61 

per cent in 2002 (Table-1). Among the institutional sources, the share of commercial banks increased sizeably 

since 1971. The co-operative sector’s share increased from 22 per cent in 1971 to about 30 per cent by 1981 and 

stagnated since then. In the 1990s, while cooperatives sustained their, albeit low, share at 30 per cent, the share 

of commercial banks slipped from 35 per cent in 1991 to 26 per cent in 2002. The decline in the share of 

institutional agencies in the 1990s can be attributed to the decline in the share of commercial banks. Formal 

Sector Credit to Rural Economy is still Low. 

Table 1 : Table 1: Relative Share of Borrowing* of Cultivator Households 

Sources of Credit 1951 1961 1971 1981 1991 2002 

Institutional 7.3 18.7 33.7 63.2 66.3 61.1 

Cooperative Societies/Banks, etc 3.3 2.6 22.0 29.8 30.0 30.2 

Commercial Banks 0.9 0.6 2.4 28.8 35.2 26.3 

Non-Institutional 92.7 81.3 66.3 36.8 30.6 38.9 

Moneylenders 69.7 49.2 36.1 16.1 17.5 26.8 

Unspecified - - - - 3.1 - 

Total 100.0 100.0 100.0 100.0 100.0 100.0 

*Borrowing refers to outstanding cash dues. 

Source: NSSO, 59th Round, All India Debt and Investment Surveys, 2003. 

Financial inclusion is a key priority for India not only for sustaining the country’s high growth line but also for 

poverty alleviation at much faster pace and for bridging the growth rural-urban divide. This cannot happen 

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unless special efforts are made for deepening the market penetration of banking service to move from ‘class 

banking ’towards ‘mass banking’. 

2.3. Status Of Financial Inclusion In India 

To serve the financial service requirements of the Indian population (over 1.1 billion) is characterized by a multi 

agency approach comprising of a wide variety of formal, semi formal and informal models with 50,000 

commercial bank branches, nearly 12,000 co-operative bank offices, over 15,000 regional rural bank (RRB) 

branches, over 100,000 primary agriculture credit societies (PACS), over 1000 Micro finance institutions 

(MFIs) and well over a million Self help groups (SHGs). Development of the credit delivery system in the 

country has metamorphosed from a monopoly of co-operatives to induction of commercial banks and 

establishment of regional rural banks improving the outreach and ensuring access to credit in rural areas. 

Despite this high density, branch infrastructure has not been able to deliver financial services to low income 

households due to (i) High fixed & operating costs resulting in high delivery cost (ii) Lack of sales incentives 

in cooperatives and regional rural banks (iii) Lack of products suited to the rural poor – lack of formal 

employment/ steady income and absence of collateral makes them unsuitable for a banking product (at times 

because of regulatory constraints) (iv) Illiteracy in general & the lack of financial knowledge (v) Lack of 

accessibility & reach of the traditional bank branches –Long distance and high cost of visiting a bank is a 

prohibiting factor, as it leads to loss of daily wage for a borrower (vi) Absence of private sector banks – 

operating model not feasible etc. 

Demographic penetration indicates the outreach of banking sector in India as shown in Table-2. 

Region Current 

Accounts 

Table-2: Coverage of Banking Services in India 

Savings 

Accounts 

Total 

Population 

Total No. Of 

accounts 

North 4215701 52416125 32676462 1 56631826 43 

North East 476603 6891081 38495089 7367684 19 

East 1814219 47876140 227613073 49690359 22 

Central 2202217 64254189 255713495 66456406 26 

West 3178102 49525101 149071747 52703203 35 

South 4666014 83386898 223445381 88052912 39 

All India 16552856 304349534 1027015247 320902390 31 

No. of acc. Per 

100 of population 

Source: Situation Assessment Survey 59th Round, National Sample Survey Organisation 2003 

One of the benchmarks employed to assess the degree of reach of financial services to the population of the 

country, is the quantum of deposit accounts (current and savings) held as a ratio to the population. As above 

Table-2 reveals that in northern region out of 100 persons only 43 persons hold a account in a bank. While 

coming to the North Eastern Region it is quite low that is just 19. Thus table reveals that access to bank services 

is low, as well as there exists a large variation across the regions in credit accessibility. Another thing is while 

compared to the developed world; the coverage of our financial services is quite low. For instance, as per a 

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recent survey commissioned by British Bankers' Association, 92 to 94 per cent of the population of UK has 

either current or savings bank account (Leeladhar, 2005) 6 . 

