DEMAND FOR AND SUPPLY OF FINANCIAL INCLUSION IN INDIA: AN INTER-STATE ANALYSIS ABSTRACT

DEMAND FOR AND SUPPLY OF FINANCIAL INCLUSION IN INDIA: AN INTER-STATE ANALYSIS Dr. Arindam Laha Assistant Professor, Department of Commerce, The University of Burdwan Mobile no: +919474601525 E-mail - arindamlaha2004@yahoo.co.in Dr. Pravat Kumar Kuri Associate Professor, Department of Economics, The University of Burdwan Mobile no: +919434672466 E-mail- pravatkumarkuri@rediffmail.com ABSTRACT In the process of economic development of a country, the expansion of real sectors is observed to have an influence on the development of the financial sector affecting both the demand for and the supply of financial services. To examine the level of financial inclusion in India, two composite financial inclusion indices are constructed separately for demand and supply side information of financial services. Empirical results suggest a wide variation across states, rural and urban regions in the access of financial services on both sides in India. The western and southern regions of India are found to be financially more included in terms of the indicators of demand for and the supply of financial inclusion. In the presence of a significant association between the demand for and supply of financial services, the study suggests for evolving an integrated approach influencing the demand and supply dimensions so as to promote the strategy of comprehensive financial inclusion in India. Key words: Financial services, Index of financial inclusion, India Introduction Despite a progressive development in the access of financial services, significant proportions of the poor and disadvantageous population are still excluded from the formal financial institutions in India. It is thus imperative to enhance the level of financial inclusion through improved credit delivery system of banks and other financial institutions. But, enhancing economic wellbeing of the poor and disadvantageous sections of the population is the pre-condition for complete financial inclusion. Government s initiatives should be directed towards the creation of conditions for improving the economic wellbeing of the disadvantages groups of the society, this along with pro-active role of the bank and other financial institutions would help to achieve the desired goal of a financially inclusive society. In other words, the expansion of financial services is, in general, conditioned upon the level of economic development, which influences both the demand for and the supply of financial services (Gurley and Shaw, 1955; Patrick, 1966; Calderón, 2003). Developed financial system promotes growth in the real sector of the economy, which ultimately widen the horizon of economic opportunities available across the entire spectrum of the population including the vulnerable sections of society. In fact, financial development facilitates the creation of an environment for providing better access to economic opportunities wider population including the weaker section of the society. However, to ensure equal access, it is necessary to strengthen human capability to exploit economic opportunities. Enhancement of capabilities would inculcate demand for financial services. If there is no usage of credit because of lack of capability inducement, then the growing up of credit intensity could also leads to greater risk on the part of borrowers because of greater indebtedness (Mohan, 2004). On the other hand, the growing demand for financial services provides an additional incentive for banks to implement the strategy of inclusive financial system. Any effective intervention in this direction would spill-over the demand to the formal financial institutions. Advancing of financial sector would facilitate adequate supply of financial services to supplement the demand for financial products. 5

Measuring financial inclusion is a complex process. It is desirable to capture the regional variations in the extent of financial inclusion in India exploring both the dimensions of demand for and supply of financial inclusion. Even though several attempts have been made in the literature to construct the index of financial inclusion (IFI hereafter) to examine the levels of variation of financial inclusion across the countries of the world, among the states of a country and the districts of a state (Beck et al, 2006; Sarma, 2008; Mehrotra et al, 2009, Kumar and Mishra, 2011; Pal and Vaidya, 2011, Kuri and Laha, 2011; Chowdhury, 2011), only a very few attempts have been made to understand the concept of financial inclusion both from the perspectives of demand for and