CHAPTER - 2

REVIEW OF LITERATURE

Review of literature gives the guidelines from past researchers and provides
foundation for the theoretical frame work for the present research. The review of past
literature makes the researcher to get an insight into the methods and procedures to be
followed. This will enable the researcher to gather sources and subject them to second
reasoning and meaningful interpretation. The different issues that have emerged from
the review have been discussed for the formulation of research gaps and objectives of
the study. The most relevant literature is presented under the following headings
keeping in view, the objectives and hypotheses of the study.

2.1 MICROFINANCE
2.2 FINANCIAL INCLUSION
2.3 PRIORITY SECTOR LENDING

2.1 MICROFINANCE

The basic idea of microfinance is to provide credit to the poor people who
otherwise would not have access to credit services. Micro-credit programs extend
small loans to very poor people for self-employment projects that generate income
and allow them to take care for themselves and their families. This program is
working in many developing countries.

Microfinance has been recognized as an important tool in connecting the

unbanked population to mainstream finance. The clearance of the draft document of
the Microfinance Institutions (Development and Regulation) Bill by the Union
Cabinet is an indication of the Government’s faith in the sector. The RBI and
NABARD have supported the propagation of micro finance considerably through the
SHG-Bank Linkage Program (SBLP) and have designed incentives to support micro
finance institutions in forming Joint Liability Groups (JLGs). Commercial Banks are
incentives to lend to Micro finance institutions (MFIs) by placing MFIs under priority
sector lending (PSL). PSL requirements mandate banks to ensure that 40% of their
aggregate net banking credit goes to stipulated sectors that are considered important to
foster financial inclusion. The literature on microfinance offers a diversity of findings

24
relating to the type and level of impact of the program. There are various studies
which confirm that the microfinance program has a significant positive impact on
increasing employment and reducing poverty. A number of studies show that the
participant households enjoy a higher standard of living as compared to the non-
participants. The program reduces consumption as well as income vulnerability
among its beneficiaries.

Seibel and Parhusib (1990) he revealed that the expansion of credit coverage
through state intervention approach was based on the argument that rural micro
entrepreneur are enabled to organize themselves. They should subsidize credit for
increasing their income and are too poor to serve.

Greenwood [Link] (1990) tried to address two vital issues in economic growth
theories in a single model. They are the relationship between economic growth and
inequality and the relation between financial structures and economic development.
They argued that financial development facilitates economic growth as it gives high
return on capital. On the other hand economic development also provides means to
financial development.

Pillai (1995) micro finance is necessary to overcome operation, create

confidence for economic self-reliance of the rural poor, particularly among rural
women and need to have flexibility in the credit instrument that could make it match
the multiple credit requirements of the low income borrower without imposing
unbearably high cost of monitoring its end use upon the lenders.

Pillai (1995) microfinance is emerging as a powerful instrument for poverty

alleviation in developing country Microfinance outlook is conquered by Self Help
Group (SHGs)-Bank Linkage Programme in India and cost effective mechanism for
providing financial services to the excluded from financial service and also
strengthening collective self-help capacities of the poor, leading to their
empowerment. By accessing to financial service rural poor people can overcome
exploitation and create self confidence especially in women. Micro finance should
provide flexibility in the credit instrument to get multiple credit requirements without
the high cost of interest.

25
 Hulme and Mosley (1996) suggested that microfinance should be
implemented and managed carefully, and product and services must be designed to
meet the needs of customers, microfinance has had positive impacts on borrowers and
also for families.

Benjamin and Piprek (1997) identified traditional approach in rural finance.

The key problem in the rural finance market is a lack of market in rural areas, absence
of moderate technology in rural areas and pervasiveness of unspurious money lenders.
A significant of the body has to accumulate and monitoring the development of the
micro finance sector.

Kempson and Whyley (1998) argued that prospect of financial exclusion

is more likely to occur in the lower income section of society than amongst others.
Beside this, income inequality and geographical factors also important factors in
determining financial inclusion of a country.

Puhazhendi and Satyasai (2000) identified the impact of micro finance was
relatively more important on social aspects than the economic aspects.

[Link]. al (2000) in their paper tried to evaluate empirically the

relationship between level of financial intermediary development and
economic growth. They observed a positive impact of financial intermediary
development on the growth of total factor productivity which will lead to economic
development.

[Link] (2000) emphasized the role of the level of employment of

a country as another important factor of financial inclusion. Access to affordable
financial services, particularly credit and insurance - enlarges livelihood opportunities
and empowers the poor to take charge of their life. Such empowerment aids
social and political stability. Financial inclusion also imparts formal identity,
provides access to the payments system and to the investments safety net
like deposit insurance. Hence it is measured to be critical for achieving
inclusive growth; which itself is required for ensuring overall sustainable overall
growth in the country.

26
 Robinson, M. (2001) has examined microfinance institutions to maintain the
financial sustainable and cost effective to reach the poor in rural area the poverty
lending approach emphasizes the importance of outreach and especially to the very
poorest clients, as a poverty fighting approach.

Hunt, J & Kasynathan (2002) has observed that both men and women in the
developing world need to access microfinance. Product and service of microfinance
packages are required to meet the wants of the poor people, both women and men.
Financial sustainability and financial regulation need to ensure that some credit
packages are accessible to the poor people.

Monique Cohen (2002) he identified the microfinance has a holistic market

driven and client focused in rural area. The problem can be traced out by providing
the responsive product, services, restructuring existing products to meet the poor
people and operation. Suitable products will not only benefit the operations of an
organization they will also have a positive impact on the interests of the client,
reducing the risk of borrowing and the poor’s liability.

Chavan and Ramakumar (2002) in their study compared NGO led

micro credit program of various countries with state led poverty alleviation scheme
and pragmatic marginal improvement in member’s income as a result of
the micro credit program.

Puhazhendi and Badatya (2002) observed significant improvements in the

savings of SHG members during post SHG situations. The program also
improves the borrowing prototype of SHG member households in terms of
increase credit widening and credit deepening.

Susy Cheston (2002) has examined that Microfinance has the prospective to
have a great impact on women’s empowerment. Women need basic facilities by
accessing the credit and other financial services. Women should be strengthening
financial support and economic involvement for family welfare and empowerment.
Product design and awareness of the program is more important to understand by
women. So MFIs should design the product and service to enhance the women
empowerment.

27
 Seibel (2003) the study showed that micro finance is equally profitable in the
rich countries as in the poor countries. He argued that the concept of Microfinance is a
poor solution for poor countries. If properly supervised and with rule and regulation,
they have great potential in poverty alleviation and expansion, both in rural and urban
areas.

Satyasai (2003) micro finance had a positive impact in respect of self

confidence, skill formation, social development, economic in Andhra Pradesh and
social empowerment in Tamil Nadu.

