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PROJECT ON
RURAL BANKING IN INDIA
MBA FINANCE
FINAL PROJECT
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PROJECT ON
RURAL BANKING IN INDIA
Submitted By
.
In Partial Fulfillment of the requirements
For the award of the Degree of MBA FINANCE
FINAL PROJECT
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C E R T I F I C A T E
This is to certify that Miss. of MBA
FINANCE FINAL PROJECT has successfully completed the
project on Rural Banking In Indiaunder the guidance of A.C. VANJANI.
Project guide
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DECLARATION
I .. student of MBA Banking &
Insurance Semester V (2008-2009) hereby declare that I
have completed the Project on Rural Banking In
India
The information submitted is true and original to the best if my knowledge.
Signature of the student
Name of the student
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ACKNOWLEDGEMENT
I would like to thank a lot of people without whom this project would not
have been complete. First DR A. C. VANJANI he was of utmost help in
guiding me structures this project. He helped me throughout and was always
present to help me whenever I had a doubt.
Expert opinion is always required to complete the project so it was Mr.DARIRA who has the experience of working in PUNJAB NATIONAL
BANK, explained me the concept and helped me structure the project. It
wouldnt have been easy for me to tackle such a topic without his practical
guidance
A research can never be over without access to a good library and in this
case I was blessed as our college library, is very well stocked with books.
And the lending policy made life a lot easier. Also not to forget the library of
INDIAN MERCHANT CHAMBER which made it easier to get through to
matter that helped me understand concepts well
And not to forget the unconditional support provided by my parents and
friends.
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RURAL
BANKING IN
INDIA
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INDEXINDEXINDEXINDEX
SR. NO CONTENTS PAGE NO.
1 EXCUTIVE SUMMARY 8
2 INTRODUCTION 10
3 STRUCTURE OF RURAL BANKING 12
4 HISTORICAL PERSPECTIVE 13
5 NEED FOR RURAL BANKING 20
6 ROLE OF PUBLIC SECTOR BANKS IN
RURAL BANKING SYSTEM
23
7 CHALLENGES AFFECTING
PERFORMANCE
24
8 FUTURE OF PUBLIC SECTOR BANKS IN
RURAL BANKING SYSTEM
31
9 RECENT DEVELOPMENTS 37
10 LATEST INITIATIVES BY REGULATORY
AUTHORITIES
41
11 ISSUUES IN AGRICULTUTAL CREDIT-
DEVELOPING COUNTRIES PERSPECTIVE
44
12 CONCLUSION 47
13 BIBLOGRAPHY 49
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The Indian national planners have taken up the banking sector as an
instrument for accelerating the process of rural development. After
nationalization both the Cooperatives and Commercial banks played a
significant role in providing credit for the development of agriculture which
is classified as a priority sector by the RBI in its credit policy. Due to rapid
growth and development of rural areas of the country both the cooperatives
and commercial banks could not meet the credit needs of the weaker section
of the community. After the introduction of modern technology in
agriculture the small marginal
EXCUTIVE SUMMARY
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in public and private sector with a large network of rural branches,
Regional Rural Banks (RRBs) and Cooperative credit structure with
State Cooperative Banks (SCBs) at state level, the affiliated District
Cooperative Banks (DCCBs) at district level and Primary Agriculture
Credit Societies (PACSs) at village level, the long term credit through
State Cooperative Agriculture and Rural Development Banks at State
level (SCARDBs) with branches or affiliated Primary Cooperative
Agriculture and Rural Development Banks (PCARDBs) at grassroots
level.
HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE
he Reserve Bank of India has a mandate to be closely
involved in matters relating to rural credit and banking by
virtue of the provisions of Section 54 of the RBI Act. The
major initiative in pursuance of this mandate was taken with
sponsoring of All-India Rural Credit Survey in 1951-52. This
committee had found that cultivators depended on private
moneylenders for about 94% of their credit needs. The All India Rural
Credit Survey Committee (1954) proposed an integrated scheme for
rural credit. It suggested that the RBI should take steps to strengthen
the cooperative movement. An important step towards gearing the
banking system for rural credit was the formation of the State Bank of
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India by amalgamating the Imperial Bank of India with other state-
associated banks. It was felt that with the assistance of the RBI, the
State Bank would play a crucial role in providing rural credit.
Adoption of a policy of social control over banks in 1967 and the
nationalization of 14 major scheduled commercial banks in 1969 have
proved to be two major turning-points in the history of commercial
banks in India. The period from 1969 to the present can be
characterized as representing, broadly speaking, three phases in
banking policy vis--vis the Indian countryside.
