Determinants of Financial Inclusion: An Empirical Study On the Inter-State Variations in India N.Chithra1 & Dr.M.Selvam2
Abstract: The access to finance by the poor is a prerequisite for poverty reduction and sustainable economic development of a country. The importance of financial inclusion arises from the problem of financial exclusion of nearly 3 billion people who are away from the formal financial services across the world (Kempson Clarie, 2006). This paper attempts to measure the inter-state variations in the access to finance, using a composite Financial Inclusion Index (IFI) developed by Sarma (2008). This paper attempts to identify and analyze the determinants of financial inclusion. The analysis reveals the fact that among the socio-economic factors, Income, Literacy and Population were found to have significant association with the level of financial inclusion. Among the banking variables, deposit and credit penetration recorded significant association with financial inclusion. Finally, credit-deposit ratio and investment ratio did not have significant association with financial inclusion.
Key words: Financial Inclusion Index, Literacy, Unemployment, Credit-Deposit Ratio and Investment Ratio
M.Phil Scholar, Department of Commerce & Financial Studies, Bharathidasan University, Trichy. Email-ID:
[email protected] Professor & Head, Department of Commerce & Financial Studies, Bharathidasan University, Trichy. 1
Introduction The Financial inclusion is a process to bring the weaker and vulnerable sections of society within the ambit of organized financial system. It creates conditions for access to timely and adequate credit and other financial services to vulnerable groups such as weaker sections and low income groups, at affordable cost. The availability of banking facilities and strong bank branch network are important for the developmental and expansionary activities. In turn, the economic agents facilitate growth, development, investment, employment generation and infrastructure improvement, which are now well established in the literature Feldstein and Horioka, (1980); Brunetti et al., (1997); Ford and Poret, (1991); Hartog and Oosterbeek, (1993). The banking industry has shown tremendous growth in volume and complexity over the last decade or so. Despite making significant improvements in all the areas relating to financial viability, profitability and competitiveness, there are several concerns that the much needed banking services did not reach a vast segment of the population, especially the underprivileged sections of the society. Globally, the possible efforts are being made to study the causes of financial exclusion and to design appropriate strategies to ensure financial inclusion of the poor and disadvantaged. It is important that the reasons for financial exclusion may vary from country to country and hence the strategies to achieve financial inclusion could also vary but all out efforts are to be made as financial inclusion can truly lift the financial condition and standards of life of the poor and the disadvantaged (Leeladhar, 2006).
Meaning of Financial Inclusion Financial inclusion may be defined 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. (Rangarajan Committee, 2008). Status of Financial Inclusion in India The status of financial inclusion in India has been assessed by various committees in terms of people’s access to avail banking and insurance services. Only 34% of the India’s population could access banking services. The Eleventh Five Year Plan (2007-12) envisions
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inclusive growth as a key objective. The process of financial inclusion in India can broadly be classified into three phases: •
During the First Phase (1960-1990), the focus was on channeling of credit to the neglected sectors of the economy. Special emphasis was also laid on weaker sections of the society.
•
The Second Phase (1990-2005) focused mainly on strengthening the financial institutions as part of financial sector reforms. Financial Inclusion in this phase was encouraged mainly by the introduction of Self- Help Group (SHG)-Bank Linkage Programme in the early 1990s and Kisan Credit Cards (KCCs) for providing credit to farmers.
•
During the Third Phase (2005 onwards), Financial Inclusion was explicitly made as a policy objective and thrust was on providing safe facility of savings deposits through ‘no frills’ accounts.
