A Project Report ON Rural Banking in India: Submitted To: M/S. Khushbu Shah

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.Pat ! E"#$" %$"# &'!! # ( L$"&h A))$!$at * t' + ,&ha"*%a&ha%-a N'%th Gu.a%at U"$/ %s$t-
SUBMITTED B0: K$".a! P%a.a1at$ (23435 A$sha Shah (23675
S.P.B.PATEL ENGINEERING COLLEGE( LINC+
ACKNO8LEGMENT
Chain of mista es leads to!ards failures" chain of failures leads to e#perience and chain of e#perience leads to success.$ %hat&s !hat a life&s path is. Some is applicable to my pro'ect !or . ( do not claim that ( ha)e a complete no!ledge of the sub'ect. First" ( !ould li e to than s my friends and many persons !ho directly or indirectly helped me during my pro'ect. *oing most fa)orable my pro'ect part" !ho help me and ac no!ledge me" ( !ould li e to e#press my profound gratitude to M+s. ,hushbu Shah" Assistance faculty" S.P.B.Patel eng. college for guiding me right related to topic.
,in'al pra'apati Aisha shah -M.B.A. .th sem)
CONTENT N'. 1. /. 3. .. 5. 7. 8. 2. 9. Pa%t$&u!a%s

Current State of 0ural Ban ing in (ndia ,ey *ri)ers of Financial 1#clusion of 0ural Ban ing in (ndia 0easons for 4nprofitable 0ural Ban ing in (ndia 4sage (ssues for 0ural Customers Mar et 6pportunity of 0ural Ban ing in (ndia (mpro)ing Access of rural Ban ing (n (ndia Conclusion Bibliography Anne#ure
Pa# N'. . 2 11 13 17 12 /1 // /3
CURRENT STATE OF RURAL BANKING IN INDIA

The Indian Economy
India is the 12th largest economy in the world in terms of gross domestic product (GDP), and fourth in terms of purchasing power parity (PPP)1. The growth of the economy is e ually impressi!e with an a!erage of o!er ".#$ during the last three years2. %owe!er, in terms of GDP per capita, India ran&s a lowly 1'#th among other nations. (ithin the country, there is a star& di!ide in the incomes of ur)an and rural areas with the a!erage monthly per capita consumption e*penditure (+P,-) in ur)an India )eing almost dou)le that of rural India. In addition, there are significant disparities in ur)an and rural consumption e*penditure )etween different states. .har&hand and /rissa, for e*ample, ha!e an +P,- of appro*imately 0s. 1## in ur)an areas and 0s. 21# in rural areas2. In other states li&e Pun3a) and %aryana, the ur)an rural disparity is significantly lower. 4 fifth of the Indian population is )elow the po!erty line (5P6) today with a +P,- )elow 0s 72#. In some states li&e .har&hand and /rissa, the proportion of 5P6 is greater than 2#$. Diamond )elie!es that the segments that are not considered 5P6 should all )e considered as 8potentially )an&a)le9 with genuine financial needs that could be met by formal financial and ban ing systems.
Current State of Indian Banking
4n important metric to determine the le!el of financial outreach:inclusion is the ratio of the num)er of deposit accounts to population. It gi!es a snapshot of the penetration of deposit accounts and credit accounts in India in comparison with a few select countries with similar socio;cultural and economic conditions. -!en in comparison with other de!eloping economies, India has a significant opportunity for increasing penetration of )oth deposit and credit accounts. <ot only is there a large disparity )etween India and other countries in )an&ing penetration )ut there is also a large !ariation in )an&ing penetration within ur)an and rural India. (hile ur)an India seems to )e o!er;)an&ed with more than 1##$ penetration (many ur)an Indians ha!e more than one )an& account), rural India lags far )ehind with a 11$ penetration. The !ariance in rural and ur)an deposit and credit account penetration is not restricted only to few states )ut is common across all states. In addition, the a!erage !alue of a deposit account and a credit account is also uite low in rural areas as compared to ur)an areas. Diamond )elie!es that the reasons for lower penetration le!els are partly economic, as e*plained )y the low GDP per capita in the rural areas of the country, and partly a result of 8controlla)le9 factors that are inherent in formal )an&ing systems in India today. The low deposit and credit account penetration S.P.B.PATEL ENGINEERING COLLEGE( LINC+ .
MANAGEMENT OF FINANCIAL SERVICES and low a!erage !alues in deposit and credit accounts demonstrate that )an&ing outreach in rural India is su);optimal. This low outreach can )e e*plained )y two &ey parameters= access and usage. >imply defined, access is the a!aila)ility of financial ser!ices, and usage is the actual use of those ser!ices. 4ccess is influenced )y issues such as the )asic economic state of rural India, lac& of physical infrastructure facilities, regulatory constraints, and the economics of rural )an&ing. ?sage is constrained )y social issues such as illiteracy, incomplete ser!ice offerings )y )an&s, and high transaction costs in the formal )an&ing system. 4ccess and usage are not synonymous, as people may ha!e access to financial ser!ices, )ut decide not to use them, either for socio;cultural reasons or )ecause opportunity costs are too high. List of Rural Banks in India 0ural )an&ing in India started since the esta)lishment of )an&ing sector in India. 0ural 5an&s in those days mainly focused upon the agro sector. 0egional rural )an&s in India penetrated e!ery corner of the country and e*tended a helping hand in the growth process of the country. >5I has 7# 0egional 0ural 5an&s in India &nown as 005s. The rural )an&s of >5I is spread in 17 states e*tending from @ashmir to @arnata&a and %imachal Pradesh to <orth -ast. The total num)er of >5Is 0egional 0ural 5an&s in India )ranches is 2721 (1'$). Till date in rural )an&ing in India, there are 12,2AB rural )an&s in the country of which 212' (11$) are located in remote rural areas. 4part from >5I, there are many other )an&s which function for the de!elopment of the rural areas in India. These )an&s are listed )elow=
Andhra Pradesh Bihar

Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank Chhattisgarh
(adhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank +ttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank Gu arat
Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank Durg-Rajnandgaon Gramin Bank Haryana
Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank Himachal Pradesh
imacha" Gramin Bank Parvatiya Gramin Bank Pun a!
arayana Gramin Bank Gurgaon Gramin Bank Jammu & Kashmir
!ammu Rura" Bank #""a$uai Dehati Bank Kamra% Rura" Bank Assam
Punja* Gramin Bank ,aridkot-Bhatinda Kshetriya Gramin Bank (a")a Gramin Bank Kerala
'armada (a")a Gramin Bank 'orth (a"a*ar Gramin Bank "amil #adu
Assam Gramin Vikash Bank &angpi Dehangi Rura" Bank Jharkhand
Pandyan Grama Bank Pa""avan Grama Bank Maharashtra
!harkhand Gramin Bank Vanancha" Gramin Bank Madhya Pradesh
'armada (a")a Gramin Bank Satpura Kshetriya Gramin Bank (adhya Bharath Gramin Bank Cham*a"-G)a"ior Kshetriya Gramin Bank Re)a-Sidhi Gramin Bank Sharda Gramin Bank Rat"am- (andsaur Kshetriya Gramin Bank Vidisha Bhopa" Kshetriya Gramin Bank (ahakausha" Kshetriya Gramin
(arath)ada Gramin Bank Auranga*ad -!a"na Gramin Bank -ainganga Kshetriya Gramin Bank Vidhar*ha Kshetriya Gramin Bank So"apur Gramin Bank .hane Gramin Bank Ratnagiri-Sindhudurg Gramin Bank

Bank
!ha*ua Dhar Kshetriya Gramin Bank Karnataka Ra asthan
Karnataka Vikas Grameena Bank Pragathi Gramin Bank Cauvery Ka"patharu Grameena Bank Krishna Grameena Bank Chikmaga"ur-Kodagu Grameena Bank
Baroda Rajasthan Gramin Bank (ar)ar Ganganagar Bikaner Gramin Bank Rajasthan Gramin Bank Jaipur .har Gramin Bank odoti Kshetriya Gramin Bank (e)ar Ancha"ik Gramin Bank
Visveshvaraya Gramin Bank $rissa %est Bengal
Ka"inga Gramya Bank +tka" Gramya Bank Baitarani Gramya Bank 'ee"acha" Gramya Bank Rushiku"ya Gramya Bank Meghalaya
Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank +ttar Banga Kshetriya Gramin Bank
Arunachal Pradesh
Ka Bank 'ogkyndong Ri Khasi!aintia #agaland
Arunacha" Pradesh Rura" Bank Mani&ur
'aga"and Rura" Bank "ri&ura
(anipur Rura" Bank Mi'oram
.ripura Gramin Bank
(ttar Pradesh
(i%oram Rura" Bank (ttaran)hal
Purvancha" Gramin Bank Kashi Gomti Samyut Gramin Bank

Uttar Pradesh Gramin Bank
+ttarancha" Gramin Bank 'ainita" A"mora Kshetriya Gramin Bank
Shreyas Gramin Bank &uckno) Kshetriya Gramin Bank Ba""ia Kshetriya Gramin Bank .riveni Kshetriya Gramin Bank
KE0 DRIVERS OF FINANCIAL E9CLUSION OF RURAL BANKING

