APROJECT REPORT

ON RURAL BANKING IN INDIA

SUBMITTED BY:

Dinesh Singh Ghinga Roll no. 581113515

1

ACKNOWLEGMENT

“Chain of mistakes leads towards failures, chain of failures leads to experience and

chain of experience leads to success.” That’s what a life’s path is.

Same is applicable to my project work. I do not claim that I have a complete

knowledge of the subject. I would like to thanks my friends and many persons

who directly or indirectly helped me during my project.

Dinesh Singh Ghinga 5811113515

(M.B.A. 4th sem)

2

PREFACE

This project report is submitted for the partial fulfillment of Master of

Business Administration degree from Sikkim Manipal University

While developing this project, I was involved with system analysis, design

and implementation process. This is a sample report describing in detail

various aspects of the system. I have used prototyping model for designing

3

STUDENT DECLARARTION

I hereby declare that the project report entitled

“Rular Banking In India”

Submitted in partial fulfillment of the requirement for the degree

of Master of Business Administration to Sikkim Manipal

University, India is my original work and not submitted for the

award of any other degree, diploma, fellowship, or any other

similar title or prizes.

Place: Haldwani Dinesh Singh GhingaRoll No. 581113515

4

CONTENT

No. Particulars

1. Current State of Rural Banking in India

2. Key Drivers of Financial Exclusion of Rural Banking in India

3. Reasons for Unprofitable Rural Banking in India

4. Usage Issues for Rural Customers

5. Market Opportunity of Rural Banking in India

6. Improving Access of rural Banking In India

7. Conclusion

8. Bibliography

9. Annexure

5

CURRENT STATE OF RURAL BANKING IN INDIA

The Indian Economy

India is the 12th largest economy in the world in terms of gross domestic

product (GDP), and fourth in terms of purchasing power parity (PPP)1. The

growth of the economy is equally impressive with an average of over 8.0%

during the last three years2. However, in terms of GDP per capita, India

ranks a lowly 160th among other nations. Within the country, there is a

stark divide in the incomes of urban and rural areas with the average

monthly per capita consumption expenditure (MPCE) in urban India being

almost double that of rural India.

In addition, there are significant disparities in urban and rural consumption

expenditure between different states. Jharkhand and Orissa, for example,

have an MPCE of approximately Rs. 900 in urban areas and Rs. 410 in rural

areas4. In other states like Punjab and Haryana, the urban rural disparity is

significantly lower. A fifth of the Indian population is below the poverty line

(BPL) today with a MPCE below Rs 340. In some states like Jharkhand and

Orissa, the proportion of BPL is greater than 40%. Diamond believes that

the segments that are not considered BPL should all be considered as

“potentially bankable” with genuine financial needs that could be met by

formal financial and banking systems.

6

Current State of Indian Banking

An important metric to determine the level of financial outreach/inclusion

is the ratio of the number of deposit accounts to population. It gives a

snapshot of the penetration of deposit accounts and credit accounts in

India in comparison with a few select countries with similar socio-cultural

and economic conditions. Even in comparison with other developing

economies, India has a significant opportunity for increasing penetration of

both deposit and credit accounts.

Not only is there a large disparity between India and other countries in

banking penetration but there is also a large variation in banking

penetration within urban and rural India. While urban India seems to be

over-banked with more than 100% penetration (many urban Indians have

more than one bank account), rural India lags far behind with a 19%

penetration. The variance in rural and urban deposit and credit account

penetration is not restricted only to few states but is common across all

states.

In addition, the average value of a deposit account and a credit account is

also quite low in rural areas as compared to urban areas. Diamond believes

that the reasons for lower penetration levels are partly economic, as

explained by the low GDP per capita in the rural areas of the country, and

partly a result of “controllable” factors that are inherent in formal banking

7

systems in India today. The low deposit and credit account penetration and

low average values in deposit and credit accounts demonstrate that

banking outreach in rural India is sub-optimal. This low outreach can be

explained by two key parameters: access and usage.

Simply defined, access is the availability of financial services, and usage is

the actual use of those services. Access is influenced by issues such as the

basic economic state of rural India, lack of physical infrastructure facilities,

regulatory constraints, and the economics of rural banking. Usage is

constrained by social issues such as illiteracy, incomplete service offerings

by banks, and high transaction costs in the formal banking system. Access

and usage are not synonymous, as people may have access to financial

services, but decide not to use them, either for socio-cultural reasons or

because opportunity costs are too high.