supply of financial services. In an important contribution in the literature, Kumar and Mishra (2011) constructed separate composite financial inclusion indices for demand and supply side information in the year 2002-03 for all the states/union territories of India. In both the dimensions, a lot of variations across states, for rural and urban regions are observed. The demand for financial inclusion is considered to be a powerful correlates of the supply of financial inclusion. Rangarajan Committee on Financial Inclusion (NABARD, 2008) suggests that mere supply side solutions from the financial sector will not work, unless some steps are taken on the demand side, or the real sectors of the economy. Under this backdrop, an attempt has been made in this paper to construct two composite indices separately for the demand for and the supply of financial services to examine the inter-state variations in the level of financial inclusion in India. The demand for financial services is measured by the proportion of households having savings, credit and insurance facilities while the supply of financial services is measured by the amount of bank credit disbursed, amount of bank deposit, number of bank branches per million people of the number of accounts per 1000 adult population etc. In addition, the paper shed some lights on the nature of association between demand and supply side information on financial services. For convenience, the paper is divided into five sections. The next section considers the data and methodological aspects relating to the construction of IFI. Section 3 examines the extent of financial inclusion of different states of India on the basis of the demand and supply side information. Section 4 analyzed the association between demand for and supply of financial inclusion of major states of India. The concluding remarks and policy implications are presented in section 5. Data and Methodology The existing literature on financial inclusion is either based on the supply side information from the perspective of credit providers, such as banks and other service providers, or demand side information from the perspective of users-individuals, households or firms. These indicators of financial access provide only partial information on the inclusiveness of the financial system of an economy. Due to some inherent limitations, these measurement concepts fail to adequately capture the overall extent of financial inclusion. An attempt has been made in the paper to construct a comprehensive measure of financial inclusion from the angles of demand and supply side perspectives of financial services that can able to incorporate information on several dimensions of financial inclusion. From the demand side perspective, three indicators are chosen, i.e., access to savings, credit and insurance; while penetration, availability and usage of banking services represents supply side indicators of financial services. For a clear exposition, the description of indicators used in the construction of the index of financial inclusion from demand and supply side are given in the table 1. Table 1: Description of the Indicators and its Data Sources Indicator Description Data source Demand side Banking Penetration Number of bank accounts as a proportion BSR March 2010, Census of of the total adult population India, 2011, CSO, 2011 Availability of Number of bank branches per 1000 adult BSR March 2010, Census of Banking Services population India, 2011, CSO, 2011 Usage of the Volume of credit and deposit as a BSR March 2010, Census of 6

Banking System proportion of the state s Net State Domestic Product Supply side Access to savings Proportion of households having access to savings Access to credit Proportion of households having access to credit Access to insurance Proportion of households having access to insurance India, 2011, CSO, 2011 All India Debt and Investment Survey, 2002 All India Debt and Investment Survey, 2002 All India Debt and Investment Survey, 2002 IFI is measured by the normalized inverse Euclidean distance of the dimension indices from their ideal values (following Sarma, 2008 i ). In the first place, the dimension index for the i th A m i i dimension, d i, is computed by the formula di, where A i = actual value of dimension M i mi i, m i = minimum value of dimension i, M i = maximum value of dimension i. Unlike UNDP Goal Post Method of calculating prefixed values for minimum and maximum values, empirically observed minimum and maximum for each dimension is used in the study. Here it can be seen that 0 d i 1; higher the value of d i, higher the achievements of state in