4ccording to Diamond estimates, appro*imately 22B million adults in rural India do not ha!e a )an& account today. 4s depicted in Collowing Ta)le, this reflects 22$ of the total population. (hile '# million out of 22B million may not need )an&ing ser!ices )ecause they are )elow the po!erty line, Diamond )elie!es that appro*imately 1"B million 8potentially )an&a)le9 people do not use formal )an&ing ser!ices )ecause of reasons li&e poor access or usage.
120 100 80 60 40 20 0
To ta lP op ul at io
100 47 53 16
37 13
24 6
&eries1 18
Source: Census India ;BSR !!"#Reser$e Bank of India; %orld Bank & 'CAER ( !!")*
Access Issues for Rural Customers 4ccess is e*plained in terms of infrastructure, physical distance, limited deli!ery capa)ilities, regulatory constraints and the economics of rural )an&ing. The )an&ing infrastructure in rural India is not encouraging, with 3ust A$ of !illages housing a )an& )ranch. (hatDs more, the poor physical and social infrastructure also impacts the access to financial ser!ices, with 27$ of !illages going without electricity, 'A$ without a Post /ffice, and an a!erage rural literacy rate of B1$ and secondary school penetration of 12$. This lac& of physical and social infrastructure in rural India is a &ey issue impacting access to formal financial ser!ices. The a!erage distance to a )ranch in India is appro*imately 7." @ms. (hile this compares fa!ora)ly to the a!erage distance to a )ranch in a de!eloped mar&et li&e the ?.>. (which is ' @ms'), there are significant additional challenges in India in the form of unpa!ed roads and limited access to modern transportation. +ost rural customers are li&ely to sacrifice an entire dayDs wage to tra!el to a )an& )ranch which is open )etween 1#=##am and B=##pm. (hile some )an&ing transactions could )e done o!er phone, this is rarely an option in a country with such low rural tele;density.
Ad ul tP op U rb ul an at io Ad n ul tP op R ul ur at al io A n du lt Po pu la tio an n !e d P op U ul nb at io an n !e d P op "i na ul at n# io ia n ll$ % on st Po ra nt in en ts tia ll$ an !a bl e
n No n A
du lt P
op ul at io n
MANAGEMENT OF FINANCIAL SERVICES 6imited delivery capability is a significant challenge. +uch of rural India is ser!iced through )ranches )ecause 4T+ penetration is low and other channels such as Phone and Internet 5an&ing are non;e*istent. Intermediaries li&e <on;Go!ernmental /rganiEations (<G/s), >elf;%elp Groups, and +icro Cinance Institutions (+CIs) are )eing used )y )an&s to impro!e access to credit and sa!ings. %owe!er, these channels, in their current form, offer limited ser!ices. There are some regulatory constraints imposed )y the 0eser!e 5an& of India (05I) which may inad!ertently contri)ute further to the lac& of formal )an&ing ser!ices in rural areas. Cor e*ample, the 05I does not allow )an&s to post any person other than a security guard at 4T+s. %ence, )an&s cannot deploy many 4T+s in rural areas as many rural customers re uire in;person support. 4 second regulatory inhi)itor is that new )an&s planning to esta)lish a )ranch in a rural area ha!e to recei!e appro!al from the 6ead 5an& and District ,ollector of that district. %ence, )an&s choose not to open new )ranches in certain areas e!en when it is profita)le to do so )ecause there is no certainty of getting appro!als. +any )an&s !iew the rural mar&et as a regulatory re uirement rather than an economic opportunity. 5an&s ha!e from time to time )orne the social cost of lending to the rural economy at rates )elow their costs. They ha!e also faced capital erosion )ecause of the write;off of loans, particularly agriculture loans. 5an&s are re uired !ia regulatory re uirements to open )ranches in rural areas to pro!ide loans to agriculture and other priority sectors.
D s&%$1t$'" : Full fledged Branches and

Extension Counters of Scheduled Co ercial Ban!s including "egional "ural Ban!s Cooperati$e Ban!s
S %/$& P%'/$* *
- Deposit Accounts - Credit Accounts - "e ittances - Cards - %hird-&art' &roducts
R ,a%:s
- 96% of total deposit and 95% of total loans are with scheduled co ercial #an!s with cooperati$e #an!s holding the difference - (as a high cost-to-ser$e
: )*+s, S(*s, -F.s and Cooperati$es that act as .nter ediaries to ta!e financial Ser$ices to the rural areas
- -F.s directl' lend to the poor and also act as agents for he #an!s - S(*s #orrow fro #an!s and are #eneficiaries of loans the sel$es
- %his channel deli$ers li ited ser$ices in its current for
Current
- +nsite - Cash /ithdrawal A%- installed at a #ranch - Cash Deposit - +ffsite - -one' %ransfer A%- installed at a re ote - Che0ue Boo! "e0uest 1ocation - Bill &a' ents Rural Banking Channels
- )egligi#le presence of this channel in rural areas
S.P.B.PATEL
- Cash /ithdrawal -anual - Cash Deposit .nteracti$e 3oice "esponse - -one' %ransfer ENGINEERING LINC+ - .nternet Ban!ing COLLEGE( Che0ue Boo! "e0uest - 4isan Credit Card - Bill &a' ents &ro$ide short-ter credit
:&hone Ban!ing
- Al ost non-existent in rural - .ndia #ecause of low2 %ele-densit' 9 .nternet-penetration Credit appetite of #an!s
Branch
Intermediaries
ATM
Others
Source: Reser$e Bank of India; +iamond analysis*
REASONS FOR UNPROFITABLE OF RURAL BANKING IN INDIA