List of Rural Banks in India

Rural banking in India started since the establishment of banking sector in

India. Rural Banks in those days mainly focused upon the agro sector.

Regional rural banks in India penetrated every corner of the country and

extended a helping hand in the growth process of the country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of

SBI are spread in 13 states extending from Kashmir to Karnataka and

Himachal Pradesh to North East. The total number of SBIs Regional Rural

8

Banks in India branches is 2349 (16%). Till date in rural banking in India,

there are 14,475 rural banks in the country of which 2126 (91%) are located

in remote rural areas.

Apart from SBI, there are many other banks which function for the

development of the rural areas in India. These banks are listed below:

Andhra PradeshBihar

Andhra Pradesh

Grameena Vikas Bank

Andhra Pragathi

Grameena Bank

Deccan Grameena Bank

Chaitanya Godavari

Grameena Bank

Saptagiri Grameena Bank

Chhattisgarh

Chhattisgarh Gramin Bank

Surguja Kshetriya Gramin

Bank

Durg-Rajnandgaon

Madhya Bihar Gramin Bank

Bihar Kshetriya Gramin Bank

Uttar Bihar Kshetriya Gramin

Bank

Kosi Kshetriya Gramin Bank

Samastipur Kshetriya Gramin

Bank

Gujarat

Dena Gujarat Gramin Bank

Baroda Gujarat Gramin Bank

Saurashtra Gramin Bank

9

Gramin Bank

Haryana

Harayana Gramin Bank

Gurgaon Gramin Bank

Jammu & Kashmir

Jammu Rural Bank

Ellaquai Dehati Bank

Kamraz Rural Bank

Assam

Assam Gramin Vikash

Bank

Langpi Dehangi Rural Bank

Jharkhand

Jharkhand Gramin Bank

Vananchal Gramin Bank

Madhya Pradesh

Himachal Pradesh

Himachal Gramin Bank

Parvatiya Gramin Bank

Punjab

Punjab Gramin Bank

Faridkot-Bhatinda Kshetriya

Gramin Bank

Malwa Gramin Bank

Kerala

Narmada Malwa Gramin Bank

North Malabar Gramin Bank

Tamil Nadu

Pandyan Grama Bank

Pallavan Grama Bank

Maharashtra

Marathwada Gramin Bank

Aurangabad -Jalna Gramin Bank

Wainganga Kshetriya Gramin

Bank

10

Narmada Malwa Gramin

Bank

Satpura Kshetriya Gramin

Bank

Madhya Bharath Gramin

Bank

Chambal-Gwalior

Kshetriya Gramin Bank

Rewa-Sidhi Gramin Bank

Sharda Gramin Bank

Ratlam- Mandsaur

Kshetriya Gramin Bank

Vidisha Bhopal Kshetriya

Gramin Bank

Mahakaushal Kshetriya

Gramin Bank

Jhabua Dhar Kshetriya

Gramin Bank

Vidharbha Kshetriya Gramin Bank

Solapur Gramin Bank

Thane Gramin Bank

Ratnagiri-Sindhudurg Gramin Bank

Karnataka

Karnataka Vikas

Grameena Bank

Pragathi Gramin Bank

Cauvery Kalpatharu

Grameena Bank

Rajasthan

Baroda Rajasthan Gramin Bank

Marwar Ganganagar Bikaner

Gramin Bank

Rajasthan Gramin Bank

Jaipur Thar Gramin Bank

11

Krishna Grameena Bank

Chikmagalur-Kodagu

Grameena Bank

Visveshvaraya Gramin

Bank

Hodoti Kshetriya Gramin Bank

Mewar Anchalik Gramin Bank

Orissa

Kalinga Gramya Bank

Utkal Gramya Bank

Baitarani Gramya Bank

Neelachal Gramya Bank

Rushikulya Gramya Bank

West Bengal

Bangiya Gramin Vikash Bank

Paschim Banga Gramin Bank

Uttar Banga Kshetriya Gramin Bank

Meghalaya

Ka Bank Nogkyndong Ri

Khasi- Jaintia

Arunachal Pradesh

Arunachal Pradesh Rural Bank

Manipur

Manipur Rural Bank

Mizoram

Mizoram Rural Bank

Nagaland

Nagaland Rural Bank

Tripura

Tripura Gramin Bank

Uttar Pradesh

Purvanchal Gramin Bank

Kashi Gomti Samyut

Gramin Bank

Uttar Pradesh Gramin

Uttaranchal

Uttaranchal Gramin Bank

Nainital Almora Kshetriya Gramin

Bank

12

Bank

Shreyas Gramin Bank

Lucknow Kshetriya

Gramin Bank

Ballia Kshetriya Gramin

Bank

Triveni Kshetriya Gramin

Bank

KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL

BANKING

According to Diamond estimates, approximately 245 million adults in rural

