Banking Sector in Rural India - Challenges and Opportunities

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Banking Sector in Rural India-
Challenges and Opportunities
A Research Project submitted in partial fulfilment of the
Requirements of 5 years Integrated MBA (Tech) Program of Mukesh Patel School of
Technology Management & Engineering, NMIMS.
By
I035-Shreeyash Dharmadikari
I038-Akshay Panwar
I045-Joel Dsouza
Under supervision of,
Prof. Yashodhan Karulkar
Year of graduation- 2018

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Declaration
We hereby declare that the research project titled, “Banking Sector in Rural India- Challenges
and Opportunities”, submitted by us is based on original work carried out by us. We certify
that it has not been submitted anywhere else. We further declare that Mukesh Patel School of
Technology Management and Engineering- NMIMS (deemed- to-be-university) will have the
copyright on the project report submitted by us to the college (MPSTME).
Thanking You,
Shreeyash Dharmadhikari Akshay Panwar Joel Dsouza

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ACKNOWLEDGEMENTS
We would like to use this opportunity to express our sincere gratitude to everyone who
supported us throughout the entire research paper. We are thankful for their 24/7 guidance,
constructive criticisms and friendly advice during the entire research project work. The
completion of this project gives us great pleasure.
We would like to express our gratitude and thanks to Prof. Yashodhan Karulkar who guided
us through every step of the way of the project.
Thank you,
Joel Dsouza
Akshay Panwar
Shreeyash Dharmadikari

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Table of contents
Abstract……………………………………………………………………………………….5
1. Introduction…………………………………………………………………………….….6
1.1 Background of The Study…………………………………………………………….6
1.2 Statement of The Problem…………………………………………………………….8
1.3 Research Objectives…………………………………………………………………..8
1.4 Research Questions…………………………………………………………………...8
2. Literature Review…………………………………………………………………………9
3. Research Methodology…………………………………………………………………...14
3.1 Theoretical Framework………………………………………………………………15
3.2 Operational Definition………………………………………………………………..16
3.3 Hypothesis……………………………………………………………………………17
3.4 Sources of Data and Sampling Procedure……………………………………………18
3.5 Methods of Data Analysis……………………………………………………………18
4. Data Analysis……………………………………………………………………………..19
4.1 Reliability Analysis…………………………………………………………………..19
4.2 Testing of Hypothesis………………………………………………………………..20
5. Summary and Conclusion……………………………………………………………….34
5.1 Restatement of The Problem…………………………………………………………34
5.2 Research Objectives………………………………………………………………….34
5.2 Description of Procedures……………………………………………………………34
5.3 Major Findings……………………………………………………………………….35
5.4 Conclusion…………………………………………………………………………...40
5.5 Limitations…………………………………………………………………………...40
5.6 Scope of Future Research……………………………………………………………41
6. References……………………………………………………………………………...…42
7. Appendix………………………………………………………………………………….43
Questionnaire for Customers………………………………………………………………43
Questionnaire for Bankers…………………………………………………………………50

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Abstract
This dissertation examines the situation of the Banking Sector in Rural India through
studying the obstacles and bottlenecks that have caused underdevelopment of banking
services and products in rural Indian areas. Contrary popular belief lack of capital to invest
for improving banking is not only the reason why the sector is underdeveloped. Banking has
been affected by challenges such as technology displacement and radical innovation of
technology, vast demographic of India, lack of liquidity, lack of services understanding
amongst customers, weak policies and unwillingness of talented bank employees to work in
rural India.
As a result, it is going to take time, investments, overall development of villages and
introduction of innovative schemes and policies to change the state of banking in Rural India.
There have been several research papers published and survey groups that have tried to
explore Rural Banking but the market and economy keeps constantly changing alongside a
lot more about Rural Banking yet to be explored.
We took the above variables in account and developed a theoretical framework containing the
dependent and independent variables along with the null and alternate hypotheses that had to
be proved true or false depending upon the data collection.
We prepared two questionnaires targeted to Bankers and customers in Rural India to get
perspectives and insights from the service providers and from users. Stratified sampling was
used to gather appropriate data.
The data collected was analysed using the SPSS software for which a set of analysis techniques
were applied and the data was interpreted which helped in proving the corresponding null or
alternate hypotheses true as per the requirement of the research.