The first was the period following the nationalization of Indias 14
major commercial banks in 1969. This was also the early phase of
the green revolution in rural India, and one of the objectives of thenationalization of banks was for the state to gain access to new
liquidity, particularly among rich farmers, in the countryside. The
declared objectives of the new policy with respect to rural banking-
what came to be known as social and development banking were
(i) to provide banking services in previously unbanked or under-
banked rural areas;
(ii) to provide substantial credit to specific activities, including
agriculture and cottage industries; and
(iii) to provide credit to certain disadvantaged groups such as,
for example, Dalit and Scheduled Tribe households.
(iv) the agricultural sector be included in the category of priority
sectors
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were, as was the green revolution itself, biased in respect of regions,
crops and classes.
The Reserve Bank hived off a part of its role in agricultural credit to a
separate national level institution, viz, Agriculture Refinance and
Development Corporation (ARDC) in 1975. Soon thereafter, the
Government established by ordinance and then legislation a new
network of rural financial institutions called the Regional Rural Banks
(RRBs), which were promoted by the Government of India, State
governments and commercial banks. These were created on the
basis of recommendations by a working group on commercial credit,
also called the Narasimham Committee. Subsequently, the ARDC
was converted into NABARD.
Where a bank fails to fulfill its commitment towards priority sectorlending, it is currently required to contribute to Rural Infrastructure
Development Fund set up by NABARD. NABARD in turn provides
these funds to State Governments and state owned corporations to
enable them to complete various types of rural infrastructure projects.
It was felt that with the establishment of large network of branches, a
system could be adopted to assign specific areas to each bank
branch in which it can concentrate on focused lending and contribute
to the development of the area. With a view to implementing this
approach, RBI introduced a scheme of "Service Area Approach" for
commercial banks. To further supplement the institutional
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mechanism, the concept of Local Area Banks was taken up in 1996-
97.
The second phase, which began in the late 1970s and early 1980s,
was a period when two strategies for employment generation were
envisaged, namely wage- employment through state-sponsored rural
employment schemes and self-employment generation by means of
loans-cum-subsidy schemes targeted at the rural poor. Thus began a
period of directed credit, during which credit was directed towards
the weaker sections. The most important new scheme of this phase
was, of course, the Integrated Rural Development Programme or
IRDP, a scheme for the creation of productive income-bearing assets
among the poor through the allocation of subsidized credit. The IRDP
was initiated in 1978-79 as a pilot project and extended to all rural
blocks of the country in 1980.
The second phase also involved an expansion and consolidation of
the institutional infrastructure of rural banking. After bank
nationalization, there was an unprecedented growth of commercial
banking in terms of both geographical spread and functional reach.
The third and current phase, which began in 1991, is that of
liberalization. The policy objectives of this phase are encapsulated in
the Report of the Committee on the Financial System, which was
chaired by M. Narasimham (RBI, 1991).
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NEED FOR RURAL BANKINGNEED FOR RURAL BANKINGNEED FOR RURAL BANKINGNEED FOR RURAL BANKING
n the period before the nationalization of banks, key sectors of the
economy including agriculture remained thoroughly neglected in
terms of availability of institutional credit. Whereas the industrial
sector at that time accounted for about 15 per cent of national output,
it appropriated two-thirds of commercial bank credit, whereas the
agricultural sector contributing about half of national output was
almost completely neglected by the commercial banks.
The rural population of India has been suffering from a great deal of
indebtedness and is subject to exploitation in the credit market due to
the high interest rates and lack of convenient access to credit. Rural
household need credit for investing in agriculture and smoothening
out of seasonal fluctuations in earnings .Rural household need
access to financial institution that can provide them with credit at a
lower rates and at reasonable terms than the traditional
moneylenders and there by help them avoid debt traps that are
common in rural India
But after the adoption of the New Economic Policy in 1991, the
Indian economy is becoming more and more mature with the
passage of time on account of structural changes undertaken in
different sectors and areas. The GDP growth rate has been much
higher and it has averaged over eight per cent during the past three
I
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ROLE OF PUBLIC SECTOR BANKS INROLE OF PUBLIC SECTOR BANKS INROLE OF PUBLIC SECTOR BANKS INROLE OF PUBLIC SECTOR BANKS IN
RURAL BANKING SYSTEMRURAL BANKING SYSTEMRURAL BANKING SYSTEMRURAL BANKING SYSTEM
ublic sector banks continue to have about 75% share in the
banking system. Despite the rapid growth of the new private
sector banks, the share of public sector banks will continue
to remain high. Hence the continued health of Indian banking system
will depend on the performance of public sector banks.
About half the branches of public sector banks (PSBs) are in the rural
sector. These are often regarded as part of the rural community.
Rural branches of PSBs have played a significant role in the past
three decades. They came to the rescue of the agricultural sector in
the wake of the Green Revolution, as the cooperative banks, on
which the agricultural sector had been mainly dependent in the pre-
nationalization period, were proving unequal to the job of meeting
higher credit requirements. Emerging as the focal points for catering
to the localized needs of the rural communities, they helped to
significantly reduce the role of professional moneylenders and
brought about a qualitative transformation in the savings and
investments activities in the rural sector.