India do not have a bank account today. As depicted in Following Table, this

reflects 24% of the total population. While 60 million out of 245 million

may not need banking services because they are below the poverty line,

Diamond believes that approximately 185 million “potentially bankable”

people do not use formal banking services because of reasons like poor

access or usage.

13

100

47 53

1637

1324

618

020406080

100120

Total

Pop

ulat

ion

Non A

dult P

opul

ation

Adult P

opulat

ion

Urban

Adult

Pop

ulatio

n

Rural

Adult

Popul

ation

Banke

d Pop

ulat

ion

Unban

ked

Popula

tion

Financia

lly C

onst

raint

s

Ponte

ntia

lly B

anka

ble

Series1

Source: Census India; BSR 2008—Reserve Bank of India; World Bank &

NCAER (2008).

Access Issues for Rural Customers

Access is explained in terms of infrastructure, physical distance, limited

delivery capabilities, regulatory constraints and the economics of rural

banking.

The banking infrastructure in rural India is not encouraging, with just 7% of

villages housing a bank branch. What’s more, the poor physical and social

infrastructure also impacts the access to financial services, with 23% of

villages going without electricity, 67% without a Post Office, and an average

rural literacy rate of 59% and secondary school penetration of 12%. This

lack of physical and social infrastructure in rural India is a key issue

impacting access to formal financial services.

14

The average distance to a branch in India is approximately 3.8 Kms. While

this compares favorably to the average distance to a branch in a developed

market like the U.S. (which is 6 Kms6), there are significant additional

challenges in India in the form of unpaved roads and limited access to

modern transportation. Most rural customers are likely to sacrifice an

entire day’s wage to travel to a bank branch which is open between

10:00am and 5:00pm. While some banking transactions could be done over

phone, this is rarely an option in a country with such low rural tele-density.

Limited delivery capability is a significant challenge. Much of rural India is

serviced through branches because ATM penetration is low and other

channels such as Phone and Internet Banking are non-existent.

Intermediaries like Non-Governmental Organizations (NGOs), Self-Help

Groups, and Micro Finance Institutions (MFIs) are being used by banks to

improve access to credit and savings. However, these channels, in their

current form, offer limited services.

There are some regulatory constraints imposed by the Reserve Bank of

India (RBI) which may inadvertently contribute further to the lack of formal

banking services in rural areas. For example, the RBI does not allow banks

to post any person other than a security guard at ATMs. Hence, banks

cannot deploy many ATMs in rural areas as many rural customers require

in-person support. A second regulatory inhibitor is that new banks planning

to establish a branch in a rural area have to receive approval from the Lead

Bank and District Collector of that district. Hence, banks choose not to open

15

new branches in certain areas even when it is profitable to do so because

there is no certainty of getting approvals.

Many banks view the rural market as a regulatory requirement rather than

an economic opportunity. Banks have from time to time borne the social

cost of lending to the rural economy at rates below their costs. They have

also faced capital erosion because of the write-off of loans, particularly

agriculture loans. Banks are required via regulatory requirements to open

branches in rural areas to provide loans to agriculture and other priority

sectors.

