i nc lu s i ve f i nanc e i nd i a re port 2014
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making cheap credit available to poor households for
asset creation. The formal banking system was a close
partner in these initiatives as channels of distribution of
such subsidized credit. The focus got decisively shifted
around the early 1990s in favour of delinking the banking
system from fiscally mandated ‘behest’ lending. Introduc-
tion of the concept of ‘financial inclusion’ has given a new
meaning and intent to the role of financial institutions
in the larger project of development as opposed to the
focused agenda of poverty alleviation. It indeed has
ushered a phase of greater financialization of economic
life through a more generic expansion of financial mar-
kets. The microcredit revolution of the 1990s was a
worthy precursor to this phase in that it helped deepen
the credit market even in remote regions, having largely
non-monetized local economies. More importantly,
MFIs demonstrated that serving the poor can be a profit-
making enterprise. Meanwhile, the microfinance experi-
ment itself has undergone scrutiny for its contribution
to the goals of development and empowerment, giving
rise to the demand for expanding its scope to include
additional services or ‘microfinance plus’ services.
Making financial services available to the poor is no
longer considered an altruistic proposition as financial
inclusion, or inclusive financing, is propped up on strong
commercial principles. Engagement with the poor is now
posed as a ‘win-win’ game, a ‘profitable’ opportunity to
make ‘fortune at the bottom of the pyramid’, notions that
have been strongly founded in theoretical frameworks of
neo-classical and institutional economics. Freeing the
markets, including financial markets, of all constraints to
the participation of different sections of economic actors
is the crux of this philosophy of development. As the
financial inclusion process unfolds in the coming years,
these notions must also get tested for their various mean-
ings and dimensions as also suitability, affordability and
sustainability of the services sought to be provided to the
excluded clientele.
This chapter seeks to review the perspectives on finan-
cial inclusion, its location within the poverty and devel-
opment discourse, and the various measures that have
emerged to quantify exclusion. The subsequent chapters
present a more detailed exposition of the progress of
financial inclusion plans of banks, look closer into the
innovations and critically examine the relevant policies.
Continuing with the tradition of the previous State of
the Sector (SOS) reports to focus on microfinance,
Chapter 4 presents a comprehensive analysis of the
microfinance sector with a view to assert its special rel-
evance to addressing problems of financial exclusion.
1.1 FINANCIAL INCLUSION: DEFINITIONS
AND DOMAIN
Financial inclusion as a term has acquired universal
acceptance in every discussion, both on the mere access
to financial services as well as deeper examination of
processes. Thus, much of the literature and discussion is
limited to the increasing extent of
availability
of banking
and financial services to the hitherto unbanked sections
of society.
The term ‘financial exclusion’ is said to have been
first coined in 1993 by geographers in Britain who were
concerned about bank branch closures and resulting lim-
ited physical access to banking services.
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Aynsley (2010)
identifies three key aspects of definitions of financial
inclusion: (i) access to financial services and products; (ii)
financial capability (managing money effectively, etc.);
and (iii) financial literacy. However, most definitions
emphasize
access
rather than the other elements. Nev-
ertheless, poverty is an unacceptable human condition
which must lie at the center of the financial inclusion
discourse; financial inclusion itself does not carry with it
the intent to address the poverty problem. Accordingly
if it is to be employed as a tool for development it must
be accompanied by a clear intent and strategy to address
poverty and vulnerability and support economic security
and viable livelihoods.
Like financial exclusion, lack of financial capability
is seen as being clearly linked to poverty and there is a
need for a certain level of financial capability as financial
products become more refined and sophisticated. Thus
it becomes clear that the process of financial inclusion
must necessarily be accompanied by attention being paid
to financial capability. Financial literacy is a means to
bring about greater financial capability towards financial
inclusion. Thus financial inclusion cannot be a limited
exercise of making available financial products to the
excluded population. Hence this makes the inclusion-
ary process a broad-based one that goes beyond limited
service delivery and encompasses improvements in capa-
bility to use financial services as well as reducing various