Purushotham (2004) micro credit borrowers utilized micro credit to

accommodate from wage work into self employment and concluded that micro credit
involvement has benefited the group members in purchase of productive assets.

Rao (2004) micro finance helped in improving the socio-economic and family
empowerment conditions of members.

Cheston & Kuhn (2004) in their study concluded that micro-finance

programmes have been very victorious in reaching women. This gives micro-finance
institutions an strange opportunity to act by design to empower poor women and to
minimize the potential negative impacts some women’s experiences.

Usha et al. (2004) micro credit increased the access to financial resources and
it made deprived women into financially dependent.

Bekaert [Link] (2004) in their study examined an optimistic impact

of equity market liberalization for real economic growth. Further, they also
observed the positive impact of capital account liberalization and quality of
financial institutions on economic growth.

Rajasekar D (2004) he traces that microfinance institution as evolved as a tool

for poverty alleviation and economic empowerment, but microfinance institution
delivery has failed and to overcome there is a need to develop tradeoff between
sustainability and outreach.

Jennifer Meehan (2004) observed microfinance will need to recognize its

possibility as a broad policy and movement, more than merely an intervention and
industry. MFIs should provide financial service to the deprived class who are

28
excluded from all financial mainstreams and it should provide a model in trapping
financial market, especially debt capital market interest so MFIs is expected to grow.

Anuradha (2005) suggested a vast increase in self confidence among the

women and considerable reduction in dependence on money lenders and freedom
from money lenders given them self-esteem.

Shannon [Link] (2005) has observed that Managerial decision making in

MFIs is becoming progressively more tied to collecting information about social
performance. It examines the impact of participation in an Ethiopian microfinance
program on indicators of socioeconomic status, including income, home or land
ownership and wealth.

Basu, P., Srivastava (2005) has examined the microfinance approaches and
access to financial services in rural poor. It shows Self Help Group (SHG) Bank
Linkages the most dominate to reach poor and microfinance tried to fill the gap
between financial access and financial usage

Eoin Wrenn (2005) has observed that microfinance creates access to

productive capital for the poor and human capital, addressed through education and
training, and social capital, achieved through local organization building, enables
people to move out of poverty.

Nidhiya Menon (2006) has opined that this paper studies the benefits of
participation in micro-finance programs, where benefits are measured in terms of the
ability to smooth the effect of seasonal shocks that cause consumption fluctuations.

Gurgaon, (2006) concluded that microfinance helps to encourage the poor and
empowerment by accessing to financial service.

Ghirmai (2006) identified that micro finance is a weapon for poverty

reduction. Their study showed that there is an essential link between microfinance and
poverty eradication, in that the latter depends on the poor gaining access and control
over economically productive resources, as well as financial resources. Government
Schemes and program should be restructured for poverty reduction micro finance is
the mean for income generation and enduring reduction of poverty through the
provision of basic facilities for nurturing poor people.

29
 Bakhtiari (2006) concluded that micro finance and micro credit have
acknowledged wide identification as a strategy for poverty reduction and economic
empowerment in rural areas through providing poor people the smaller amounts of
credit at reasonable interest rates and given an opportunity to set up their own
business.

Devi (2006) micro credit helped in the empowerment and poverty alleviation
of rural women and the income generating activities made a divergence in the lives of
poor women by providing economic independence, self-assurance and self-
sufficiency.

Leelavathy and Aradhana (2006) identified members of SHG have a high

degree of participation in decision making and most of the members of the group
expressed that they were economically and socially empowered after joining Self
Help Groups.

Sangwan.S.S (2006) studied the extent financial inclusion crosswise various

states. He also tried to examine the role of SHG bank linkage programmed in
achieving financial inclusion. The study suggested a significant role of SHG led
programmed in achieving financial inclusion. Beside this, it also tried to examine the
role of other factors like financial literacy, banking density, and per capita income in
achieving financial inclusion.

Meenakshi (2006) observed Self Help Groups brought greater awareness

regarding their rights and responsibilities due to participation in the training
programmes, group meetings, and knowledge led to confidence building and social
self-respect among women.

Linda Mayoux (2006) has examined that Micro-finance programmes not only
give women and men access to savings and credit, but reach millions of people
worldwide, bringing them together universally in structured groups. Through their
involvement, women’s ability to earn an income, micro-finance programmes can
potentially instigate a series of ‘virtuous spirals’ of economic empowerment, social
empowerment, family empowerment and political empowerment

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 Ghate, et al., (2007) microfinance routed through SHGs has emerged as a
visible credit channel to the poor as their access to conservative credit channels is
embarrassed by the requirements of collateral and high transaction costs. Participation
of women in economic activities and it will help to accelerate in economic
development.

Sapovadia (2007) opined that the typical micro finance clients are self
employed, household-based entrepreneurs and low income persons who are excluded
from formal financial institutions and also lack business skills. Therefore the study
reveals that successful micro entrepreneurs have contributed much to society by
creating wealth, economic assets and jobs.

Srinivasan, Sunderasan (2007) has studied that micro finance and micro
banking facilities have helped large numbers of developing country nationals by
supporting the establishment and growth of microenterprises.

Gopalan (2007) observed that micro finance increases the self confidence of
the poor by ensuring need based timely credits, meeting their emergency
requirements, and making the poor capability of savings. The study also shows the
reliability of microfinance in health related issues in a positive manner. It has been
postulated that by making policy towards income generation and development,
ultimately to eradicate poverty and improve the health status through time, better, and
easy access of health care.

Reena Agrawal (2007) in this article concluded that Innovation in the form of
business facilitators and correspondents will be required for banks to increase their
outreach for banks to ensure financial inclusion. Stress that with increasing
liberalization and higher economic growth, the role of the banking sector is balanced
to increase in the financing pattern of economic activities within the country. The
trend of increasing commercialization of agriculture and rural activities should
produce greener pastures, and banks should examine the benefits of increasing
penetration. Financial inclusion will support, financial deepening and provide
resources to the banks to expand credit delivery. Thus, financial inclusion will lead to
financial development in our country which will help to step up economic growth

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 [Link] (2007) in their empirical study clearly shows that the
SHG-Bank linkage programmed has enhanced the flow of institutional credit to
landless and marginal farm households and discouraged non-institutional borrowing
through the thrift creation. Financial inclusion index, which measures the degree of
financial inclusion, has been computed for each household by giving suitable weight
to the selected financial services. Percentage of households which reached the
medium and high degree of financial inclusion, increased with the size of the land
holding. The percentage of households, which reached the highest degree of financial
inclusion, is relatively more among SHG member households compared to non-
member households.