Current Rural Banking Channels

16

Description Service Provided Remarks

- Full fledged Branches and - Deposit Accounts - 96% of total deposit and 95% of Extension Counters of - Credit Accounts total loans are with scheduled Scheduled Commercial Banks - Remittances commercial banks with including Regional Rural Banks - Cards cooperative banks holding Cooperative Banks - Third-Party Products the difference - Has a high cost-to-serve

- NGOs, SHGs, MFIs and - MFIs directly lend to the poor - This channel delivers limited Cooperatives that act as and also act as agents for services in its current form Intermediaries to take financial he banks Services to the rural areas - SHGs borrow from banks and are beneficiaries of loans themselves

- Onsite - Cash Withdrawal - Negligible presence of this ATM installed at a branch - Cash Deposit channel in rural areas - Offsite - Money Transfer ATM installed at a remote - Cheque Book Request Location - Bill Payments

-Phone Banking - Cash Withdrawal - Almost non-existent in rural Manual - Cash Deposit - India because of low: Interactive Voice Response - Money Transfer Tele-density - Internet Banking - Cheque Book Request Internet-penetration - Kisan Credit Card - Bill Payments Credit appetite of banks Provide short-term credit

Branch

Source: Reserve Bank of India; Diamond analysis.

REASONS FOR UNPROFITABLE OF RURAL BANKING IN

INDIA

17

Intermediaries

ATM

Others

High Non-performing Loans (NPL):

Banks have higher non-performing loans in rural areas because rural

households have irregular income and expenditure patterns. The issue is

compounded by the dependence of the rural economy on monsoons, and

loan waivers driven by political agendas. NPLs from the agriculture sector

are 7.7%, compared to 3.5% across non-agriculture sectors8. In order for

banks to view rural India as a growth opportunity, rather than a regulatory

requirement, a combination of these issues must be addressed. Increasing

financial access to rural areas is contingent upon basic conditions such as

proper infrastructure and an enabling regulatory framework, as well as

innovative thinking on the part of commercial banks. Access issues,

however, explain only one part of the problem. Usage is an equally

important issue for rural customers.

Low Ticket Size:

The average ticket size of both a deposit transaction and a credit

transaction in rural areas is small. This means that banks need more

customers per branch or channel to break even. Considering the small

catchments area of a branch in rural areas, generating a customer base

with critical mass is challenging.

High cost to serve:

18

Branches are the most used channel in rural areas. This is because many

rural people are not literate and are not comfortable using technology-

driven channels such as ATMs, phone banking or internet banking. On the

other hand, a branch is an expensive channel for banks (Following Table). In

addition, rural people, whenever they have access to banks, have frequent

low ticket and cash-based transactions, which increase the overall

transaction cost for their bank.

Cost Per Transaction in Indian Banks

19

48

25

18

84

0

10

20

30

40

50

60

Branch Phone (CallCentre)

ATM Phone (IVR) Internet

Series1

Source: Reserve Bank of India; CGAP, World Bank.

Higher risk of credit:

Rural households may have highly irregular and volatile income streams.

Irregular wage labor and the sale of agricultural products are the two main

sources of income for rural households. The poor rural households (landless

and marginal farmers) are particularly dependent on irregular wage

employment. Rural households also have irregular expenditure patterns.

The typical expenditure profile of rural households is small, with daily or

irregular expenses incurred through the month. Furthermore, a majority of

households incur at least one unscheduled expenditure per year, with the

most frequent reasons being medical or social emergency7. In short, the

rural customer is generally considered to be a risky one.

20

Information Asymmetry:

Since many rural people do not have bank accounts, there is a lack of

information on customer behavior in rural India. Absence of a Credit

Information Bureau also complicates the problem as banks have to rely on

informal sources to learn the credit history of rural customers. A lack of

reliable information can result in either missed opportunities in not

approving otherwise eligible loan candidates, or nonperforming loans.

USAGE ISSUES FOR RURAL CUSTOMERS

21

Even if access to formal banking is provided to rural customers, there is no

guarantee that these services will be used. According to a study conducted

by the World Bank, many households, even in developed countries, choose

not to have a bank account as they do not engage in many financial

transactions—they collect wages in cash, spend in cash and do not wish to

be burdened by a bank account9. To compound the situation many

customers in rural India, who have access to and would otherwise choose

to use formal financial services, do not do so because the product and

service mixes do not meet their needs.

The financial service needs of rural customers are not confined to just

savings and credit, as is usually assumed. Their financial needs are linked to

their life cycle needs, ranging from savings to credit to insurance to

remittances. In fact, even the savings and credit products currently offered

to rural customers do not entirely meet their needs.

