35234544 rural-banking


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35234544 rural-banking

  1. 1. MANAGEMENT OF FINANCIAL SERVICES A PROJECT REPORT ON RURAL BANKING IN INDIA SUBMITTED TO: M/S. Khushbu shah (Faculty member of M.B.A department of S.P.B.Patel engineering college) S.P.B.Patel Engineering college, Linch Affiliated to Hemchandracharya North Gujarat University SUBMITTED BY: Kinjal Prajapati (0848) Aisha Shah (0851)S.P.B.PATEL ENGINEERING COLLEGE, LINCH 1
  2. 2. MANAGEMENT OF FINANCIAL SERVICES ACKNOWLEGMENT“Chain of mistakes leads towards failures, chain of failures leads to experience and chainof experience leads to success.” That’s what a life’s path is.Some is applicable to my project work. I do not claim that I have a complete knowledgeof the subject. First, I would like to thanks my friends and many persons who directly orindirectly helped me during my project.Doing most favorable my project part, who help me and acknowledge me, I would like toexpress my profound gratitude to M/s. Khushbu Shah, Assistance faculty, S.P.B.Pateleng. college for guiding me right related to topic. Kinjal prajapati Aisha shah (M.B.A. 4th sem)S.P.B.PATEL ENGINEERING COLLEGE, LINCH 2
  3. 3. MANAGEMENT OF FINANCIAL SERVICES CONTENTNo. Particulars Page No.1. Current State of Rural Banking in India 42. Key Drivers of Financial Exclusion of Rural 8 Banking in India3. Reasons for Unprofitable Rural Banking in 11 India4. Usage Issues for Rural Customers 135. Market Opportunity of Rural Banking in 16 India6. Improving Access of rural Banking In India 187. Conclusion 218. Bibliography 229. Annexure 23S.P.B.PATEL ENGINEERING COLLEGE, LINCH 3
  4. 4. MANAGEMENT OF FINANCIAL SERVICESCURRENT STATE OF RURAL BANKING IN INDIAThe Indian EconomyIndia is the 12th largest economy in the world in terms of grossdomestic product (GDP), and fourth in terms of purchasing power parity(PPP)1. The growth of the economy is equally impressive with anaverage of over 8.0% during the last three years2. However, in termsof GDP per capita, India ranks a lowly 160th among other nations.Within the country, there is a stark divide in the incomes of urban andrural areas with the average monthly per capita consumptionexpenditure (MPCE) in urban India being almost double that of ruralIndia.In addition, there are significant disparities in urban and ruralconsumption expenditure between different states. Jharkhand andOrissa, for example, have an MPCE of approximately Rs. 900 in urbanareas and Rs. 410 in rural areas4. In other states like Punjab andHaryana, the urban rural disparity is significantly lower. A fifth of theIndian population is below the poverty line (BPL) today with a MPCEbelow Rs 340. In some states like Jharkhand and Orissa, the proportionof BPL is greater than 40%. Diamond believes that the segments thatare not considered BPL should all be considered as “potentiallybankable” with genuine financial needs that could be met by formalfinancial and banking systems.Current State of Indian BankingAn important metric to determine the level of financialoutreach/inclusion is the ratio of the number of deposit accounts topopulation. It gives a snapshot of the penetration of deposit accountsand credit accounts in India in comparison with a few select countrieswith similar socio-cultural and economic conditions. Even in comparisonwith other developing economies, India has a significant opportunity forincreasing penetration of both deposit and credit accounts.Not only is there a large disparity between India and other countries inbanking penetration but there is also a large variation in bankingpenetration within urban and rural India. While urban India seems to beover-banked with more than 100% penetration (many urban Indianshave more than one bank account), rural India lags far behind with a19% penetration. The variance in rural and urban deposit and creditaccount penetration is not restricted only to few states but is commonacross all states.S.P.B.PATEL ENGINEERING COLLEGE, LINCH 4