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1] Introduction
1.1. Background of Study:
Advancement in the field of technology paves the way for many for many more developments
to follow along. One of those is Financial inclusion. Financial inclusion is the delivery of
financial provisions at affordable costs to sections of disadvantaged and low-income segments
of society. While implementing it in India, the concerns were recognized in regard to the
banking practices in the rural areas, that tend to exclude rather than attract vast sections of
population, banks were urged to review their existing practices to align them with the objective
of financial inclusion.
The Government uses this technology in order to reach out to each and every corner of India
by the means of providing facilities or even if it’s just a feedback. Government thinks that the
rise in the number of people that are educated about the use of these financial services can bring
about an increase in the financial inclusion of the country.
Not only riding on technology solely, it is important that the people in the rural sector are first
approached through the traditional ways of providing Financial help i.e. through the Banks and
Financial Centres. Providing the people living in the rural sector of India with Financial
schemes that best suit their nature and working and living circumstances.
The Regional Rural Banks could use a tailored approach in order to target groups such as
Farmers, Large and small entrepreneurs, school and college children and senior citizens.
The rural India has been classified into 4 groups ranging from R1-R4. They are classified on
the basis of matrix built on the types of houses that they stay in and the education they have
received. Now this classification is solely carried out on the individual who earns a living for
his/her family.
The government has been trying for years to make the people in rural India to understand the
ill effects of taking loans from the private sectors and from the rich in the villages. This step
has been taken due to an ever increase in the killings of the farmers that are unable to pay back
the loan and the members of the family made to work for the wealthy as bonded labor.

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In order to tackle such problems, the government has been lenient with the rules and policies
regarding the provision of loans to the rural sector and redressal centres at the nearby RRB’s.
The government of India has come up with various schemes to help tackle current challenges
faced by the industry. A few of the most important ones are:
● Pradhan Mantri Jan Dhan Yojana.
This scheme was announced in order to tackle the financial inclusion problem the
country has been facing since many years. It provides basic banking facilities to the
account holder A Rupay Debit and also provides 1Lakh Rupees accident cover
insurance.
● Swarnajayanti Gram Swarozgar Yojana
This scheme was announced to get the poor people living in the rural regions of India
over the poverty line by organizing them into groups through the process of social
mobilization, training and capacity building in order to make them self-sufficient and
provision of income generating assets through credit schemes and government subsidy.
● Kisan Credit Scheme
A credit scheme designed keeping the farmers of India in mind. Credit scheme will
allow farmers to buy equipment’s, machineries and crops seeds on credit basis. The
validity for the scheme is around five years and can to be extended upto 3 years.
Accident insurance of around 50,000 Rupees is provided and around 25,000 on
permanent disability.
● Pradhan Mantri Suraksha Bima Yojana
Pradhan Mantri Suraksha Bima Yojana has been made available to the people in the
age group of 18-70. According to this scheme the individual has to pay an annual
premium amount of Rs12. This amount will directly be deducted from the mentioned
Bank account. Incase of an accidental death or permanent disability the nominee will
be paid 2lakh Rupees and in case of partial disability 1lakh Rupees.

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1.2 Statement of the Problem:
How has Development and Economic growth impacted banking penetration in rural India?
1.3 Research Objectives:
● To identify the factors that cause an obstruction for greater financial inclusion for the
rural population to approach the Banks.
● To analyse the usage of Bank Facilities provided to the Rural Customers.
● To identify the challenges faced by the Banks in Rural India.
1.4 Research Questions:
● What are the problems faced by the rural customer when approaching Banks for
Financial Services?
● What are the services that are provided to the Rural Customer and to what extent the
customer has found the services satisfying its needs?
● What are the reasons that RRB’s are unprofitable in Rural India?

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2] Literature Review
Rural sector occupies a vital place within the Indian financial set-up, as 3 out of each four
Indians board rural square measures and 5 out of each 6 persons living in rural areas are
dependent upon agriculture as primary supply of financial gain that contributes around 35
percent to national income. Hence, development of agriculture in India would mean
development of rural India. The fast development of rural areas, agriculture and allied activities
as a sector and numerous class of individuals residing within the country has been the basis of
policy formulation within the consecutive plans of the country. Rise in agricultural production
and productivity depends on the adoption of recent farm techniques and technologies. The
adoption of recent tools and practices depends on the supply of larger . quantity of funds, and
this is often for the most part influenced by the structure and operations of the money
establishments set within the country. India has succeeded in developing one in every of the
biggest rural banking system within the world. numerous regulatory measures were taken in
close succession enabling banking system to play an effective role in economic development
of country. The 2 prominently decided measures were; firstly, the consolidation programme of
Primary Agricultural Co-operative Credit Societies (PACS) therefore make build them sturdy
and viable, policy of rural commercial bank branch expansion and its transformation from class
banking to mass banking. And, secondly, the formulation of specific development programmes
and action plans to facilitate the flow of bank credit to rural sector. Further, targets and sudo-
targets were set before, to ensure that the credit to neglected sector (Priority sector) will
increase significantly. (Chellani , 1991)
Single-Agency and Multi-Agency Approaches in Rural Banking
The cooperative movement was 1st formally established within the country in 1904 for
facilitating the development of a special Institutional agency for the supply of credit for
agricultural sector. Government of India continuing its efforts to establish co-operative credit
system as a single agency to fulfill the credit needs of agricultural sector. This enclosed
numerous concessions within the form of state contribution to share capital of co-operative
credit societies, subscription to debentures of land development Banks, exemption from
stamp duties, concessional finance from RBI/NABARD then on. The Central Banks
involvement in agricultural finance was terribly limited. Numerous committees just like the
Agricultural Finance Sub Committee (1945), Rural Banking Enquiry Committee (1950), the