Access to savings and investment facilities is critical for the poor. The two

critical needs for the rural poor are micro-savings and frequent

withdrawals. These needs facilitate a customer in building capital over the

long term, as well as coping with income shocks in the near term. However,

banks do not offer adequate services to address these needs. The lack of

services, therefore, leaves the rural poor with little option than to transact

with the informal banking market. A study conducted by Micro Save also

concludes that the poor transact with the informal sector because it will

22

accept small amounts, provide doorstep service, and ensure ease of

enrolment.

Rural customers need loans not only for productive purposes but also for

consumption needs (Following Table). A part from agricultural support,

rural customers need micro credit for consumption, education and

emergencies. Though banks offer purpose free loans (personal loans and

credit cards) in urban areas quite liberally, in rural areas sanction of such

loans is significantly restricted. Therefore, the poor raise these loans

through the informal financial system (it is worth noting that these loans

taken from the informal system are almost always repaid or renewed12). In

addition, larger households need occasional high value micro-enterprise

loans for small capital investment. Though banks offer these loans, they

require excessive documentation and time-consuming processes which

discourage customer applications.

Purpose of Borrowing

23

Rural Household Borrowing

Other business expenditure, 14%

Household expenditure, 48%

Agriculture expenditure, 38%

Other businessexpenditure

Householdexpenditure

Agricultureexpenditure

Bank Lending to Rural Households

Personel Loans, 12%

Agriculture Loan, 36%

Other Business Loan, 52%

Personel Loans

Agriculture Loan

Other Business Loan

A significant percentage of borrowing is toward consumption and other

household expenditure, whereas formal financial institutions in rural India

provide loans primarily for productive purposes.

Source: AIDIS—2008, National Sample Survey Organization (NSSO);

Diamond analysis.

24

Insurance reduces the vulnerability of poor households by replacing the

uncertain prospect of large losses with the certainty of payout against

small, regular premium payments. It is integral to a comprehensive risk

management strategy for poor households. This includes life, health,

accident and asset (dwelling, crop, and livestock) insurance. Banks and

insurance firms do not offer these services in many rural areas, leading the

poor to rely on the informal financial system.

There are many rural households which depend on weekly or monthly

remittances from their family members who have moved to urban areas. At

present, they depend on informal channels to remit the money and

consequently either risk the loss of money or pay high transaction fees.

Banks do not offer seamless remittance facilities between urban and rural

branches as many of the rural branches are not computerized and

connected to the main bank’s computer systems. This often results in the

beneficiary receiving the amount two weeks after it has being transferred.

This represents yet another key service which is not provided.

The transaction cost for a rural customer to receive credit primarily

constitutes four attributes: the interest rate, loan amount received as a

percentage of amount applied, bribes paid, and the lead time to process

the loan. Though the formal banking system offers loans at interest rates

lower than informal banking systems, the time taken for a loan to be

sanctioned is high which increases uncertainty and opportunity cost. In

addition, the customer needs to pay almost 10% of the loan amount in

25

bribes and eventually receives an amount that is less than what was applied

for. Therefore, while the interest rates are usurious in the informal

financing system, rural customers still resort to this channel because the

waiting time to receive the loan is negligible and there are no indirect costs

or commission. Banks also insist on collateral security which many rural

poor cannot afford.

As far as savings are concerned, though the formal banking system provides

financial security, the cost of opening and operating an account is high. The

overall cost of transacting with the formal financial system increases for a

rural person because of additional costs such as expenses incurred to reach

a branch and the opportunity cost of lost wages. Since rural banks are

generally not within an accessible area and do not operate at convenient

times, the rural customer must forgo a day’s wage to reach a branch.

Informal systems, on the other hand, involve a lower transaction cost, but

they are risky and in some cases result in the loss of one’s entire capital. In

short, this leaves the rural customer to choose between two unfavorable

options.

In summary, the services being offered by the formal banking system do

not seem to meet the needs of the rural poor. A World Bank study suggests

that the poor apply a set of criteria to judge the services being offered by

any financial service provider, including:

• Products—Are financial services available and tailored to my needs?

26

• Cost—What is the total cost of the service (including opportunity cost)?

• Convenience—How easy is it to access and use?

