This is a report that puts the country to shame. 'Trillion dollar economy: opportunities and challenges for banks', brought out by Ernst and Young and Assocham claims that India has the second highest number of households in the world which are left out of the formal finance sector.

“There are 600,000 unbanked villages in India and only 38 percent of the country’s bank branches are in rural areas,” said the report released by Ernst & Young and Assocham.

The country lags behind several developing and developed countries, the report highlights.  “Approximately 40 percent of India’s population has bank accounts, and only 10 percent have any kind of life insurance cover, while a meagre 0.6 percent has non-life insurance over,” the report highlighted about the numbers on how much Indian banks have not covered.

The report cited the lack of infrastructure in the villages as the main reason of exclusion.

“Lack of basic physical and social infrastructure (roads, transport and communication facilities) and IT infrastructure increases the cost of serving unbanked areas and makes accessibility a significant challenge,” the report pointed out.

Financial illiteracy also remains a major stumbling block for the government's efforts for inclusion of people. “More than 75 percent of the accounts opened under the financial inclusion drive remain inactive due to financial illiteracy,” the report said.

The report also noted that reforms and a clear policy are required to effectively direct credit flow to the agriculture sector. “Of 148 million rural households, 89 million are farm households and 59 million are non-farm households. Out of 89 million farm households 46 million are outside the financial services net,” said the report which is a major concern as more than 65 percent of India lives in rural areas.

However, the reason cited by report for banks not pushing for more activities in the rural areas is high cost of delivery. “Delivering financial services in rural India attracts high costs in terms of operational costs and the cost of loan losses,” it said.

“We have to have universal financial inclusion, financial literacy to move towards achieving that goal. If we do not have it, we are going to create divides within the country and will not have healthy society,” said Deepali Joshi, CGM-rural planning and credit development of the RBI.

However, there is a word of praise for the commercial banks in terms of financing to the farmers. “The total number of new farmers financed by commercial banks and RRBs collectively was 7.76 million, against the target of 5.0 million for the FY10,” said the report.

The report specially highlighted achievement of two countries – Brazil and Kenya in meeting financial inclusion by using the modern technology. Brazil used the banking correspondents (BC) model and Kenya used the mobile money (MM) model to include the people who were financially excluded.

“The Kenyan example illustrates the potential of mobile phone technology in supporting the extension of access to financial services to the developing countries,” the report added.