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All-India Rural Credit Survey Committee (1950), whereas emphasising that credit provided
by CBs in India to agriculture was negligible, none had created any recommendations or
suggestion that CBs in India ought to enter the agricultural two and rural sector in a huge
manner. (Desai, 1990)
The establishment of Multi institutional agencies of rural finance was the result of quick
increasing needs of credit for agricultural and rural development, that after all, was the results
of the green revolution in late sixties and therefore the increasing emphasis on the
development of rural sector within the Five-Year Plans. These developments signified that
though co-operatives were the best suited agency for providing agricultural finance, sole
reliance henceforward couldn't be placed on them for meeting larger credit requirements. The
co-operatives both organisationally and operationally found it troublesome to fulfill the new
challenges single handed , for they might not be developed uniformly in all parts of the
country and strengthen financially. The 1st state effort to increase commercial banking
facilities in rural areas was the conversion of the Imperial Bank of India into the SBI in 1955,
on the recommendations of the A.D. Gorwala Committee in 1954. This process was carried
further with the state induction of Central Banks within the field of rural banking under the
policy of 'Social Control' over banks on the recommendations of the National Credit Council
(Under the chairmanship of the Finance Minister) in 1968 to adopt the Multi-Agency
Approach to fulfill the growing credit needs of the farmers. Further, in 1969 the All-India
Rural Credit Review Committee powerfully stressed the requirement of Cooperative Banks to
enter the sector of agricultural finance and this eventually led to the policy of nationalisation
of fourteen major Cooperative Banks in July 1969 (another six banks were nationalised in
April 1980). With this, the penetration of Cooperative Banks within the rural sector began in
a huge way. Further, on the recommendations of Shri M. Narasimham, RRBs were
established in 1975, to serve completely the credit needs of the rural poor. Hence, the change
from the single agency of co-operatives to the multi-agency system of rural banking, was
brought over with a read to extend the flow of rural credit and to deliver credit at the door
step of the farmers. (Narsimham, 1992)
India has one of the world’s most extensive formal rural credit systems, with nearly 47,000
bank branches and close to 100,000 cooperative credit shops in rural areas however despite
that the physical reach of the agricultural credit has not been effective in achieving financial
gain enlargement and poverty reduction, and access to needed financial services is still an
issue in geographical region (PwC & BASIX Report). depository financial institution credit

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to rural areas is ten of total bank credit as against rural GDP contribution(Being 40%). The
RRBs account for only 8 May 1945 of formal sector credit, with close to 60 minutes of it
being lent to the “non-target group” (PwC & BASIX Report). On the contrast MFIs work
with the poor and are known to be effective but lack scale due to their limited ability to raise
resources within the absence of facilitative regulations. None of the existing institutions have
been able to provide savings services to the poor. (PWC & BASIX, 2003)
Regional rural Banks play a significant role in the agriculture and rural development of India
through their vast network. The success of rural credit in Indian State of Chhattisgarh is
largely dependent on their money strength & RRBs are the key financing establishment at the
rural level that shoulders the responsibility of meeting Agricultural credit needs. RRBs face
the issues of overdue, recovery, non-performing assets and other issues. to resolve these
issues the govt. of India promoted Regional Rural Banks (RRBs) through the RRBs Act of
1976 to bridge the gap in the flow of credit to the rural poor. The paper finished that the
RRBs were established to develop the rural economy by providing for the purpose of
development of agriculture, trade, commerce, credit and alternative facilities, particularly to
small and marginal farmers, agricultural labourers several entrepreneurs. (Kumar & Soni,
2013)
Internet banking in rural areas and its applications for many rural consumers in rural areas.
The research objective was to analyze the opportunity of using net banking within the new
generation of rural area that centered on some of the rising trends in rural banking.The
research concluded that the facilities provided by the bank like Term loans, online FD,
Demand Draft facilities etc. are not getting used as much as they were expected to and it was
found that the expectations of consumers towards net banking are, it should be time saving
and convenient to use, should be user friendly and best in security and therefore the main
reason for using net banking facilities would be to have a traditional account within the same
bank that would provide excellent net services. (Parmar & Ranpura, 2013)