Indicators like (i) number of loans per 1,000 persons and (ii) number of deposits per 1,000 persons capture the 

use of access to financial/banking services as s given in Table-3. 

Table 3 : Deposit and Loan accounts in Rural and Urban India (per 1000 persons) 

Particulars Deposit accounts Credit accounts 

1996 2006 1996 2006 

Rural 322 325 63 62 

Urban 699 724 50 115 

It is evident from the above that there exists a rural-urban divide with respect to banking services in terms of 

‘usage’ also. And this divide has widened in the last decade. The number of deposit accounts (per 1000 persons) 

increased from 322 in 1996 to 325 in 2006 in rural areas, whereas the comparable figures for urban areas was 

699 in which increased to 724 in 2006. For credit accounts (per 1000 persons) there was a decline in the number 

of accounts during the period 1996 to 2006 (Table-3). With 70 per cent of the population living in the rural 

areas, a decline in the credit accounts and slow pace of increase in the deposit accounts needs to be reversed. 

The figures ultimately reveal that there is lack of outreach of banking services to the population, at this juncture 

micro finance services doing well in bringing excluded 

2.3.1. Extent of Financial Exclusion statistics in India, NSSO Survey 59th Round 

(a) General : 

� 51.4% of farmer households are financially excluded from both formal / informal sources . 

� Of the total farmer households, only 27% access formal sources of credit; one third of this group also 

borrow from non-formal sources. 

� Overall, 73% of farmer households have no access to formal sources of credit. 

(b) Region-wise : 

� Exclusion is most acute in Central, Eastern and North-Eastern regions – having a concentration of 64% of 

all financially excluded farmer households (from formal sources) in the country. 

� Overall indebtedness to formal sources of finance alone is only 19.66% in these three regions (4.09% for 

North-Eastern Region, 18.74% for Eastern Region and 22.41% for Central Region). 

(c) Occupational Groups : 

� Marginal farmer households constitute 66% of total farm households. Only 45% of these households are 

indebted to either formal or non formal sources of finance (small farmers – 51%, medium farmers – 65.1% 

and large farmers – 66.4%). 

� About 20% of indebted marginal farmer households have access to formal sources of credit (medium 

farmers – 57.6% and large farmers – around 65%). 

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� Among non-cultivator households nearly 80% do not access credit from any source. 

(d) Social Groups : 

� Only 36% of ST Farmer households are indebted (SCs and Other Backward Classes - OBC - 51%) mostly 

to informal sources. 

Analysis of the data provided by the Basic Statistical Returns of Scheduled Commercial Banks reveal that 

critical exclusion (in terms of credit) is manifest in 256 districts, spread across 17 States and 1 UT, with a credit 

gap of 95% and above. This is in respect of commercial banks and RRBs. Credit coverage by cooperatives is 

also on a relatively low level, as nearly 62% of its members are non-borrowing members. 

In the era of liberalization, the pursuit of financial inclusion appears to be an arduous task (Chavan, 2007) 7 . But 

the country cannot afford to have an elite minority enjoying services offered by banks and a large unorganized 

majority in the cash and barter mode. This divide, apart from undermining economic growth, could engender 

social tensions. Sustained growth of the nation and its continued prosperity depend critically on universal 

financial services coverage of all people (Srinivasan, 2007) 8 . Further, empirical evidence significantly raise 

growth, alleviate poverty and expand economic opportunity (Mor and Ananth, 2007) 9 . 

