Financial inclusion is a stated policy of the government and the central bank, but it will take some concerted effort to bring more of the population into the network of formal financial services. The current spread of formal finance network is quite inadequate. At least 60% of Indians do not have access to the banking system. Even though the average number of people that a bank branch serves is around 15,000, there are six states where each branch serves around 20,000. These states are mostly in the east. The inadequate spread of banking is reflected in the data on credit as well. On average, only 16% of Indian households have taken loans from institutional agencies—commercial banks and cooperative societies. Non-institutional agencies, including moneylenders, friends and relatives, have a higher reach at 22%. Again, sharp regional differences show up, with Kerala coming up high on indicators of banking and finance. As many as 14 of the top 20 districts that have access to institutional credit are from Kerala. The districts of Kottayam, Kannur and Idukki top the list, with at least 65% of households taking loans from institutional agencies. Kerala, however, has some peculiar characteristics that help explain this widespread integration with the formal financial system—high literacy and educational levels, well-connected rural areas as density of population is high, and remittances from overseas migrant workforce. All these make for an environment more conducive towards higher access to formal finance. At the other end of the spectrum are districts where less than 1% of households have taken credit from institutional agencies. These are mostly in Assam, Manipur, Meghalaya, Arunachal Pradesh, Jammu and Kashmir and Mizoram, where the banking system is extremely underdeveloped given constraints of a low density of population, poor connectivity and law and order concerns. In regard to the penetration of non-institutional loans, the focus shifts from Kerala at the top end. Here, the top 24 districts have penetration ranging from 50-53% and are mostly located in Tamil Nadu and Andhra Pradesh. These are the states where microfinance and self-help groups have spread into the hinterland. The districts languishing at the bottom remain the ones from the hill states. In fact, 64 districts have less than 7% penetration of non-institutional loans. Of these, two are from Andaman and Nicobar, 13 from Arunachal Pradesh, 14 from Jammu and Kashmir, seven from Meghalaya, eight from Mizoram, four from Sikkim, 13 from Uttarakhand and three from West Bengal. At a broader level, there is a clear need for better services in the hill states. The question remains whether the government measures of banking correspondents, using post offices, etc., will reap dividends in expanding the financial network in areas where topography and socio-economic characteristics remain tough barriers to overcome. Essentially, there are two clear characteristics of household access to finance. One, the bulk of the population is financially underserved and rely on informal lending. Two, non-institutional agencies have together achieved a much higher penetration than institutional agencies. The need of the hour is for financial institutions to focus more on expanding the market rather than flog the existing ones. And for this, innovative use of technology just might be the way to go.

1. Finance institutions need to focus on expanding market On average, only 16% of Indian households have taken loans from institutional agencies--commercial banks and cooperative societies. Financial inclusion is a stated policy of the government and the central bank, but it will take some concerted effort to bring more of the population into the network of formal financial services. The current spread of formal finance network is quite inadequate. At least 60% of Indians do not have access to the banking system. Even though the average number of people that a bank branch serves is around 15,000, there are six states where each branch serves around 20,000. These states are mostly in the east. The inadequate spread of banking is reflected in the data on credit as well. On average, only 16% of Indian households have taken loans from institutional agencies—commercial banks and cooperative societies. Non-institutional agencies, including moneylenders, friends and relatives, have a higher reach at 22%. Again, sharp regional differences show up, with Kerala coming up high on indicators of banking and finance. As many as 14 of the top 20 districts that have access to institutional credit are from Kerala. The districts of Kottayam, Kannur and Idukki top the list, with at least 65% of households taking loans from institutional agencies. Kerala, however, has some peculiar characteristics that help explain this widespread integration with the formal financial system—high literacy and educational levels, well-connected rural areas as density of population is high, and remittances from overseas migrant workforce. All these make for an environment more conducive towards higher access to formal finance. Source: Indian Financial Scape Demand Curve

2. At the other end of the spectrum are districts where less than 1% of households have taken credit from institutional agencies. These are mostly in Assam, Manipur, Meghalaya, Arunachal Pradesh, Jammu and Kashmir and Mizoram, where the banking system is extremely underdeveloped given constraints of a low density of population, poor connectivity and law and order concerns. In regard to the penetration of non-institutional loans, the focus shifts from Kerala at the top end. Here, the top 24 districts have penetration ranging from 50-53% and are mostly located in Tamil Nadu and Andhra Pradesh. These are the states where microfinance and self-help groups have spread into the hinterland. The districts languishing at the bottom remain the ones from the hill states. In fact, 64 districts have less than 7% penetration of non-institutional loans. Of these, two are from Andaman and Nicobar, 13 from Arunachal Pradesh, 14 from Jammu and Kashmir, seven from Meghalaya, eight from Mizoram, four from Sikkim, 13 from Uttarakhand and three from West Bengal. At a broader level, there is a clear need for better services in the hill states. The question remains whether the government measures of banking correspondents, using post offices, etc., will reap dividends in expanding the financial network in areas where topography and socio-economic characteristics remain tough barriers to overcome. Essentially, there are two clear characteristics of household access to finance. One, the bulk of the population is financially underserved and rely on informal lending. Two, non-institutional agencies have together achieved a much higher penetration than institutional agencies. The need of the hour is for financial institutions to focus more on expanding the market rather than flog the existing ones. And for this, innovative use of technology just might be the way to go. Demand Curve is a weekly column by research firm Indicus Analytics Pvt . Ltd on consumer trends and markets.