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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