Therefore, need was felt for alternative policies, systems and procedures, savings and loans products, other 

complementary services and new delivery mechanisms, which would fulfill the requirements of the poorest is 

“Microfinance Intervention”. 

3. PLEDGING OF ‘CREDIT PLUS SERVICES’ IN FINANCIAL INCLUSION AND 

WELFARE FOR THE POOR 

The problem is that the poor do not have access to viable financial options and, hence, tend to keep their wealth 

in physical goods such as cattle or gold. A publication by the National Council of Applied Economic 

Research—How India Earns, Spends and Saves, by Rajesh Shukla—shows that a quarter of urban families and 

more than 40% of rural families consider keeping money at home as the preferred form of cash savings. That’s 

millions of people treating the mattress at home as their bank. While micro credit does have a role to play in 

advancing financial inclusion, more attention needs to be paid to micro savings. In an article published in 

March, The Economist cited a survey of 166 microfinance institutions in 2009 by the Microfinance Information 

Exchange, which showed that all offered credit to the poor, but only 27% had savings products. Grameen Bank 

is one of those that offer savings options to members. 

Indian policymakers have been keen on this form of financial inclusion, pushing banks to open no-frills 

accounts and trying to route all payments made for work done in the Mahatma Gandhi National Rural 

Employment Scheme through banks. 

Maintaining low-value bank accounts for the poor will be commercially profitable only if banks are able to drop 

costs through the smart use of technology. In January, the Bill and Melinda Gates Foundation decided to provide 

grants worth $38 million “to help microlenders explore ways to make savings accounts available to 11 million 

poor people across 12 countries in Africa, Asia and Latin America over the next five years,” Joyce Lehman, a 

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programme officer at the Financial Services for the Poor unit of the Gates Foundation, said at the time. The 

SHG-Bank Linkage Programme has been successfully growing and the number of SHGs financed increased to 

29.25 lakhs on 31st March, 2007. Several Voluntary Organisations and NGOs have also been associating in the 

exercise throughout the country. 

3.1. Genesis of Microfinance-Meaning and Issues of Concern 

The concept of microfinance is not new. Savings and credit groups that have operated for centuries include the 

‘susus’ of Ghana,‘chit funds’ in India, ‘tandas’ in Mexico, ‘arisan’ in Indonesia, ‘cheetu’ in Sri Lanka, 

"tontines" in West Africa, and ‘pasanaku’ in Bolivia, as well as numerous savings clubs and burial societies 

found all over the world . Now it has become a buzz-word among the development practitioners. In this process, 

the word has been imputed to mean everything to everybody. Micro Credit is essentially the dispersion of small 

collateral-free loans to jointly liable groups in order to foster income generation and poverty reduction through 

enhancing self-employment. 

The basic philosophy behind micro Credit is “ownership and participation”. Muhammad Yunus and the 

Grameen Bank have been leading pioneer of the Micro credit movement. He was awarded the Nobel peace prize 

in 2006 for his contribution to institutions like microfinance and Grameen bank system .Nobel laureate Prof 

Yunus founded the Grameen bank in 1976 to make loans to poor Bangladeshis. Since then the grameen bank 

has issued more then $3 billion in loans to some 2.4 million borrowers. To ensure repayment, the bank uses a 

system of ‘Solidarity group’. Small informal groups apply together for loans and whose members act as co- 

guarantors of repayment and support one another’s efforts at economic advancement. They have made two 

important contributions to development practice: (1) to demonstrate that creditworthiness and collateral do not 

go hand in hand and therefore, it is possible to delink the two. (2) it is possible to use a collectivist ethos and 

group solidarity to minimise the risk of loans being made to persons with high-risk propositions (adverse 

selection) or of their being utilised for purposes other than that for which they are contracted (moral hazard), and 

to use peer pressure to ensure that repayment schedules are met . 