  5. 5. MANAGEMENT OF FINANCIAL SERVICESIn addition, the average value of a deposit account and a creditaccount is also quite low in rural areas as compared to urban areas.Diamond believes that the reasons for lower penetration levels arepartly economic, as explained by the low GDP per capita in the ruralareas of the country, and partly a result of “controllable” factors thatare inherent in formal banking systems in India today. The low depositand credit account penetration and low average values in deposit andcredit 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, andusage is the actual use of those services. Access is influenced by issuessuch as the basic economic state of rural India, lack of physicalinfrastructure facilities, regulatory constraints, and the economics ofrural banking. Usage is constrained by social issues such as illiteracy,incomplete service offerings by banks, and high transaction costs in theformal banking system. Access and usage are not synonymous, aspeople may have access to financial services, but decide not to usethem, either for socio-cultural reasons or because opportunity costs aretoo high.List of Rural Banks in IndiaRural banking in India started since the establishment of bankingsector in India. Rural Banks in those days mainly focused upon the agrosector. Regional rural banks in India penetrated every corner of thecountry and extended a helping hand in the growth process of thecountry.SBI has 30 Regional Rural Banks in India known as RRBs. The ruralbanks of SBI is spread in 13 states extending from Kashmir toKarnataka and Himachal Pradesh to North East. The total number ofSBIs Regional Rural Banks in India branches is 2349 (16%). Till date inrural banking in India, there are 14,475 rural banks in the country ofwhich 2126 (91%) are located in remote rural areas.Apart from SBI, there are many other banks which function for thedevelopment of the rural areas in India. These banks are listed below:Andhra Pradesh BiharS.P.B.PATEL ENGINEERING COLLEGE, LINCH 5
  6. 6. MANAGEMENT OF FINANCIAL SERVICES • Andhra Pradesh Grameena Vikas • Madhya Bihar Gramin Bank Bank • Bihar Kshetriya Gramin Bank • Andhra Pragathi Grameena Bank • Uttar Bihar Kshetriya Gramin Bank • Deccan Grameena Bank • Kosi Kshetriya Gramin Bank • Chaitanya Godavari Grameena • Samastipur Kshetriya Gramin Bank Bank • Saptagiri Grameena Bank Gujarat • Dena Gujarat Gramin Bank Chhattisgarh • Baroda Gujarat Gramin Bank • Chhattisgarh Gramin Bank • Saurashtra Gramin Bank • Surguja Kshetriya Gramin Bank • Durg-Rajnandgaon Gramin Bank Himachal Pradesh • Himachal Gramin Bank Haryana • Parvatiya Gramin Bank • Harayana Gramin Bank • Gurgaon Gramin Bank Punjab • Punjab Gramin Bank Jammu & Kashmir • Faridkot-Bhatinda Kshetriya Gramin Bank • Jammu Rural Bank • Malwa Gramin Bank • Ellaquai Dehati Bank • Kamraz Rural Bank Kerala • Narmada Malwa Gramin Bank Assam • North Malabar Gramin Bank • Assam Gramin Vikash Bank • Langpi Dehangi Rural Bank Tamil Nadu • Pandyan Grama Bank Jharkhand • Pallavan Grama Bank • Jharkhand Gramin Bank • Vananchal Gramin Bank Maharashtra • Marathwada Gramin Bank Madhya Pradesh • Aurangabad -Jalna Gramin Bank • Narmada Malwa Gramin Bank • Wainganga Kshetriya Gramin Bank • Satpura Kshetriya Gramin Bank • Vidharbha Kshetriya Gramin Bank • Madhya Bharath Gramin Bank • Solapur Gramin Bank • Chambal-Gwalior Kshetriya • Thane Gramin Bank Gramin Bank • Rewa-Sidhi Gramin Bank • Ratnagiri-Sindhudurg Gramin Bank • Sharda Gramin Bank • Ratlam- Mandsaur Kshetriya Gramin Bank • Vidisha Bhopal Kshetriya Gramin Bank • Mahakaushal Kshetriya GraminS.P.B.PATEL ENGINEERING COLLEGE, LINCH 6
  7. 7. MANAGEMENT OF FINANCIAL SERVICES Bank • Jhabua Dhar Kshetriya Gramin Bank Karnataka Rajasthan • Karnataka Vikas Grameena Bank • Baroda Rajasthan Gramin Bank • Pragathi Gramin Bank • Marwar Ganganagar Bikaner Gramin Bank • Cauvery Kalpatharu Grameena • Rajasthan Gramin Bank Bank • Jaipur Thar Gramin Bank • Krishna Grameena Bank • Hodoti Kshetriya Gramin Bank • Chikmagalur-Kodagu Grameena Bank • Mewar Anchalik Gramin Bank • Visveshvaraya Gramin Bank Orissa West Bengal • Kalinga Gramya Bank • Bangiya Gramin Vikash Bank • Utkal Gramya Bank • Paschim Banga Gramin Bank • Baitarani Gramya Bank • Neelachal Gramya Bank • Uttar Banga Kshetriya Gramin Bank • Rushikulya Gramya Bank Meghalaya Arunachal Pradesh • Arunachal Pradesh Rural Bank • Ka Bank Nogkyndong Ri Khasi- Jaintia Manipur Nagaland • Manipur Rural Bank • Nagaland Rural Bank Mizoram Tripura • Mizoram Rural Bank • Tripura Gramin Bank Uttar Pradesh Uttaranchal • Purvanchal Gramin Bank • Uttaranchal Gramin Bank • Kashi Gomti Samyut Gramin Bank • Nainital Almora Kshetriya Gramin Bank • Uttar Pradesh Gramin Bank • Shreyas Gramin Bank • Lucknow Kshetriya Gramin Bank • Ballia Kshetriya Gramin Bank • Triveni Kshetriya Gramin BankS.P.B.PATEL ENGINEERING COLLEGE, LINCH 7
