Financial exclusion can be broadly defined as the inability to access basic financial services due to problems associated with access, conditions, prices, marketing or self-exclusion in response to discouraging experiences or perceptions of individuals / entities. In the Report of the Committee on Financial Inclusion in India (Chairman: C. Rangarajan, 2008) defined Financial inclusion/exclusion as – The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at affordable cost.

The sections that are generally excluded are:

Marginal farmers, landless labourers, Unorganized sector, urban slum dwellers Migrants, ethnic minorities, women, Eastern & Central regions of India mostly.

Some of the reasons for exclusion are:

Lack of awareness, low income, social exclusion, illiteracy.

Sparse population in remote & hilly areas with poor infrastructure & lack of physical

access.

Easy availability of informal credit.

Documenting procedures requiring proof of identity and address, high charges and

penalties, generic products that are currently in the market do not satisfy the needs of the sections that are excluded financially. There is no single over-riding factor that could explain financial exclusion. It includes a variety of factors stated above and probably many more.

SUPPLY SIDE BARRIERS

Supply side barriers pose bigger impediments in the process of financial inclusion. Some of the significant causes of comparatively low expansion of institutional credit in the rural areas can be risk perception, high transaction costs, lack of infrastructure, and difficult terrains and low density of population.

Another noticeable factor being the perception among bankers that large number of rural population is un-bankable as their capacity to save is limited, small loan requirements, miniscule margin in handling small transactions. Also, non-availability of Know Your Customer (KYC) requirements (documentary proof of identity and address) can be a very important barrier in having a bank account especially for migrants and slum dwellers). Further, unsuitability of products and services being offered to the rural people are not tailor- made. For example, most of their credit needs are in form of small lump sums and banks are reluctant to give small amounts of loan at frequent intervals. Consequently, they resort to borrowing money from moneylenders at exorbitant rates. Poor market linkage or say penetration of service providers also constitutes the major factors of financial exclusion. And also one more unreasoned perception among the bankers is that the rural areas have poor repayment record.

Global literature explains financial exclusion also in the context of a larger issue of social exclusion of weaker sections of the society. While Leyshon and Thrift (1995) explain financial exclusion as such processes those aid to prevent certain social groups and individuals from gaining access to the formal financial system, Carbo et al. (2005) and Conroy (2005) opine that it is a state of inability of some poor and disadvantaged societal groups to access the financial system. Mohan (2006) reasons that financial exclusion implies the lack of access by some segments of the society to appropriate, low-cost, fair and safe financial products and services from mainstream providers. Ensuing the reasoning made above, it can be an indication that financial exclusion occurs mostly to people who are the disadvantaged sections of the society.