Micro credit, is banking the unbankables, bringing credit, savings and other essential financial services within 

the reach of millions of people who are too poor to be served by regular banks, in most cases because they are 

unable to offer sufficient collateral. In general, banks are for people with money, not for people without money.” 

Micro credit is based on the premise that the poor have skills, which remain unutilized or underutilized. It is 

definitely not the lack of skills, which make poor people poor….charity, is not the answer to poverty. It only 

helps poverty to continue. It creates dependency and takes away the individual’s initiative to break through the 

wall of poverty. It is unleashing of energy and creativity in each human being, is the answer to poverty”. 

Professor Yunus called the process of substituting the provision of collateral with group harmony and other 

aspects of micro-credit as ‘freeing of credit from the bondage of collateral’. The process of keeping poor 

people outside the credit facilities of formal financial sector institutions through collateral requirement is 

denoted as ‘financial apartheid’ by Professor Yunus. 

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3.2. Grameen model and Credit expansion 

With the belief that “Credit is a human right” and “There is an inbuilt capacity in every person”, Professor 

Muhammad Yunus framed the Grameen Bank model in order to serve the poorest of the poor with microcredit 

to provide them with opportunities to engage themselves in income generating activities. According to him a 

financial system for the poor should – 

� only serve the poor to help themselves overcome poverty 

� bring the disadvantaged people within the folds of some organizational format which they can understand 

and operate, and can find socio- political and economic strength in it through mutual support. 

� create opportunities for self-employment and income for the poor 

� be cost-effective and sustainable 

� be need based 

� be flexible, and 

� have positive impact on the lives of its borrowers. 

Grameen Bank provides loan without any collateral. It is a trust-based banking. It does not require any credit 

history or business experience for providing loans. Grameen has a revealed preference for the poorest women. It 

regards women as the effective agents of greater family welfare and social change. 

For Grameen Bank, if one is poor, she is welcome, if one is poorer, she is more welcome and if one is the 

poorest she is most welcome to Grameen. In Grameen system, the bank goes to the poor. Its credit delivery and 

recovery mechanism is very client friendly and flexible. Repayment is made in weekly installments. It promotes 

social capital. The entire Grameen system is built on peer support with the framework of a five member group 

and the broader framework of a centre. It develops leadership quality among its members through annual 

election of group and centre leaders, electing board members as the institute is owned by the borrowers. 

In Grameen, all banking transactions take place at the centre meeting. All transactions are highly transparent. 

The poor do not come to the bank but the bank goes to the poor. As of September 2008, Grameen has 1, 40,016 

centers, 1, 98,038 groups and about 7.6 million members. 97% of its members are women. 

The first disbursement of Grameen loan was US$ 27 to 42 members. The cumulative disbursement by the end of 

September 2008 stood at US $ 7.4 billion. The monthly disbursement is more than US $ 80 million. The amount 

of loan outstanding was US $ 609.60 million in September 2008. Grameen has different kinds of savings 

products. These are Grameen Pension Savings (for Grameen Bank members and staff), personal savings (open 

to all), double in 7 years-term deposits (open to all), loan insurance savings fund (Grameen Bank members), 

Fixed Deposit with monthly income (open to all) and others (like weekly compulsory saving at the rate of taka 

10, additional GPS etc.). Grameen has mobilized more than US$ 826 million as deposits including US$ 373 

from non-members (Sept. 2008). The deposit as a percentage of outstanding loans is 136 percent. Grameen 

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Bank offers very attractive rates for deposits. Minimum interest offered is 8.5 percent and maximum rate is 12 

percent. As Grameen is always for developing and operating a sustainable micro credit program, it charges the 

borrowers an affordable interest rate. It remains cautions to avoid changing a price which makes the borrowers 

pay for any inefficiency of the system or luxury of its management. 