PSBs have been able to percolate to the rural areas accompanied by
an increase in priority sector lending, which private banks have not
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been able to do. The probable reason is the low level of social
responsibility of business on the part of private and foreign banks.
Another notable thing is that by and large PSBs have been ethical as
compared to their counterparts in private sector.
PSBs are incorporating new technology, reducing manpower and
extending the ambit of customer facilities. While these measures will
reduce the cost overburden in the urban and metropolitan branches,
the relief is not likely to be substantial enough to offset the heavyadministrative and operational burden of running hundreds of rural
branches.
CHALLENGES AFFECTINGCHALLENGES AFFECTINGCHALLENGES AFFECTINGCHALLENGES AFFECTINGPERFORMANCEPERFORMANCEPERFORMANCEPERFORMANCE
anking System :
Historically, there have been four major problems with
respect to the supply of credit to the Indian countryside.
The supply of formal sector credit to the countryside as a whole
has been inadequate.
B
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lending. There have been external pressures on the banking sector to
lend to weaker sections. In addition, the priority sector lending has to
be at a low concessional rate of interest.
The deposits collected by banks from rural areas were not totally
deployed there. This indicates that institutional sources of credit such
as banks and co-operative societies are unable to meet the farmers
needs.
Inadequate branches: The spread of bank branches in rural areas is
quite inadequate. In fact, the number of such branches has declined
in the post-liberalization era. The number of rural bank branches in
the country has come down from 35,000 in early 1990s to as low as
30,572 by March 2006 through mergers and swapping of rural
branches. At one time, rural India accounted for 57 per cent of total
bank branches in the country. This share has now come down to 47
per cent. What is more disappointing, they generate only 14 per cent
of deposits and 12 per cent of advances.
Financial exclusion: The main problem is the lack of access to
banking. More than half of the Indian population suffers from financial
exclusion, with a substantial portion of the households, especially in
the rural areas, still outside the coverage of the formal banking
system. Almost 40 per cent of the adult population of the country is
unable to access mainstream financial products. Such a high level of
financial exclusion obviously imposes social costs.
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Poor Financial Viability: Banks may not find operations economical,
as sometimes the transaction and follow up costs are more than the
amount of credit. Rural banks and rural branches that are compelled
to operate in this milieu do so unprofitably.
Non consumption loans: Another problem is that banks generally
do not give loans for consumption. In cases where day-to-day living
itself is at question, banks, their strict conditions on the use of money
borrowed and the numerous delays are avoided.
Nature of transactions: Rural transactions are cash based. Majority
of the rural populiace has the capacity to engage in micro-savings
and would require depositions and withdrawals at their convenience.
Moreover, the timing of the transaction does not necessarily coincide
with the bank branch timings. Since most transactions are cash
based, this increases the total cost of transactions because of the
cost of idle cash, and the cost of handling infrastructure, that is
branch setup, manpower and the cost of cash security.
Education and Awareness level of the people: Rural India at 59
percent rate of literacy is behind urban India. It affects the acceptance
of formal banking by villagers as they feel a natural hesitation towards
a structured and rigid environment. They also find it difficult to fulfill
the formalities required for carrying out banking transactions. Hence,
they need a higher level of guidance and support which requires
deploying more manpower; again a cost escalating factor. Lower
education and awareness also act as an impediment in effective
utilization of proposed and existing ATMs.
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which were too large to be made use by the very poor. These
practices led to a high default.
The difficulty is that, faced with the demands made on them by the
advocates of liberalization and the effects of competition from the
private sector banks, banks in the public sector are also being forced
to change. They are trying to trim operating expenses, by reducing
the wage bill by reducing employment through retrenchment under
the VRS scheme and computerization. They are also seeking toreduce costs by limiting branch expansion and reducing the number
of bank branches.
The latter, which affects the rural areas first, reduces access to credit
in rural areas that were well-served by the post-nationalization branch
expansion drive, and worsens the tendency towards reduced
provision of credit to the agricultural sector.
What is however worrying the PSB management is the structural drag
of these branches on the profitability of the banks. Costs had been no
consideration when these branches were established at breakneck
speed in the Seventies. But today the exact benchmarks forprofitability and viability have put the PSBs in an unenviable position.
The big challenge in promoting rural banking is to keep the costs low
in view of the fact that while the number of transactions in such areas
may be high, they are mostly small-value transactions. However,
technology can play an important role in keeping the costs of such
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transactions low. Unfortunately, public sector banks (PSBs), which
account for 70 per cent of assets, have been slow in making use of
modern technology to bring down transaction costs.