A Ramanathan (2007) banks have a large number of outlets in the rural area
and it may be further increased. With enabling technology support, the delivery
channels could be improved with reduced transaction costs. With the introduction of
core banking solutions, in most of the major banks, there is a huge surplus of
available manpower. This, surplus manpower, needs to be reoriented to take up the
challenge of addressing the needs of the rural masses and bringing them into the
banking fold. However, with the collective effort from banks, regulators, the
Government, SHGs & voluntary sector, more of the rural poor can be brought within
the ambit of financial inclusion. Banks have an important role to play and a stake in
inclusive banking, as it would be a necessary transitional step towards inclusive
economic growth. .

Mohammed Anisur Rahaman (2007) has examined the impact of microfinance

on the poor people of the society in Bangladesh. The purpose of this study is to prove
how microfinance works, by using a group lending methodology for reducing poverty
and how it affects the income, saving etc of the deprived people. Microfinance has
the positive impact on the standard of living of the poor people and their life style. It
has not only helped the deprived people to come over the poverty line, but has also
helped them to make authoritative themselves.

Tripathy and Jain (2008) micro finance has a negligible income impact on
asset less rural poor, disadvantaged and deprived

Mawa (2008) identified microfinance is an innovative step towards alleviating

poverty. Microfinance provided facilities to the poor people and help them to use and

32
develop their skills and enable them to earn money through micro enterprises.. Micro
finance helps the poor to educate their children, built assets, manage unexpected risks
and have a better quality of life.

Knight and Farhad (2008) suggested that micro finance impact the quality of
life and poverty reduction. By accessing to financial services the client become self
employed and manages himself from the external threats. By getting employment they
increase in standard of living and poverty reduced.

Crabb, P. (2008) he identifies the correlation between the degree of economic

freedom in their host countries and success of microfinance institutions. Many
microfinance institutions are currently working to attain the desired goal and to reach
their mission to outreach people. The sustainability of the micro finance institutions is
analyzed here using a large cross-section of institutions and countries. Microfinance
institutions operate largely in countries with a comparatively low degree of overall
economic freedom and various economic policy factors are important to sustainability

Anant [Link] (2008) suggested that the financial inclusion drive be jointly
implemented with the government‘s social schemes, particularly the National Rural
Employment Guarantee Programmed (NREGP). The joint implementation of the
drive and NREGP ensures the regular usage of bank accounts while providing much
needed financial products to the poor. Our suggestion further included the use of
technology such as a smart card to enhance the efficiency and security of the
transaction. Last, but not least, the use of MFIs/NGOs/POs through a Business
Correspondent scheme was measured.

[Link] (2008) opined that financial inclusion is one species of a large

genus of human capacity building. The functioning of MFIs at the grassroots level
ensures economic decentralization, for a complete empowerment such a measure must
be supported by a broader human rights framework. Also, financial inclusion as a
policy measure should be followed up by building up suitable database, which could
supply as a guide to assess the impact of credit policies from time to time and reorient
schemes of financial assistance to the targeted groups. The MFIs should be
strengthened with the tools of managerial expertise, user-friendly technology and with
the principles of good governance and social responsibility.

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 Haripriya Gundimeda [Link] (2008) examined the role of SHG bank linkage
model in achieving financial inclusion across various states. A cross sectional
regression analysis was adopted to study the impact of selected independent variables
on financial inclusion. The multiple regression analysis method exhibited a positive
and significant impact of Self Help Group bank linkage programmed on financial
inclusion in terms of credit deepening and also revealed a positive impact of
economic development and financial literacy on financial inclusion whereas branch
density (population per branch) exhibited an opposite relationship with financial
inclusion. Self Help group linkage model is one of the effectively operated models of
Microfinance in India.

Devendra Prasad Pandey (2008) in his a study entitled micro finance offers
greater promise and prospective to address poverty as it is focused on building social
capital through providing access to financial service through linking with
conventional and mainly focusing on corporate social responsibility. However, to
enable the SHGs to perform their comprehensive, empowerment role, it is necessary
that they are operationally and financially managed towards financial inclusion. Micro
finance should not set high growth targets since it is against the spirit of corporate
social responsibility and it excludes the poor who cannot respond fast enough. Their
business should include the poor, distressed, disadvantage, resource less. Then only it
can be acceptable a micro finance programmed with greater emphasis on ‘inclusive
financing’.

Sahoo [Link] (2008) had attempted to develop index of financial inclusion

to examine the progress of financial inclusion and various determinants of
financial inclusion using secondary data from various sources. In their study, they
observed a positive impact of education, infrastructure development, self help group
formation of financial inclusion both from deepening perspectives and financial
widening

Shastri (2009) suggested self employment opportunities are one way of

poverty reduction and solving the problems of unemployment. The Micro-finance is
an effective tool for poverty reduction through providing them self-employment
opportunities and making them to gain credit worthy.

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 Nirmala and Geetha (2009) observed the positive impact of microfinance. It
showed improvement in enterprise stability and household economic welfare and
micro finance is empowering women, bringing gender equality.

Ashta, A. & De Selva, R. (2009) has examined that the correlation between
microfinance and religion. Religious institutions often play a vital role in establishing
microfinance systems, but interactions between microfinance and religion have
received vast importance in the developing countries.

Banerjee (2009) it was observed that from the low-income group more people
have shifted to high-income levels. This has abridged the inequality in the distribution
of family monthly income.

Tenaw & Islam (2009) observed that micro finance plays a very vital role in
improving and maintaining a standard of rural people in Bangladesh and Ethiopia.
The financial system that was originated by the local population proved positive tool
in promoting self help and independence. The main disadvantage of this local
originated financial system was that the rules and regulation. The main sector of
income in Bangladesh and Ethiopia is agriculture, but dependent on infrastructure,
unreliable climate, and poor technology, small and fragile market creates problems in
the development of this sector. Micro finance is the only method through which this
problem can be overcome. When agriculture sector become stable in these countries,
poverty will be eliminated mechanically. So for poverty, improvement in agriculture
sector micro finance is a necessity.

Anamika Sharma (2009) critical analysis of challenges creates hindrance for

structure, financial inclusion for India, challenges could be lack of awareness, low
income or assets, social exclusion, illiteracy, cumbersome records & measures,
unsuitable products, Branch timings and distances, easy availability of informal
sources of finance and international index of financial inclusion. To accelerate the
economic growth rate, investment and savings are two pillars. Increasing credit
necessities have emphasized more on mobilization of deposit. But Inculcation of
financial habit among household are to be the ultimate priority. Therefore, to cover
most household into bank ambit, innovation of products and process must be ensured
worldwide. Recommended Financial Inclusive Model emphasizes that financial
deepening and access requires active involvement of the local population in the

35
efficient financial system in spreading knowledge about difficult financial products
and services.