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The Rural Banking Structure in India
The co-operative credit structure consists of two types, the one engaged in short term and
medium term credit and the other in a long terra credit. The short-term credit structure is
federal in character, based on 3 tier pattern with the apex banks at the state level, Central Co-
operative Banks at the district level and co-operative credit societies at the village level. The
State Co-operative Banks are the apex level institutions which finance the DCCBs. DCCBs in
turn finance the co-operative credit societies at the primary level. The long-term credit
structure is either Federal or unitary in character with State Co-operative Land Development
Banks (SLDBs) as the apex institutions at the State Level and Primary Land Development
Banks (PLDBs) or branches of SLDBs at the Taluka/block level. The SLDBs have unitary
structure with branches located at the taluka level. Thus, the field level co-operative
institutions which provide credit to individual borrowers consists of
(i) PACS, Providing both short term and medium term credit to their members and
(ii) PLDBs or branches of SLDBs dispensing long term credit to their members.
(Venkateshwari, A.Sujatha, & S.Suresh, 2016)
The reorganisation programme of PACS was introduced in early sixties to make them strong
and viable, following the recommendations of The Committee on Co-operative Credit (Shri
V.L. Mehta as chairman) 1960. The Working Group on Co-operation constituted by the
planning commission, for the Fifth Five Year Plan (1973) had observed that a PACS could
become viable only if it has a minimum short term agricultural credit business of Rs. 2 lakhs.
Further, it was decided by RBI in May 1976, that for the purpose of viability the coverage of
villages with a gross cropped area of 2000 hectares might be considered adequate to provide
a 3-minimum short term credit potential of Rs. 2 lakhs. (Reserve Bank Of India, 1981)
Based on the recommendations of CRAFICARD, the NABARD has formulated a set of
guidelines for planning the future development of re-organised societies in a phased manner.
As a result of the consolidation programme the number of PACS were drastically reduced
over the last 15 years. The commercial banking structure comprises of the rural branches of
both public and private sector banks. SBI and its associates and nationalised banks constitute
the Public-Sector banks. The CBs provides both short-term and long-term loans to fanners
and also finance allied activities like marketing. Processing, storage etc. in rural areas through
their rural branch network. Prior to 1969, most of the CBs branches were concentrated in

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urban areas, hence to increase the branch network in rural areas, RBI evolved a specific
branch licensing policy. As a result, in 1989, the 57 per cent of commercial bank branches
were located in rural areas as against only 22 per cent in 1969. (NABARD, 2014-2015)
RRBs as new institutional agency was established in 1975, so as to meet the credit
requirements of rural poor, which were neglected hither to both by co-operatives and CBs.
They combine the features of both co-operatives & CBs. RR3s are mainly located in rural
areas. The share capital of an RRB (Rs. 1 crores authorised and Rs. 25 lakhs issued) is
contributed by GOI, concerned state Governments and sponsoring bank in the ratio of
50:15:35. These are scheduled commercial banks but differ from the CBs in the following
way:
• Firstly, the area of operation of an RRB is limited to a particular region comprising
one or two districts.
• Secondly, RRBs grant loans and advances only to the rural poor people.
• Lastly, the lending rates of interest of an RRB is similar to the prevailing lending rates
of interest of co-operative societies in the area of operation.
As, at the end of March 1990, there were 196 RRBS covering total of 372 districts in the
country. Out of 196 RRBs, 192 have been sponsored by 26 public sector banks 4 3 by 2
private sector banks, and 1 by a Co-operative bank. (Sinha, 1991)
In our analysis, CBs data includes that of RRBs. The traditional co-operative rural credit
institutions viz. SLDBs and PACS are the other two constituents of rural banking system. At
the all-India level, the state wise presence of all the 3 constituents of rural banking system is
found to be existing in 18 states (Rafique & Manwani, 2013).