High Non-performing Loans (NPL):
1;
5an&s ha!e higher non;performing loans in rural areas )ecause rural households ha!e irregular income and e*penditure patterns. The issue is compounded )y the dependence of the rural economy on monsoons, and loan wai!ers dri!en )y political agendas. <P6s from the agriculture sector are A.A$, compared to 7.B$ across non;agriculture sectors". In order for )an&s to !iew rural India as a growth opportunity, rather than a regulatory re uirement, a com)ination of these issues must )e addressed. Increasing financial access to rural areas is contingent upon )asic conditions such as proper infrastructure and an ena)ling regulatory framewor&, as well as inno!ati!e thin&ing on the part of commercial )an&s. 4ccess issues, howe!er, e*plain only one part of the pro)lem. ?sage is an e ually important issue for rural customers.
Low Ticket Size:
The a!erage tic&et siEe of )oth a deposit transaction and a credit transaction in rural areas is small. This means that )an&s need more customers per )ranch or channel to )rea& e!en. ,onsidering the small catchments area of a )ranch in rural areas, generating a customer )ase with critical mass is challenging.
High cost to ser e:
5ranches are the most used channel in rural areas. This is )ecause many rural people are not literate and are not comforta)le using technology;dri!en channels such as 4T+s, phone )an&ing or internet )an&ing. /n the other hand, a )ranch is an e*pensi!e channel for )an&s (Collowing Ta)le). In addition, rural people, whene!er they ha!e access to )an&s, ha!e fre uent low tic&et and cash;)ased transactions, which increase the o!erall transaction cost for their )an&.
Cost Per Transaction in Indian Banks
11
60 50 40 30 20 10 0 ran#h Phone '%all %entre( AT) Phone '*+R( *nternet 25 18 8 4 &eries1 48
S'u%& : R s %/ Ba": ') I"*$a; CGAP( 8'%!* Ba":.
Higher risk of cre!it:
0ural households may ha!e highly irregular and !olatile income streams. Irregular wage la)or and the sale of agricultural products are the two main sources of income for rural households. The poor rural households (landless and marginal farmers) are particularly dependent on irregular wage employment. 0ural households also ha!e irregular e*penditure patterns. The typical e*penditure profile of rural households is small, with daily or irregular e*penses incurred through the month. Curthermore, a ma3ority of households incur at least one unscheduled e*penditure per year, with the most fre uent reasons )eing medical or social emergencyA. In short, the rural customer is generally considered to )e a ris&y one.
"nformation As#mmetr#:
>ince many rural people do not ha!e )an& accounts, there is a lac& of information on customer )eha!ior in rural India. 4)sence of a ,redit Information 5ureau also complicates the pro)lem as )an&s ha!e to rely on informal sources to learn the credit history of rural customers. 4 lac& of relia)le information can result in either missed opportunities in not appro!ing otherwise eligi)le loan candidates, or nonperforming loans.
USAGE ISSUES FOR RURAL CUSTOMERS
1/
MANAGEMENT OF FINANCIAL SERVICES -!en if access to formal )an&ing is pro!ided to rural customers, there is no guarantee that these ser!ices will )e used. 4ccording to a study conducted )y the (orld 5an&, many households, e!en in de!eloped countries, choose not to ha!e a )an& account as they do not engage in many financial transactionsFthey collect wages in cash, spend in cash and do not wish to )e )urdened )y a )an& account1. To compound the situation many customers in rural India, who ha!e access to and would otherwise choose to use formal financial ser!ices, do not do so )ecause the product and ser!ice mi*es do not meet their needs. The financial ser!ice needs of rural customers are not confined to 3ust sa!ings and credit, as is usually assumed. Their financial needs are lin&ed to their life cycle needs, ranging from sa!ings to credit to insurance to remittances. In fact, e!en the sa!ings and credit products currently offered to rural customers do not entirely meet their needs. 4ccess to sa!ings and in!estment facilities is critical for the poor. The two critical needs for the rural poor are micro-savings and frequent withdrawals. These needs facilitate a customer in )uilding capital o!er the long term, as well as coping with income shoc&s in the near term. %owe!er, )an&s do not offer ade uate ser!ices to address these needs. The lac& of ser!ices, therefore, lea!es the rural poor with little option than to transact with the informal )an&ing mar&et. 4 study conducted )y +icro >a!e also concludes that the poor transact with the informal sector )ecause it will accept small amounts, pro!ide doorstep ser!ice, and ensure ease of enrolment, 0ural customers need loans not only for producti!e purposes )ut also for consumption needs (Collowing Ta)le). 4 part from agricultural support, rural customers need micro credit for consumption, education and emergencies. Though )an&s offer purpose free loans (personal loans and credit cards) in ur)an areas uite li)erally, in rural areas sanction of such loans is significantly restricted. Therefore, the poor raise these loans through the informal financial system (it is worth noting that these loans ta&en from the informal system are almost always repaid or renewed12). In addition, larger households need occasional high !alue micro;enterprise loans for small capital in!estment. Though )an&s offer these loans, they re uire e*cessi!e documentation and time;consuming processes which discourage customer applications.
Pur&ose of Borro*ing
Rural Household Borro*ing
13
-ther business e.penditure/ 140 A2ri#ulture e.penditure/ 380
-ther business e.penditure 1ousehold e.penditure A2ri#ulture e.penditure
1ousehold e.penditure/ 480
Bank Lending to Rural Households
Personel 3oans/ 120 Personel 3oans -ther usiness 3oan/ 520 A2ri#ulture 3oan A2ri#ulture 3oan/ 360 -ther usiness 3oan
A significant percentage of borro!ing is to!ard consumption and other household e#penditure" !hereas formal financial institutions in rural (ndia pro)ide loans primarily for producti)e purposes. Source: AIDIS2 !" #ational Sample Survey $rgani%ation &#SS$'( Diamond analysis .
Insurance reduces the !ulnera)ility of poor households )y replacing the uncertain prospect of large losses with the certainty of payout against small, regular premium payments. It is integral to a comprehensi!e ris& management strategy for poor households. This includes life, health, accident and asset (dwelling, crop, and li!estoc&) insurance. 5an&s and insurance firms do not offer these ser!ices in many rural areas, leading the poor to rely on the informal financial system. There are many rural households which depend on wee&ly or monthly remittances from their family mem)ers who ha!e mo!ed to ur)an areas. 4t present, they depend on informal channels to remit the money and conse uently either ris& the loss of money or pay high transaction fees. 5an&s do not offer seamless remittance facilities )etween ur)an and rural )ranches as many of the rural )ranches are not computeriEed and connected to the main )an&Ds computer systems. This often results in the )eneficiary recei!ing the amount two wee&s after it has )eing transferred. This represents yet another &ey ser!ice which is not pro!ided. The transaction cost for a rural customer to recei!e credit primarily constitutes four attri)utes= the interest rate, loan amount recei!ed as a percentage of amount applied, S.P.B.PATEL ENGINEERING COLLEGE( LINC+ 1.
MANAGEMENT OF FINANCIAL SERVICES )ri)es paid, and the lead time to process the loan. Though the formal )an&ing system offers loans at interest rates lower than informal )an&ing systems, the time ta&en for a loan to )e sanctioned is high which increases uncertainty and opportunity cost. In addition, the customer needs to pay almost 1#$ of the loan amount in )ri)es and e!entually recei!es an amount that is less than what was applied for. Therefore, while the interest rates are usurious in the informal financing system, rural customers still resort to this channel )ecause the waiting time to recei!e the loan is negligi)le and there are no indirect costs or commission. 5an&s also insist on collateral security which many rural poor cannot afford. 4s far as sa!ings are concerned, though the formal )an&ing system pro!ides financial security, the cost of opening and operating an account is high. The o!erall cost of transacting with the formal financial system increases for a rural person )ecause of additional costs such as e*penses incurred to reach a )ranch and the opportunity cost of lost wages. >ince rural )an&s are generally not within an accessi)le area and do not operate at con!enient times, the rural customer must forgo a dayDs wage to reach a )ranch. Informal systems, on the other hand, in!ol!e a lower transaction cost, )ut they are ris&y and in some cases result in the loss of oneDs entire capital. In short, this lea!es the rural customer to choose )etween two unfa!ora)le options. In summary, the ser!ices )eing offered )y the formal )an&ing system do not seem to meet the needs of the rural poor. 4 (orld 5an& study suggests that the poor apply a set of criteria to 3udge the ser!ices )eing offered )y any financial ser!ice pro!ider, including= G ProductsF4re financial ser!ices a!aila)le and tailored to my needsH G ,ostF(hat is the total cost of the ser!ice (including opportunity cost)H G ,on!enienceF%ow easy is it to access and useH G -ligi)ilityF4m I eligi)le for financial ser!ices and can they )e accessed repeatedlyH 4s e*plained earlier, the sa!ings products offered in the current format do not ualify as a fle*i)le, con!enient and cost;efficient ser!ice. >imilarly, loan products do not meet product and eligi)ility criteria. In addition, insurance and remittance ser!ices are not e!en a!aila)le. The cost of ser!ices, despite lower interest rates, is high )ecause of other indirect costs which ma&e the )an&ing ser!ices cost;inefficient.
MARKET OPPORTUNIT0 OF RURAL BANKING

