Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
Study on the Level of Financial Inclusion among Homogeneous
Business Groups in Urban Areas
Charusree R* and Harinivash B**
Financial Inclusion plays a critical role in poverty reduction, reducing income disparities and
economic development. The World Bank statistics indicate that the urban areas of India
including metropolitan cities have an inclusion of 41%. The availability of bank ing and
payment services did not reach a large section of the community; which is the major
concern for the central bank - Reserve Bank of India. The bank has tak en various steps to
include people into the organized financial sector including the poor and the uneducated. A
harmony and synchronization of the views and objectives of all the stak eholders can
improve the current status of financial inclusion.
The study provides an analysis and evaluation of the current level of financial inclusion
among homogeneous business groups in a specific urban area. The hypothesis tested is
whether the presence of a large number of bank branches in urban areas leads to a higher
level of financial inclusion. The methodology includes collection of primary data from
different sections of people including fishermen, migrant work ers, domestic helpers and
vendors in Chennai (Tamil Nadu). The result shows that each of these groups has unique
constraints and the current level of inclusion is not satisfactory. The major reason for the
limited use of bank ing services is the increase in number of unorganized money lenders in
the country servicing the people.
1. Introduction
Financial Inclusion is a measure of the accessibility of financial services by the people in the
country. In India, 22% of the population (25.7% in rural areas and 13.7% in urban areas) was
below the poverty line in 2011-12 (Planning Commission 2013) but 43% of the population
(excluding below poverty line) did not have access to organized financial institutions. Most of
these people belong to rural areas, but it also includes the urban poor of the country. Two
decades of major changes in banking reforms still leaves the situation of financial exclusion
upto 59% in urban areas (World Bank 2012). There is a need to probe deeper as to why the
urban poor do not avail the financial services despite the widespread network of banks in
urban areas. One of the major reasons for the financial exclusion is the presence of
unorganized financial entities such as money lenders and pawnbrokers in different parts of the
country. They demand interest rate for loans as high as eighteen to hundred percent per year.
The success of these institutions is due to the fact that they provide loan in zero processing
time unlike organized financial institutions.
This paper aims to find the major reasons for financial exclusion. This study also analyses the
financial habits of the urban poor and provides recommendations to reduce people‟s
dependence on informal financial sector. The aim is to bring harmony between the regulator,
the banks and the urban poor.
*Ms Charusree R, Post graduate diploma in management, Institute for Financial Management and Research,
Chennai-34, India. Email: charusree.rajagopal@ifmr.ac.in
**Mr Harinivash B, Post graduate programme in management, Indian Institute of Management, Trichy
Trichy-15, India. Email: harinivash26@gmail.com
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
2. Literature Review
Financial inclusion is an important concept existing for more than two centuries. Lot of
empirical research had been done on finance-led economic development to analyse financial
inclusion. The origin of the finance-led growth hypothesis can be traced back to Bagehot
(1873) which argues that the existence of an energetic financial sector has growth-enhancing
effects. Availability of capital is not the sufficient criteria, in which case an economy should
mobilize the capital better. Schumpeter (1911) argued that the service provided by financial
intermediaries - mobilizing savings, evaluating projects, managing risk, monitoring managers,
and facilitating transactions - are essential for technological innovation and economic
development. Research over the years had produced a key result that countries with betterdeveloped financial systems tend to grow faster.
Growth theory has mainly focused on savings and financing services. Financial development
is expected not only to stimulate the rate of saving (thus capital accumulation), but also to
improve the use of savings, both in the short-run (more efficient allocation of savings) and in
the long-run (stimulation of technological change and productivity growth, as emphasized by
the Schumpeterian view). The services provided by the financial system have a huge impact
on long-run economic growth.
In 2006, United Nations released a book titled "Building Inclusive Financial Sectors for
Development", more popularly known as the "Blue Book" UNO (2006). The Blue book raised
a simple but comprehensive question "Why are so many bankable people unbanked?" An
inclusive financial sector, the Blue Book says, would provide access to credit for all bankable
people and firms, access to insurance to all insurable people, and access to savings and
payment services for everyone at an affordable cost.
3. The Methodology and Model
To test the hypothesis “availability of a large number of bank branches leads to greater
financial inclusion”, primary research was conducted among four homogeneous business
groups in Chennai (Tamilnadu). The objective was to identify the reasons of not using the
formal financial services. A total of one hundred and twenty respondents were chosen on the
basis of simple random sampling. The research questionnaire includes financial habits
including savings, remittances and credit information in both organized and unorganized
financial institutions. It also covered socio-economic characteristics of the respondents.