Smita Nirbachita Badajena and Prof. Haripriya Gundimeda (2009) empirical

study examined the extent of financial inclusion by self help group bank linkage
program against the background of growing regional inequality which the formal
banking system faces across different regions in India. Further, it also seeks to adopt
the cross sectional regression technique to inspect the role of self help group bank
linkage model, banking density, financial literacy, and level of economic development
in achieving financial inclusion across various regions in India. The pragmatic result
demonstrated a positive impact of SHG bank linkage model on financial inclusion.
The multiple regression investigation method exhibited a positive and significant
impact of Self Help Group bank linkage programme on financial inclusion in terms of
credit deepening. The observed analysis also revealed a positive impact of economic
development and financial literacy on financial inclusion whereas branch density
(population per branch) exhibited an opposite relationship with financial inclusion.
Self Help group linkage model is one of the profitably operated models of
Microfinance in India.

Report on the high level committee on lead bank scheme (2009) observed that
the share of government sponsored scheme in total priority sector lending was around
4% in terms of number of accounts and 0.4% in terms of amount outstanding. In
terms of credit to weaker section, the share was about 8% and 3% respectively. As
lending to priority sectors and weaker sections is significant in securing inclusive
growth. The committee recommended that the state level Bankers committee (SLBC)
and the various for a under lead bank scheme (LBS) should focus on addressing the
‘enablers” and “impeders” in achieving greater financial inclusion and flow of credit
to the priority and weaker sections, while continuing to use the for monitoring
accomplishment of subsidy linked government sponsored schemes.

Hassan (2010) observed the reason behind the success of micro finance is
having no collateral against loans

Pillai and Nadarajan (2010) the study suggest that microfinance has brought
better social empowerment and psychological than economic empowerment

36
 Ali & Alam (2010) concluded that Microfinance is the most important
resource to provide basic facilities like loans and other financial services to increase
the productivity, earning capacity and employment rate. Microfinance will have much
impact on people by reducing poverty, and other social impacts. The micro credit is
needed higher in the rural area than urban areas. Because of high interest rates on
micro credit is one of the problems faced by the microfinance sector. But poor people
still favor and want micro credit because they are excluded from financial access to
the commercial loans, which are collateralized loans. These poor people have very
innovative ideas and hard working to achieve their goal, but they don’t have the
opportunity. A person takes micro loans on high interest rate and frequently they get
success in their business and repayment of these loans.

[Link]. (2010) in their study microfinance now developed into an

important delivery instrument for reaching the poor and achieving financial inclusion.
Microfinance is a powerful tool for sustainable expansion and help in attaining
inclusive growth by creating dynamic employment, reducing gender and geography
difference which lead to the expansion of the economy, thereby contributing to the
growth of the economy. Micro finance has tiled the way to create a center for
inclusive growth by identifying and virtual the best practices and the models that are
economical and sustainable.

Sangram Panigrahi (2010) concluded that one-third of the population in our

country is living in a rural area, so there is much essential for inclusion of rural
people. The linkage of SHG had cut down the transaction cost for both banks and
their rural client’s recognition among women and with the banking linkage program
the growth of SHG. Bank linkage in region wise SBLP linkage amenities financial
deepening and smoothing of credit services by accessing conventional banking
resources. The imperative part of the government/the reserve bank of India(RBI) and
NABARD to promote and encourage this strong and synergetic relation between
common people and banks for financial inclusion

Chavan.V.M and Mundargi (2010) shg-bank linkage (SBL) programme for

credit has been able to reduce transaction cost. It has also enabled the banks to
achieve improved loan recovery and organize low cost deposits. The result of the
evaluation studies conducted by NABARD and agencies has established the positive

37
impact of the linkage programme. There is an increase in the loan volume of the
SGHs and a definite shift in the loaning pattern of the members from income
generating activity to production activities. There has been near 100% repayment
performance.

Sadhan kumar chattopadhyay (2011) it is observed that although various

measures have been undertaken for financial inclusion, the achievement is not found
to be significant. However, only supply side factor is not responsible for the financial
exclusion. Demand side factor is also equally responsible for this exclusion. Thus,
there is a need to solve both these problem with the help of proper policies. A whole
hearted effort is called for from all the corners of the society, viz, banks, beneficiaries
and regulators in order make financial inclusion more significant and successful.

Rajendran and Raya (2011) identified there is a high level of political

empowerment and less compared to economic empowerment and poor level of social
empowerment.

Sathiyabama and Meeenakshi Saratha (2011) it was found that the qualities
like decision making, democratic, team work, team spirit, self confidence, social
mobility, confidence to meet the officials, mutual help and in total the leadership
qualities have improved to a significant level.

Abiola & Salami (2011) observed that micro finance is a good tool for poverty
alleviation but in many incidents the result is opposite. The major reason behind the
negative effect of the micro finance on poverty alleviation is due to the time shortage.
The time is not enough for generating the income i.e. the shortness does not give
possibility for loan to generate future income.

Pokhriyal A.K. [Link] (2011) concluded that microfinance has been promoted
through the SHG-bank linkage agenda with the objective of bridging the widespread
gap in the financial network and spreading banking facilities to the poor in rural and
urban areas. SHG-bank linkage has contributed well towards achieving the objective
of unbiased financial inclusion.

38
 Sarkar & Baishya (2012) suggest that women’s access to credit has a role in
improving the household decision making capacity, workforce participation, control
over resources, political and legal awareness, thereby it lead to greater empowerment
of women of Assam.

[Link] (2012) has suggested microfinance must have collective

strategies beyond micro-credit to increase the empowerment of the poor and enhance
their proxy outcomes of the markets, family, community state; political and social
cultural are required for both poverty reduction and women empowerment.

Chintamani Prasad Patnaik (March 2012) has identified that microfinance

development could be a solution to the problems of rural financial market
development. The microfinance is positively care in improving access to finance for
the excluded and underserved poor and low-income households and also for
enterprises. So it should overcome the issues of rural financial market development.
So it is required for a planned, regulated policy, technology and human development.

2.2 FINANCIAL INCLUSION

India has, for a long time, recognized the social and economic imperatives for
broader financial inclusion and has made an enormous contribution to economic
development by finding innovative ways to empower the poor. Starting with the
nationalization of banks, priority sector lending requirements for banks, lead bank
scheme, establishment of regional rural banks (RRBs), service area approach, self-
help group-bank linkage programme, etc., multiple steps have been taken by the
Reserve Bank of India (RBI) over the years to increase access to the poorer segments
of society.

Financial inclusion is extremely crucial for poverty reduction and equitable

growth, especially for the developing nations. Today development in most developing
countries is a result of the contribution of the economically top few percent of the
population. Through financial inclusion it is possible, over a period of time, to
transform these economically deprived people into a large section of society that
actively contributes to the economic development.