dimension i. By considering the above three dimensions, state i can be represented by a point ( d 1, d 2, d 3 ) in three-dimensional Cartesian space, such that 0 d 1, d2, d3 1. In the three dimensional Cartesian space, the point (0, 0, 0) will indicate the worst situation and the point (1, 1, 1) will indicate the best or ideal situation. The IFI from demand and supply perspectives are measured by the normalized inverse Euclidean distance of the point ( d 1, d 2, d 3 ) from the ideal point (1,1, 1). Algebraically, IFI (demand or supply side perspectives) can be expressed as 2 2 2 (1 d1) (1 d 2 ) (1 d3) IFI 1. Depending on the value of IFI, states are 3 categorized into three categories. States with a IFI value below 0.2 are considered to have a low level of financial inclusion, those in between 0.2 to 0.5 a medium level, and those above 0.5 a high level. Financial Inclusion in India: An Inter-State Analysis Supply of Financial Services The supply of financial services across the states of India has been approximated by means of three financial dimensions: banking penetration (i.e., the number of bank accounts as a proportion of the total adult population), availability of banking services (i.e., the number of bank branches per 1000 adult population) and use of banking services (i.e., the volume of credit and deposit as proportion of the state s Net State Domestic Product). The data pertaining to the year 2010 shows a wide inter-state disparity in supply side individual indicators of financial inclusion. In respect of the number of bank account, states like Delhi, Chandigarh, Goa, Punjab, Pondicherry, Himachal Pradesh, Kerala, Uttaranchal, Haryana, Karnataka, Andhra Pradesh, Tamil Nadu, Jammu & Kashmir and Gujarat, an average individual has more than one bank account (as shown in column 2 of Table 2), while an average individual in Delhi, Chandigarh and Goa has more than three bank accounts. On the other hand, more than 40 percent of the adult population in Mizoram, Bihar and Manipur do not have any bank account. Such unbanked population is higher in north-eastern and eastern regions. Inter-state variability in the availability of banking services, which is measured by the number of bank branches per 1000 adult population, is represented in column 4 of Table 2. It is 7

evident that states like Chandigarh, Goa, Himachal Pradesh, Delhi, Punjab, Uttaranchal, Sikkim, Kerala, Pondicherry, Haryana, Karnataka, Mizoram, Andaman & Nicobar, Jammu & Kashmir, Meghalaya, Tamil Nadu, Andhra Pradesh, and Gujarat have more bank branches than the all India average of 1.19 branches per 10000 adult populations. A wide inter-state disparity in the availability of banking services in India is evident as more than four banks are found in operation for 10000 adult population in states like Chandigarh, Goa and Himachal Pradesh, while only one bank is serving for 10000 adult population in states like Uttar Pradesh, West Bengal, Chhattisgarh, Assam, Bihar and Manipur. Credit and deposit as a proportion of NSDP can be considered as one of the important indicator of actual utilisation of fiancial services by the population. Usage of banking habit is crucial as it indicates the development of banking habit subject to the constraint of the penetration and availability of banking services. The volume of credit and deposit is found to be more than double than NSDP in the states like Delhi, Chandigarh and Maharashtra (column 6 of Table 2). The inequality in the usage of financial services is widespread in India, out of 31 States and Union Territories 24 States and Union Territories are lagging behind the all India average. A poor rating of banking habit is observed in Mizoram, Andaman & Nicobar and Manipur. Table 2: ing of the States on the basis of Supply Side Dimensions of Financial Inclusion States/UTs Credit and No of accounts No of bank Deposit as a per 100 of adult branches per proportion of population 100 adult pop NSDP Northern Region 138.38-0.016-1.975 - Haryana 127.37 9 0.016 10 0.911 21 Himachal Pradesh 137.12 6 0.023 3 1.074 12 Jammu & Kashmir 117.06 13 0.014 14 1.414 7 Punjab 155.49 4 0.02 5 1.319 8 Rajasthan 75.25 23 0.011 20 0.891 22 Chandigarh 332.95 2 0.047 1 4.593 2 Delhi 355.86 1 0.023 4 4.762 1 North Eastern Region 70.5-0.009-0.794 - Arunachal Pradesh 76.91 21 0.01 22 0.839 24 Assam 71.86 26 0.008 29 0.82 25 Manipur 40.23 31 0.005 31 0.516 31 Meghalaya 66.67 27 0.014 15 0.855 23 Mizoram 58.05 29 0.015 12 0.676 29 Tripura 84.85 20 0.01 23 0.766 28 Eastern Region 71.97-0.009-1.06 - Bihar 52.63 30 0.007 30 0.808 26 Jharkhand 75.8 22 0.01 25 1.026 14 Orissa 74.54 24 0.011 21 0.948 20 Sikkim 93.69 17 0.02 7 1.038 13 West Bengal 88.11 19 0.009 27 1.225 10 Andaman & Nicobar 111.06 14 0.015 13 0.625 30 Central Region 86.8-0.01-0.955 - Chhattisgarh 63.85 28 0.009 28 0.78 27 Madhya Pradesh 72.08 25 0.01 24 0.987 15 Uttar Pradesh 93.24 18 0.009 26 0.976 16 Uttaranchal 129.03 8 0.02 6 0.967 17 Western Region 103.11-0.012-2.141-8