Regression analysis was performed to find the major reasons for the people to choose banks
as their savings mode. Eight bank branch managers in Chennai were questioned to
determine the financial inclusion initiatives taken by them to target urban poor and the
uneducated. Secondary sources including World Bank statistics and Reserve Bank of India
(RBI) were used to collect data.
4. Homogeneous business groups
The study focuses on the following four homogeneous business groups in Chennai.
Vendors in Koyambedu: Koyambedu wholesale market complex (KWMC) is one of Asia's
largest perishable goods market complex located at Koyambedu, Chennai. It consists of
more than 1,000 wholesale shops and 2,000 retail shops. Thirty vendors were selected based
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
on random sampling inside the market complex. These consisted of vegetable, fruit and
flower vendors who did not own permanent shops, but sold the items on pavements. Their
wage fluctuated from loss of 50% to profit of 100% depending on uncertainty in demand.
Domestic Helpers: Many women migrate to Chennai from other parts of Tamil Nadu in search
of employment. They later settle in Chennai and work as house maids in five to ten homes.
These women, although having fewer fluctuations in their monthly salary, find some restrictions
in the usage of banking services especially when it comes to credit requirements. Having
come from remote areas they lack the required knowledge and documentation required to
avail banking services. Hence, for their credit requirements, they favour unorganized financial
sector.
Migrant Workers: Every year, a large number of people migrate from villages to cities in
search of a better life for themselves and their families. They take up non-contractual and nonpermanent jobs of porters, hawkers, construction workers, domestic workers, rickshaw
pullers, etc. A majority of them work on construction sites. Sample of thirty construction
workers working under private builders for construction of houses or those employed for
government infrastructural projects were interviewed. In view of the non-permanent nature of
their occupations, they frequently shift base within city or even across cities. As they do not
have permanent jobs and living places, they are not able to avail banking services as they fail
to provide documentation to banks.
Fishermen: Situated on the eastern coastal region, Chennai has a large population whose
major occupation is fishing. Thirty fishermen families in the area of Foreshore estate and
lighthouse of Marina Beach were surveyed to find out the penetration of banks and to
understand their experience with the financial services.
5. The findings
5.1 Domestic helpers
Savings: Out of thirty respondents, 52% of the respondents had a bank account, out of which
81% used their accounts to save their monthly income. The remaining 19% of the accounts
were inoperative. The major reasons for these people to have bank accounts are safety and
to earn interest on their savings. About 30% did not save their earnings instead preferred to
keep it as liquid cash in their home. Unorganized financial institutions accounts for 16% of
their savings followed by post office (14%). Figure 1 represents the reasons for saving in
banks and savings mode of the domestic helpers.
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
Figure 1 Reasons for savings in banks and savings mode of domestic helpers
Regression analysis was performed to analyse the major reasons for domestic helpers to use
banks as savings option which is the dependent variable. Four independent variables are
chosen to determine the reasons for making deposits in banks. The independent variables
are safety (X1), savings (X2), interest rate (X3), ease of access (X4).
Y = 0.178 + 0.528X1 + 0.362X2 + 0.326X3 + 0.253X4
The above equation reveals that safety is an important criterion for the customer to choose
bank deposits. R-square value of 0.569 indicates that there are other variables which account
for bank deposits.
Credit: The uncertainty in the need for money occurs due to children‟s marriage (38%),
medical emergency (26%) and education (22%). People obtain loans from banks, working
company, post office, money lenders and pawnbrokers to finance their needs. Less than 5%
of the respondents choose banks as the source of their needs. Remaining 95% of the
respondents take loan from their employers, money lenders, pawnbrokers and chit funds.
Figure 2 relates the respondents‟ dependency on different source of loans.
Figure 2 Source of loans for domestic helpers
There are thirteen major reasons for the domestic helpers to not choose banks as their
source of financing. These are depicted by analysing respondents perceptions on banking
services.
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
Table 1 Reasons for not utilising banks by domestic helpers
Banks ask for a lot of documents
70%
Banks have complex procedures
58%
I lack the knowledge / awareness about banks
48%
Banks ask for guarantor / collateral
48%
Banks would never give me a loan when I need it urgently 39%
A visit to the bank is always time consuming
33%
I am not treated well in banks
33%
My friends and relatives have had bad experiences with 30%
banks
I am hesitant / scared of / do not know to use ATMs
30%
I have to spend a lot of money travelling to a bank
12%
Banks working hours are not as per my convenience
9%
Banks give low interest rates
6%
Banks do not offer suitable products
3%
70% of them felt that they were not able to submit various documents asked by banks. It takes
around six months to get these documents; by then people do not need the loan anymore. The
situation leads people to approach unorganised financial institutions even though the interest
rates are thrice the banks. Table 1 represents different reasons for not utilising banks by the
domstic helpers.