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3] Research Methodology
The research study topic is Banking Industry in Rural India: Opportunities & Challenges.
Through which we will be trying to explain the lower rate of banking penetration in rural
India and its effect on provision of financial services by banks in the country. Our research
objectives are to identify and analyse the obstructions that prevent the successful delivery of
Financial Services by banks in Rural India.
A mix of both primary and secondary data will be utilised in our research, where secondary
data would provide the background of our study, necessary statistics to understand the current
scenario of the banking industry in rural India. To measure the rate of penetration in rural
India and provision of financial services we have considered 8 variables (1 Dependent & 7
Independent variables), which will help in determining the effect of each independent
variable on the dependent variable. Based on the considerations of these variables, a
theoretical framework has been designed which will enable us to know whether the
independent variables considered have any effect on the dependent variable or not. Thus, to
prove if the theoretical framework put forth by us is right, we have prepared a questionnaire
for the purpose of Data gathering which will enable us to collect data from homogeneous
groups of people living in rural areas and the people working in the banks, using the
Stratified sampling. A mix of both qualitative & quantitative data will be gathered through
the questionnaire for this research and two separate questionnaires will be circulated, one for
the people living in rural areas and one for the people working in banking sector, with
relevant questions, via the social media, e-mails and 1-on-1 interviews. The types of scale
used in the questionnaire are: Ordinal Scale, Nominal Scale and Dichotomous scale.

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3.1 Theoretical Framework
In this framework, we have Rate of Banking Penetration in Rural India as the Dependent
variable and Infrastructure, Technology Know-How, Regulatory Constraints, Lack of
Training & Education, Cost to Serve, Financial Schemes & Employee Willingness to work as
the Independent variables. These Independent variables will affect the Dependent variable
either directly or indirectly depending upon each variable’s nature.

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3.2 Operational Definition
A. Rate of Banking Penetration: This variable is of the primary interest to us and will
remain our Dependent Variable in all of the Theoretical Frameworks; hence the
independent variables mentioned below will affect this dependent variable as per their
nature.
B. Infrastructure: The physical & social infrastructure in rural India is an independent
variable impacting access to formal financial services provided by the banks.
C. Technology Know-How: The knowledge & understanding of the various available
technologies and means to access financial services acts as an Independent variable
that affects the banking penetration in rural India.
D. Regulatory Constraints: The constraints imposed by the Reserve Bank of India
(RBI) & the government acts as an independent variable that affects the accessibility
to formal financial services provided by the banks.
E. Lack of training & Education: Access to proper training and education provided by
the government & the banks is an independent variable affecting the banking
penetration in rural India.
F. Cost to Serve: The cost of running a physical branch, using technology driven
channels such as ATMs, internet banking, etc. act as an independent variable that
affects the penetration of the banks in rural areas.
G. Financial Schemes: Financial Schemes offered by the banks & the government is an
independent variable that has an effect on the penetration of the banks in rural India.
H. Employee Willingness to Work in Rural Areas: Willingness of the employees to
work in rural India is an independent variable affecting the banking penetration in
rural India.

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3.3 Hypothesis
Null Hypothesis
A. Infrastructure of the banking industry in rural India does not have any effect on the
access to financial services provided by the banks.
B. There is no relation between the technology know-how and the banking penetration in
rural India.
C. Regulatory constraints by the RBI in rural India do not have any effect on the
accessibility to financial services provided by the banks.
D. There is no relation between the lack of training & education and the banking
E. Financial Schemes provided by the banks & Government does not affect the
penetration of the banks in rural areas.
F. There is no relationship between cost to serve and banking penetration in rural India.
G. Employees’ willingness to work in rural India does not affect the penetration of the
banks.
Alternate Hypothesis
A. Infrastructure of the banking industry in rural India affects the access to financial
services provided by the banks.
B. There is a relation between the technology know-how and the banking penetration in
rural India.
C. Regulatory constraints by the RBI in rural India do have an effect on the accessibility
to financial services provided by the banks.
D. There is a relation between the lack of training & education and the banking
E. Financial Schemes provided by the banks & Government affects the penetration of the
banks in rural areas.
F. There is a relationship between cost to serve and banking penetration in rural India.
G. Employees’ willingness to work in rural India affects the penetration of the banks.

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3.4 Sources of Data and Sampling Procedure
We have used primary data for our research and targeted banking customers living in the
rural areas along with the people currently working in the rural banks as well as urban banks.
The data collection methods include survey of the customers and the bank employees. We
have developed 2 separate questionnaires for customers and bank employees for the survey.
Due to time constraints, we have used the method of convenience sampling for collection of
data and we have obtained 96 responses to both questionnaires in total.
3.5 Methods of Data Analysis
We have used SPSS for analysis of the collected data. We used Cronbach’s alpha coefficient
to test the internal consistency of the variables, and hence analysed the reliability of the data.
We have conducted a Simple Linear Regression Analysis using two-tail test to discover
relation between the various variables. We have chosen Spearman’s Correlation Coefficient
(ρ) over the Pearson Correlation Coefficient (r), as Pearson is more appropriate for
measurements taken from an interval scale, while the Spearman is more appropriate for
measurements taken from ordinal scales. This analysis has also been used to test the
hypotheses.