While public sector banks have the potential, with their spread and
reach, to enable financial inclusion, they also have to face difficult
challenges in human resource development. Public sector banks
need to invest significantly in skill enhancement at all levels, for
delivering new service modes in the face of greater competition. Theywill also face new recruitment challenges in the face of adverse
compensation structures in comparison with the private sector banks.
FUTURE OF PUBLIC SECTOR BANKSFUTURE OF PUBLIC SECTOR BANKSFUTURE OF PUBLIC SECTOR BANKSFUTURE OF PUBLIC SECTOR BANKS
IN RURAL BANKING SYSTEMIN RURAL BANKING SYSTEMIN RURAL BANKING SYSTEMIN RURAL BANKING SYSTEM
he future of banking in rural areas depends on several
factors, namely, how the current concerns are addressedtaking into account the dynamics of transformation in rural
economies, the new realities in credit markets, the linkages between
formal and informal markets, and the impact of financial as well as
technological progress on the systems of financial intermediation.
Consequently, public policy will have to address several issues to
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On financing development
The 11th Plan must ensure that our policies are sufficiently flexible to
support the development of micro finance. Interest rates in the micro
finance sector have to be significantly higher than in the banking
sector reflecting the much higher cost of doing business. It is
important to remember that most micro-finance institutions charge
rates which are much lower than rates charged by money lenders.
On agriculture sector policy
The failure of the organized credit system in extending credit has led
to excessive dependence on informal sources usually at exorbitant
interest rates. This is at the root of farmer distress reflected in
excessive indebtedness.
There is evidence that farm debt is increasing much faster than farmIncomes and the larger issue of the overhanging debt stock, as
distinct from credit flow, have not even been on the agenda except
of a few State governments. Admittedly, there are limits to the extent
that banks can be expected to play a purely social role in todays
more competitive environment. However, too conservative an
approach on settling debt that has turned bad, due to contingencies
of poor weather or prices, is not even prudential banking if this serves
only to show bank balance sheets to be better than they are, and
prevents profitable new lending. There are several suggestions,
ranging from a Stabilization Fund to be run by the Centre for
automatic write-off under some specified conditions, to the setting up
by States of standing professional Debt Commissions to examine
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LATEST INITIATIVES BYLATEST INITIATIVES BYLATEST INITIATIVES BYLATEST INITIATIVES BY
REGULATORY AUTHORITIESREGULATORY AUTHORITIESREGULATORY AUTHORITIESREGULATORY AUTHORITIES
uring the Ninth Plan period, the total amount of
agriculture/rural credit was to the extent of Rs. 229956
crore. This is sought to be increased to Rs. 736570 crore.
For this to happen, the Government has directed that:
Commercial Banks, cooperative banks and RRBs should
double the credit to agriculture in the next three years.
Periodic review and enhancement of credit delivery in rural
areas should be undertaken.
Stepping up of rural infrastructure for long term sustainable
growth should be made.
Innovative way of providing finance e.g. micro-finance, Kisan
Credit Card should be evolved on an ongoing basis.
Self-Helf-Group (SHG) micro-finance programme through
NABARD should be encouraged.
D
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CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION
ublic sector banks, entrenched as they are in rural banking
for over three decades appear to be holding on their
business. When the banking industry is surging ahead the
world over, they find that nearly one half of their branches generate
less than 15 per cent of their business. About 17 per cent of their staff
is deployed for handling this business.
Banking sector being on the threshold of major technological
innovation, public sector banks are at the cross-roads: whether to
shed the historical baggage and adopt sophisticated banking.
A plea is made for functional specialization and structural
reorganization of rural banking business, with a view to strengthen
the competitive edge of the banking sector to be in tune with the fast
changing banking scenario. While the new banks prefer to flourish in
cities, gramin banks are directed to operate in rural areas and public
sector banks struggle to remain in both the worlds. They have donethis balancing act for over three decades. Hiving of the rural business
into a subsidiary and amalgamating the gramin banks into it is a
radical suggestion made.
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The process of partial privatization is changing drastically the
perceptions of the state owned banks. The increasing stress on
transparency is pushing them towards reducing NPA and improving
the bottom line. This shift in emphasis is slowly resulting in the
elimination of less remunerative business. They have virtually
stopped rural branch expansion. As a part of the rationalization of the
branch network, some rural branches are being shifted the semi
urban centre or closed, unlamented.
Reorganization of rural business, however, should not result in
creating monolithic, impersonal banking giants. Rural India needs
user-friendly, rural oriented banks, an amalgam of the rustic simplicity
of gramin banks and business concentricity of commercial banks.
Finally, it can be said that rural India provides ample opportunities forprofitable banking and the public sector banks should take advantage
of these latent opportunities and expand rural credit by repositioning
themselves and delivering better services in the financial system.
Only then can PSBs meet the expectations of becoming vibrant rural
financial institutions capable of meeting the growing requirements of
rural India.
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