5.2 Vendors
Savings: 70% of the respondents had a bank account out of which 81% used their accounts to
save their earnings. The remaining 19% of the accounts were inoperative. The popular
reasons why bank accounts were used for deposits were “Safety” and “To prevent impulse
spending”. Saving in banks and investing in gold were most popular modes. Chits were not
the major mode of savings as depicted in figure 3.
Figure 3 Reasons for savings in banks and savings mode of vendors
Regression analysis was performed to analyze the major reasons for vendors to use banks as
savings option which is the dependent variable. As discussed in previous sections, four
independent variables are chosen to determine the reasons for making deposits in banks.
The independent variables are safety (X1), savings (X2), interest rate (X3), ease of access
(X4).
Y = 0.1 + 0.9X1
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
The above equation reveals that safety is an important criterion for the customer to choose
bank deposits. Other independent variables are insignificant; which clearly indicates that the
variables are not important for the vendors to use banks as savings option.
Credit: 76% of the vendors obtained loan to invest in their business and 42% of them
obtained loan from money lenders.
Figure 4 Source of loans for vendors
Vendors obtained loan majorly from three sources as seen in figure 4.
When analysing the reasons for not using banks as savings and financing mode for the
vendors, 93% of the respondents depicted that they lose one day earnings for any
transactions. Sometimes, the transaction in banks takes more than two days. Hence, the
respondents miss the opportunity of earning in these days. Table 2 provide the reasons for
the vendors to not utilise banking services.
Table 2 Reasons for not utilising banks by vendors
Banks working hours are not as per my convenience
93%
Banks would never give me a loan when I need it urgently 90%
Banks ask for guarantor / collateral
80%
A visit to the bank is always time consuming
77%
Banks have complex procedures
73%
Banks ask for a lot of documents
40%
I am hesitant / scared of / do not know to use ATMs
40%
Banks do not offer suitable products
40%
I lack the knowledge / awareness about banks
27%
I am not treated well in banks
13%
My friends and relatives have had bad experiences with 3%
banks
Banks give low interest rates
0%
I have to spend a lot of money travelling to a bank
0%
5.3 Fishermen
Savings: 73% of the respondents had a bank account out of which only 36% made regular
deposits. The remaining 64% of the accounts were inoperative. When investigated, it was
found that the reason for opening accounts was to receive the benefit given by the state
government for the fishermen during the 45-day fishing ban since the government insists on
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
electronic benefit transfers. Apart from this, the fishermen did not use their savings accounts.
Majority of respondents preferred to save their daily earnings in chit funds organised by local
people. In few cases, fishermen lost their money in chit funds. Saving in gold was the next
preferred mode as shown in figure 5.
Figure 5 Reasons for savings in banks and savings mode of fishermen
Regression analysis was performed as similar to the previous sections to understand the
reasons for savings in banks. From the equation below only safety (X 1) is significant and other
independent variables are insignificant.
Y= 0.579 + 0.421 X1
Unlike domestic helpers, fishermen utilise banks only for the reason that banks are safer. This
could be inferred as few fishermen lost their money in chit funds.
Credit: Business requirements (35%), Education (26%), Child‟s marriage (19%) were the
major reasons for which loans were taken by the fishermen. Presence of local money lenders
in the household area provides them credit support at higher interest rate. Money lenders and
chit fund plays major role in extending their support to finance fishermen as shown in figure 6.
Figure 6 Source of loans for fishermen
As most of these fishermen are illiterate, they find it difficult to understand the complex
procedures followed by banks. 64% argue that bank does not finance them when they are in
need of money. Other major reasons are explained in table 3.
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
Table 3 Reasons for not utilising banks by fishermen
Banks have complex procedures
79%
Banks would never give me a loan when I need it urgently
64%
I am hesitant / scared of / do not know to use ATMs
61%
Banks ask for guarantor / collateral
48%
My friends and relatives have had bad experiences with
30%
banks
I lack the knowledge / awareness about banks
18%
A visit to the bank is always time consuming
15%
I am not treated well in banks
15%
Banks do not offer suitable products
12%
Banks ask for a lot of documents
0%
Banks give low interest rates
0%
Banks working hours are not as per my convenience
0%
I have to spend a lot of money travelling to a bank
0%
5.4 Migrant labourers
Savings: 67% of the respondents had a bank account, but only 39% had savings account in
Chennai. 55% used the account to make regular deposits. Major transaction done by the
migrant workers was remittance to the account of their native places. Similar to other
homogeneous business groups the main reasons for migrant labourers to make deposits
were “Safety”. No one stated that interest rate is an important criterion. Their priority was to
keep the money safe and transfer it to their family back home. Unlike other homogeneous
groups, migrant workers have considerable amount of savings in insurance. Holding the
money in hand for a specified period before depositing it in their native accounts was the
most preferred mode followed by banks. 15% said they do not have sufficient money to save
or send back home. Savings pattern and reasons for savings in banks are shown in figure 7.