Review of Literature and Objectives The review of earlier research works undertaken in the area of Financial Inclusion would help to identify the research gaps, methodology used and findings of earlier studies. According to Satya R. Chakravarty and Rupayan Pal (2010), the axiomatic measurement approach developed in the human development literature could be usefully applied to the measurement of financial inclusion. The suggested index of financial inclusion allows calculation of percentage contributions of different dimensions to the overall achievement. Pravat Kumar Kuri & Arindam Laha (2011) identified the underlying factors that are responsible for creating obstacles in the process of financial inclusion in rural West Bengal. Mandira Sarma (2008) focused on the literature which indicated a lack of a comprehensive measure that could be used to measure the extent of financial inclusion across economies. Nitin Kumar (2011) assessed the
behavior and determinants of financial inclusion in India. The study found that the factory proportion and employee base are considered as the significant variables indicating that income and employment generating schemes lead the public to be more active, aware, interested with regard to banking activities, which contributes towards financial inclusion. Kuldeep Singh & Anand Singh Kodan (2012) analyzed the relationship between financial inclusion and 3
development with the help of Index of Financial Inclusion (IFI) and also to identify factors associated with financial inclusion with the help of Regression Analysis. The study found that per capita NSDP and urbanization were significant explorers of financial inclusion while the literacy, employment and sex-ratio were not statistically significant explorers/predictors of the financial inclusion. It is to be noted that the importance of financial inclusion is widely recognized. The literature on financial inclusion lacks a comprehensive measure that can be used to measure the extent of financial inclusion across economies. Hence the attempt to fill the gap by proposing an Index of Financial Inclusion.
Statement of the Problem Building an inclusive financial system is a complex process. It has been observed that even ‘well-developed’ financial systems have not succeeded in being ‘all-inclusive’ and certain segments of the population remain outside the formal financial systems. The importance of an inclusive financial system is widely recognized in the policy circle in recent years and fin\ancial inclusion is seen as a policy priority in many developing countries. The major barriers to serve the poor, apart from socioeconomic factors such as lack of regular income, poverty, illiteracy, etc., are the lack of reach, higher cost of transactions and time taken in providing those services. The existing business models do not pass the test of scalability, convenience, reliability, flexibility and continuity. An attempt has been made in this study to examine the extent of interstate variation in the level of financial inclusion in India by using a composite index which was developed by Sarma (2008). Moreover, this study also identifies and analyzes the determinants of financial inclusion in India. Objective of the Study The objective of this study is to measure the Index of Financial Inclusion across States in India and to identify the determinants of financial inclusion. Hypothesis of the Study The present study tested the following null hypothesis
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NH0: There is no significant association between determinants (Socio-economic, Infrastructure, Banking variables) and Financial Inclusion.
Sources of Data Collection The study was based on secondary sources of information available from RBI Annual Reports, Indiasta.com, districtsofindia.com, journals, books etc.
Methodology for Designing a Comprehensive Indicator The inclusiveness of a financial system is to be evaluated along several dimensions. Hence, a multidimensional approach was used for constructing the financial inclusion index (FII). The approach is similar to the one used by UNDP for computation of well known development indexes such as Human Development Index (HDI), Human Population Index (HPI), Growth Development Index (GDI) and so on. The dimension index Zi, as computed by the formula, given below measures the country’s achievement in the ith dimension of financial inclusion (Sarma and Jesim Pais (2008) & Satya R Chakravarthy (2010)). The form of the dimension index (Z) and the FII suggested by Sarma (2008) are given as:
Dimension Index (Zi) = Wi *
Ai – mi
------------ (1)
Mi - mi Where, Zi = Dimension Index, Ai = Actual value of ith dimension, mi = Minimum value of ith dimension, and Mi = Maximum value of ith dimension The index of financial inclusion, IFI for the ith State then, is measured by the normalized inverse Euclidean distance of the point Di from the ideal point I= (1,1,1,….1). The exact formula is
n Financial Inclusion Index (FII) = 1/n ∑ Zi i=1 5
The Banking Statistical Returns (BSR) Statement, published by RBI, India, provides population breakup in terms of rural, semi-urban, urban and metropolitan branch wise classification of various parameters. Such parameters were used as the basis for the analysis of this study. The proposed Index theoretically takes values between Zero(0) and one(1).The value zero could be interpreted as indicating ‘no financial inclusion’ and the value 1 indicating ‘complete financial inclusion’. For analytical purpose, the range between the values 0 to 1 is divided into three grades as given below (Table -1). The proposed FII is used for ranking Districts and the State FII values. Table – 1 Grades of Financial Inclusion Financial Inclusion Index (Value) 0 to 0.3 0.3 to 0.6 0.6 to 1
Financial Inclusion Grade Low stated Financial Inclusion Medium stated Financial Inclusion High stated Financial Inclusion
Source from: Mandira Sarma 2010, working paper series No.215.