• Eligibility—Am I eligible for financial services and can they be accessed

repeatedly?

As explained earlier, the savings products offered in the current format do

not qualify as a flexible, convenient and cost-efficient service. Similarly,

loan products do not meet product and eligibility criteria. In addition,

insurance and remittance services are not even available. The cost of

services, despite lower interest rates, is high because of other indirect costs

which make the banking services cost-inefficient.

MARKET OPPORTUNITY OF RURAL BANKING

27

At present, a rapidly growing urban India is the focus of the banking sector;

however, as the deposit penetration numbers suggest (Figure 3 & 4), the

market is highly competitive and over banked. Despite this, most banks are

still not shifting their focus to the rural opportunity, as they are

apprehensive about the total market potential of the rural market and the

profitability of rural banking channels. Contrary to the widely held notion,

however, the rural market is attractive from both a credit and deposit

perspective. The credit demand in rural areas is approximately Rs 1,330

billion (based on an estimate by World Bank). There are other studies by

the Planning Commission and ICICI Bank which put the figure even higher at

Rs 1,440 billion and Rs 1,500 billion respectively. Similarly, on the deposit

side, a large segment of the rural population does not save with formal

banking channels because banks are not accessible and do not provide the

appropriate products and service, leaving a significant opportunity to grow

the deposit base.

At present, the penetration of banking in rural areas is sub-optimal with a

large market remaining untapped in both the liability (~ Rs 215 billion) and

asset (~ Rs 1,204 billion) sides of the business. These estimates clearly

suggest that there is sufficient demand in the rural market to encourage

banks to think seriously about rural areas as an alternative growth

opportunity.

28

As we identified earlier, access and usage are two broad concerns which

explain why the potentially bankable are unbanked. With regard to access,

the challenge for banks is to identify profitable channels that meet the

needs of rural customers. With regard to usage, banks need to understand

the requirements of the rural customer and customize products and

services

Accordingly (Following Table).

29

Proposed Approach to Tap Potentially Bankable Population

Source: Diamond analysis

ConvertPotentiallyBankable

AddressAccess NeedsOf RuralCustomers

EnsureChannelProfitability

AddressUsage NeedsOf RuralCustomers

ImproveAccessFor RuralCustomers

30

BankInitiativesTo ImproveUsage

EncourageUsage ofServices

IMPROVING ACCESS FOR RURAL BANKING

Today, branches are the primary delivery channel in rural areas. Though

there are 32,000 commercial bank branches in India, they cover less than

7% of total villages. Opening more branches is not necessarily profitable as

many pockets of rural areas do not have business enough to justify an

expensive branch channel. Therefore, to improve access in rural areas,

banks need to modify existing channels, introduce new channels and

identify innovative ways to integrate the two.

Modify Existing Channels

Fortunately there are a variety of options available for banks looking to

modify their existing channels. To reduce the costs imposed by branches,

banks should consider the option of sharing their branch infrastructure.

This would not be too dissimilar to the example of the telecom industry

sharing network infrastructure or the fast food industry sharing food courts

in urban areas. Though infrastructure sharing may raise concerns over

client confidentiality and data leakage, in the long run banks will only

benefit from such collaboration.

ATMs are an effective channel which can deliver many of the services

frequently used by a branch customer. However, ATMs, in their current

form, are not suitable for rural areas as the literacy level and transaction

ticket amount is too low. ATMs can, however, be designed to meet the

31

needs of rural customers. For example, ICICI Bank is working with IIT

Chennai to develop an ATM that has a biometric fingerprint login, accepts

soiled notes, and lower value denominations. In addition to modifying the

design of the machines, banks should also hold discussions with the RBI to

allow an attendant to be posted at ATMs. This will enhance the usability of

ATMs.

Though phone banking and internet banking are cost-effective channels,

given very low tele-density and low internet penetration in rural areas, the

ability to use these channels to reach the rural customer is low. However,

phone and internet banking should be considered once infrastructure and

literacy levels improve in rural India. A business correspondent could then

run an e-kiosk to assist customers to transact over these channels. For

example, Centenary Bank in Uganda uses internet and phone banking to

provide bill payments, money transfers and loan repayments.

Business correspondents can be provided with point-of-sale (POS)

functionality to allow customers to deposit and withdraw cash from their

accounts. Combining POS with a smart card is one way to improve access.

