Rural India constitutes 69% of India’s population. 86% of Rural population earns less than $2 per day (most of Indian BoP households earn $67 per month). Only 0.29 per cent of the male population has reached the graduation level (0.04% for women) and 6.% of the rural males arc educated up to the middle level. Connectivity – In 2006: 13% in rural India had to travel > 30 minutes; 2011: just 2%. When it comes to connectivity, Rural Indian BOP segment has grown more than urban in last year. The rural economy contributes nearly half of the country’s GDP More than 50 percent of the sales FMCG and Durable companies come from the rural areas. The McKinsey report (2007) on the rise on consumer market in India predicts that in twenty years the rural Indian market will be larger than the total consumer markets in countries such as South Korea or Canada today It is almost four times the size of today’s urban Indian market and estimated the size of the rural market at $577 Billion. According to estimates, approximately 245 million adults (24%) in rural India do not have a bank account today 60 million out of 245 million may not need banking services because they are below the poverty line approximately 185 million “potentially bankable” people do not use formal banking services because of reasons like poor access or usage
First, services sector is getting increasing importance in the rural areas also -from coffee shops to cable television operators. Assessing and meeting of credit needs of this sector is important. Second, the integration between rural and urban areas has increased significantly, with the result, mobility of labour, capital, products and even credit between the two is increasing. Third, commercialisation of agriculture, particularly the increasing role of cash crops like cotton has resulted in substantial role for suppliers' and buyers' credit. Thus, fertiliser and pesticide are supplied to farmers on credit, often on deferred payment basis. In such deferred payment arrangements, credit terms are built into price and hence it is difficult to isolate terms. Similarly, the commission-agents advance money towards purchase of output from farmers, which amounts to providing credit and includes an element of forward trading. These arrangements are often entered into on a voluntary basis. The present banking system does not generally encourage financing the transactions of this nature. Fourth, compared to cereal production, other food items, including poultry and fish are growing at a faster pace. In other words, rural agriculture is getting increasingly diversified in terms of products and processes. Fifth, in areas where commercialisation of agriculture has reached significant levels, the traditional landlord-based tenancy is replaced with commercial-based tenancy. Where intensive cultivation of cash crops such as cotton is called for, this has become quite common. However, the present credit and banking procedures do not cater to the working capital needs of such commercial based tenancy relationship. Sixth, given the diversified activities, and large work force in rural areas, there is increasing recourse to multiple occupations to earn a decent livelihood. For example, a small farmer is also a petty trader and may also be a satellite based cable television operator in the village. Seventh, to the extent employment and indeed incomes could be seasonal, especially for agricultural labour, there is reason to seek and obtain consumption loans. Such assurance is possible with prosperity in rural employment. Present arrangements in formal credit markets are inadequate to meet such requirements. Eighth, while there is significant commercialisation and diversification of rural economies, progress is very uneven in different parts of the country. So, there are still many areas, where exploitation of tribals by money lenders or of agricultural labourers by landlord-money lenders, still persists. Norms and procedures of credit, therefore, need to be different to meet varying circumstances.
To enable them to raise their income levels and improve living
Depending upon the requirement and purpose, the funds needed by Indian farmers can be categorized into three types
Money lender is often combined with the farming by the village money lender as they lend to farmer for both the productive and non productive purposes charging high rate of interest. They enter larger than actually borrowed sums through false pretense by obtaining promissory and give no receipts for repayment and often deny such repayments. Their main interest has been exploit the farmers and grab their lands. Institutional credit has been introduced to stop such activities of the money lenders
Though several efforts were made to increase the flow of institutional credit for agricultural and rural lending, there were mismatches in credit and production. Field studies conducted to determine the reason, revealed that it was due to absence of effective local level planning. 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 focussed lending and contribute to the development of the area.
The cooperative banks have different layers and many of them have significantly large non-performing assets (NPAs). Many cooperatives are undercapitalised. The public sector banking system also exhibits NPAs, and some of them have so far been provided with recapitalised funds. The RRBs also exhibit NPAs and these have been recapitalised from the Government of India so far, which would imply a total recapitalisation of double the amount provided by Government of India.
The poorest group spend the highest proportion of the their income on food –typically more than 60% and sometimes as much as 90% .Under these circumstances , any drop in earning or any additional expenditure has immediate consequence for family welfare –unless saving or loan can be accessed
CONTENTNo. Particulars1 Current State of Rural Banking in India2 Key Drivers of Financial Exclusion of Rural Banking in India3 Reasons for Unprofitable Rural Banking in India4 Market Opportunity of Rural Banking in India5 Usage issues for Rural Customers6 Improving Access of Rural Banking in India7 Conclusion8 Bibliography
Rural India 69% - India’s Population. 86% - earns less than $2/day. 0.33% - reached graduation level (0.29% men & 0.04% women). 50% - economy contributes nearly half of the country’s GDP 50% - the sales FMCG and Durable companies come from the rural areas. 2% - had to travel > 30 minutes (whereas 13% in 2010). 24% - don’t have a bank account today (of below poverty line and reasons like poor access or usage). The McKinsey report on the rise on consumer market in India predicts that in twenty years the rural Indian market will be larger than the total consumer markets in countries such as South Korea or Canada today
What Is Rural Banking??? It is a form of services that provide solution to the financial needs of the consumers in Rural areas.