Goa 326.77 3 0.043 2 1.657 5 Gujarat 104.54 15 0.012 18 0.96 18 Maharashtra 99.15 16 0.012 19 2.688 3 Southern Region 123.35-0.015-1.381 - Andhra Pradesh 122.18 11 0.013 17 1.198 11 Karnataka 124.81 10 0.016 11 1.687 4 Kerala 130.87 7 0.019 8 1.225 9 Tamil Nadu 119.41 12 0.013 16 1.428 6 Pondicherry 152.41 5 0.017 9 0.953 19 All India 100.24-0.012-1.443 - Sources: Authors calculation based on Basic Statistical Return of SCBs (Reserve Bank of India) March 2010, Census of India, 2011, Central Statistical Organization, 2011. Thus, segregated analysis of all three dimensions suggests that the performances of the states are not uniform in all the dimensions of financial inclusion. In some states like Himachal Pradesh, Punjab and Pondicherry, a highly banked areas do not ensure that all the account holder use the services provided by banks. Banking services are adequately utilized in these states in comparison to Maharashtra and Karnataka where banking penetration or availability of banking services is not so well developed. Thus a composite index based on all three dimensions is desirable to provide an overall picture of the level of financial inclusion in Indian States. Accordingly, the inter-state variations in the level of financial inclusion as estimated are shown in table below. Indices of rural and urban Financial Inclusion have been constructed separately for 27 states of India for the year 2010 ii and are presented in Table 3. Overall, it can be argued that the extent of financial inclusion in urban areas (0.277) is comparatively higher than rural India (0.047) iii. A positive value in the rank difference indicates rural areas are performing better than urban areas, while a negative value indicates the general pattern, i.e., urban areas are financially more included than rural areas. Chandigarh maintains a consistently first position both in urban and rural areas and thus the rank difference is found to be zero. In most of the States rank differences are found to be negative. However, in some states like, Gujarat, Himachal Pradesh, Jammu & Kashmir, Jharkhand, Kerala, Mizoram, Pondicherry, Tamil Nadu, Tripura and Uttaranchal a noticeable exception arises in the sense that rural areas are, in fact, more included than urban areas. Table 3: Index for Financial Inclusion of Supply of Financial Services across States of India (Rural, Urban and Combined) State IFI (Rural) (Rural) IFI (Urban) (Urban) IFI (Comb.) (Comb.) (Urban) (Rural) Northern Region 0.072 -- 0.261 -- 0.305 -- -- Haryana 0.053 15 0.356 5 0.208 12-10 Himachal Pradesh 0.135 5 0.251 14 0.281 4 9 Jammu & Kashmir 0.102 8 0.28 12 0.226 10 4 Punjab 0.131 6 0.332 6 0.302 3 0 Rajasthan 0.037 22 0.24 15 0.114 20-7 Chandigarh 1 1 0.853 1 0.952 1 0 Delhi 0.348 2 0.684 2 0.673 2 0 North Eastern Region 0.041 -- 0.179 -- 0.083 -- -- Assam 0.039 20 0.234 16 0.081 24-4 Manipur 0.002 27 0.025 27 0 27 0 9

Meghalaya 0.04 19 0.283 10 0.123 17-9 Mizoram 0.078 10 0.031 26 0.108 22 16 Tripura 0.053 14 0.113 24 0.107 23 10 Eastern Region 0.033 -- 0.27 -- 0.107 -- -- Bihar 0.026 24 0.281 11 0.054 26-13 Jharkhand 0.056 13 0.174 22 0.117 18 9 Orissa 0.048 17 0.266 13 0.117 19-4 West Bengal 0.026 23 0.289 9 0.139 15-14 Central Region 0.042 -- 0.256 -- 0.122 -- -- Chhattisgarh 0.023 25 0.184 20 0.075 25-5 Madhya Pradesh 0.038 21 0.22 17 0.111 21-4 Uttar Pradesh 0.041 18 0.296 8 0.126 16-10 Uttaranchal 0.122 7 0.18 21 0.243 8 14 Western Region 0.038 -- 0.377 -- 0.245 -- -- Gujarat 0.05 16 0.212 18 0.161 14 2 Maharashtra 0.021 26 0.405 4 0.267 6-22 Southern Region 0.087 -- 0.266 -- 0.231 -- -- Andhra Pradesh 0.06 12 0.33 7 0.203 13-5 Karnataka 0.068 11 0.412 3 0.269 5-8 Kerala 0.183 3 0.098 25 0.258 7 22 Tamil Nadu 0.094 9 0.208 19 0.219 11 10 Pondicherry 0.164 4 0.155 23 0.241 9 19 All India 0.047 -- 0.277 -- 0.19 -- -- Sources: Authors calculation based on Basic Statistical Return of SCBs (Reserve Bank of India) March 2010, Census of India, 2011, Central Statistical Organization, 2011. Demand for Financial Services Three household level indicators have been used to analyze the inter-state variability of the demand for financial services: savings, credit and insurance. At the all India level, only 31.2 per cent of the households having access to savings, 18.4 per cent to credit and only 12.8 