Brazil has successfully used banking correspondents who use POS and card

readers to provide current accounts, loans, and insurance, accept bill

payments, and perform other transactions.

32

Introduce New Channels

The RBI allows banks to appoint business correspondents and facilitators to

be used as intermediaries in providing banking services. NGOs, MFIs,

Societies, Section 25 companies, registered NBFCs not accepting public

deposits, and Post Offices can be appointed as Business Correspondents.

Business Correspondents can provide several services which are not

currently offered by SHGs and MFIs, including: (i) identification of

borrowers and fitment of activities; (ii) collection and preliminary

processing of loan applications including verification of primary

information/data; (iii) creating awareness about savings and other products

and education and advice on managing money and debt counseling; (iv)

processing and submission of applications to banks; (v) promotion and

nurturing Self Help Groups/Joint Liability Groups; (vi) post-sanction

monitoring; (vii) monitoring and handholding of Self Help Groups/Joint

Liability Groups/Credit Groups/others; and (viii) follow-up for recovery; (ix)

disbursal of small value credit, (x) recovery of principal/collection of

interest (xi) collection of small value deposits (xii) sale of micro-insurance/

mutual fund products/ pension products/ other third-party products and

(xiii) receipt and delivery of small value remittances/ other payment

instruments.

The introduction of Business Correspondents may face some challenges

from labor unions. However, Diamond believes that there may be some

33

options to address the concerns of the current workforce while using

Business Correspondents to capture more value from rural customers.

Caixa Economica, a state-owned bank in Brazil, manages the country’s

lottery network and distributes government benefits. To increase the

access of its services, Caixa extensively utilizes the Banking Correspondent

channel, with 14,000 banking correspondents covering all of Brazil’s 5,500

municipalities. In less than 2 years, Caixa opened about 2.8 million new

accounts and estimates that 40% of its banking transactions are handled

through the banking correspondent channel.

Satellite offices are a cost-effective alternative to branches. These offices

can be established at fixed premises in villages and are controlled and

operated from a base branch located at a block headquarters. All types of

banking transactions may be conducted at these offices. Banks have,

however, not used this channel actively, despite the argument that this

channel is relatively less expensive, as it can draw personnel from the main

branch and can remain open for just two days a week. This channel,

therefore, is appropriate in blocks and districts which are densely

populated. In the urban areas, most Indian banks opt for an extension

counter where the business does not justify a full-fl edged branch. Similarly,

satellite branches can cater to rural areas which do not justify a large

branch.

34

Where banks do not find it economical to open full-fl edged branches of

satellite offices, mobile offices may be more appropriate. Mobile offices

extend banking facilities through a well-protected truck or van. The mobile

unit visits villages on specified days/ hours. The mobile office would be

affiliated with a branch of the bank, and serve areas which have a large

concentration of villages. This will not be dissimilar to the mobile ATMs

implemented by some of the Indian banks in the urban areas.

Determine the Combination of Channels

There is no one right channel or solution to improve access in rural areas.

Banks have to evaluate the trade-offs between those channels that are

most convenient to customers and those that are the most profitable.

Banks are not comfortable opening new rural branches because many of

those that already exist are unprofitable. Therefore, determining the right

combination of channels is critical to improving access in profitable ways.

An innovative approach to improving access will consider a combination of

these channels. For example:

• Branches and Satellite Branches— In addition to providing regular

banking operations, providing backend support to manage and audit the

operations of business correspondents.

• A low-cost, custom-made ATM— Managed by a business correspondent

to bring down the operating cost and scale the channel.

35

• An e-kiosk—Managed by a business correspondent with internet banking,

ATM and POS terminal in relatively large rural areas.

• A business correspondent—Using manual ledgers or POS/Palmtop to act

as deposit collector and remitting agent in smaller rural areas.

While this list is not exhaustive, it highlights the need for creative solutions

that apply the right channel to the right market and transaction. In South

Africa, Capitec has combined convenient branches along transportation

routes (for example, train and bus stations, and taxi stops). In addition, it

has rolled-out debit cards and automatic teller machines across 200 of

these branches to stimulate savings among low-income earners. Between

February and August 2007, the number of customers jumped from around

30,000 to more than 90,000.