3.3. Self-Help Group Linkage Model And Financial Inclusion 

In spite of Indian banking sector having witnessed a spectacular progress in spread of banking networks and 

extending financial outreaches across the country in the recent past, the relative decline in the supply of credit in 

rural areas poses the biggest challenge to achieve hundred percent financial inclusion before Indian formal 

financial system. In this context, self help group bank linkage model launched by NABARD (1992) can be 

conceived as an alternative model to bridge the gaps which could not be filled up by formal banking system. It 

facilitates extending financial services to unbanked vulnerable section of society. NABARD led SHG bank 

linkage model is widely accepted as one of the largest and successful micro finance model in the world. 

There are three kinds of model are being emerged under SHG linkage programme. 

They are: 

Model-1: SHGs are financed, guided and promoted by banks. 

Model-2: SHGs are promoted by Non Government Organizations/Government agencies but financed by bank. 

Model-3: SHGs are promoted by NGOs but financed through financial intermediaries like NGOs or by any 

formal agencies. 

3.3.1. Progress of SHG linkage programme in India 

NABARD led SHG bank linkage programme witnessed a significant progress in the recent past. As on March 

2009, total 6121147 SHGs were having Rs 5545.62 cr savings with banks .On the other hand total 12253.51 cr 

loan have been disbursed to 1609586 SHGs and thereby registered 38.5% and 31.1% growth 

respectively.(Report by NABARD 2008- 09) 10 .Overall progress under micro finance through SHG Bank linkage 

model from 2006-07 to 2009-10 has been given in the following Table-4. 

Particulars 

Savings of SHGs 

B 

with Banks as on 

a 

31 st March 

n 

Total 

SHGS 

Out of 

which 

SGSY 

Table-4: SHG Bank Linkage Model 

2006-07 2007-08 2009-10 

No of 

SHGS 

Amount 

(crores) 

No of 

SHGS 

Amount 

(crores) 

No of 

SHGS 

Amount 

(crores) 

4160584 3512.71 5009794 3885.39 6121147 5545.62 

956317 757.50 1203070 809.51 1505581 1563.38 

Total 1105749 6570.39 1227770 8849.26 1609586 12253.51 

k 

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SHGS 

Out of 

which 

SGSY 

188962 1411.02 246649 1857.74 264653 2015.22 

Source: Report on status of micro finance in India, NABARD 

Fig-1: Growth and progress of self help groups under SHG bank linkage Programme 

Source: www.indiastat.com 

Figure-1 represents the progress of SHG bank linkage programme from the year 200-01 to 2008-09.From the 

period 2000-01 to 2008-09, total number of SHG increased from 149050 to 1609586.The year 2006-07 

witnessed a significant growth (78.31%) in total number of SHGs over previous year. The year 2008-09 

registered a year on year growth of 31.09% for the number of SHG’s under SHG bank linkage programme.SHG 

bank linkage programme has been recognized as one of the most successful and rapidly growing micro finance 

model to meet the promise to financial inclusion in India 

There has been a remarkable increase in the spread of micro finance in India since its inception in the 1990s. 

The progress of the SBLP model can be judged by the number of SHGs credit linked with banks as also the 

bank loans disbursed by SHGs. The cumulative number of SHGs credit linked with banks increased sharply 

from 33,000 in 1992-99 to 264,000 in 2000-01 and further to 2,239,000 in 2005-06. During the above period, 

the cumulative bank loans disbursed to SHGs also witnessed a sharp increase from Rs. 57 crore in 1992-99 to 

Rs.481 crore in 2000-01 and further to Rs.11,398 crore in 2005-06. Under the SBLP, as on March 31, 2007, 2.9 

million SHGs had outstanding bank loans of Rs.12,366 crore. 

As on March 31, 2007, the number of SHGs maintaining savings bank accounts with the banking sector was 4.2 

million with outstanding savings of Rs. 3,513 crore, thereby covering more than 58 million poor households 

under the programme. Commercial banks had the maximum share of the SHG’s savings (53.9 per cent), 

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followed by RRBs (32.9 per cent) and co-operative banks (13.2 per cent). In terms of relative shares of different 

agencies, commercial banks continued to account for the largest share, both in terms of number of SHGs credit 

linked and bank loans disbursed, followed by regional rural banks and co-operative banks. 