Analysis of Determinants of Financial Inclusion For the purpose of this study, the analysis of determinants of financial inclusion is made as follows: A) Index of Financial Inclusion (FII) across States in India B) Factors Associated with Financial Inclusion 1. Results of Regression Analysis for Financial Inclusion Index (States in India) on Socio-economic Variables 2. Results of Regression Analysis for Financial Inclusion index (States in India) on Infrastructure variables 3. Results of Regression analysis for Financial Inclusion Index on banking variables A. Financial Inclusion Index (FII) across States in India The value of Financial Inclusion Index (FII) across states in India is presented in Table – 2. As stated earlier, the researcher chose the minimum and maximum values as mi and Mi, for the construction of Financial Inclusion Index (FII). From the analysis of the coverage in terms of number of bank branches per 1000 people in the each State, it is observed from the individual 6
contribution that Uttar Pradesh was thickly covered with a value of 0.25 while Chhattisgarh was thinly covered with a value of 0.035. Access & Availability was measured in terms of number of deposit account per 1000 people. It is significant to note that Uttar Pradesh enjoyed the highest score (0.25) while Orissa received the minimum score (0.036). The input of the banking system is measured in terms of the amount of deposit. The analysis of Input/Usage shows that Maharashtra gained the highest score (0.25) while Jharkhand received the least score (0.024). Likewise, Maharashtra enjoyed the maximum score (0.25) while Assam received the minimum score (0.042).s Output / Usage of the Banking System indicates the amount of credit enjoyed by people. For the purpose of this study, Sample States were categorized into three categories based on the values of Financial Inclusion Index. It is significant to observe that among 20 States (for which FII was estimated by using data on four dimensions of financial inclusion), Maharashtra (0.634) led with the highest value of FII, followed by Uttar Pradesh (0.599). It is to be noted that only two States (Maharashtra and Uttar Pradesh) could be included in the high financial inclusion, with FII values of 0.634 & 0.599. It is significant to record that another four States, namely, Kerala, Tamil Nadu, Punjab and West Bengal formed the group of medium financial inclusion, with FII values between 0.3 and 0.5. The rest of 14 States taken for this study, that is, Karnataka, Uttarakhand, Himachal Pradesh, Andhra Pradesh, Haryana, Jammu Kashmir, Gujarat, Orissa, Bihar, Assam, Madhya Pradesh, and Rajasthan formed the third group of low financial inclusion with FII values ranging between 0.1 and 0.3. It is important that among the 20 States, Tamil Nadu ranked 4th place, with an FII value of 0.331. A notable feature is that the States like Orissa, Bihar, Assam, Rajasthan and Chhattisgarh needs should be given more attention by appropriate authority as they were low performing States. B. Factors Associated With Financial Inclusion in India
It is desirable to examine the determinants of financial inclusion so as to undertake appropriate policy measures for bringing about a more inclusive society in terms of the access to financial services. The process of financial inclusion is conditioned by a numbers of factors. Some are socio-economic factors related to physical Infrastructure and some are Banking Variables. In the
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section, an attempt has been made to identify and analyze the determinants of financial inclusion in India. 1. Results of Regression Analysis for Financial Inclusion Index (States in India) on SocioEconomic Variables The results of the regression analysis for Financial Inclusion Index (FII) on socio-economic variables are presented in Table –3. It is to be noted that Socio-economic Variables cover GDP per capita, Literacy, Rural Population, Unemployment and Households (Ginicoeff). The analysis of the Table reveals the fact that the coefficient of GDP per capita was positively associated with Financial Inclusion Index (FII) and the actual sig p – value (0.045) was lesser than the value at 0.05 levels, which indicates that there was statistically significant level of financial inclusion. It is clear that higher the income level, higher the financial inclusion both at the individual level and for a State. Likewise the coefficient of Literacy was positively associated with FII and the statistically significant p- value (0.04) was lesser than the value at 0.05 levels. It indicates that higher the literacy, higher will be financial inclusion. In the case of Rural Population, it is to be noted that the coefficient was positively associated with