4t present, a rapidly growing ur)an India is the focus of the )an&ing sectorI howe!er, as the deposit penetration num)ers suggest (Cigure 7 J 2), the mar&et is highly competiti!e and o!er )an&ed. Despite this, most )an&s are still not shifting their focus to the rural opportunity, as they are apprehensi!e a)out the total mar&et potential of the rural mar&et and the profita)ility of rural )an&ing channels. ,ontrary to the widely held notion, howe!er, the rural mar&et is attracti!e from )oth a credit and deposit
15
MANAGEMENT OF FINANCIAL SERVICES perspecti!e. The credit demand in rural areas is appro*imately 0s 1,77# )illion ()ased on an estimate )y (orld 5an&). There are other studies )y the Planning ,ommission and I,I,I 5an& which put the figure e!en higher at 0s 1,22# )illion and 0s 1,B## )illion respecti!ely. >imilarly, on the deposit side, a large segment of the rural population does not sa!e with formal )an&ing channels )ecause )an&s are not accessi)le and do not pro!ide the appropriate products and ser!ice, lea!ing a significant opportunity to grow the deposit )ase. 4t present, the penetration of )an&ing in rural areas is su);optimal with a large mar&et remaining untapped in )oth the lia)ility (K 0s 21B )illion) and asset (K 0s 1,2#2 )illion) sides of the )usiness. These estimates clearly suggest that there is sufficient demand in the rural mar&et to encourage )an&s to thin& seriously a)out rural areas as an alternati!e growth opportunity. 4s we identified earlier, access and usage are two )road concerns which e*plain why the potentially )an&a)le are un)an&ed. (ith regard to access, the challenge for )an&s is to identify profita)le channels that meet the needs of rural customers. (ith regard to usage, )an&s need to understand the re uirements of the rural customer and customiEe products and ser!ices 4ccordingly (Collowing Ta)le).
Pro&osed A&&roa)h to "a& Potentially Banka!le Po&ulation
17
I,1%'/ A&& ss F'% Ru%a! Cust', %s
A**% ss A&& ss N *s O) Ru%a! Cust', %s E"su% Cha"" ! P%')$tab$!$t-
C'"/ %t P't "t$a!!Ba":ab! A**% ss Usa# N *s O) Ru%a! Cust', %s Ba": I"$t$at$/ s T' I,1%'/ Usa#
E"&'u%a# Usa# ') S %/$& s
S'u%& : D$a,'"* a"a!-s$s
IMPROVING ACCESS FOR RURAL BANKING

