sector, employing approximately 295 lakh people. for the small and medium enterprises ( sme ) sector, the estimated incremental working capital provided by the scheduled commercial banks during the eleventh five year plan would be at rs. 1, 67, 989 crore, which amounts to a growth rate of an average 16. 8 per cent per annum. the incremental flow of term loan to the sme sector is estimated at rs. 1, 48, 720 crore, which translates into a growth rate of an average 24. 1 per cent per annum for the plan period ( goi, 2006 ). despite the risk, financing of first time entrepreneurs is a must for financial inclusion and growth. role of financial inclusion in achieving inclusive growth the committee on financial inclusion ( chairman : c. rangarajan, 2008 ) defines financial inclusion 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 an affordable cost ”. 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 not convenient, inflexible, not customized and of low quality. financial inclusion promotes thrift and develops culture of saving and also enables efficient payment mechanism strengthening the resource base of the financial institution which benefits the economy as resources become available for efficient payment mechanism and allocation. the empirical evidence shows that countries with large proportion of population excluded from the formal financial system also show higher poverty ratios and higher inequality ( thorat, 2008 ). it has been the endeavour of both the government and the reserve bank to expand banking sector across the length and breadth of the country to ensure reasonably priced credit in a timely manner to all the deserving borrowers. notwithstanding the significant expansion in bank network in unbanked areas after bank nationalisation in india, there are still large segments of the society that remain outside the financial system. a quick look at the data on the sources of loans and also percentage of persons having annual income less than rs. 50, 000 show that 28. 3 per cent had bank accounts and only 13 per cent had availed of bank finance and even in higher income bracket exclusion existed ( tables 2 and 3 ). hence, the recent focus has been on providing access to affordable banking services to every person. the process of financial inclusion in india can broadly be classified into three phases. during the first phase ( 1960 - 1990

banking account to all those desirous of opening a bank account. several other aspects such as simplified kyc, ots for loans upto rs 25000, offering a gcc / simplified overdrafts etc were also covered. a decentralized approach was advocated through targeting 100 % financial inclusion district by district involving the dcc and bank and government officials to facilitate enrolment and identification. another very important policy measure in january 2006 was to allow banks to adopt the agency model or what is known as the business facilitator / business correspondent model for achieving greater outreach through intermediaries / agents. the results have been extremely impressive. in just two years the number of no frills accounts opened by banks has increased from around half a million accounts in march 2006 to 15 million in 2008. going by the data from service providers offering smart card solutions, it may be assumed that smart card accounts probably account for 2 to 3 million of these no frills accounts. evaluation by external agencies appointed by rbi has shown that while the first stage of opening no frills accounts has been quite impressive, due to inadequate f follow up, cost of transaction and access constraints, in many cases the accounts have not been operated upon at all after having been opened. in order to improve access and use of these accounts, banks will have to offer the services much closer to the customer either through mobile branches, satellite offices, extension counters or using intermediaries like shgs / mfis or through business correspondents using it to increase scale, access and reduce cost. also as is obvious from the results of these recent studies and surveys, the credit product that has to be offered, if the low income borrowers have to be brought into the formal system, has to be simple covering all the needs of small borrowers. i have absolutely no doubt that the simple overdraft or gcc based on cash flow / track record is the way forward to meet the challenges of providing access to the large numbers currently excluded. shgs and mfis role in fi the need for informality in credit delivery and easy access is demonstrated by the fact that shgs and mfis constitute the fastest growing segment in recent years in reaching out to small borrowers. these institutions are able to effectively address the small ticket and last mile issues. in the four years between 2003 and 2007, small borrower bank accounts ( credit ) i. e. upto rs 25000 increased marginally from 36