4. DISCUSSION AND POLICY PRESCRIPTIONS 

Financial Inclusion should include access to financial products and services like- 

� No frill Bank accounts – check in account 

� Micro Credit 

� Savings products 

� Remittances& Payment services 

� Insurance – Healthcare 

� Mortgage 

� Financial advisory services 

� Entrepreneurial credit 

� Pension for old age 

� Business correspondence& self help group 

� Branchless banking 

� Micro finance & micro credit facility 

� Investment plan for child's education 

General Equation 

NFA + BC = FI Where, BC = Banks + OFIs + MFI + IT 

NFA = No Frills Saving Bank Account 

BC = Banks + Other Financial Institutions + Micro Finance Institutions + Information Technology 

OFI = Insurance Companies, Mutual Funds, Pension Companies 

Pre-requisites for the Success of Financial Inclusion 

� Appropriate Technology 

� Appropriate and Efficient Delivery model 

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� Mainstream banks’ determination and involvement 

� Strong Collaboration among Banks, Technical Service Provider, BC Services 

� Especially the state administration at grass-root level 

� Liberalization of BC model 

A key requirement of greater “financial inclusion” would be a reduction of transaction costs (PM's Address at 

the Canara Bank Centenary Celebrations, June 23, 2006 Bangalore). Till now, micro financing has been a grey 

area in the finance sector as the current laws allow only the entities registered with RBI to raise deposits and 

lending activities. In view of the rising micro-financing activities in the country, a need has been felt to regulate 

the unregulated business in this sector and also provide legal framework to facilitate the credit flow in rural 

areas (Tiwari, 2006) 11 . The Micro Financial Sector (Development and Regulation) Bill 2007 has been tabled in 

the Parliament (The Hindu Business Line, March 2007) 12 . MFIs fear that regulation might stifle growth, but 

analysts say that it is important to put them under scanning (Patnaik, 2006) 13 . Micro-insurance is a key element 

in the financial services package for people at the bottom of the pyramid. The poor face more risks than the well 

off. It is becoming increasingly clear that micro-insurance needs a further push and guidance from the Regulator 

as well as the Government. 

5. CONCLUSION 

The study shows that credit plus services of microfinance has positively correlating with the improving in 

household expenditure, income, assets and employment. Microfinance has contributed in improving the access 

to credit for consumption and productive purposes. Most (formal) institutions regarded low-income households 

as “too poor to save”. But microfinance programme nullify the argument and showed that even vulnerable poor 

can save if he/she having the accessibility and reward from it (Hulme et al., 1996) 14 . Generally, the life of poor 

is often hindered by many contingencies or risks. Insuring against these risks makes people to bear the large 

uncertain losses with certainty of small and regular payments. Thus, the credit plus services of microfinance 

introduced the micro-insurance services to reduce vulnerability (result of risk and uncertainty) of the poor. The 

micro credit plus services of microfinance has tried to bring out the poor (women in particular) from below 

poverty line and fight against the poverty though deploying the financial and non-financial services. Various 

skill enhancement trainings and awareness programmes, networking with various institutions, etc, will make the 

welfare path soften towards poor. The credit plus services of microfinance not only uplifted the poor from 

income poverty but it also from the knowledge poverty. Hence, easily accessible and affordable “credit plus 

services” should be provided to the vulnerable poor who are excluded socially and economically for a long 

period of time. 

6. REFERENCES 

[1] “National Sample Survey (NSS) 61 st 

round, 2004-05. 

[2] Morduch, J. (1999). The Micro Finance Promise, Journal of Economic Literature, 37 (4):1569-1614. 

[3] Rangarajan C. (2007). Financial Inclusion: Some Key Issues, Lecture delivered at Mangalore University, 

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Mangalore, August 10,2007. 

[4] Karmakar, K.G.(2002). Rural Credit and Self-help Groups: Microfinance needs and concepts in India, Sage 

publication. 

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