  8. 8. MANAGEMENT OF FINANCIAL SERVICES KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL BANKINGAccording to Diamond estimates, approximately 245 million adults inrural India do not have a bank account today. As depicted in FollowingTable, this reflects 24% of the total population. While 60 million out of245 million may not need banking services because they are below thepoverty line, Diamond believes that approximately 185 million“potentially bankable” people do not use formal banking servicesbecause of reasons like poor access or usage. 120 100 100 80 47 53 60 37 Series1 40 24 18 16 13 20 6 0 n le n n n n n n ts io tio io io io io io ab in at at at at at at la ra nk ul ul ul ul ul ul pu st op Ba op op op op op on Po P lP P P tP tP lly C d lt ed lt ta ul ul tia ke lly du du To nk Ad Ad ia en an A A nc Ba nt al an on nb na ur Po rb N U R Fi USource: Census India ;BSR 2008—Reserve Bank of India; World Bank &NCAER (2008).Access Issues for Rural CustomersAccess is explained in terms of infrastructure, physical distance, limiteddelivery capabilities, regulatory constraints and the economics of ruralbanking.The banking infrastructure in rural India is not encouraging, with just7% of villages housing a bank branch. What’s more, the poor physicaland social infrastructure also impacts the access to financial services,with 23% of villages going without electricity, 67% without a PostOffice, and an average rural literacy rate of 59% and secondary schoolpenetration of 12%. This lack of physical and social infrastructure inrural India is a key issue impacting access to formal financial services.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 adeveloped market like the U.S. (which is 6 Kms6), there are significantadditional challenges in India in the form of unpaved roads and limitedaccess to modern transportation. Most rural customers are likely tosacrifice an entire day’s wage to travel to a bank branch which is openS.P.B.PATEL ENGINEERING COLLEGE, LINCH 8
  9. 9. MANAGEMENT OF FINANCIAL SERVICESbetween 10:00am and 5:00pm. While some banking transactions couldbe done over phone, this is rarely an option in a country with such lowrural tele-density.Limited delivery capability is a significant challenge. Much of ruralIndia is serviced through branches because ATM penetration is low andother channels such as Phone and Internet Banking are non-existent.Intermediaries like Non-Governmental Organizations (NGOs), Self-HelpGroups, and Micro Finance Institutions (MFIs) are being used by banksto improve access to credit and savings. However, these channels, intheir current form, offer limited services.There are some regulatory constraints imposed by the ReserveBank of India (RBI) which may inadvertently contribute further to thelack of formal banking services in rural areas. For example, the RBIdoes not allow banks to post any person other than a security guard atATMs. Hence, banks cannot deploy many ATMs in rural areas as manyrural customers require in-person support. A second regulatoryinhibitor is that new banks planning to establish a branch in a ruralarea have to receive approval from the Lead Bank and District Collectorof that district. Hence, banks choose not to open new branches incertain areas even when it is profitable to do so because there is nocertainty of getting approvals.Many banks view the rural market as a regulatory requirement ratherthan an economic opportunity. Banks have from time to time bornethe social cost of lending to the rural economy at rates below theircosts. They have also faced capital erosion because of the write-off ofloans, particularly agriculture loans. Banks are required via regulatoryrequirements to open branches in rural areas to provide loans toagriculture and other priority sectors.S.P.B.PATEL ENGINEERING COLLEGE, LINCH 9
  10. 10. MANAGEMENT OF FINANCIAL SERVICESCurrent Rural Banking Channels Description Service Provided Remarks - Full fledged Branches and - Deposit Accounts -96% of total deposit and 95% of Extension Counters of - Credit Accounts Branchtotal loans are with scheduled Scheduled Commercial Banks - Remittancescommercial banks with including Regional Rural Banks - Cardscooperative banks holding Cooperative Banks - Third-Party Productsthe difference Intermediaries- Has a high cost-to-serve - NGOs, SHGs, MFIs and - MFIs directly lend to the poor - Thischannel delivers limited Cooperatives that act as and also act as agents forservices in its current form ATM 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 Others ATM installed at a branch - Cash Depositchannel in rural areas - Offsite - Money Transfer ATM installed at a remote - Cheque Book Request Location - Bill PaymentsSource: Reserve Bank of India; Diamond analysis.S.P.B.PATEL ENGINEERING COLLEGE, LINCH 10