This further leads to a snowball effect. With financial inclusion, banks gain
business. For example, in India 49.5 million farm households can be included

39
financially. Financial inclusion and electronic mode of payment can be used to check
pilferage of funds to a large extent. Finally, financial inclusion opens up access to a
large market, which creates opportunities for global market players and foreign
investment, increasing employment in developing countries.

Thus, it is important to understand that the purpose of financial inclusion in

India is the integration of the financially excluded into the mainstream banking
system, thus providing them a platform for empowerment out of their state of
economic and financial deprivation. In India, financial inclusion is being carried out
under the Reserve Bank of India through the “Lead Bank.” A lead bank is identified
for every state and is mandated to cover all villages, with a population of 2000 or
more, with a bank branch within 5 km., within the stipulated time period. A brief
analysis of financial inclusion strategies in different countries has been conducted
with special emphasis on factors of Indian relevance.

Farhat Husain (1986) has made a detailed analysis of the development of

Commercial banks in India in the light of reorientation of banking policy, credit
planning and resource mobilization for the regional development.

Porter, (1990) suggested focusing on a narrow segment or a niche of the

market will allow banks to be better placed to meet the needs of the customers. In this
case, especially when the financial exclusion could mainly be found in rural.

Barman, K.K. (1994) has made an analytical study on the implications of

financial sector reforms in the rural credit delivery system and widespread for
financial inclusion, lending rates, priority sector lending, and institutional
restructuring and on the interest rate of agricultural loans preserve requirements.

Yavas et al., (1997) identified the end product of service quality on

commitment. He stated that service quality in the banking sector is an effective
predictor of client loyalty. This genus of commitment can also be interpreted as
inclusiveness and will lead to financial inclusion.

Karmarkar, K.G. (1997) has highlighted the use of Micro financing (SHGs) on
the rural credit delivery system in the province of Orissa. He has anticipated for active
involvement of banks and other development authorities to promote micro financing
in large scale to accelerate the rate of rural growth and financial inclusion.

40
 Shetty (1997) in his studies ‘social banking’ policies being adopted by the land
resulted in broadening the ‘geographical spread and functional reach’ of commercial
banks in rural regions in the period that came after the nationalization of banks for
financial inclusion.

Tiwari Piyush and Fahad S.M.L (1998) has identified that microfinance can
contribute to solving the problem of deficient urban service and housing as an interior
part of poverty alleviation programs. MFIs should provide a multiple credit
requirement of the deprived class of people without imposing a high cost of interest.
One of the biggest challenges faced by MFIs in finding the levels, flexibility in the
credit instrument that could make it match the multiple credit requirements of the low
income borrower.

NABARD (1999) noticed that the despite having a broad network of rural
bank branches in India, which implemented specific poverty alleviation programs that
sought creation of self employment opportunities through bank credit, a very great
numeral of the most wretched of the poor continued to stay outside the fold of the
formal banking systems.

According to Jobber (2004) opined customer value is the principal focus of

banks to attract and retain customer loyalty. The aim of banks is to provide target
customers with more value added service to achieve financial inclusion.

Hansemark & Albinsson (2004) observed customer satisfaction and retention

is a significant facet in the banking industry as customers tend to supply a big portion
of the net income and financial inclusion.

According to Rakesh Mohan(2004) examined in India currently a clear

perception that there is a gigantic figure of people, potential entrepreneurs, small
enterprises and others, who are excluded from the financial sector, which leads to
opportunity for them to develop and thrive.

Dasgupta Rangarajan (2005) concluded that the microfinance reform process

has to be important points. Microfinance should build a comprehensive policy,
supporting and capacity building mechanism to direct the issues like capital structure,
regulatory and supervisory, prudential norms and legal views of MFIs and financial
inclusion.

41
 Kempson (2006) stated that countries with low strata of income inequality
tend to deliver lower degrees of financial exclusion, whereas high financial exclusion
is found in least equal countries. In most countries of the world, a person who is
unemployed and with no source of income is almost probable excluded for financial
access.

Kempson (2006) observed countries with high floors of financial exclusion,

self exclusion of people with depressed or no income is more of the reason for lack of
access to banking services than direct exclusion by the banks refusing to open
accounts.”

Togo et al., (2006) gave several success factors as essential for a dependable
and well conclusive inclusion of individuals in the use of financial facilities and
services. Delivering access to financial services requires one to be well learned about
the services at stake. There is a high demand for the accessibility of basic banking
services

Tagoe et al., (2006) by increasing the accessibility of basic bank accounts and
increasing the ability of credit unions to provide similar products will serve as critical
for the success of financial inclusion

Beck et al., (2006) financial inclusion should indicate access to a range of

different financial services and bank account is the typical measuring stick for width
of financial services.

Becks et al., (2007) observed a negative relationship between barriers to

banking access and bank branches. Financial inclusion entails the access of basic
services and as such bank deposits, loans, products and services. The premeditated
expansion of these subdivisions, though quite cost will be one of the important
measures to assure an almost full banking inclusion.

Ansari (2007) in her study reveals that reaching the most miserable and whose
credit requirements were very minuscule, frequent and unpredictable, was found to be
unmanageable. Further, the bulge was on providing credit rather than financial
products and services to the poor to meet their simple requirements. Thus, a demand
was felt for alternative policies, organizations and procedures, savings and loan

42
products, services and new delivery mechanisms, which would meet the demands of
the poor for the financial inclusion.

Transact the national forum for financial inclusion (2007) financial inclusion
is a nation in which all people receive access to pertinent, defined financial products
and services in order to contend with their money effetely. Financial inclusion is
achieved by financial capability and financial literacy

European Commission Manuscript (2008) stated that financial products/

services will be considered appropriate when their provision, organization and costs
do not lead the customer to encounter access or use difficulties. These damages are
caused by the characteristics of the products and the way they are provided. The
assurance that customers derive from the use and access of financial services is ace of
the elements of financial inclusion. The nature of financial services and products is
more of an encouraging element of usage of such products and services.

Gupta and Gupta (2008) have identified ATMs and mobile service in rural
areas will create a new opportunity to overcome financial exclusion. Thus an effective
tool to provide banking services to un-banked area and access the remote rural
destination of India.

World Bank (2008) financial inclusion is too determined by specific

recognition needs of various segment people arises from a number activities such as
housing, agriculture and entrepreneur difficulties in accessing formal sources of
credit, the poor persons and small savings or domestic resources to invest in living
accommodations, health and training, and opportunities.

Mandira Sarma and Jesim Paise (2008) indicate that the subject of financial
inclusion is a development policy priority in many states. Among socioeconomic
factors, as expected, income is positively associated with the stage of financial
inclusion. The index of financial inclusion developed in levels of human progression
and financial inclusion in a country move intimately with each other. Physical and
electronic connectivity play positive role in enhancing financial inclusion.