FII and significant p-value (0.02) was lesser than the value at 0.05 levels, which implies that there was statistically significant relationship between rural population and FII. The coefficient of Unemployment was positively associated with FII. Sig p-value (0.946) was greater than the value at 0.05 levels, which implies that there was statistically insignificant relationship between unemployment and financial inclusion index. Similarly, the Household was negatively associated with FII and sig p-value (0.12) was greater than the value at 0.05 levels. It implies that there was statistically insignificant relationship for Households with the FII. The value of R2 (0.776) explains that the 77.7 % of socio-economic variables (Income, Unemployment, Rural population, Households) had highly significant relationship with the financial inclusion index. It is clear from the above Table that the co-efficient of Income, Literacy and Ginicoeff (Households) was significant at 5 % where Fvalue was 9.32. Hence the Null Hypothesis (NH1) namely, there is no significant relationship with financial inclusion index on socio-economic variables, was rejected and the alternative hypothesis, namely there is significant relationship with financial inclusion index on Socioeconomic variable, was accepted. 8
2. Results of Regression Analysis for Financial Inclusion index (States in India) on Infrastructure Variables The access to financial services requires basic infrastructure to be in place for achieving the inclusive growth. The infrastructure such as Road network, Telephone (landline and mobile), access to information through Newspapers, Computer & Internet play a vital role in enhancing financial inclusion by facilitating easy mobility and awareness about financial services. The result of regression analysis of Financial Inclusion Index (FII) on Infrastructure Variables is displayed in Table – 4. The analysis of the Table reveals the fact that physical infrastructure facilities like Internet (3.014) were highly significant (positively) in enhancing financial inclusion. Similarly, the Phone facilities (0.290) and Road (1.128) network were also found to have positive and significant association with the financial inclusion. The other variable, namely, Newspapers did not show any significant relationship with financial inclusion in our estimation. The Telephone and internet usage were positively associated with the level of financial inclusion. This indicates the fact that connectivity and information play an important role in financial inclusion. This is in line with the findings of Sarma (2010) & Beck et.al (2007). They also found in their study that the Telephone and Internet network had positive association with banking outreach. From the Model Summary, it is clear that the value of R2 (0.816) explains that 81.6 % of Infrastructure variable was highly associated with the level of financial inclusion index and F value (12.43) i.e. sig pvalue was 0.000, which implies that the Null Hypothesis (NH2), namely, there is no significant relationship between financial inclusion index and infrastructure, was rejected. The alternative hypothesis, namely, there is a significant relationship between Financial Inclusion Index and Infrastructure, was accepted. 3. Results of Regression Analysis for Financial Inclusion Index (States) in India on Banking Variables As seen from the results of regression analysis for Financial Inclusion Index and Banking Variables in Table – 5, it is to be noted that the banking variables include Deposit penetration, Credit penetration, Credit-Deposit ration and Investment ratio. The analysis of above Table 9
reveals that the results of coefficient of deposit penetration (2.589) was positively associated with financial inclusion index and sig p-value (0.001) was lesser than the value at 0.01 level which indicates that there was a statistically significant association with the level of financial inclusion. It is followed by the coefficient of Credit penetration (-1.839) was negatively associated with Financial Inclusion index and statistically significant p-value (0.083) was greater than the value at 0.01 level of financial inclusion. The coefficient of Credit-Deposit ratio (-0.990) was negatively associated with FII and sig p-value (0.338) was greater than the value at 0.01 .It implies that there was statistically insignificant association for credit penetration with financial inclusion index. Similarly, Investment ratio was positively associated with FII and sig p-value (0.209) was greater than the value at 0.01 levels which indicates that there was statistically insignificant relationship with financial inclusion. From the observation of Model Summary, the value of R2 Square (0.670) explains that 67% of variables are associated with the level of financial inclusion. It is observed from the above Table that Null Hypothesis (NH3) namely there is no significant association between the financial inclusion indexes and banking variables was rejected. Hence the alternative hypothesis namely, there is a significant association between financial inclusion index and banking variables was accepted. Conclusion