per cent in insurance in 2002-03 iv (Table 4). There is a huge disparity across the states on the individual components of the demand for financial services. Out of 35 states and union territories, 20 States are lagging below the all India average on the access to savings. Access to savings is observed to be highest in Andaman and Nicobar Island followed by Himachal Pradesh, Daman and Diu, Kerala and Chandigarh. The last five States in the ranking are Chhattisgarh, Tripura, Orissa, Nagaland and Bihar. All other States and Union Territories lie in the intermediate position. Inter-state disparity is also visible in respect of credit and insurance coverage. The coverage of credit and insurance facility has been relatively higher for southern states (Kerala, Pondicherry, and Maharashtra). Insurance coverage is observed to be relatively better-off in most of the Union Territories. It is worth mentioning that Andaman & Nicobar, Chandigarh and Himachal Pradesh have a good saving and insurance coverage although they have poor credit access. On the other hand, Pondicherry has good credit and insurance coverage but does not have a good saving coverage in the formal sector. Thus to draw an overall conclusions, an aggregative analysis based on all three components of demand side financial inclusion is desirable. Table 4: ing of the States on the basis of Demand Side Dimensions of Financial Inclusion 10

State Proportion of Proportion of Proportion of households households having households having having access to access to credit access to insurance savings Northern Region 0.324 -- 0.142 -- 0.138 -- Haryana 0.32 17 0.203 10 0.179 12 Himachal Pradesh 0.646 2 0.151 16 0.22 9 Jammu & Kashmir 0.388 14 0.032 29 0.153 17 Punjab 0.5 7 0.185 11 0.136 23 Rajasthan 0.178 29 0.15 17 0.103 29 Chandigar h 0.551 5 0.067 22 0.419 1 Delhi 0.306 18 0.007 35 0.115 25 North Eastern 0.207 -- 0.041 -- 0.153 -- Region Arunachal Pradesh 0.205 26 0.012 33 0.068 33 Assam 0.224 24 0.028 30 0.158 16 Manipur 0.221 25 0.014 32 0.166 15 Meghalay a 0.184 28 0.01 34 0.111 27 Mizoram 0.164 30 0.043 28 0.126 24 Tripura 0.121 34 0.164 13 0.147 19 Nagaland 0.126 32 0.056 25 0.266 6 Eastern Region 0.194 -- 0.131 -- 0.093 -- Bihar 0.132 31 0.065 23 0.031 35 Jharkhand 0.186 27 0.081 21 0.107 28 Orissa 0.123 33 0.221 6 0.076 32 Sikkim 0.387 15 0.058 24 0.198 10 West Bengal 0.276 21 0.157 15 0.145 20 Andaman & Nicobar 0.652 1 0.12 19 0.37 3 Central Region 0.257 -- 0.158 -- 0.075 -- Chhattisga rh 0.114 35 0.207 9 0.087 31 Madhya Pradesh 0.228 23 0.209 8 0.098 30 Uttar Pradesh 0.283 19 0.135 18 0.059 34 Uttarancha l 0.421 11 0.055 26 0.145 21 Western 0.475 -- 0.228 -- 0.181 -- 11

Region Goa 0.392 13 0.094 20 0.265 7 Gujarat 0.421 12 0.178 12 0.179 13 Maharasht ra 0.502 6 0.255 3 0.18 11 Dadra & Nagra 0.456 10 0.053 27 0.149 18 Daman & Diu 0.597 3 0.026 31 0.259 8 Southern Region 0.366 -- 0.261 -- 0.162 -- Andhra Pradesh 0.247 22 0.226 5 0.136 22 Karnataka 0.278 20 0.209 7 0.112 26 Kerala 0.568 4 0.496 1 0.273 5 Tamil Nadu 0.477 9 0.237 4 0.174 14 Pondicherr y 0.361 16 0.257 2 0.394 2 Lakshadw eep 0.487 8 0.163 14 0.283 4 All India 0.312 -- 0.184 -- 0.128 -- Sources: Authors calculation based on All-India Debt and Investment Survey (2002-03) Like supply side analysis, a composite index based on all three demand dimensions is constructed to provide an overall picture of the level of financial inclusion in Indian States. The composite index has brought out the picture that the demand for financial services is highest in Kerala (index value 0.765) followed by Pondicherry (0.577), Andaman & Nicobar Island (0.550), Lakshadweep (0.524), and Maharashtra (0.517). The lowest demand for financial services is found in Bihar (index value 0.049). The other states in the lower tail are Arunachal Pradesh (0.090), Meghalaya (0.110), Mizoram (0.134) and Jharkhand (0.160). The rural-urban segregation of the composite index reveals that the extent of financial inclusion in urban areas (0.328) is comparatively higher than rural India (0.283). This trend is consistently found in 13 states; notable among them are Madhya Pradesh, Jharkhand and Daman & Diu. Kerala maintains consistently first position both in urban and rural areas. On the other hand, in 17 states out of 35 states, rural area is found to be more inclusive than the urban area including the states like Delhi, Goa and Uttar Pradesh. Table 5: Index for Financial Inclusion of Demand for Financial Services across States of India (Rural, Urban and Combined) State IFI (Rural) (Rural) IFI (Urban) (Urban) IFI (Comb.) (Comb.) (Urban) (Rural) Northern Region 0.21 -- 0.163 -- 0.205 -- -- Haryana 0.356 13 0.339 15 0.388 13 2 Himachal Pradesh 0.502 3 0.46 5 0.496 6 2 Jammu & Kashmir 0.232 21 0.305 20 0.267 21-1 Punjab 0.396 10 0.313 17 0.418 10 7 Rajasthan 0.158 27 0.249 29 0.196 26 2 12