S.P.B.PATEL ENGINEERING COLLEGE( LINC+ 18
MANAGEMENT OF FINANCIAL SERVICES Today, )ranches are the primary deli!ery channel in rural areas. Though there are 72,### commercial )an& )ranches in India, they co!er less than A$ of total !illages. /pening more )ranches is not necessarily profita)le as many poc&ets of rural areas do not ha!e )usiness enough to 3ustify an e*pensi!e )ranch channel. Therefore, to impro!e access in rural areas, )an&s need to modify e*isting channels, introduce new channels and identify inno!ati!e ways to integrate the two.
Mo!if# $%isting &hanne's
Cortunately there are a !ariety of options a!aila)le for )an&s loo&ing to modify their e*isting channels. To reduce the costs imposed )y )ranches, )an&s should consider the option of sharing their branch infrastructure. This would not )e too dissimilar to the e*ample of the telecom industry sharing networ& infrastructure or the fast food industry sharing food courts in ur)an areas. Though infrastructure sharing may raise concerns o!er client confidentiality and data lea&age, in the long run )an&s will only )enefit from such colla)oration. A)*s are an effecti!e channel which can deli!er many of the ser!ices fre uently used )y a )ranch customer. %owe!er, 4T+s, in their current form, are not suita)le for rural areas as the literacy le!el and transaction tic&et amount is too low. 4T+s can, howe!er, )e designed to meet the needs of rural customers. Cor e*ample, I,I,I 5an& is wor&ing with IIT ,hennai to de!elop an 4T+ that has a )iometric fingerprint login, accepts soiled notes, and lower !alue denominations. In addition to modifying the design of the machines, )an&s should also hold discussions with the 05I to allow an attendant to )e posted at 4T+s. This will enhance the usa)ility of 4T+s. Though phone ban+ing and internet ban+ing are cost;effecti!e channels, gi!en !ery low tele;density and low internet penetration in rural areas, the a)ility to use these channels to reach the rural customer is low. %owe!er, phone and internet )an&ing should )e considered once infrastructure and literacy le!els impro!e in rural India. 4 )usiness correspondent could then run an e;&ios& to assist customers to transact o!er these channels. Cor e*ample, ,entenary 5an& in ?ganda uses internet and phone )an&ing to pro!ide )ill payments, money transfers and loan repayments. 5usiness correspondents can )e pro!ided with point-of-sale (P/>) functionality to allow customers to deposit and withdraw cash from their accounts. ,om)ining P/> with a smart card is one way to impro!e access. 5raEil has successfully used )an&ing correspondents who use P/> and card readers to pro!ide current accounts, loans, and insurance, accept )ill payments, and perform other transactions.
"ntro!(ce New &hanne's
The 05I allows )an&s to appoint business correspondents and facilitators to )e used as intermediaries in pro!iding )an&ing ser!ices. <G/s, +CIs, >ocieties, >ection 2B companies, registered <5C,s not accepting pu)lic deposits, and Post /ffices can )e appointed as 5usiness ,orrespondents. 5usiness ,orrespondents can pro!ide se!eral
12
MANAGEMENT OF FINANCIAL SERVICES ser!ices which are not currently offered )y >%Gs and +CIs, including= (i) identification of )orrowers and fitment of acti!itiesI (ii) collection and preliminary processing of loan applications including !erification of primary information:dataI (iii) creating awareness a)out sa!ings and other products and education and ad!ice on managing money and de)t counselingI (i!) processing and su)mission of applications to )an&sI (!) promotion and nurturing >elf %elp Groups:.oint 6ia)ility GroupsI (!i) post;sanction monitoringI (!ii) monitoring and handholding of >elf %elp Groups:.oint 6ia)ility Groups:,redit Groups:othersI and (!iii) follow;up for reco!eryI (i*) dis)ursal of small !alue credit, (*) reco!ery of principal:collection of interest (*i) collection of small !alue deposits (*ii) sale of micro;insurance: mutual fund products: pension products: other third;party products and (*iii) receipt and deli!ery of small !alue remittances: other payment instruments. The introduction of 5usiness ,orrespondents may face some challenges from la)or unions. %owe!er, Diamond )elie!es that there may )e some options to address the concerns of the current wor&force while using 5usiness ,orrespondents to capture more !alue from rural customers. ,ai*a -conomica, a state;owned )an& in 5raEil, manages the countryDs lottery networ& and distri)utes go!ernment )enefits. To increase the access of its ser!ices, ,ai*a e*tensi!ely utiliEes the 5an&ing ,orrespondent channel, with 12,### )an&ing correspondents co!ering all of 5raEilDs B,B## municipalities. In less than 2 years, ,ai*a opened a)out 2." million new accounts and estimates that 2#$ of its )an&ing transactions are handled through the )an&ing correspondent channel. Satellite offices are a cost;effecti!e alternati!e to )ranches. These offices can )e esta)lished at fi*ed premises in !illages and are controlled and operated from a )ase )ranch located at a )loc& head uarters. 4ll types of )an&ing transactions may )e conducted at these offices. 5an&s ha!e, howe!er, not used this channel acti!ely, despite the argument that this channel is relati!ely less e*pensi!e, as it can draw personnel from the main )ranch and can remain open for 3ust two days a wee&. This channel, therefore, is appropriate in )loc&s and districts which are densely populated. In the ur)an areas, most Indian )an&s opt for an e*tension counter where the )usiness does not 3ustify a full;fl edged )ranch. >imilarly, satellite )ranches can cater to rural areas which do not 3ustify a large )ranch. (here )an&s do not find it economical to open full;fl edged )ranches of satellite offices, mo)ile offices may )e more appropriate. *obile offices e*tend )an&ing facilities through a well;protected truc& or !an. The mo)ile unit !isits !illages on specified days: hours. The mo)ile office would )e affiliated with a )ranch of the )an&, and ser!e areas which ha!e a large concentration of !illages. This will not )e dissimilar to the mo)ile 4T+s implemented )y some of the Indian )an&s in the ur)an areas.
)etermine the &om*ination of &hanne's
There is no one right channel or solution to impro!e access in rural areas. 5an&s ha!e to e!aluate the trade;offs )etween those channels that are most con!enient to customers
19
MANAGEMENT OF FINANCIAL SERVICES and those that are the most profita)le. 5an&s are not comforta)le opening new rural )ranches )ecause many of those that already e*ist are unprofita)le. Therefore, determining the right com)ination of channels is critical to impro!ing access in profita)le ways. 4n inno!ati!e approach to impro!ing access will consider a com)ination of these channels. Cor e*ample= G 5ranches and >atellite 5ranchesF In addition to pro!iding regular )an&ing operations, pro!iding )ac&end support to manage and audit the operations of )usiness correspondents. G 4 low;cost, custom;made 4T+F +anaged )y a )usiness correspondent to )ring down the operating cost and scale the channel. G 4n e;&ios&F+anaged )y a )usiness correspondent with internet )an&ing, 4T+ and P/> terminal in relati!ely large rural areas. G 4 )usiness correspondentF?sing manual ledgers or P/>:Palmtop to act as deposit collector and remitting agent in smaller rural areas. (hile this list is not e*hausti!e, it highlights the need for creati!e solutions that apply the right channel to the right mar&et and transaction. In >outh 4frica, ,apitec has com)ined con!enient )ranches along transportation routes (for e*ample, train and )us stations, and ta*i stops). In addition, it has rolled;out de)it cards and automatic teller machines across 2## of these )ranches to stimulate sa!ings among low;income earners. 5etween Ce)ruary and 4ugust 2##A, the num)er of customers 3umped from around 7#,### to more than 1#,###.
CONCLUSION
There are 1"B million )an&a)le adults in rural India who are un)an&ed )ecause of access and usage issues. This presents a significant opportunity for commercial )an&s. %owe!er, to reach this mar&et and su)se uently )uild an inclusi!e financial system, there must )e a coordinated and concerted effort )y the three &ey sta&eholders= the Go!ernment of India, the 0eser!e 5an& of India and the commercial )an&s. In addition, a partnership )etween )an&s and )usiness correspondents, and colla)oration amongst )an&s is critical. Curthermore, )an&s should tailor their product and ser!ice mi* to meet rural
/;
MANAGEMENT OF FINANCIAL SERVICES needs, and adapt their deli!ery models to ensure commercial !ia)ility of their rural )an&ing operations.
BIBLIOGRAP+0
1. (orld 5an& 2##" 2. 0eser!e 5an& of India 2##" 7. www.cia.go! 2. <ational >ample >ur!ey /rganiEation (<>>/), %ousehold ,onsumer -*penditure in India (2##') B. ,ensus 2##' '. 4ccess to and ?sage of Cinancial >er!ices, (orld 5an& 2##" A. 0C4>, 2##", (orld 5an& J <,4-0 ". 0eser!e 5an& of India, www.r)i.org.in 1. 4ccess to Cinancial >er!ices )y >ti3in ,laessens, (orld 5an& 2##B 1#. 0utherford >tuart, 8The Poor and their +oney,9 .anuary 2### 11. www.microsa!e;africa.com 12. 0C4> 2##", (orld 5an& 17. 5harat <irman is a four year )usiness plan of the Go!ernment of India to impro!e rural infrastructure S.P.B.PATEL ENGINEERING COLLEGE( LINC+ /1
MANAGEMENT OF FINANCIAL SERVICES 12. <ational >ample >ur!ey /rganiEation (<>>/) 2##A .
ANNE9URE
Ta,le - . : Bank /oan outstanding against SH0s - Agency12ise Position (Amount Rs* crore)
A# "&-
Du%$"# T'ta! Ba": L'a" 'utsta"*$"# th a#a$"st - a% S+Gs as '" <7 Ma%&h =223
P % S+Gba": !'a" Outsta"*$"# (Ru1 s5 > Sha%
N'. ') S+Gs
> Sha%
A,'u"t
Out ') T'ta! : Ba": !'a" 'utsta"*$"# a#a$"st S+Gs u"* % SGS0 N'. ') A,'u"t S+Gs
//

