Research in Economics


A Study of Financial Inclusion in Bangalore Urban and Bangalore
Rural District Minor Research Project Submitted to
The University Grants Commission South Western Region

Principal Investigator
Dr.Subhashini Muthukrishnan,
Associate Professor Department of Economics,
St Joseph’s College(Autonomous),
No. 36, Lalbagh Road, Bangalore - 560 027

Executive Summary
To make India’s economic growth more inclusive and to improve the wellbeing of a vast majority of her poor who are left out of the mainstream economy, an expansion in economic opportunities including financial inclusion is mandatory. The present research had the objectives of examining the nature, extent and causes of rural- urban differences in financial inclusion across different dimensions such as region, gender and caste especially with reference to Bangalore urban and Bangalore rural .It aimed at identifying the demand side determinants of financial inclusion and access to credit. Random samples were collected from 1049 respondents spread over towns and city zones across these two districts and this represented a good mix of respondents.

The demand factors like Geographical Accessibility, Culture, Religion, Caste, Assets, Literacy and educational levels as determinants of financial inclusion had not been studied in Karnataka’s two districts of Bangalore urban and Bangalore rural. These variables were found to be important in determining financial inclusiveness in the study area. The study indicates that there appears to be a close connection between social inclusion and financial inclusion as more respondents from general category have bank accounts than those from the reserved categories. As expected, people with higher level of income have greater access to banks. More people have accounts with scheduled banks. Family and friends are more influential in helping respondents to open accounts while the role of banks is relatively less. Identity requirements, terms and conditions of bank accounts, levels of bank charges, physical access and psychological and cultural barriers act as obstacles in opening bank accounts. Lack of money to participate in the formal banking system is a major reason for exclusion. Occupation of the respondents is another reason for exclusion. Many of the respondents have bank accounts as it was required for receiving payments.

Results of the Probit Regression to identify the determinants of Financial Inclusion show that out of the eleven explanatory variables included, eight variables such as income in urban area, income in rural area, being a male, no savings, self employed, illiterate, general caste and Muslim are significant . In urban area the income has shown high significance in opening a bank account which implies that being in urban area the higher the income level greater is the probability of opening a bank account. It could be that people in urban areas use banking for different transactions, therefore require bank account.

Large number of people take loan from informal sector and the reason for this is that informal sector provides the small sum that they require without much hassle and for personal, socio cultural reasons and often without guarantee or other security making such borrowing convenient for them. Repaying off (v)past debt by borrowing from informal sources has been a major reason for many to fall in the debt trap. Out of the eight explanatory variables included in the probit model , three variables namely income in urban area, being illiterate and being general caste(below 10%) were important in determinants of using informal credit. Thus urban households of higher economic status have lower probability of borrowing from informal financial sector compared to that of poorer households. The reason may be that in urban areas poorer households may have better linkages in the informal market compared to that of a richer household. For example an employer may be willing to provide loan to his poorer employee. However, one should also note that poorer households do not have accessibility from other sources. General caste households possess higher probability of borrowing from informal sector compared to that of other castes. One of the reasons is that loan in informal market is generally provided to borrowers of same caste. Since general caste people have better network and also they are economically better off in India than any other castes, they can avail more loans. (Jodhka, 1995). Being illiterate increases the probability of borrowing from informal financial sector. Illiterate people are generally poor. They meet their financial need by borrowing from informal sector. The probable reasons are they get small amount, repay small amount on weekly basis, no guarantee or security required and know the lender personally.

Debit card usage is popular among half of the sample in rural areas while it is much more in urban areas. A very small percentage of respondents use credit card and still and smaller percentage are users of mobile banking and it is urban based .A small insignificant size of the sample use net banking services and that too only among educated urban respondents . It is important that technological developments do not create new forms of exclusion though a danger of this sort is lurking. Regarding seeking financial advice, a little more than half have sought financial advice from family and friends. Banks’ engagement in this activity is very small.

Regardless of the level of exclusion, it is quite clear that some groups of people are at much greater risk than others. Especially vulnerable are people living on low incomes, especially if they are not in employment and living on social security payments from the state. People from low-income indigenous and ethnic minority communities have very low levels of engagement with banking. Also at risk of exclusion are people with a history of bad debt, who often have their accounts closed if they fail to reduce their overdraft and then find it difficult to open another one. It is possible to identify ways in which these barriers can be minimised. This would include ensuring the availability of simple accounts that are both appropriate and affordable for people on low incomes; maximising the advantages of technology to provide appropriate access and encouraging take-up of the banking services available, and involving not-for-profit organisations such as post offices in providing financial inclusion. All these indicate that the diverse socio cultural and economic factors influence financial inclusiveness. The formal sector has to become more pragmatic, innovative yet cautious in giving loans to people and prevent them from getting trapped in informal sector.
Economics Research Report
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