Chandigarh 0.406 9 0.456 6 0.493 7-3 Delhi 0.289 15 0.269 25 0.314 16 10 North Eastern Region 0.144 -- 0.254 -- 0.179 -- -- Arunachal Pradesh 0.097 31 0.126 34 0.09 34 3 Assam 0.183 24 0.262 27 0.183 27 3 Manipur 0.145 29 0.197 30 0.176 28 1 Meghalaya 0.08 33 0.263 26 0.11 33-7 Mizoram 0.053 35 0.18 31 0.134 32-4 Nagaland 0.18 26 0.179 32 0.2 24 6 Tripura 0.195 23 0.27 24 0.199 25 1 Eastern Region 0.158 -- 0.281 -- 0.186 -- -- Bihar 0.061 34 0.102 35 0.049 35 1 Jharkhand 0.085 32 0.357 13 0.16 31-19 Orissa 0.156 28 0.304 21 0.17 29-7 Sikkim 0.303 14 0.433 8 0.324 14-6 West Bengal 0.265 19 0.31 19 0.301 19 0 Andaman & Nicobar 0.538 2 0.51 2 0.55 3 0 Central Region 0.2 -- 0.241 -- 0.225 -- -- Chhattisgarh 0.143 30 0.293 22 0.167 30-8 Madhya Pradesh 0.181 25 0.367 12 0.258 22-13 Uttar Pradesh 0.207 22 0.167 33 0.209 23 11 Uttaranchal 0.259 20 0.327 16 0.294 20-4 Western Region 0.419 -- 0.417 -- 0.489 -- -- Goa 0.408 8 0.285 23 0.404 11 15 Gujarat 0.364 12 0.383 11 0.426 9-1 Maharashtra 0.444 6 0.432 9 0.517 5 3 Dadra & Nagra 0.269 18 0.503 4 0.308 17-14 Daman & Diu 0.382 11 0.34 14 0.393 12 3 Southern Region 0.411 -- 0.378 -- 0.437 -- -- Andhra Pradesh 0.286 16 0.312 18 0.316 15 2 Karnataka 0.278 17 0.255 28 0.304 18 11 Kerala 0.762 1 0.611 1 0.765 1 0 Lakshadweep 0.44 7 0.447 7 0.524 4 0 Tamil Nadu 0.46 4 0.415 10 0.488 8 6 Pondicherry 0.451 5 0.506 3 0.577 2-2 All India 0.283 -- 0.328 -- 0.324 -- -- Source: Authors calculation based on All India Debt and Investment Survey, 2002. Association between Demand for and Supply of Financial Inclusion in India In order to make a comparative analysis between the demand for financial services and the supply of financial services across the states of India, it requires data on demand-supply components at the same point of time. Since our above analysis is based on the data on two points of time (for demand analysis for the year 2002-03, and supply analysis for the year 2010), we are not in a position make such comparison. In order to make effective comparison we have again constructed the index relating to the supply of financial services for the time period 2002-03. A comparison of IFI from demand and supply perspective in 2002-03 suggests that IFI of demand for and supply of financial services move closely with each other (Table 6). The state, Kerala, secures first position in the ranking of demand side of financial services while it ranks seventh in respect of 13

supply of financial services. Chandigarh, a high IFI state from supply point of view has ranked seventh in respect of demand side of IFI. Table 5: Index for Financial Inclusion of Demand for and Supply of Financial Services across States of India in 2002-03 State / UTs IFI_ DD IFI_SS Andaman & Nicobar 0.550 3 0.186 17 Andhra Pradesh 0.316 15 0.171 19 Arunachal Pradesh 0.090 34 0.132 24 Assam 0.183 27 0.077 30 Bihar 0.049 35 0.092 29 Chandigarh 0.493 7 1.000 1 Chhattisgarh 0.167 30 0.244 11 Delhi 0.314 16 0.618 3 Goa 0.404 11 0.645 2 Gujarat 0.426 9 0.206 15 Haryana 0.388 13 0.202 16 Himachal Pradesh 0.496 6 0.309 6 Jammu & Kashmir 0.267 21 0.252 10 Jharkhand 0.160 31 0.146 22 Karnataka 0.304 18 0.256 9 Kerala 0.765 1 0.288 7 Madhya Pradesh 0.258 22 0.126 25 Maharashtra 0.517 5 0.276 8 Manipur 0.176 28 0.000 32 Meghalaya 0.110 33 0.182 18 Mizoram 0.134 32 0.121 26 Nagaland 0.200 24 0.023 31 Orissa 0.170 29 0.116 27 Pondicherry 0.577 2 0.226 12 Punjab 0.418 10 0.331 5 Rajasthan 0.196 26 0.138 23 Sikkim 0.324 14 0.225 13 Tamil Nadu 0.488 8 0.210 14 Tripura 0.199 25 0.098 28 Uttar Pradesh 0.209 23 0.147 21 Uttaranchal 0.294 20 0.332 4 West Bengal 0.301 19 0.154 20 All India 0.324 0.196 Source: Authors calculation based on All India Debt and Investment Survey, 2002; Basic Statistical Return of SCBs (Reserve Bank of India) March 2003, Census of India, 2001, Central Statistical Organization, 2002-03. Classification of states according as the values of IFI from supply and demand side suggest that states like Kerala, Pondicherry and Maharashtra have a high level of demand side financial development but have attained medium level in supply side financial inclusion. States having a medium level of financial inclusion regarding both demand and supply point of view are Gujarat, Punjab, HP, Haryana, Karnataka, Uttaranchal, Jammu & Kashmir, Tamil Nadu and Sikkim. On the other hand, States like Meghalaya, Jharkhand, Orissa, Rajasthan, Mizoram, Tripura, Assam, Nagaland, Bihar, Manipur, and Arunachal Pradesh belong to the category of low level of 14