Figure 7 Reasons for savings in banks and savings mode of migrant labourers
Regression equation depicts that only safety (X 1) is the major reason for making deposits in
banks (Y). The other independent variables have insignificant value and are not shown in the
equation. In all the four homogeneous business groups safety is the major reason for deposits
and other independent variables do not contribute unlike domestic helpers.
Y= 0.474 + 0.526 X 1
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
Credit: Migrant labourers obtain credit from their office and do not obtain from chit funds. They
also prefer to obtain loan from their friends as they come from same community. The credit
behaviour of migrant labourers is shown in figure 8.
Figure 8 Source of loans for migrant labourers
As migrant labourers do not have permanent jobs and houses, it is difficult for them to get loan
from banks. They will not be able to provide proof of residence and other important
documents asked by bank. As most of them are illiterate, these people do not understand the
complex procedures followed by the banks. Any transactions in bank will take their opportunity
cost of earnings. 48% of migrant labourers believe that the banks would not provide loan
when there is a need. Table 4 represents the reasons for not utilising banks by migrant
labourers.
Table 4 Reasons for not utilising banks by migrant labourers
Banks ask for a lot of documents
61%
Banks have complex procedures
61%
A visit to the bank is always time consuming
48%
Banks would never give me a loan when I need it urgently 48%
I am hesitant / scared of / do not know to use ATMs
30%
Banks working hours are not as per my convenience
27%
I am not treated well in banks
18%
Banks ask for guarantor / collateral
12%
I lack the knowledge / awareness about banks
9%
My friends and relatives have had bad experiences with 6%
banks
Banks do not offer suitable products
6%
I have to spend a lot of money travelling to a bank
6%
Banks give low interest rates
0%
6. Inferences
70% of the respondents without bank savings accounts said that they do not have an account
because of the documentation demanded. Complex and time consuming procedures were
the other problems faced by people in using banking services. The purpose for opening
account varied from one group to the other. 64% of the fishermen who had bank accounts
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
opened it to receive benefits from the government in the form of direct benefit transfer. 55% of
the migrant workers opened it for remittances. 81% of domestic helpers and vendors opened
it to save their earnings. 48% of domestic maids, 27% vendors, 18% fishermen and 9%
migrant labourers said that they do not approach banks due to lack of awareness /
knowledge. The poor lack the education and knowledge to understand financial services
offered to them. 60% of the respondents felt that there is a low possibility of getting loans from
banks. Hence they do not approach banks to obtain loans. The first person who comes to
their mind when they need money is the local money lenders, who are always ready to lend in
zero processing time.
20% of the respondents said that they do not like going to a bank because of the attitude of
bank officials. The entire four homogeneous groups had the presence of a welfare
association. Some of these associations were initially involved in providing credit, but it was
later discontinued due to various issues like high levels of loan delinquency rate and default.
Some respondents said that they did not like being questioned by the bank officials regarding
their account transactions. One such instance was when a fisherwoman had an emergency
and withdrew the entire amount from her account and the manager wanted to know the reason
and suggested against the same. Some respondents had opened an account under
compulsion and said that being given a choice they would never visit a bank again.
A set of migrant workers belonging to the same area nominated one person to open an
account and all remittances were done via that single account. The respondents were
apprehensive of giving data. Many said that they do not earn enough to save however a visit
to the bank showed contradicting results. Eg: many vendors of Koyambedu visited the bank
branches to make deposits mostly on a weekly basis. Migrant workers remit money through
NEFT channel either through branch or availing services of Corporate BCs though they do not
have an account with that bank. The recipient (spouse/parents) maintains an account with the
bank and the remittance gets credited instantly.
7. Recommendations
Technology reduces transaction costs, thus making financial inclusion a viable business for
the banks. Some technology solutions include Cash Deposit Machine (CDM), Green Channel
and Green Remit Card do away with form filling and save time.
Improving ATMs: ATMs programmed to speak the local language, voice activated and
fingerprint enabled ATMs would increase the level of trust and encourage the urban poor to
use ATMs. ATMs that give notes of smaller denomination would be convenient for the poor.
Accessibility can be increased with ATM on wheels (Mobile ATM), Branch on wheels & Bank
on the move.