%o44er#ial an!s 'Publi# 5 Pri6ate &e#tor( 20077 08 20087 08 3 gro2th Re2ional 20077 Rural 08 an!s 20087 08 3 gro2th %ooperati6e 20077 an!s 08 20087 08 3 gro2th TOTAL =22?@23 20087 08 3 gro2th
2378847 65,6 2831374 67,1 .4*! 875716 877834 ..*6 371378 415130 ..*" <A=6B47 10,2 8,8 722.2 24,2 23,1
11475,47 67,5 16148,43 68,6 5!*6 4421,04 5224,42 ."* 1103,38 1306,00 ."*5 7ABBB.B2 6,5 5,8 722.2 26,0 23,0
48/240 57/037 ."* 50/485 53/428 7*" 28/711 31/460 7*4 4A(334 53/688 .5*7
638283 3225,82 645145 3861,53 .*. *"
223181 1332,33 258880 1508,10 .8*! 55504 72852 9.*9 B7AB?3 .9* 258,62 382,08 7.*8 437A.3?
4224338 100,0 .8*7
22678,85 100,0 99*5
876887 5861,72 8*7 .*6
Ta,le -
: Agency12ise 'PAs of Bank loans to SH0s (Amount Rs* crore)
A# "&-
T'ta! "'. ') Ba":s % 1'%t * *ata '" NPAs
NPAs as '" <7 Ma%&h =22B Outsta"*$"# L'a"s a#a$"st S+GsCC