  11. 11. MANAGEMENT OF FINANCIAL SERVICES REASONS FOR UNPROFITABLE OF RURAL BANKING IN INDIAHigh Non-performing Loans (NPL):Banks have higher non-performing loans in rural areas because ruralhouseholds have irregular income and expenditure patterns. The issueis compounded by the dependence of the rural economy on monsoons,and loan waivers driven by political agendas. NPLs from the agriculturesector are 7.7%, compared to 3.5% across non-agriculture sectors8. Inorder for banks to view rural India as a growth opportunity, rather thana regulatory requirement, a combination of these issues must beaddressed. Increasing financial access to rural areas is contingent uponbasic conditions such as proper infrastructure and an enablingregulatory framework, as well as innovative thinking on the part ofcommercial banks. Access issues, however, explain only one part of theproblem. Usage is an equally important issue for rural customers.Low Ticket Size:The average ticket size of both a deposit transaction and a credittransaction in rural areas is small. This means that banks need morecustomers per branch or channel to break even. Considering the smallcatchments area of a branch in rural areas, generating a customerbase with critical mass is challenging.High cost to serve:Branches are the most used channel in rural areas. This is becausemany rural people are not literate and are not comfortable usingtechnology-driven channels such as ATMs, phone banking or internetbanking. On the other hand, a branch is an expensive channel forbanks (Following Table). In addition, rural people, whenever they haveaccess to banks, have frequent low ticket and cash-based transactions,which increase the overall transaction cost for their bank.S.P.B.PATEL ENGINEERING COLLEGE, LINCH 11
  12. 12. MANAGEMENT OF FINANCIAL SERVICES Cost Per Transaction in Indian Banks 60 48 50 40 30 25 S rie e s1 18 20 8 10 4 0 B n ra ch P o e (C ll hn a AM T P o e(I R hn V ) I te e n rn t Cn ) e treSource: Reserve Bank of India; CGAP, World Bank.Higher risk of credit:Rural households may have highly irregular and volatile incomestreams. Irregular wage labor and the sale of agricultural products arethe two main sources of income for rural households. The poor ruralhouseholds (landless and marginal farmers) are particularly dependenton irregular wage employment. Rural households also have irregularexpenditure patterns. The typical expenditure profile of ruralhouseholds is small, with daily or irregular expenses incurred throughthe month. Furthermore, a majority of households incur at least oneunscheduled expenditure per year, with the most frequent reasonsbeing medical or social emergency7. In short, the rural customer isgenerally considered to be a risky one.Information Asymmetry:Since many rural people do not have bank accounts, there is a lack ofinformation on customer behavior in rural India. Absence of a CreditInformation Bureau also complicates the problem as banks have to relyon informal sources to learn the credit history of rural customers. A lackof reliable information can result in either missed opportunities in notapproving otherwise eligible loan candidates, or nonperforming loans.S.P.B.PATEL ENGINEERING COLLEGE, LINCH 12
  13. 13. MANAGEMENT OF FINANCIAL SERVICES USAGE ISSUES FOR RURAL CUSTOMERSEven if access to formal banking is provided to rural customers, there isno guarantee that these services will be used. According to a studyconducted by the World Bank, many households, even in developedcountries, choose not to have a bank account as they do not engage inmany financial transactions—they collect wages in cash, spend in cashand do not wish to be burdened by a bank account9. To compound thesituation many customers in rural India, who have access to and wouldotherwise choose to use formal financial services, do not do so becausethe product and service mixes do not meet their needs.The financial service needs of rural customers are not confined to justsavings and credit, as is usually assumed. Their financial needs arelinked to their life cycle needs, ranging from savings to credit toinsurance to remittances. In fact, even the savings and credit productscurrently offered to rural customers do not entirely meet their needs.Access to savings and investment facilities is critical for the poor. Thetwo critical needs for the rural poor are micro-savings and frequentwithdrawals. These needs facilitate a customer in building capitalover the long term, as well as coping with income shocks in the nearterm. However, banks do not offer adequate services to address theseneeds. The lack of services, therefore, leaves the rural poor with littleoption than to transact with the informal banking market. A studyconducted by Micro Save also concludes that the poor transact with theinformal sector because it will accept small amounts, provide doorstepservice, and ensure ease of enrolment.Rural customers need loans not only