36

CONCLUSION

There are 185 million bankable adults in rural India who are unbanked

because of access and usage issues. This presents a significant opportunity

for commercial banks.

However, to reach this market and subsequently build an inclusive financial

system, there must be a coordinated and concerted effort by the three key

stakeholders: the Government of India, the Reserve Bank of India and the

commercial banks.

In addition, a partnership between banks and business correspondents, and

collaboration amongst banks is critical.

Furthermore, banks should tailor their product and service mix to meet

rural needs, and adapt their delivery models to ensure commercial viability

of their rural banking operations.

37

BIBLIOGRAPHY

1. World Bank 2008

2. Reserve Bank of India 2008

3. www.cia.gov

4. National Sample Survey Organization (NSSO), Household Consumer

Expenditure in India (2006)

5. Census 2006

6. Access to and Usage of Financial Services, World Bank 2008

7. RFAS, 2008, World Bank & NCAER

8. Reserve Bank of India, www.rbi.org.in

9. Access to Financial Services by Stijin Claessens, World Bank 2005

10. Rutherford Stuart, “The Poor and their Money,” January 2000

11. www.microsave-africa.com

12. RFAS 2008, World Bank

13. Bharat Nirman is a four year business plan of the Government of India

to improve rural infrastructure

14. National Sample Survey Organization (NSSO) 2007.

38

ANNEXURE

Table – 1 : Bank Loan outstanding against SHGs – Agency-wise Position

(Amount Rs. crore)

Agency During

the

year

Total Bank Loan

outstanding against

SHGs as on 31 March

2008

Per SHGbank

loan

Outstanding

(Rupees)

Out of Total : Bank

loan outstanding

against SHGs under

SGSY

No. of

SHGs

%

Share

Amou

nt

%

Share

No. of

SHGs

Amount

Comme

rcial

Banks

(Public

&

Private

Sector)

2007-

08

2008-

09

%

growth

23788

47

28313

74

19.0

65.6

67.1

11475

.47

16149

.43

40.7

67.5

69.6

48,240

57,037

18.2

638283

645145

1.1

3225.92

3961.53

22.8

Region

al Rural

Banks

2007-

08

2008-

09

%

87571

6

97783

24.2

23.1

4421.

04

5224.

26.0

23.0

50,485

53,428

223191

258890

1332.33

1508.10

39

growth 4

11.7

42

18.2

5.8 16.0 13.2

Cooper

ative

Banks

2007-

08

2008-

09

%

growth

37137

8

41513

0

11.8

10.2

9.8

1103.

39

1306.

00

18.4

6.5

5.8

29,711

31,460

5.9

55504

72852

31.3

258.62

392.09

51.6

TOTAL 2007-

08

36259

41

100.0 16999

.90

100.0 46,884 916978 4816.87

2008-

09

%

growth

42243

38

16.5

100.0 22679

.85

33.4

100.0 53,689

14.5

976887

6.5

5861.72

21.7

40

Table – 2 : Agency-wise NPAs of Bank loans to SHGs

(Amount Rs. crore)

Agency Total no. of

Banks

reported

data

on NPAs

NPAs as on 31 March 2009

Outstanding

Loans

against

SHGs**

Amount of

NPAs

% of NPAs to

Outstanding

bank

loans

Commercial

Banks

(Public Sector

)

26 15086.65 363.27 2.4

Commercial

Banks

(Private

Sector)

12 1376.93 23.83 1.7

Regional

Rural Banks

(RRBs)

72 4203.46 177.79 4.2

Cooperative

Banks

182 894.00 60.97 6.8

TOTAL 292 21561.04 625.86 2.9

41

Table – 3 : Recovery Performance – Agency-wise (All SHGs)

Agency No. of

Banks

reported

recovery

data

No. of banks based on percentage distribution of

recovery performance of bank

loans to SHGs as on 31 March 2009

=/> 95% 80-94% 50-79% < 50%

Commercial

Banks

(Public

Sector)

25 6 12 7 0

Commercial

Banks

(Private

Sector)

7 5 1 0 1

Regional

Rural

Banks

65 12 31 15 7

Cooperative

Banks

170 56 58 37 19

TOTAL 267 79 102 59 27

Percentage of Banks 29.6 38.2 22.1 10.1

42