the financial system. access to financial products is constrained by several factors which include lack of awareness about the financial products, unaffordable products, high transaction costs and products which are inconvenient, inflexible, not customized and of low quality. however, we must bear in mind that apart from the supply side factors, demand side factors such as lower income and / or asset holdings also have a significant bearing on inclusive growth. owing to difficulties in accessing formal sources of credit, poor individuals and small and micro enterprises usually rely on their personal savings and internal sources or take recourse to informal sources to invest in health, education, housing and entrepreneurial activities to make use of growth opportunities. the mainstream financial institutions like banks have an important role to play in overcoming this constraint, not as a social obligation, but as pure business proposition. financial inclusion – a global policy priority the importance of an inclusive financial system is widely recognized in the policy circles, not only in india, but has become a policy priority in many countries. several countries across the globe now look at financial inclusion as the means of a more comprehensive growth, wherein each citizen of the country is able to use their earning as a financial resource that they can put to work to improve their future financial status, adding to the nation ’ s progress. in advanced markets, it is mostly a demand side issue. initiatives for financial inclusion have come from the financial regulators, the governments and the banking industry. the banking sector has taken a lead role in promoting financial inclusion. legislative measures have been initiated in some countries. for example, in the united states, the community reinvestment act ( 1997 ) requires banks to offer credit throughout their entire area of operation and prohibits them from targeting only the rich neighborhood. in france, the law on exclusion ( 1998 ) emphasizes an individual ’ s right to have a bank account. the german bankers ’ association introduced a voluntary code in 1996 providing for an “ everyman ” current banking account that facilitates basic banking transactions. in south africa, a low cost bank account called “ mzansi ” was launched for financially excluded people in 2004 by the south african banking association. in the united kingdom, a “ financial inclusion task force ” was constituted by the government in 2005 in order to monitor the development of financial inclusion. the “ principles for innovative financial inclusion ” serve as a guide for policy and regulatory approaches with the objectives of fostering safe and sound adoption of innovative, bis central bankers ’ speeches adequate,

to the internal credit rating framework, which are generally used to rate corporate clients, banks also use simple credit scoring models to rate smaller borrowers and retail borrowers. credit scoring models for retail customers generally look at the following four groups of indicators – demographic indicators, financial indicators, employment indicators and behavioural indicators. since credit ratings / scores are a measure of credit risk, it has a strong link with npas. loans extended by banks are classified as npas when the bank considers that borrower has not serviced his debt or is unlikely to service his debt as per the terms and conditions of the contract. as such npas are manifestation of credit risk. since credit ratings are relative measure of credit risk, the likelihood of default of a borrower with a higher credit rating should be lower than a borrower with a lower credit rating. as a corollary, a higher proportion of borrowers with good credit rating in the books of a bank should translate into lower level of npas. whether that assertion is true or not requires us to evaluate the credit ratings assigned by a credit rating agency by juxtaposing them against the actual default experience. another important factor that needs to be kept in mind while comparing the ratings by a cra with that by a bank is what constitutes a “ default ”? credit rating agencies recognise default even if there is a default of one rupee or a delay of one day in servicing the scheduled debt obligations. as far as banks are concerned, an asset is treated as non - performing asset only when a scheduled payment remains overdue for a period of more than 90 days. the definition of default is different as the purpose of recognition of default is different. what should banks be doing? there is growing need for banks to strengthen their internal credit appraisal system i. e. on their credit assessment and risk management mechanisms. at the same time, banks should also consider using external credit appraisals in conjunction with their own assessment. this would mean getting the house in order and at least on this score, banks would be on stronger ground. banks would still be vulnerable to other factors such as economic slowdown, or policy changes or wilful defaults. but, one area of concern would be plugged. this is where credit rating agencies can play an important role given their experience as well as steady track record over the years. regulation of cras in the indian context, the general superintendence and regulation of credit rating agencies are carried out by