Rural Banking - Introduction Started since the establishment of banking sector in India. Mainly focused upon the agro sector. 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. SBI – Largest bank catering to Rural banking. A high proportion of rural lending is from informal sources. About 500-600 million people in India still do not have bank accounts. Current demand for credit in Rural India is around Rs.1,33,000 Crs. Commercial Bank branches cover only 7% of rural sector and large market is still untapped.
TERM OF RURAL FINANCE Funds needed by Indian farmers can be categorized into three types: Short term loan - 12 to15 months SHORT TERM LOAN are issued to the farmer for the purpose of cultivation or domestics expenses such buying seeds, manure and fodder for cattle, etc. Medium term loan -3 to 5 years MEDIUM TERM LOAN are given to farmer to purchase cattle, agriculture implement and to make improvement on land. Long term loan -15 to 20 years LONG TERM LOAN are given to the farmer to purchase land, pay of old debt and purchase useful machinery for long term usage. These loans are for comparative long period since the farmers can repay them gradually over a number of years.
Objectives Of Banking Services In Rural Areas Poverty Alleviation Objectives: The objectives is to uplift the mass of population residing in the rural areas who are currently below the poverty line by extending credit to the smallest-scale economic activity. Financial Intermediation Objectives: The approach involves increasing the accessibility of banking services to the poor in a commercially sustainable manner.
Rural banking faces twin challenges Regulation Distribution Regulation with respect to banking has been designed for delivery in urban India. Distribution requires more manpower to be deployed in rural area. Rs 1-crore business in microfinance required 30 people in terms of manpower, the same volume of business in other portfolios requires only one person.
The Government Constitute an authority for National Mission on Financial inclusion. Draw a road map for replicating the successful pilots. Establish open standards for technology to be used. Source BC from diverse streams to get at the required number. Undertake a massive program for financial literacy and credit counseling. Dovetail Govt. payments under various programs through bank accounts. Strategic action plan for remittance facility both inter bank/intra bank and post office. Implement a time bound plan for training of BC. Include SHGs as BC.
Reserve Bank of India The regulator of the formal banking system, has a critical role in improving rural access and usage. Changes in technology, banking systems, and market conditions may require to revisit guidelines governing the licensing of new branches, operations of ATMs, and use of technology. Banks Focus on non farm rural business. Reach out to the needy through micro credit/SHGs(Self Help Group). Easy and affordable financial services through the best use of technology. Expand reach through alternate channels. exclusive focused attention to the financial Inclusion of unbanked rural area. To extend banking services at the customer’s convenience. Improvement in service levels in Rural Areas.
Market Opportunity Money lender and informal financing are always synonymous. Informal markets are less significant now than before, and have to face competition or at least accept benchmarking of formal credit. Financing of consumption and at interest rates comparable to those prevailing in the rural informal debt markets. The informal market is providing a range of financial products, which the formal banking system is not able to. Studies have demonstrated that expansion of literacy and education tends to increase the access of rural folk to formal credit, reduce the informal transaction costs in dealings
Role of RBI in RURAL CREDIT Providing timely and adequate credit through NABARD. Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40 % of net bank credit should go to the priority sector, out of which at least 18 % of net bank credit should flow to agriculture. Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percent sub-target would have to go to the corpus Rural Infrastructure Development Fund(RIDF). Recapitalization of Regional Rural Banks (RRBs) and setting up of local area banks(LABs). Developing and strengthening cooperative credit structures. Establishment of RRBs in 1975 By 1982, to consolidate the various arrangements made by the RBI to promote/ supervise institutions and channel credit to rural areas, NABARD was established. “Service Area Approach”
Concerns regarding current approach Non Performing Assets Difference between the cost of resources and the commercial rates of interest of cooperative banks in the deregulated interest rate regime is on the high side. Institutional credit is more likely to be available for well to do among the rural community. Relatively backward regions have less access to institutional credit than others do. Non-availability of timely credit and the cumbersome procedures for obtaining credit For Government sponsored schemes, there has been overlap in accountability.
Concerns regarding current approach Multiple financing - over financing and under financing. Different agencies often fail to formulate and develop meaningful agriculture programs in given blocks and districts. Different procedures and policies in the matter of providing loans and their recovery. Problems in the recovery of loans lent to same person by different agencies. Flow of formal credit to agriculturally developed regions and to relatively larger farmers leaving the backward regions and small farmers. The transaction costs vary with type of credit agency involved, the type of borrower and farm-size. Effective cost of borrowings for smaller loans tends to be relatively higher than for a larger loan.