Enrolling the urban poor in a single enrolment drive like the Aadhar card, thus capturing
biometric data and other details, would speed up the account opening process. Also,
information, including payments to mobile companies, utility companies, as well as the
government, collected, then the excluded can build information records that will show their
credit worthiness. To reduce transaction costs, customer details can be stored on cloud. Tab
banking can also reduce transaction costs and processing time. The poor are comfortable
using mobiles hence mobile banking can change the future of banking. Shifting the educated
customer base to net banking would create more time for bankers to tend to the uneducated
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
customers. The key is to increase the confidence of people in technology and preventing them
from de-banking.
Encouraging the Business correspondent (BC) Model: Some of the stated reasons for not
using banking services were “A visit to the bank is always time consuming”, “I am not treated
well in banks” and “I have to spend a lot of money travelling to a bank”. Business
Correspondent (BC) can solve this problem by servicing the urban poor at their place of work.
However BCs with the right attitude must be chosen and should be adequately remunerated.
Timely service of hand-held machines, flexible work timings of BCs beyond bank hours,
increasing cash limit of transactions done by BCs are some parameters that should be taken
care of.
Financial literacy centres (FLCs): Financial Inclusion needs to be backed by financial Literacy
in order to achieve financial Stability. Major banks in each block should set up (FLCs) and
also conduct outdoor financial literacy programs. FLCs should make the people informed on
banking services available to them. Informed customer is the one who knows how to use the
basic banking products including How to withdraw funds from savings account, How to
transfer funds from one account to another, the usage of demand draft, cheques, ATM, NEFT
AND RTGS.
8. Conclusion
Financial inclusion is important for the country‟s economic development and for solving the
problem of variation in income disparities. The need for inclusion is not understood by the
people in India. The perception is that the banks operating in India are for higher income
groups but not for the common people. The situation increases the share of money lenders
and pawnbrokers in the financial sector of India. Poor people in the country avail credit
services from money lenders at higher interest rates. Once the poor are financed from these
institutions, then it is difficult for them to repay the interest thus making them fall in a debt trap.
In few cases, a small amount borrowed turns out so large that it could take generations for the
people to repay the principal. The regulators need to customize the financial system targeting
the poor, uneducated, rural people and the vulnerable groups. Financial inclusion initiatives by
the government should focus on improving the overall well-being of the people.
References
Building Inclusive Financial Sectors for Development, bluebook.uncdf.org
Dr K. C. Chakrabarty, Former Deputy Governor, Reserve Bank of India “Inclusion, Growth and
Governance- Issues and Way Forward”
Dr Raghuram G. Rajan, Governor, Reserve Bank of India “Financial Inclusion: Technology,
Institutions and Policies”
Institute for financial management and research, http://www.ifmr.co.in
J. Schumpeter, 1911, „The Theory of Economic Development: An Inquiry into Profits, Capital,
Credit, Interest and the Business Cycle‟
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Proceedings of 3rd European Business Research Conference
4 - 5 September 2014, Sheraton Roma, Rome, Italy, ISBN: 978-1-922069-59-7
Reserve bank of India circulars and FAQs, http://www.rbi.org.in for circulars and FAQs
W. Bagehot, 1873, Lombard Street: A Description of the Money Market
World Bank, financial inclusion, http://datatopics.worldbank.org/financialinclusion/country/india
Appendix
Parameters measured in urban areas of India in 2011 (percentage)
Account at a formal financial institution
41
0 deposits/withdrawals in a typical month
3+ deposits/withdrawals in a typical month
10.5
ATM is main mode of withdrawal
31.2
Loan in the past year
30.4
Loan from a financial institution in the past year
5.9
Loan from a private lender in the past year
7.4
Loan from family or friends in the past year
19.6
Personally paid for health insurance
Saved any money in the past year
11.1
Saved at a financial institution in the past year
12.6
19
26.6
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Proceedings of 3rd European Business Research Conference
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Basic savings bank deposit account in Tamil Nadu
Tamil Nadu
As on March 2013
As on March 2014
Progress
No of BSBDA opened (in lakhs)
128.37
168.11
39.74
Amount in BSBDA (in crores)
No of BSBDA with OD facility
(in lakhs)
Amount availed in BSBDA with
OD(in crores)
1547.04
2821.72
1274.68
2.69
4.41
1.72
19.91
26.74
6.83
Business correspondents
As on March 2013
As on March 2014
Progress
Tamil Nadu
12330
11876
-454 (decreased)
Urban Tamil Nadu
423
1296
873
Bank Branches in Chennai
1322
ATM
3528
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