43
 Roubini and Bilodeau (2008) opined Finance matters for both economic
development and growth. There is solid evidence that financial development, financial
intermediation and markets that provide a rich and extensive approach to formal
financial services to economic factors, promotes growth.

Dr Bihari (2008) opined the process of assuring access to financial services

and adequate credit where needed by exposing groups such as weaker sections and
low income groups at an affordable cost

Kempson et al (2009) explained that the financial demands of low income

clients are regarded by many suppliers as uneconomic because their needs are modest
and the profit margins small.

World Bank Financial access (2009) a very basic measurement of financial

access can be derived through the number of open accounts across financial
institutions and estimating the dimension of the population with an account and as
well through the number of loans.

Pali A. P. (2009) concluded that SHGs is an effective instrument in targeting

the rural poor and group lending activities by providing credit to poor people in North
East India. It can also achieve the financial inclusion by expanding the rural outlet
branches and private sector banks.

Dr. Vigneswara Swamy and Dr. Vijayalakshmi (2009) identified financial

inclusion has success consequences in helping poor people to come out of utter
poverty circumstances by providing formal identity, access and utilization of financial
service. The main target of financial inclusion is to widen the range of activities of the
organized financial system to admit the hapless people into the fold of financial
services.

Michael Chibba (2009) opined that financial inclusion is a comprehensive

progress and poverty reduction strategy. However, given the current global crises, the
need to upgrade Financial Inclusion is now feasibly more important as a
corresponding and incremental advance to work towards meeting the MDGs than at
any other time in recent history.

44
 [Link] and Khalid Alkhathlan (2009) opined the financial inclusion
is a tactic towards inclusive growth in future provided it maintain by diverse influence
like technology, financial education, counseling and the society. So once this scheme
is properly implemented and executed in every village in sustaining from government
and society, and then this can lift the standard of living the majority of the poor,
which can really make our country proud.

[Link] (2009) observed lending to the poor is a perceptive issue and

MFIs have to ensure that are fair and reasonable in their dealing with borrowers. In
the enthusiasm to increase the levels of interest income, MFIs need to remember that
focal point of lending to the poor is to enable them to raise income levels and to
develop their living standard and the object is not to improve the rate of return on the
capital. Restraint in fixing interest rates and promising returns on investment would
be in the interest of all stake holders and would assist the growth of MFIs and
promotion of financial inclusion.

World Bank Financial (2009) identified a very basic measurement of financial

inclusion can be inferred through number of loans and access to financial service
across financial institutions. Access to financial services is a stepping stone towards
both social and economic inclusion.

Johnson et al (2009) opined strategic customer and market segmented by

geographic location of rural and urban plays a major role in financial
[Link] inclusion stands as more effective in both the rural and rural urban
areas. Therefore, picking up these areas as opportunities are essential for getting the
appropriate strategic capability.

Sinclair et al., (2009) explained that low income means a deficiency of

adequate demand for services. He said that such a deficiency of demand can be
ascribed to the failures and limitations of services from current providers of such
inspection and service. Banking services are crucial for financial inclusion.

Nirupam Mehrotra (2009) the determinates of financial inclusion can be

considered from different dimensions like widening (saving/ credit), deepening
(credit) and the number of financial services/product offered on the supply side, , easy
accessibility , right kind of products, nearness of bank office, etc., and demand side,

45
financial education of consumers and financial capability, etc, are expected to control
financial inclusion.

Anshul Agarwal (2010) suggested that Government initiatives to support

Financial Inclusion needs to be backed by progressive policy. This will be achieved
only through Public- Private Partnership Model powered by universally technologies.
Government of India constituted a Committee to enhance financial inclusion in India
and committee on financial inclusion has initiated a mission called National Rural
Financial Inclusion plan. It has set targets to increase Financial inclusion in the
country across regions and across institutions (banks, rural regional banks etc. It has
suggested events to address both, supply and demand constraints in growing financial
inclusion.

M. Mahalekshmi and M. Edwin Gnanadhas (2010) suggested that financial

education and counseling, particularly credit and debt counseling are important for the
village, which help in motivated towards achieving 100% financial inclusion.
Financial inclusion agenda should go beyond the ambit of more corporate social
responsibility and maker for a striking business proposition in the connection, credit
linkage with self –help group should always remain as a possible proposition. The gap
between the progress against the economic aspect and socio-political aspects situation
needs to be condensed and the collective efforts should be made.

Bhatia Navin and Chettarjee Arnab (2010) found that financial inclusion has
become the exhortation in present day financial circles; there are miles to go before it
becomes a authenticity in the urban population.

Das Prasun Kumar (2010) identified the objective of financial inclusion is to

broaden the range of activities of the organized financial system to admit within its
ambit people with low income and the distance through the formal financial system to
make them collaborator of economic growth of the country.

According to Jama M.H (2010) opined main issues of financial service is the
quality of service supplied by banks. He proposed to overcome the problem like
providing the good customer affability and quality of services.

46
 Agarwal (2010) has identified in developing countries, many have excluded
from the financial sector. In developing countries financial institution is focusing
towards rich people and [Link] economically challenged, financial inclusion is
essential for the sustainable growth of our country. Financial inclusion is needed for
rural and exploited mass area for the future growth in the economy.

Vijay Kelkar (2010) analyzed, improved financial inclusion will considerably

reduce the farmers’ indebtedness, which is one of the primary causes of farmers’
suicides. Benefit of financial inclusion is that it will contribute to the more rapid
translation of Indian farming

Satya R. Chakravarty and Rupayan Pal (2010) concluded demonstrates that

the axiomatic measurement approach developed in the human development will be
useful in practical measurement of financial inclusion

Joseph Massey (2010) said that, the role of financial institutions in a

developing rural area is critical in promoting financial inclusion. The efforts of the
regime to promote financial inclusion and deepening can be further raised by the pro-
activeness on the role of capital market players including financial institution.
Financial institutions have a very vital and a wider role to play in national and
international in fostering financial inclusion. The government has taken efforts on
domestic and global levels to encourage the financial institutions to take up better
responsibilities in including the financially excluded lot.

Finance Minister Pranab Mukherjee (2010) Said financial inclusion was a

central determinant of sustainable and inclusive growth, which could disengage the
enormous hidden potential of savings, expenditure and investment propensities of the
shorter segments of social club.

Finance Minister Pranab Mukherjee (2010) opined financial inclusion was a

central determinant of sustainable and inclusive growth, which could disengage the
enormous hidden potential of savings, expenditure and investment propensities of the
shorter segments of social club.

