ISSN (Print) - 0012-9976 | ISSN (Online) - 2349-8846

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Outreach of Formal Banking Services and Financial Inclusion

Evidence from Indian States

This paper attempts to examine financial inclusiveness in major states of India. Using banking outreach services data from 1981 to 2018, we construct an index of financial inclusion. Although the outreach of formal banking services is well-dispersed across the states, there is a large variation among the states in terms of its access and usage. The evidence suggest that there exists a need to focus more on spreading financial literacy and create awareness about banking services in the poorer states to achieve a higher degree of financial inclusion.

The authors thank S L Shetty, J Dennis Rajakumar, Thaarcis Albin, M Vijayabaskar, K Saji Mathew, and Vijayata Sawant for discussions and useful comments. Elayaraja M S gratefully acknowledges the Economic and Political Weekly Research Foundation, Mumbai for granting the A K Banerji Fellowship.

The expansion of the “formal” channel for providing fin­ancial services to all segments of society determines the degree of financial inclusion in an economy. Thus, the main focus of financial inclusion policies is to have easy and timely physical access to the services offered by formal financial institutions so that the poor, marginalised, deprived, and vulnerable sections of the population can effectively use formal banking facilities. The use of credit facilities at a relatively low cost for productive purposes, to enhance livelihoods, assumes significance for the poorer sections. The first step of formal financial inclusion is opening a bank account. Having a basic savings account can serve as a gateway for acc­essing other financial services (Singh 2017; Sinha and Azad 2018). The Reserve Bank of India (RBI) has taken sustainable efforts to bring the financially excluded segments of the population into the formal financial categories (Joshi 2014; RBI 2015).

Studies have pointed out the existence of a positive relationship between financial sector development and economic growth (Yang and Yi 2008; Bist 2018). Access to formal finance and appropriate financial services influences the gross domestic product (GDP) growth (Demirguc-Kunt et al 2017). Evidence shows that a lack of financial inclusion or exclusion from the formal banking system results in a loss of 1% to the GDP (Chattopadhyay 2011; CRISIL 2018). There is also a direct relationship between financial exclusion, financial sector development, and poverty reduction. Inclusive growth through financial inclusion has two important dimensions: (i) principle of equity, and (ii) ens­uring growth with financial stability. Wider access to ­formal finance by unorganised, small, and medium enterprises as well as vulnerable groups, especially women and poor adults, result in a more even spread of benefits (Zhuang 2009; World Bank 2015). Financial inclusion is thus not a concept with sociopolitical ­imperativeness rather it is an important element of ­economic growth.

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Updated On : 25th Oct, 2022
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