Professional Documents
Culture Documents
BM SandeepP 2010
BM SandeepP 2010
Project report
On
A comparative study of business models of co-operatives
MFIS and FINANCIAL INCLUSION
Project Supervisor:
Dr. Mahil Carr
(Associate Professor, IDRBT)
Submitted by:
Sandeep kumar.padala
MBA-Banking Technology
School of Management
Pondicherry University
Puducherry-605014
Certificate
Dr.Mahil carr,
Associate. Professor,
IDRBT
Contents
1.Introduction
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1.1Financial exclusion
1.2Business model
1.3Financial inclusion
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3. RRBs
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4.MFIs
5. Evolution of Banking In India
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model
for
financial 41
inclusion
1.Introduction
1.1 Financial exclusion
Financial Exclusion is the process by which a certain section of the
population or a certain group of individuals is denied the access to basic
financial services.
Financial Exclusion Who are these People?
o Underprivileged section in rural and urban areas like, Farmers,
small vendors, etc.
o Agricultural and Industrial Laborers
o People engaged in un-organized sectors
o Unemployed
o Women
o Children
o Old people
o Physically challenged people
Causes of Financial Exclusion
Demand-side Barriers: On demand constraints and opportunities, the
Following issues have a significant bearing on the extent of financial
Exclusion/inclusion:
1. Cultural factors - Women are often disadvantaged by credit requirements
such as collateral since in most of the cases property is registered under their
husbands name and they are to seek male guarantees to borrow.
2. Mistrust of financial institutions - The feeling that there is no point in
Applying for financial products because he/she expects to be refused, as
banks are not interested to look into their cause has led to self-exclusion for
many of the low-income groups.
3. Level of income - A higher share of population below the poverty line
Results in lower demand for financial services as the poor may not have
Savings to place as deposit in savings banks.
4. Financial literacy and skills capacity High information barriers, low
Awareness and limited literacy, particularly financial literacy, i.e., basic
Mathematics, business finance skills as well as lack of understanding often
Constrain demand for financial services.
Supply-side Barriers: The following issues on the supply side are major
Obstacles in providing an adequate supply of financial services to the
Currently unbanked:
1. Locational constraints Absence of physical infrastructure in interiormost parts of the country leads to difficulties in accessing financial
institutions (like banks, etc) resulting in a substantial proportion of
households in rural and remote areas being kept outside the ambit of the
formal financial system.
2. Real and perceived risk in lending - The perceived risk of lending to the
Poor is higher than the real risk, creating a supply barrier by triggering
higher than necessary transactions costs due to stricter than needed
prudential requirements.
3. Approaches and products - Generally, financial services tend to be
Concentrated in urban areas, allowing rural clients little access to services
and information for making well-grounded decisions.
4. Financial viability of MFIs - MFI practitioners encounter difficulties in
having a double bottom line: at the same time aiming to be profitable and
stimulating local economic development.
Infrastructure
Offering
Customers
Finances
Co-operative Movement
Setting up of State Bank of India
Nationalization of banks
Lead Bank Scheme
RRBs
Service Area Approach
Self Help Groups
Cooperative is defined as
A voluntary association of people who have come together to
achieve a common goal
The main principle of co operative is
Each for all and all for each
The origin of concept is
May all work with same mind so that they could work well
Situation of India in the 19th century
75% population was residing in rural India.
Majority of population depend on agriculture and agriculture related
activities
There were no nationalized banks.
Available of rural credit is mainly through prime lenders
There was no any other way to get the credit
Interest charges were very high. Farmers were suffering from indebt
ness and poverty
All these conditions helped introduction of co-operatives in Indian
soil.
Introduction of cooperatives:
Raiffersen initially frames cooperative concept at the time of
German food crisis. In Germany in the year 1864.It worked out very
well at that time in Germany in the 19th century.