Finance Minister Pranab Mukherjee (2010) Said financial inclusion was a

central determinant of sustainable and inclusive growth, which could disengage the

47
enormous hidden potential of savings, expenditure and investment propensities of the
shorter segments of social club.

Rachana (2011) observed In India; the centering of the financial inclusion at

present is restrained to ensuring a bare minimum access to a savings bank account
without frills.

Suresh Chandra Bihari (2011) examines the relationship of financial inclusion

and development and earnings to propose an index for measuring financial inclusion.
The Index of financial inclusion is a multi-dimensional index that captures
information on various dimensions of financial inclusion in one single digit between 0
and 1. Here 0 denotes complete financial exclusion and 1 indicates complete financial
inclusion in an economy.

Jana Madan Mohan (2011) observed main reason for financial exclusion is
education, lack of awareness and lack of income. So MFIs should provide awareness
program and banks should provide value added service to the rural and urban poor at
an affordable cost.

Ramanathan Ramesh (2011) observed MFIs plays a major role in sustainable

and financial inclusion. MFIs should follow the rules and guidelines from the RBI and
state government.

Reddy K. Sriharsha (2011) identified the objective of the flow of credit to

small borrowers and measure the extent of financial Inclusion based on credit to small
borrowers with particular extensions of agricultural credit in Andhra Pradesh. He
attempted to fill this gap by evaluating the degree of financial inclusion in Andhra
Pradesh based on the access of credit to small borrowers.

Tiwari Kumari Reshma and Das Debabrata (2011) observed that the
population per bank branch statistic is crestfallen in Assam. Mobile banking
initiatives have still not take place and the financial literacy, which is the need of the
hour is still in its maturing phase.

Pai D. T (2012) opined that financial literacy refers to Knowledge required for
supervision personal finance. It is not just about transmitting the financial information
and knowledge to borrowers. It is also about shifting the behavior in the financial

48
pattern and natural processes of people. The main aim of financial literacy progrmme
is to empowerment of rural poor and self-regard. When the people know
approximately the financial products available and when they are capable to assess the
merits and demerits of each product for their specific needs, they are in a more upright
situation to determine what they desire and feel invested in a meaningful manner.

Bagli, S and Dutta P (2012) have observed a wide range of indicators to

measure the index of financial inclusion. He suggested having an awareness programs
and financial literacy programs in rural area of the marginalized section of people to
achieve financial inclusion. It is the sole responsibility of the financial institution to
achieve financial inclusion.

Roshny Unnikrishnan et. al (2012) he identified “Enabling Financial

Inclusion at the bottom of the Economic Pyramid”, the importance of financial
inclusion in economic empowerment. He recognized the variability in enabling
financial inclusion and analyzed the effectiveness of barriers in financial inclusion
and inclusive growth. Stated the important of financial inclusion and social inclusion
by reinforcing the important of self nourishment at the bottom of the economic
pyramid.

Hemavathy Ramasubbian and Ganesan Duraiswamy (2012) suggested

financial inclusion strategy had improved the standard of living in Tamil Nadu state.
By accessing and usage of financial service, but misplaced focus on savings and credit
improvement strategies degrades the benefits of Financial inclusion. He analyzes the
issues pertaining to execution of financial inclusion in economically exploited
districts of Tamil Nadu, India.

Rama Pal and Rupayan Pal (2012) observed the effect of social, political,
family, economic and demographic characteristics of households on inclination of a
household to use formal financial services. A significant result is that greater
availability of banking services fosters financial inclusion, particularly among rural
and urban sectors.

Roy (2012) the analysis concluded that banks have set up their branches in the
distant corner of the state. The banking industry rules and regulation are simplified
and has registered enormous development

49
 [Link] (2013) observed that the branch density in a state transactions
the opportunity for financial inclusion in India. Literacy is a prerequisite for creating
investment awareness, and hence intuitively it seems to be a key tool for financial
inclusion. Branch density and Literacy in creating investment awareness has a
significant impact on financial inclusion. By just creating investment awareness is not
possible to achieve financial inclusion at the same time there need to be significantly
improving the investment opportunities in India.

Shankar (2013) observed MFIs are playing a major role in eradicating demand
side and supply side barriers for financial inclusion. It is also focusing on the
excluded population who has been neglected by the banking sector, to get financial
facilities, policy and incentives to reach and expansion of those neglected areas.

Chakroborty. K.C (2013) Observed that a number of measures have and being
taken across the country moved over the atrociousness of the task, a good deal of
ground still need to roof. Apart from the government regulatory bodies, there is a need
for pertaining to the civil society and all other stakeholders require spreading financial
literacy.

Amidzic Goran and Mialou Andre (2014) opined that there is general
acknowledgment among policy makers that financial inclusion plays an important role
in supporting employment, financial stability and economic growth.

Cain et al (2010) it seems that income related inequality in financial inclusion

deserves the particular attention of the policy makers. In club to evaluate the extent of
financial inclusion of a household, it is important to pertinently estimate the demand
of different financial services by that household

2.3 PRIORITY SECTOR LENDING

Financial inclusion has always been a priority for India polity, particularly
given the socialist disposition of the state. With the bank nationalization of the
seventies, public sector banks and other subsidies became the chosen implement so of
this policy, primarily through mandated rules on priority sector lending. This requires
banks to lend between 32-40% of net bank credit to specific areas (defined as priority
sectors) at a rate lower than the prime lending rate of the bank. This rate is called the
priority sector lending, or PSL rate. Traditionally, most PSL was targeted towards the

50
poor engaged in agricultural or allied activities. These were monitored by the National
Bank for Agriculture and Rural Development (NABARD), a department of the RBI.
The definition of what PSL activities entail have been steadily modified, and today
include consumption loans for weaker sections, as well as micro-loans to SHGs, either
directly or through any intermediary including NGOs. Since the MFI business falls
under a PSL category, they can raise loans from banks at PSL rates. In addition, MFIs
can deploy these funds with more flexibility than can be done under any of the bank-
led efforts since they do not face the public sector constraints of the typical Indian
bank. It is a combination of this operational flexibility together with their ability to
raise funds at PSL rates that has enabled the MFIs to help displace the strong hold of
traditional money-lenders on indebted households. The MFI growth has been so
significant that the importance of deepening the outreach of microfinance through
both the bank-led SHG program and the MFI.

There have been many researches and studies on priority sector lending by
banks in India. An epigrammatic review of these studies is highlighted in the
following paragraphs to emphasize the importance of the study.

Joshi (1972) proposed the RBI to give clear and specific definition of the
different component of priority sector as some of the bankers are not clear about the
precise scope of agricultural lending.

Chawala (1979) examined the dimension of credit flow to the priority sector
during the seventies and observed that the purpose of PSL by banks is not available
for which it is meant for.