OFFICES OF COMMERCIAL BANKS IN INDIA 2006 TO 2010 As on March 31 Bank Groups 2006 2007 2008 2009 2010 (1) (2) (3) (4) (5) State Bank of India and its Associates 14310 14673 15846 16878 18114 Nationalised Banks $ 35858 37431 39234 40854 43187 Public Sector Banks 50168 52104 55080 57732 61301 Old Private Sector Banks 4819 4826 4690 4908 5174 New Private Sector Banks 2016 2598 3632 4328 5213 Private Sector Banks 6835 7424 8322 9236 10387 Foreign Banks 259 272 279 295 310 Regional Rural Banks 14807 14843 15070 15485 15723 Non-Scheduled Commercial Banks 41 46 46 46 47 All Commercial Banks 72110 74689 78797 82794 87768 Notes : 1. Data on number of offices include administrative offices. 2. Data for 2006 to 2009 have been revised and data for 2010 are provisional. 3. $ includes IDBI Bank Ltd. Source : Master Office File (latest updated) on commercial banks, Department of Statistics and Information Managemenr, RBI
GROUP-WISE DISTRIBUTION OF OFFICES OF COMMERCIAL BANKS - 2010 20000 15000 10000 5000 0 Northern North Eastern Central Western Southern Region Eastern Region Region Region Region Rural 5108 1219 7533 7988 3889 6791 Urban 10113 1073 6946 9429 9812 17867
Expand Reach – Tie-up with India Post to penetrate the rural market. – Partner with NGO / MFI to act as Business Facilitators. Focus on Micro Finance Banks currently have to invest 40% in priority sector lending (Agriculture, SME & Government Securities). MFI lending provides 10-14% return as against 6-7% in Government instruments. Risks could be mitigated further by partnering with MFI in specific markets and while dealing with SHG directly in others. Thus entering the micro finance business makes a lot of commercial sense for SBI in the long run.
“Kiosk Banking”…Offer Convenience• Kiosk Operator owns the kiosks at the villages, enroll as agents of the Business Correspondent.• Banking services can be offered to the rural population at close vicinity like a mini branch.• Making Kiosk –operators as the agents of the Business Correspondent, helps in building rural entrepreneurs.• The bio-metric authentication helps illiterate people also operate bank accounts comfortably.• The Bank in turn would benefit greatly because of the improved business adding to the bottom line of the Bank.
Be Cost Effective Low cost ATM for Wage Disbursement with finger print authentication and local language interface. This ultra low cost ATM costs just 1/10 th that of the traditional ATM used in cities. Will enable transfer of funds from NREGA directly to the rural workers. It is not just an ATM but an e-governance model that is people friendly and empowers the poorest labor to assert his/her rights.
Innovate & Adopt Technology Smart Cards, Biometric scanning for signatures and Handheld Devices and other innovative technology needs to be explored. It will help bring down the cost per transaction as well as help improve the Service Delivery in Rural Areas.
Latest Updates…22nd August 2011 - The government has told banks to open branchesin over 43,000 new rural locations during the current financial yearthat would bring all habitations with population of over 2,000 underbanking net, parliament has been told.19th August 2011 - Association of India (EFCAI) has urged ReserveBank of India (RBI) to allow post offices function as Banks. In amemorandum submitted to RBI deputy governor, H R Khan here, theEFCAI has pointed out that India has the worlds largest postalnetwork in India with over 1.55 lakhs post offices, out of which 1.40lakhs are in the rural areas. If the RBI allows Indian Posts to starttheir own banking operations it will have the potential to emerge asone of the biggest banks in the country and also ensure inclusivegrowth.
Major 1998 Kisan(Farmers) Credit CardMilestone 1992 NABARD launches SHG bank linkage program 1985 Comprehensive crop insurance 1982 NABARD - APEX agency for rural finance Establishment of RRBs 1975Major Commercial banks nationalized 1969
MajorMilestone Proposed bill on microfinance 2007 regulation Marketing of Mutual Fund Units - RRBS 2006 Establishment of SIDBI Foundation of Micro-credit 2000
ConclusionThere are 185 million bankable adults in rural India who areunbanked because of access and usage issues. This presents asignificant opportunity for commercial banks.However, to reach this market and subsequently build an inclusivefinancial system, there must be a coordinated and concertedeffort by the three key stakeholders: the Government of India, theReserve Bank of India and the commercial banks.In addition, a partnership between banks and businesscorrespondents, and collaboration amongst banks is critical.Furthermore, banks should tailor their product and service mix tomeet rural needs, and adapt their delivery models to ensurecommercial viability of their rural banking operations.
Referred from… Indian Finance & Investment guide. Seminar Rural Banking through ICT`