for productive purposes but alsofor consumption needs (Following Table). A part from agriculturalsupport, rural customers need micro credit for consumption, educationand emergencies. Though banks offer purpose free loans (personalloans and credit cards) in urban areas quite liberally, in rural areassanction of such loans is significantly restricted. Therefore, the poorraise these loans through the informal financial system (it is worthnoting that these loans taken from the informal system are almostalways repaid or renewed12). In addition, larger households needoccasional high value micro-enterprise loans for small capitalinvestment. Though banks offer these loans, they require excessiveS.P.B.PATEL ENGINEERING COLLEGE, LINCH 13
  14. 14. MANAGEMENT OF FINANCIAL SERVICESdocumentation and time-consuming processes which discouragecustomer applications.Purpose of BorrowingRural Household Borrowing Other business Other business expenditure, 14% expenditure Agriculture Household expenditure, 38% expenditure Agriculture expenditure Household expenditure, 48%Bank Lending to Rural Households Personel Loans, 12% Personel Loans Other Business Loan, Agriculture Loan 52% Agriculture Loan, 36% Other Business LoanA significant percentage of borrowing is toward consumption and other household expenditure, whereasformal financial institutions in rural India provide loans primarily for productive purposes.Source: AIDIS—2008, National Sample Survey Organization (NSSO);Diamond analysis.Insurance reduces the vulnerability of poor households by replacingthe uncertain prospect of large losses with the certainty of payoutagainst small, regular premium payments. It is integral to acomprehensive risk management strategy for poor households. Thisincludes life, health, accident and asset (dwelling, crop, and livestock)insurance. Banks and insurance firms do not offer these services inS.P.B.PATEL ENGINEERING COLLEGE, LINCH 14
  15. 15. MANAGEMENT OF FINANCIAL SERVICESmany rural areas, leading the poor to rely on the informal financialsystem.There are many rural households which depend on weekly or monthlyremittances from their family members who have moved to urbanareas. At present, they depend on informal channels to remit themoney and consequently either risk the loss of money or pay hightransaction fees. Banks do not offer seamless remittance facilitiesbetween urban and rural branches as many of the rural branches arenot computerized and connected to the main bank’s computersystems. This often results in the beneficiary receiving the amount twoweeks after it has being transferred. This represents yet another keyservice which is not provided.The transaction cost for a rural customer to receive credit primarilyconstitutes four attributes: the interest rate, loan amount received as apercentage of amount applied, bribes paid, and the lead time toprocess the loan. Though the formal banking system offers loans atinterest rates lower than informal banking systems, the time taken fora loan to be sanctioned is high which increases uncertainty andopportunity cost. In addition, the customer needs to pay almost 10% ofthe loan amount in bribes and eventually receives an amount that isless than what was applied for. Therefore, while the interest rates areusurious in the informal financing system, rural customers still resort tothis channel because the waiting time to receive the loan is negligibleand there are no indirect costs or commission. Banks also insist oncollateral security which many rural poor cannot afford.As far as savings are concerned, though the formal banking systemprovides financial security, the cost of opening and operating anaccount is high. The overall cost of transacting with the formal financialsystem increases for a rural person because of additional costs such asexpenses incurred to reach a branch and the opportunity cost of lostwages. Since rural banks are generally not within an accessible areaand do not operate at convenient times, the rural customer must forgoa 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 casesresult in the loss of one’s entire capital. In short, this leaves the ruralcustomer to choose between two unfavorable options.In summary, the services being offered by the formal banking systemdo not seem to meet the needs of the rural poor. A World Bank studysuggests that the poor apply a set of criteria to judge the servicesbeing offered by any financial service provider, including:• Products—Are financial services available and tailored to my needs?S.P.B.PATEL ENGINEERING COLLEGE, LINCH 15
