Financial development, financial inclusion and economic growth : empirical evidence from India

Abstract

Indian economy has experienced broadly two waves of changes in financial institutions and financial markets in its history including nationalization of banks (1969) as well as financial liberalization (1991). India is moving towards the financial sector development, but it is still far from being a financially inclusive economy. So, the government of India (GOI) is taking various steps for achieving financial development and inclusion. The nationalization of banks marked a paradigm shift in Indian banking, as it was intended to shift the focus from class banking to mass banking. Private sector banks were nationalized for providing financial services to rural people, for extending planning, policy and operations in the field of credit for agriculture as well as several economic activities in rural areas, National Bank for Agricultural and Rural Development (NABARD) was established in 1982. It plays an active role in emerging financial inclusion policy in India. Moreover, it coordinates with GOI, state governments, Reserve Bank of India (RBI) and national level financial institutions to finance rural people and contributes to the development of institutions which help the rural economy. NABARD adopted the concept of microfinance, and it provides different financial services such as saving accounts, insurance, and microcredit to poor and low-income groups for improving their standard of living. Since loans provided to rural poor people by commercial banks have many limitations including lack of securities as well as high hidden charges. Therefore, microfinance helps to provide loans to the poor and marginalized people without any security or mortgage. In recent times, GOI has made further attempts to provide financial access to people of India especially after 2000 to bring people under the umbrella of formal financial institutions to avail credit and insurance facilities, RBI constituted Khan Commission in 2004 to look into financial inclusion policy to provide the basic banking services and for the opening of ‘no frills’ account either with zero balance or a very small amount to include vast sections of the society.