Angadi (1983) observed the concentration of PSL in general and agricultural

advances in particular in some state because of rapid branch expansion, deposit
mobilization, privileged cropped area, adoption of high yielding variety etc.

Joshi (1986) in his study identified weak fund management capacity of banks
due to statutory liquidity ratio (SLR), cash reserve ratio (CRR) and PSL. He found
that the low yield rate and rising cost contributed a lot to the declining trend in
profitability of banks.

Singh (1987) identified many exogenous and endogenous factors for the
strains and stresses of the banking system. The majority of them being a continuous

51
increase in the SLR, CRR, persistent emphasis on social goals, growing incidence of
industrial sickness, rapid branch expansion in the under banked areas, unfavorable
change of deposit mix and growing incidence of financial disintermediation.

MuhammedYunus (1988) strongly underlined that credit without discipline is

nothing but charity and charity in the name of credit will only destroy the poor,
instead of helping them. He, however, stressed on the loan recovery mechanism rather
than blaming the defaulters.

Rangarajan (1991) pointed out that improving the quality of loan assets is the
true test of improved efficiency of the banking system. The Narasimham Committee
(1991) has stated the need for the gradual phasing out of the directed credit
programme.

Krishnaswamy (1992) criticized the recommendations of the committee on

financial system. He pointed out the committee’s report considered only the interest
of industrialist and it essentially concerned with reducing govt. regulations and
improving profitability.

Rajagopal (1994) studied on the consequences of PSL in Indian banking and

remarked that concessional credit should be restricted only to the poorest of the poor
and to the underprivileged sections of the society. The Commercial rate of interest
should be charged for those who can afford it.

Patel (1996) in his paper realized that the traditional banking ethics were not
compatible with the needs of economic development and that the balanced
development was not possible without strengthening the hold of commercial banks in
the backward and neglected areas. With a view to bring the down-trodden, hitherto
neglected sector households in the mainstream, fundamental changes in the traditional
banking norms were called for to move away from security based credit towards
programme oriented credit.

Kohli (1997) observed the existence of significant linkages between bank

credit and investment in both agriculture and industries in India. He suggested that
although directed credit programme for PSL is effective in India, affirmative support
to small-scale units is required.

52
 Ajit (1997) examined the issue of para banking activities and suggested that
bank should be allowed to undertake these activities, particularly the use of capital as
risk, from the experience of other countries like USA.

The Narasimham committee (1998) pointed out that the sufficient credit to
priority sector is very indispensable for intended beneficiaries.

Department of Banking Supervision (1999) studied the impact of priority

sector advances on NPAs and found that the incidence of NPAs in priority sector is
much higher in view of the fact that priority sector advances constitute 30-32 per cent
of the gross bank credit.

Vyas committee (2001) observed that commercial banks seem to have shied in
extending rural credit as they are dealing vast number of small accounts.

Niranjana and Anbumani (2002) observed that there is anxiety among the
bankers that the advances to priority sector resulted in a loss of interest income due to
highly subsidized lending rates. In the context of enormous demand for funds for
priority sector,

Shete (2002) examined priority sector advances by PSBs during the post
reform years and found that the PSBs are not able to reach the prescribed target of
lending to priority sector.

The World Bank (2004) in its report, 'Sustaining India's Service Revolution'
highlighted that government ownership of banks in India stifles competition and
raises the cost of lending to the public. The World Bank has blamed RBI's stiff PSL
norms for foreign and domestic banks for the weak financial health of commercial
banks. The report has indicated that largest government ownership in the banking
sector led to insufficient competition in the Indian banking system and hence, led to
increased cost of intermediation, lowering capital allocation efficiency and under-
lending to the private sector.

RBI (2005) draft technical paper of the internal working group identified the
issues relating to the necessity of PSL. The working group recommended the need for
PSL prescriptions, the composition of priority sector, which includes agriculture, SSI,
small road and water transport operators, small business, professional and self-

53
employed persons, education, housing, etc. The existing system of computation of
priority sector obligations in relation to NBC is based on the outstanding advances of
banks. Linking the priority sector obligations to outstanding advances has its
shortcomings as outstanding tend to decline as a result of better recovery, write-offs,
etc. Moreover, a portion of outstanding comprises NPAs, which continue to get
reflected in the achievement of banks in lending to priority sector. The disbursement
during a given period is, therefore, a better indicator of banks’ lending. In order to
improve the flow of credit to the priority sector and to ensure that a certain proportion
of funds out of the total bank credit flows in this sector, the computation of PSL
obligations of banks could be linked to the total disbursements made by banks during
the previous year.

Ahmed (2005) observed that commercial banks together have gradually

increased the quantum of advances to small industries, but the proportion in which
total bank credit in priority sector has expanded, the relative share of small sector has
not grown in the same ratio during the reform regime. The weak infrastructure
facilities may have prevented the greater flow of credit. The industrial campaign,
awareness programmes and industrial training to the prospective entrepreneurs from
the appropriate authority may be the remedy in this respect.

Bhati (2006) examined the lending climate for banks in emerging economies
like India. The study found that due to the government policies, banks in India
undertake many additional risks when they lend. This study focused on one specific
aspect of the lending relationship between branch manager and loan officer of bank
branches in India and recommended social risk evaluation is therefore more
appropriate for risk evaluation and reduction by banks in India.

Rikta (2006) opined policy note on institutional lending and financing policy
for small sector in Bangladesh examined the effectiveness of financial, fiscal, and
related policies for financing the small sector. The study suggested that the financial
institutions need to have the financial capacity to accept the lending risks along with
access to appropriate funding which fulfill the clients' requirements. An assessment on
the causes and consequences of NPAs of commercial banks,

54
 Rajesham and Rajender (2007) concluded that a strong political will only be
able to find a satisfactory solution to the problem of mounting NPAs.

Narasaiah and Naik (2007) observed that although great strives have been
made in the last decade to ensure financing for micro enterprises, rare initiative has
been taken to help SSIs. As a result, SSIs have been constrained to seek loans for new
ventures from commercial banks.

Sooden and Kumar (2007) analyzed the priority sector lending in the post
reform period and suggested for a balanced approach as development agent and
sustainability of direct lending keeping in view the quantum of NPA in priority sector
advances.

Research Gaps

The research gaps have been identified based on the literature review.

The above literatures focused on policies and government role in financial

inclusion. Some studies have focused on SHG-Bank Linkage program and financial
inclusion. Some studies regarding women empowerment through microfinance.
Microfinance on poverty reduction show mixed results. Some studies show the
improvement in living standards and some studies interpret the opposite, that
activities like micro credit and microfinance did nothing to reduce the poverty.
Therefore, there is need to evaluate the effectiveness of microfinance and financial
inclusion in poverty reduction in Mysore and Chamarajanagar districts.

55