  16. 16. MANAGEMENT OF FINANCIAL SERVICES• Cost—What is the total cost of the service (including opportunitycost)?• Convenience—How easy is it to access and use?• Eligibility—Am I eligible for financial services and can they beaccessed repeatedly?As explained earlier, the savings products offered in the current formatdo not qualify as a flexible, convenient and cost-efficient service.Similarly, loan products do not meet product and eligibility criteria. Inaddition, insurance and remittance services are not even available. Thecost of services, despite lower interest rates, is high because of otherindirect costs which make the banking services cost-inefficient. MARKET OPPORTUNITY OF RURAL BANKINGAt present, a rapidly growing urban India is the focus of the bankingsector; 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, asthey are apprehensive about the total market potential of the ruralmarket and the profitability of rural banking channels. Contrary to thewidely held notion, however, the rural market is attractive from both acredit and deposit perspective. The credit demand in rural areas isapproximately Rs 1,330 billion (based on an estimate by World Bank).There are other studies by the Planning Commission and ICICI Bankwhich put the figure even higher at Rs 1,440 billion and Rs 1,500 billionrespectively. Similarly, on the deposit side, a large segment of the ruralpopulation does not save with formal banking channels because banksare not accessible and do not provide the appropriate products andservice, leaving a significant opportunity to grow the deposit base.At present, the penetration of banking in rural areas is sub-optimal witha large market remaining untapped in both the liability (~ Rs 215billion) and asset (~ Rs 1,204 billion) sides of the business. Theseestimates clearly suggest that there is sufficient demand in the ruralmarket to encourage banks to think seriously about rural areas as analternative growth opportunity.As we identified earlier, access and usage are two broad concernswhich explain why the potentially bankable are unbanked. With regardto access, the challenge for banks is to identify profitable channels thatmeet the needs of rural customers. With regard to usage, banks needto understand the requirements of the rural customer and customizeproducts and servicesS.P.B.PATEL ENGINEERING COLLEGE, LINCH 16
  17. 17. MANAGEMENT OF FINANCIAL SERVICESAccordingly (Following Table).Proposed Approach to Tap Potentially Bankable Population Address Access Needs Of Rural Improve Customers Access For Rural Customers Ensure Channel Profitability Convert Potentially Bankable Address Usage Needs Of Rural Encourage Customers Usage of Services Bank Initiatives To Improve Usage Source: Diamond analysisS.P.B.PATEL ENGINEERING COLLEGE, LINCH 17
  18. 18. MANAGEMENT OF FINANCIAL SERVICES IMPROVING ACCESS FOR RURAL BANKINGToday, branches are the primary delivery channel in rural areas.Though there are 32,000 commercial bank branches in India, theycover less than 7% of total villages. Opening more branches is notnecessarily profitable as many pockets of rural areas do not havebusiness enough to justify an expensive branch channel. Therefore, toimprove access in rural areas, banks need to modify existing channels,introduce new channels and identify innovative ways to integrate thetwo.Modify Existing ChannelsFortunately there are a variety of options available for banks looking tomodify their existing channels. To reduce the costs imposed bybranches, banks should consider the option of sharing their branchinfrastructure. This would not be too dissimilar to the example of thetelecom industry sharing network infrastructure or the fast foodindustry sharing food courts in urban areas. Though infrastructuresharing may raise concerns over client confidentiality and dataleakage, in the long run banks will only benefit from such collaboration.ATMs are an effective channel which can deliver many of the servicesfrequently used by a branch customer. However, ATMs, in their currentform, are not suitable for rural areas as the literacy level andtransaction ticket amount is too low. ATMs can, however, be designedto meet the needs of rural customers. For example, ICICI Bank isworking with IIT Chennai to develop an ATM that has a biometricS.P.B.PATEL ENGINEERING COLLEGE, LINCH 18