financial inclusion both from the demand and supply side perspectives. The mis-match between the demand for financial services and the supply of financial services is observed in states like Chandigarh, Goa and Delhi, Andhra Pradesh, West Bengal, Madhya Pradesh, Uttar Pradesh (Table 7). Table 7: Classification of States according as the Values of IFI from Supply and Demand side Supply Side High Medium High 0.5 IFI 1 0.5 IFI 1 0.2 IFI 0.5 ----- Kerala, Pondicherry, Maharashtra Low 0 IFI 0.2 A&N De ma Medium Chandigarh, Gujarat, Punjab, AP, WB, MP, UP nd 0.2 IFI 0.5 Delhi HP, Haryana, Sid Karnataka, e Uttaranchal, J&K, TN, Sikkim Low ----- Chhattisgarh Meghalaya, Jharkhand, 0 IFI 0.2 Orissa, Rajasthan, Mizoram, Tripura, Assam, Nagaland, Bihar, Manipur, Ar. Pr. The movement of both the demand and supply side indices of financial inclusion is shown in the following figure 1. An association between these two indices is quite evident in the figure. Figure 1: Movement of IFI of Demand for and Supply of Financial Services Movement of IFI of Demand for and Supply of Financial Services IFI of Demand for Financial Services IFI of Supply of Financial Services Figure 2 simply plots the relationship between the process of financial inclusion from demand side and supply side perspectives of major states of India. It is expected that as we move into the ranges of states with very high level of demand for financial services, the consequent supply of these services will be at a high levels as well. In this diagram, the scatter dots represent the observations of various states. It has been found that the majority of observations lie within the southwest portion of the scatter diagram. This suggests that the demand side financial inclusion is a powerful correlate of supply side financial inclusion at the lower level. In other words, if we rank states according to their level of demand of financial services and then compute similar ranks based 15

on supply side development of financial inclusion, then we find a high degree of statistical correspondence between the two sets of ranks. In fact, the correlation coefficients between these two sets of indices are estimated to be about.671 (Pearson Correlation),.468 (Kendall s tau-b) and.673 (Spearman s rho). All these coefficients are found highly statistically significant at 0.01 percent level of significance (2-tailed). Figure 2: Scatter Plot of Demand for and Supply of Index of Financial Inclusion Summary and Policy Implications An attempt has been made in this paper to examine inter-state variation of financial inclusion from the angles of demand and supply of financial services. Empirical results suggest that the extent of demand for and supply of financial services in urban areas is comparatively higher than rural India. Region-wise analysis reveals that the western and southern regions of India are financially more included in terms of the indicators of demand for and the supply of financial inclusion. The highest demand for financial services has been witnessed in northern region. In India, still a large section of the population is excluded from the formal financial services. On the demand side, only one out of five households having access to credit, one out of three households having access to savings and one out of eight households having access to insurance. The trend of the supply of financial services is also not found to be praiseworthy in India: only 1.2 bank branches per 10,000 adult population, an average individual has nearly one bank account and the volume of credit and deposit is 1.4 times higher than net domestic product of India. It is interesting to note that the low demand for financial inclusion is observed to have an important bearing on the supply of low financial services. In other words, the demand for financial inclusion is a powerful correlate of the supply side financial inclusion. In this context, it is recommended that merely supply of financial services would not ensure a comprehensive financial system in an economy, unless it is supplemented by generation of demand for financial services by the hitherto excluded sections of the population from financial access. Rangarajan Committee (2008) on financial inclusion in India provides an outline of future strategy for promoting financial inclusion in India by analyzing the demand side causes and their solutions. Some of the recommended demand side measures are: 16