Financial inclusion is a process to include the people who lack formal financial services to enjoy the formal financial services. It is observed that there was wide inter-state variation in the level of financial inclusion in India. Among the different States of India, the Chandigarh is at the top and Manipur is at the bottom in terms of the level of financial inclusion. Besides out of 28 states in India, Maharashtra is at the top and Chhattisgarh is at the bottom in terms of the level of financial inclusion index. It is interesting to note that among 20 states, Tamil Nadu ranks 4th place in the process of Financial Inclusion. The empirical analysis for indentifying the determinants of financial inclusion reveals that socio-economic factors like Income, Literacy and Population were found to have significant association with the level of financial inclusion. Further, physical infrastructure for connectivity and information are also significant association with financial inclusion. Among the banking variables deposit and credit penetration were found significant association with financial inclusion. Finally, Credit-deposit ratio and Investment ratio were not significant association with financial inclusion. 10
REFRENCE: 1. Government of India (2008), “Report of the Committee on the Financial Inclusion (Chairman: C.Rangarajan)”, January 2008. 2. Kuldeep Singh and Singh Kondan (2012) “Financial Inclusion, Development and Its Determinants: An Empirical Evidence of Indian States” The Asian Economic Review Vol.53 (1) 115-134. 3. Leeladhar (2006) “Taking Banking Services to the Common Man Financial Inclusion” Reserve Bank of India at the Fedbank Hormis Memorial Foundation. www.bis.org/review/r051214e.pdf 4. Mandira Sarma & Jesim Pais (2008) “ Financial Inclusion and Development: A Cross Country Analysis” Published by Indian Council for Research on International Economic Relations (http://www.icrier.org/pdf/Mandira%20Sarma-Paper.pdf) 5. Mandira Sarma (2008) “Index of Financial Inclusion” Indian Council for Research on International Economic Relations, Working Paper no.215. 6. Mandira Sarma (2012) “Index of Financial Inclusion – A measure of financial sector inclusiveness” Working Paper No. 07/2012. 7. Nitin Kumar (2012) “Financial Inclusion and its determinants: Evidence from state level empirical analysis in India” Indira Gandhi Institute of Development & Research. (http://www.igidr.ac.in/money/Financial%20Inclusion%20and%20Its%20Determinants_ Nitin.pdf) 8. Pravat Kumar Kuri & Arindam Laha (2011) “Determinants of Financial Inclusion: A Study of Some Selected Districts of West Bengal, India” ICSSR Major Research Project, University of Burdwan. 9. Pravat Kumar Kuri & DrArindam Laha (2011) “Financial Inclusion and Human Development in India: An-inter State Analysis” Indian Journal of Human Development, Vol.5 (1) 61-78. 10. Satya R. Chakravarty and Rupayan Pal (2010) “Measuring Financial Inclusion: An Axiomatic Approach” Indira Gandhi Institute of Development Research, WP-2010-003.
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Table -2 The Value of Financial Inclusion Index (FII) across different states in India State Maharashtra Uttar Pradesh Kerala Tamil Nadu Karnataka Punjab Uttarakhand Himachal Pradesh Andhra Pradesh Haryana West Bengal Jammu Kashmir Gujarat Madhya Pradesh Orissa Rajasthan Jharkhand Bihar Assam Chhattisgarh
D1
D2
D3
D4
IFI
Rank
Category
0.064 0.25 0.061 0.082 0.068 0.077 0.091 0.050 0.087 0.045 0.116 0.047 0.094 0.049 0.049 0.066 0.048 0.045 0.049 0.035
0.072 0.25 0.097 0.127 0.057 0.059 0.043 0.061 0.067 0.49 0.064 0.055 0.066 0.064 0.036 0.060 0.071 0.062 0.074 0.042
0.25 0.063 0.090 0.058 0.063 0.085 0.053 0.046 0.047 0.068 0.067 0.107 0.059 0.074 0.074 0.042 0.031 0.061 0.062 0.068
0.25 0.049 0.145 0.064 0.057 0.088 0.068 0.085 0.045 0.066 0.056 0.047 0.042 0.053 0.056 0.052 0.048 0.041 0.042 0.048
0.634 0.599 0.393 0.331 0.245 0.309 0.255 0.242 0.246 0.228 0.303 0.256 0.261 0.24 0.215 0.22 0.198 0.209 0.227 0.193
1 2 3 4 11 5 9 12 10 14 6 8 7 13 17 16 19 18 15 20
High High Medium Medium Low Medium Low Low Low Low Medium Low Low Low Low Low Low Low Low Low
Source: Basic Statistical Returns in Scheduled Commercial (http://rbidocs.rbi.org.in/rdocs/Publications/PDFs/0BSR010612FL.pdf)
Banks,
RBI
Note: The variables are explained as D1
- Coverage is measured as the number of bank branches per 1000 people.