  19. 19. MANAGEMENT OF FINANCIAL SERVICESfingerprint login, accepts soiled notes, and lower value denominations.In addition to modifying the design of the machines, banks should alsohold discussions with the RBI to allow an attendant to be posted atATMs. This will enhance the usability of ATMs.Though phone banking and internet banking are cost-effectivechannels, given very low tele-density and low internet penetration inrural areas, the ability to use these channels to reach the ruralcustomer is low. However, phone and internet banking should beconsidered once infrastructure and literacy levels improve in ruralIndia. A business correspondent could then run an e-kiosk to assistcustomers to transact over these channels. For example, CentenaryBank in Uganda uses internet and phone banking to provide billpayments, money transfers and loan repayments.Business correspondents can be provided with point-of-sale (POS)functionality to allow customers to deposit and withdraw cash fromtheir accounts. Combining POS with a smart card is one way to improveaccess. Brazil has successfully used banking correspondents who usePOS and card readers to provide current accounts, loans, andinsurance, accept bill payments, and perform other transactions.Introduce New ChannelsThe RBI allows banks to appoint business correspondents andfacilitators to be used as intermediaries in providing banking services.NGOs, MFIs, Societies, Section 25 companies, registered NBFCs notaccepting public deposits, and Post Offices can be appointed asBusiness Correspondents. Business Correspondents can provideseveral 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 includingverification of primary information/data; (iii) creating awareness aboutsavings and other products and education and advice on managingmoney and debt counseling; (iv) processing and submission ofapplications to banks; (v) promotion and nurturing Self HelpGroups/Joint Liability Groups; (vi) post-sanction monitoring; (vii)monitoring and handholding of Self Help Groups/Joint LiabilityGroups/Credit Groups/others; and (viii) follow-up for recovery; (ix)disbursal of small value credit, (x) recovery of principal/collection ofinterest (xi) collection of small value deposits (xii) sale of micro-insurance/ mutual fund products/ pension products/ other third-partyproducts and (xiii) receipt and delivery of small value remittances/other payment instruments.S.P.B.PATEL ENGINEERING COLLEGE, LINCH 19
  20. 20. MANAGEMENT OF FINANCIAL SERVICESThe introduction of Business Correspondents may face somechallenges from labor unions. However, Diamond believes that theremay be some options to address the concerns of the current workforcewhile using Business Correspondents to capture more value from ruralcustomers.Caixa Economica, a state-owned bank in Brazil, manages the country’slottery network and distributes government benefits. To increase theaccess of its services, Caixa extensively utilizes the BankingCorrespondent channel, with 14,000 banking correspondents coveringall of Brazil’s 5,500 municipalities. In less than 2 years, Caixa openedabout 2.8 million new accounts and estimates that 40% of its bankingtransactions are handled through the banking correspondent channel.Satellite offices are a cost-effective alternative to branches. Theseoffices can be established at fixed premises in villages and arecontrolled and operated from a base branch located at a blockheadquarters. All types of banking transactions may be conducted atthese offices. Banks have, however, not used this channel actively,despite the argument that this channel is relatively less expensive, asit can draw personnel from the main branch and can remain open forjust two days a week. This channel, therefore, is appropriate in blocksand districts which are densely populated. In the urban areas, mostIndian banks opt for an extension counter where the business does notjustify a full-fl edged branch. Similarly, satellite branches can cater torural areas which do not justify a large branch.Where banks do not find it economical to open full-fl edged branches ofsatellite offices, mobile offices may be more appropriate. Mobileoffices extend banking facilities through a well-protected truck or van.The mobile unit visits villages on specified days/ hours. The mobileoffice would be affiliated with a branch of the bank, and serve areaswhich have a large concentration of villages. This will not be dissimilarto the mobile ATMs implemented by some of the Indian banks in theurban areas.Determine the Combination of ChannelsThere is no one right channel or solution to improve access in ruralareas. Banks have to evaluate the trade-offs between those channelsthat are most convenient to customers and those that are the mostprofitable. Banks are not comfortable opening new rural branchesbecause many of those that already exist are unprofitable. Therefore,determining the right combination of channels is critical to improvingaccess in profitable ways. An innovative approach to improving accesswill consider a combination of these channels. For example:S.P.B.PATEL ENGINEERING COLLEGE, LINCH 20