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4. Data Analysis
4.1Reliability Analysis
We have conducted a reliability test for our research, by the means of Cronbach’s alpha test.
We have used SPSS software for the same.
Cronbach’s alpha test is a measure of the internal consistency of the variables. In other
words, it gives us an idea as to how closely related a set of items are as a group. Ideally, the
value of Cronbach’s alpha should be between 0.7 and 1.
The results of the reliability test are represented in a tabular form as follows –
Thus, from the reliability test using Cronbach’s alpha method, we infer that our research is
reliable.

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4.2Testing of Hypothesis
Hypothesis 1:
Null Hypothesis (H0):
Infrastructure of the banking industry in rural India does not have any effect on the access
Alternate Hypothesis (H1):
Infrastructure of the banking industry in rural India affects the access to financial services
provided by the banks.
Analysis:
Inference:
i. The R Square value is .553 which tells us that 55.3% of the variability in the
response data is explained by the Independent Variable’s Performance
Expectancy.

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ii. The coefficient INF1, INF2 and INF3 have a positive relationship with the
Dependent variable.
iii. F (3,46) =19.00 which is much more than the F critical value of 2.81 and
hence there is enough evidence to suggest that the Infrastructure has a
relationship with banking penetration in rural areas.
iv. The most significant impact is being created by the variable INF1 as the p-
value is less than 5% (0.01%<5%). The p-value also supports this argument.
Hence, we Reject the null hypothesis and Accept the alternative hypothesis.

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Hypothesis 2:
There is no relation between the technology know-how and the banking penetration in
rural India.
There is a relation between the technology know-how and the banking penetration in
rural India.
Analysis:
Inference:
Expectancy.
ii. The coefficient TECH1 and TECH2 have a positive relationship with the
Dependent variable while TECH3 has a negative relationship with the DV.

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iii. F (3,46) = 4.948, which is more than the F critical value of 2.81 and hence
there is enough evidence to suggest that Technology has a relationship
with Banking Penetration in rural areas.
iv. The most significant impact is being created by the variable TECH1 and
TECH3 as the p-value is less than 5% (2.7%<5%). the p-value also supports
this argument.
Hence, we Reject the Null Hypothesis and Accept the Alternative Hypothesis.

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Hypothesis 3:
Regulatory constraints by the RBI in rural India do not have any effect on the
accessibility to financial services provided by the banks.
Regulatory constraints by the RBI in rural India do have an effect on the accessibility
Analysis:
Inference:
Expectancy.
ii. The coefficient REG2 has a positive relationship with the Dependent variable
while REG1 has a negative relationship with the DV.
iii. F (2,47) = 0.283, which is much less than the F critical value of 3.20 and
hence there is not enough evidence to say that the Regulatory Constraints
has a relationship with the Banking Penetration in rural areas.

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iv. No Independent Variable is seen creating a significant impact on the
Dependent Variable as all the p-values are higher than 5%. The overall p-
value also supports the above argument.
Hence, we Accept the Null Hypothesis and Reject the Alternative Hypothesis.

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Hypothesis 4:
There is no relation between the lack of training & education and the banking
There is a relation between the lack of training & education and the banking
Analysis:
Inference:
Expectancy.
ii. The coefficient LTE2 & LTE3 have a positive relationship with the Dependent
variable while LTE4 has a negative relationship with the DV.
there is significant evidence to say that the Lack of Training & Education

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has a relationship with the Banking Penetration in rural areas if we just
look at the F-value.
iv. Since the p-value is less than 5% in LTE2, it also supports the above
argument.

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Hypothesis 5:
Financial Schemes provided by the banks & Government does not affect the
penetration of the banks in rural areas.
Financial Schemes provided by the banks & Government affects the penetration of the
banks in rural areas.
Analysis:
Inference:
Expectancy.
ii. The coefficient FS2, FS3 & FS4 have a positive relationship with the
Dependent variable while FS1 has a negative relationship with the DV.

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iii. F (4,45) = 12.099, which is much more than the F critical value of 2.58 and
hence there is significant evidence to say that the Financial Schemes have a
relationship with the Banking Penetration in rural areas if we just look at
the F-value.
iv. Since the p-value is less than 5% in FS1 & FS4, it also supports the above
argument.

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Hypothesis 6:
There is no relationship between cost to serve and banking penetration in rural India.
There is a relationship between cost to serve and banking penetration in rural India.
Analysis:
Inference:
Expectancy.
ii. The coefficient CTS1, CTS2& CTS3 have a positive relationship with the
Dependent variable.
iii. F (3,46) = 0.957, which is much less than the F critical value of 2.81 and
hence there is not enough evidence to say that the Cost to Serve has a
relationship with the Banking Penetration in rural areas.