D2
- Access & Availability is measured as the number of deposit account per 1000 people.
D3
- Input of the banking system is measured as the volume of deposit account and
D4
-Usage/ Output of the banking system is measured as the volume of credit.
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Table – 3 Results of regression analysis for Financial Inclusion Index (states) in India on Socio-economic Variables Variables Coefficient Std Error ** In(GDP) 0.400 0.189 ** Literacy 0.009 0.004 ** Rural Pop 0.046 0.011 Unemployed 0.000 0.005 Households -0.422 0.196 Constant -0.645 0.695 Source: www.indstat.com & Computation by using SPSS
t 2.119 2.191 4.074 0.070 -2.155 -0.927
Sig P-value 0.045 0.04 0.02 0.945 0.12 0.369
Results of Model Summary Model
R
R Square
Adjusted R Square
Standard Error of the estimate
1
0.822
0.776
0.697
0.08162
Notes: Dependent Variable – FII and Number of Observations, N = 20 **
- Variable Significant at 0.05 level
The variables in the above Table are: FII
-
Logarithmic Transformation of FII
In (GDP)
-
Logarithm of GDP Per capita (in 2004-2005 Constant USD)
Literacy
-
Percentage of literate people in total population
Rural Pop
-
Percentage of total population living in rural areas
Unemployed -
Percentage of unemployed people in total labor force
Households
indicates logit of Housed holds living in India
-
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Table – 4 Results of regression analysis for Financial Inclusion Index (states) in India on Infrastructure Variables Variables Road Phone News Paper Computer Internet users (Constant)
Coefficient Std Error T 1.128* 0.000 -1.219 0.290** 0.126 -2.300 -3.380 0.000 -.216 ** 2.049 0.000 -0.962 * 3.014 0.000 3.041 1.091 0.783 1.393 Model Summary of Regression
Sig p-value 0.009 0.037 0.243 0.046 0.002 0.185
Model
R
R square
Adjusted R square
Std Error of the Estimate
F-value
Sig Fvalue
1
0.903
0.816
0.751
0.0765
12.43
0.000
Source: www.indiastat.com and Computed from SPSS Notes: Dependent Variable – FII & N=20 ** - Variable significant at 0.05 level, * - Variable significant at 0.01 level The variables in Table – 4 are: FII
- logarithmic transformation of FII
Road - roads (in Km) per square Km of land area. Phone - logarithm of the number of telephone (landline and mobile) subscription per 1000 population Newspaper - Number of daily newspapers per 1000 population Computer
- Number of personal computer users per 1000 population
Internet
- Number of internet users per 1000 population
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Table – 5 Results of regression analysis for Financial Inclusion Index (states) in India on Banking Variables Variables Deposit pen Credit pen C_D ratio Investment ratio Constant
Model
Coefficient 2.714* -2.013 -1.134 1.472
Std Error t 0.000 2.589 0.000 -1.839 0.007 -0.990 0.006 1.312 1.02 -8.492 Model Summary of Regression Results
R
R square
Adjusted R square
1
Sig P-value .001 .086 .338 .209 .000
Standard Error of the estimate
0.819 0.670 0.582 0.09915 Source: Various Annual Reports from RBI, Branch Banking Statistics and Computed by using SPSS
Notes: Dependent variable is FII and Number of Observation is 20 The variables in the above Table are: Deposit_pen - Deposit Amount per 1000 thousand people Credit_pen
- Credit Amount per 1000 thousand people
C_D ratio
- Credit-Deposit Ratio per 1000 thousand people
Investment Ratio – Investment Ratio per 1000 thousand people
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