  21. 21. MANAGEMENT OF FINANCIAL SERVICES• Branches and Satellite Branches— In addition to providing regularbanking operations, providing backend support to manage and auditthe operations of business correspondents.• A low-cost, custom-made ATM— Managed by a businesscorrespondent to bring down the operating cost and scale the channel.• An e-kiosk—Managed by a business correspondent with internetbanking, ATM and POS terminal in relatively large rural areas.• A business correspondent—Using manual ledgers or POS/Palmtop toact as deposit collector and remitting agent in smaller rural areas.While this list is not exhaustive, it highlights the need for creativesolutions that apply the right channel to the right market andtransaction. In South Africa, Capitec has combined convenientbranches along transportation routes (for example, train and busstations, and taxi stops). In addition, it has rolled-out debit cards andautomatic teller machines across 200 of these branches to stimulatesavings among low-income earners. Between February and August2007, the number of customers jumped from around 30,000 to morethan 90,000. CONCLUSIONThere are 185 million bankable adults in rural India who are unbankedbecause of access and usage issues. This presents a significantopportunity for commercial banks.However, to reach this market and subsequently build an inclusivefinancial system, there must be a coordinated and concerted effort bythe three key stakeholders: the Government of India, the Reserve Bankof 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 meetruralS.P.B.PATEL ENGINEERING COLLEGE, LINCH 21
  22. 22. MANAGEMENT OF FINANCIAL SERVICESneeds, and adapt their delivery models to ensure commercial viabilityof their rural banking operations. BIBLIOGRAPHY1. World Bank 20082. Reserve Bank of India 20083. www.cia.gov4. National Sample Survey Organization (NSSO), Household Consumer Expenditure in India (2006)5. Census 20066. Access to and Usage of Financial Services, World Bank 20087. RFAS, 2008, World Bank & NCAER8. Reserve Bank of India, www.rbi.org.in9. Access to Financial Services by Stijin Claessens, World Bank 200510. Rutherford Stuart, “The Poor and their Money,” January 200011. www.microsave-africa.com12. RFAS 2008, World BankS.P.B.PATEL ENGINEERING COLLEGE, LINCH 22
  23. 23. MANAGEMENT OF FINANCIAL SERVICES13. Bharat Nirman is a four year business plan of the Government ofIndia to improve rural infrastructure14. National Sample Survey Organization (NSSO) 2007. ANNEXURETable – 1 : Bank Loan outstanding against SHGs – Agency-wise Position (AmountRs. crore)Agency During Total Bank Loan outstanding Per Out of Total : the against SHGbank Bank year SHGs as on 31 March 2008 loan loan outstanding Outstanding against SHGs (Rupees) under SGSYS.P.B.PATEL ENGINEERING COLLEGE, LINCH 23
  24. 24. MANAGEMENT OF FINANCIAL SERVICES No. of % Amount % No. of Amount SHGs Shar Shar SHGs e eCommercial 2007-Banks 08 2378847 65.6 11475.47 67.5 48,240 638283 3225.92(Public & 2008-Private 09 2831374 67.1 16149.43 69.6 57,037 645145 3961.53Sector) % growth 19.0 40.7 18.2 1.1 22.8Regional 2007-Rural 08 875716 24.2 4421.04 26.0 50,485 223191 1332.33Banks 2008- 09 977834 23.1 5224.42 23.0 53,428 258890 1508.10 % growth 11.7 18.2 5.8 16.0 13.2Cooperative 2007-Banks 08 371378 10.2 1103.39 6.5 29,711 55504 258.62 2008- 09 415130 9.8 1306.00 5.8 31,460 72852 392.09 % growth 11.8 18.4 5.9 31.3 51.6TOTAL 2007-08 3625941 100.0 16999.90 100.0 46,884 916978 4816.87 2008- 09 4224338 100.0 22679.85 100.0 53,689 976887 5861.72 % growth 16.5 33.4 14.5 6.5 21.7Table – 2 : Agency-wise NPAs of Bank loans to SHGs (Amount Rs.crore) Agency Total no. of NPAs as on 31 March 2009 Banks reported data Outstanding Amount of % of NPAs to on NPAs Loans NPAs Outstanding against bank SHGs** loansCommercial 26 15086.65 363.27 2.4BanksS.P.B.PATEL ENGINEERING COLLEGE, LINCH 24
  25. 25. MANAGEMENT OF FINANCIAL SERVICES(Public Sector )Commercial 12 1376.93 23.83 1.7Banks(Private Sector)Regional Rural 72 4203.46 177.79 4.2Banks(RRBs)Cooperative 182 894.00 60.97 6.8BanksTOTAL 292 21561.04 625.86 2.9Table – 3 : Recovery Performance – Agency-wise (All SHGs) Agency No. of No. of banks based on percentage distribution of Banks recovery performance of bank reported loans to SHGs as on 31 March 2009 recovery =/> 95% 80-94% 50-79% < 50% dataCommercial 25 6 12 7 0Banks(Public Sector)Commercial 7 5 1 0 1Banks(PrivateSector)Regional Rural 65 12 31 15 7BanksCooperative 170 56 58 37 19BanksTOTAL 267 79 102 59 27Percentage of Banks 29.6 38.2 22.1 10.1S.P.B.PATEL ENGINEERING COLLEGE, LINCH 25