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iv. No Independent Variable is seen creating a significant impact on the
Dependent Variable as all the p-values are higher than 5%. The overall p-
value also supports the above argument.
Hence, we Accept the Null Hypothesis and Reject the Alternative Hypothesis.

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Hypothesis 7:
Employees’ willingness to work in rural India does not affect the penetration of the
banks.
Employees’ willingness to work in rural India affects the penetration of the banks.
Analysis:
Inference:
Expectancy.
ii. The coefficient EW has a negative relationship with the Dependent variable.

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there is significant evidence to say that the Employee Willingness has a
relationship with the Banking Penetration in rural areas.
iv. Since the p-value is less than 5% in EW, it also supports the above argument.

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5. Summary
5.1 Restatement of the Problem
How has Development and Economic growth impacted the penetration of Banks in Rural
India?
5.2 Research Objectives:
● To identify the factors that cause an obstruction for greater financial inclusion for the
rural population to approach the Banks.
● To analyse the usage of Bank Facilities provided to the Rural Customers.
● To identify the challenges faced by the Banks in Rural India.
5.3 Description of Procedures
We targeted customers living in the rural areas and employees currently working in rural and
urban banks. The data collection methods include survey of the customers and the bank
employees. We have developed 2 separate questionnaires for customers and bank employees
for the survey. We have used the method of convenience sampling for collection of data and
we have obtained 96 responses to both questionnaires in total.
Our responses were measured on a 5-point Likert Scale. Due to the ordinal nature of the scale
and multiple independent variables we have chosen Simple Linear Regression over the other
methods for testing the various hypothesis that were developed.
The data analysis methods used are as follows:
a) Reliability Analysis: Using the reliability analysis we get the Cronbach’s alpha and it is a
coefficient of consistency or reliability, for the data to be reliable the Cronbach’s alpha
should be greater than 0.7 usually.
b) Correlational Analysis: This method is used for testing if any two metric variables are
related to each other linearly in a given population. The Null and the Alternate Hypotheses
are accepted or rejected in this method. Ha: Alternate hypotheses and Ho: Null hypotheses.

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5.4 Major Findings
Major findings from Customers:
There are millions of bankable adults in rural India who have chosen to use the traditional
method of always dealing in cash. People choose to approach private lenders over of banks,
the reason for this ranges from non-availability of banks to no proper infrastructure to even
provide the basic needs. Average person looks at some type of credit in order to even gain
this basic need. Financial inclusion has always been a problem that India has been dealing
with. Excessive focus on Urban India rather than Rural India has pushed the financial growth
of the country to a standstill from the Rural India point of view. According to the responses
received from the questionnaire circulated, we were able to conclude that the main reason for
an average rural person to not have a bank account is that they don’t earn enough money to
deposit it in the bank and withdraw when needed. Many of the people living in rural India
earn on daily basis.

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Daily wage earners need to buy food daily from the money they earn. This leaves them with
no need to open a bank account as there is no savings left with them. Which leaves most of the
people living in rural India without a Bank account This has further repercussions, as not having
a bank account results in been left out from vailing any Financial Schemes provided by the
government such as applying for a loan or credit. Many of the people living in rural India do
not have proper Identification Documents. Due to such difficulties raised in opening a bank
account in the first place raises a negative attitude towards the banks.
Due to the non-availability of financial help from the banks or the government due to some or
the other reason. The average person tends to move towards private lenders for financial help.
This impacts the governments future decisions regarding the rural India due to the incorrect
data available with them regarding the credits provided to the Farmers and Entrepreneurs in
rural India. Government has introduced many financial schemes such Pradhan Mantri Jan dhan
Yojana, Awaas Yojana, KKisan credit schemes. These credit schemes are focused towards
rural India and the interest rates have been kept low in order to target every income sector and
the individual is even allowed to keep 0 savings in the bank account without the fear that the
account will be closed. This will help the individual in gaining an official document helping in
further economic growth of the individual.
Development and Technology in India has been at the growing stage since 2000, we are
competing toe to toe with countries in the International Markets. This technology can further
be focused towards the rural India and thus bring opportunities to the people that have been
deprived of it.