emphasis on human development, access to land, enhancement of employment opportunities, development of rural infrastructure, enhancement of agricultural productivity, implementation of agricultural risk mitigation programme. It is, thus, necessary for the government to formulate a target oriented comprehensive sequential plan, properly integrated with the rural development programmes, which is to be effectively implemented within a specific time span to achieve the target of financially inclusive society. Notes i In a similar study on cross-country experience of financial inclusion, Sarma (2008) examined the extent of financial inclusion by using data on all three dimensions (penetration, availability and usage) for 55 countries. Based on the empirical evidences, it was argued that a large number of economies, including several industrial economies have low levels of financial inclusion. ii The existing data from Basic Statistical Return (2010) on three dimensions are partitioned into four areas such as rural, semi-urban, urban and metropolitan areas. We have broadly defined a rural area as composed of both rural and semi-urban, whereas urban area is composed of both urban and metropolitan areas. It, thus help us to examine the variations of financial inclusion in rural/urban areas across the states of India. The states like Arunachal Pradesh, Nagaland, Sikkim, Andaman & Nicobar, Goa, Dadra & Nagar Haveli, Daman & Diu, and Lakshadweep do not have any urban or metropolitan area. iii It is to be noted that all of the three dimensions of financial inclusion, such as, penetration (d 1 ), accessibility (d 2 ) and usage (d 3 ) of formal banking services are significantly lower in rural areas in comparison to urban areas. iv There is a problem in having access to such data at the current period because comprehensive data on savings, credit and insurance are generated by All India Debt and Investment Survey (AIDIS). The latest available data AIDIS is pertaining to the year 2002-03. Due to this reason we have analyzed the components of the demand for financial services for the year 2002-03. References Beck, T. Kunt, A, D. and Peria, M.S.M. (2006): Reaching out: Access to and use of - banking services across countries, July 2006, Accessed from. www.yearofmicrocredit.org/docs/reaching_out_sept9.pdf Calderón, L. L. (2003): The direction of causality between financial development and economic growth, Journal of Development Economics, Volume 72, Issue 1, October 2003, Pages 321 334. Chowdhury, B. (2007), Financial Inclusion, Bank Quest-The Journal of Indian Institute of Banking. & Finance, October- December 2007. Gurley, J. G. and Shaw, E. S. (1955): Financial Aspects of Economic Development, The American Economic Review, Vol. 45, No. 4 (Sep., 1955), pp. 515-538 Kumar, C and S. Mishra (2011): Banking Outreach and Household level Access: Analyzing Financial Inclusion in India, paper prepared for consideration of inclusion in the 13 th Annual Conference on Money and Finance in the Indian Economy to be held during 25-26 February 2011, Accessed from http://www.igidr.ac.in/conf/money1/banking%20outreach%20and%20household %20level%20Access.pdf Mehrotra, N, Puhazhendhi, V, Nair, G and Sahoo, B. B (2009): Financial Inclusion- An Overview, Occasional Paper 48, Department of Economic Analysis and Research National Bank for Agriculture and Rural Development, Mumbai, 2009 Mohan, R. (2004): Agricultural Credit in India: Status, Issues and Future Agenda, Reserve Bank of India Bulletin, November 2004, 993-1006. 17

NABARD (2008): Report of the Committee on Financial Inclusion, January, Accessed from: www.nabard.org/report_comfinancial.asp, Accessed on 12 February 2009. National Sample Survey Organization (NSSO) (2005): Situational Assessment of Farmers: Indebtedness of Farmer Households, NSS 59th Round, May. Pal, R and Vaidya, R. R (2011): Outreach of Banking Services across Indian Sates: 1981-2007 Converging or Diverging?, Chapter 12 in D. M. Nachane (Ed.) India Development Report 2011, Oxford University Press pp. 116-129, 2011. Patrick, H. T. (1966): Financial Development and Economic Growth in Underdeveloped Countries, Economic Development and Cultural Change, Vol. 14, No. 2 (Jan., 1966), pp. 174-189. Kuri, P.K and Laha, A (2011): Financial Inclusion and Human Development in India: An Inter-State Analysis, Indian Journal of Human Development, 5 (1), 2011. Reserve Bank of India: The All-India Rural Debt and Investment Survey of 2001-02. Basic Statistical Return of Scheduled Commercial Banks in India, New Delhi, March 2010. Sarma, M. (2008): Index of Financial Inclusion, Working paper no. 215, Indian Council for Research on International Economic Relations, June 2008, Accessed from www.icrier.org pdf or ing Paper 21.pdf. 18