15086,65 1376,83
A,'u"t ') NPAs

363,27 23,83
> ') NPAs t' Outsta"*$"# ba": !'a"s

2,4 1,7
%o44er#ial an!s 'Publi# &e#tor ( %o44er#ial an!s 'Pri6ate &e#tor(
26 12
/3

Re2ional Rural an!s 'RR s( %ooperati6e an!s 72 182 4203,46 884,00 177,78 60,87 4,2 6,8
TOTAL
=B=
=76A7.24
A=6.3A
=.B
Ta,le - 9 : Reco$ery Performance - Agency12ise (All SH0s)
A# "&-
N'. ') Ba":s % 1'%t * % &'/ %*ata

25 7 6 5
N'. ') ba":s bas * '" 1 %& "ta# *$st%$but$'" ') % &'/ %- 1 %)'%,a"& ') ba": !'a"s t' S+Gs as '" <7 Ma%&h =22B D/E B6> 32@B4> 62@?B> F 62>
12 1 7 0 0 1
%o44er#ial an!s 'Publi# &e#tor( %o44er#ial an!s 'Pri6ate &e#tor( Re2ional Rural an!s %ooperati6e an!s
65 170
12 56
31 58
15 37
7 18
TOTAL
=A?
?B =B.A
72= <3.=
6B ==.7
=? 72.7
P %& "ta# ') Ba":s
/.

A Project Report ON Rural Banking in India: Submitted To: M/S. Khushbu Shah

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MANAGEMENT OF FINANCIAL SERVICES