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Major Findings from Bankers:
Major Findings by Variable:
i. Infrastructure
Lack of Infrastructure is clearly hindering Banks from providing effective services in
Rural India. Over 57% of Employees thought so. Employees voted for Internet
Connectivity should be set up as a priority to improve quality of services followed by
setting up of new branches. Bankers also believed that current ICT facilities were
inadequate.
ii. Customer Training and Education:
The rural masses still remain uneducated about how can they use banking services
and products. Routine education has to be provided on utilisation of primary banking
facilities by employees

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iii. Employee willingness to work in Rural India:
Rural Banking Sector has been suffering from lack of talent as qualified and talented
employees choose to work in cities over rural villages. Employees working in villages
for over 5 years also expressed that they would like work for city banks.
iv. Cost to Serve:
By bringing down the average cost to serve a customer of a local branch it can better
invest in creating better customer experience, invest in creating new facilities. Setting
up of ATMs and increasing dependency on Internet banking are most likely to help
banks lower average cost to serve.

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v. Financial Schemes:
The PMJDY Scheme responsible for mass customer on boarding in the banking sector
has brought in a positive impact in Rural India. Majority of the Bank accounts opened
under the scheme are being actively used.

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5.5 Conclusion
Hence by collecting, analysing and studying the data, we conclude that independent
variables considered by us like the Infrastructure, Technology Know-How, Lack of
Training and Education, Financial Scheme & Employee Willingness are indeed
affecting the rate of penetration of banks in rural areas of India. While the independent
variables Regulatory Constraints and Cost to Serve have no impact on the banking
The values obtained after performing the various data analysis methods mostly turned
out consistent, which reflects that the analysis methods chosen by us were favourable
and data collected through the questionnaires was reliable.
5.6 Limitations
i. Limited sample size: To effectively gauge the situation of the banking industry, a
Nationwide heterogenous sample size must be used which would be on the scale of
lakhs of customers and bankers.
Our survey reached out to 96 apt respondents after discarding faulty responses.
ii. Faulty responses: We discarded 7 responses that were not filled in the intended
manner.
iii. Limited time available: As students of a full time graduate program, our team was
able to devote limited time to this research project and could not visit more rural
areas.

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5.6 Scope for Future Research
The economic reforms initiated by the Government of India about two decades ago have
changed the landscape of several sectors of the Indian economy. Last two decades also
witnessed radical technological innovation in Banking sector. The recently elected
Government and it’s bold and ambitious resetting of goals and schemes like PMJDY and
Demonetization also bring about change in this sector.
As early as while doing the primary research the team had realized that no single survey will
ever be enough to understand the banking sector. A lot of potential for research lies in this
area. A few of the interesting areas that we could have tapped into are:
• State wise surveys covering the entirety of India.
• Detailed study of technology as a displacer of traditional banking and changes and
effects brought in by it.
• Analysis of current policies and policy formulation by RBI and its effect on Rural
Bank Branches.
• Study of implementing long term sustainability in Rural Indian Banks.
• Upcoming developments in Banking like Mobile wallets, Mobile Apps, e-Banking,
Payment banks and how they can be utilized to improve penetration and quality of
banking services and products in Rural India.
• Technologies of the future like Artificial Intelligence, Machine Learning, Cognitive
Computing, Deep Learning, powerful mobile devices and their possible role in the
banking sector of tomorrow.
• Future of Rural Indian banking in a globalized world.

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6. References
Chellani , D. (1991). Role of Banks In Rural Development Social Work Review.
Desai, S. (1990). Agriculture And Rural Banking In India,. Published By Himalaya
Publishing House, . , 326. .
Kumar, A. K., & Soni, A. K. (2013). A Study on Current Status of Regional Rural Banks in
India. IJECR.
NABARD. (2014-2015). Annual Report.
Narsimham, M. (1992). Committee on Financial System. Narasimham Committee report on
the financial system.
Parmar, B. J., & Ranpura, D. B. (2013). Rural banking through internet: A study on use of
internet banking among rural consumers. Asian Journal of Management.
PWC, & BASIX. (2003). INDIA: Rural Finance Sector Restructuring and.
Rafique, & Manwani. (2013). Role of Regional Rural Bank (RRB’s) in the Economic
Development of India. International Journal of Advance Research in computer science
and management studies.
Reserve Bank Of India. (1981). Report Of The Committee To Review Arrangements For
Institutional Credit For Agriculture And Rural Development. Mumbai: RBI.
Sinha, S. (1991). Origin And Objectives Of Regional Rural Banks, Agricultural Banker.
Rural Banking And Economics, 2.
Venkateshwari, A.Sujatha, & S.Suresh. (2016). Indian Banking sector-Callenges and
Opportunities. International Journal of Science Technology Management.

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7. Appendix
• Questionnaire for Customers

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• Questionnaire for Bank Employees

Banking Sector in Rural India - Challenges and Opportunities

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