Introduction of cooperatives in India
The classic study by Frederic Nicholson, followed by the Edward
Law Committee on Cooperative Legislation, confirmed and
reiterated the need for the State to actively promote cooperatives. A
decade later, the Maclagan Committee (1915) advocated there
should be one cooperative for every village and every village should
be covered by a cooperative. The Royal Commission on Agriculture
in India, which submitted its report in 1928, suggested among other
things, that the cooperative movement should continue to focus on
expanding rural credit and that the State should patronize
cooperatives and protect the sector. It was the Royal Commission
which made the observation if cooperation fails, there will fail the
best hope of rural India. By this time, the State was already deeply
involved in promoting agricultural credit cooperatives. The number
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The RRBs were established with a view to developing the rural economy
by providing, for the purpose of development of agriculture, trade,
commerce, industry and other productive activities in the rural areas, credit
and other facilities, particularly to small and marginal farmers, agricultural
labourers, artisans and small entrepreneurs, and for matters connected
therewith and incidental thereto
The first rural bank in india is prathama grameen bank(October 2nd 1975)
Reasons for establishment of RRBs
Need of regionally oriented banks
Cooperative banks were weak
Commercial banks outreach was low
Need of bank for weaker section of rural areas (small and marginal
farmers and agriculture labors
Purposes of Rural Credit
For purchase of farm implements viz. indigenous wooden implements,
improved iron implements, agricultural implements, hand tools etc.
For purchase of tractors with accessories, threshers, power tillers,
combine harvesters, power sprayers.
For purchase of oil engines, electrical engines, pump sets,
construction of wells, leveling of ground for irrigational purposes etc.
For the purpose of construction and repairs to farm buildings/structure
of the type viz bullocks shed, farm store, godowns, animal farm etc.
For the purposes of bunding, terracing, leveling, drainage, reclamation
of ravine lands, moisture conservation practices
For purchase of seeds including high yielding/hybrid fertilizers,
manure, pesticides, fungicides etc.
For meeting capital expenditure and working capital on units and
dairy, poultry, piggery etc. for construction of buildings, purchase of
animal equipment, feeds, medicines, vehicles etc
Structure of Rural Credit
The credit facilities are available to rural agriculturists and artisans through
financial and non financial institutions which are:
Non Institutional
- Professional money lenders
- Agricultural money lenders
- Relatives and friends
- Traders and commission agents
- Land lords and
- Others
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Institutional
- Government
- Cooperative Banks and
- Commercial banks
The non institutional credit sources are considered as exploitative and high
cost system. However, they are very much accessible and easily negotiable
with the lenders. It is observed that non institutional source of credit is
continued to be an important source in rural areas.
Institutional lending or credit or loans refers to loans provided by financial
institutions.
Institutional Arrangement for Rural Credit
Commercial
Banks
Cooperative
Societies
Rural Branches
Regional Rural
Banks
Branches
Unitary structure
District Central
Cooperative Banks
State level
Agricultural and
Rural Development
Bank
Primary
Development
banks
State level
Agricultural and
Rural Development
Bank
Primary Agricultural
Credit Society
Branches
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iii.)
iv.)
v.)
With these objectives in mind, knowledge of the local language by the staff
is an important qualification to make the bank accessible to the people
Capital Structure
The authorized capital of each Regional Rural Bank is Rs.1crore, divided
into 1 lakh fully paid up shares of Rs.100 each. The Central Government
may, after consultation with the Reserve Bank and the sponsoring bank,
increase or reduce such authorized capital, but it shall not be reduced below
25 lakhs. The issued capital of each Rural Bank is Rs.25lakh. Fifty percent
of the capital issued by a Rural Bank is subscribed by the Central
Government and thirty five percent by the sponsoring Bank. The Board of
Directors of a Rural Bank may, after the consultation with the Reserve Bank
and the sponsoring Bank and with the prior approval of the Central
Government, increase the issued share capital from time to time. The
additional capital shall be subscribed in the same proportion as is specified
above. The shares if the Rural Bank shall be deemed to be included in the
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securities enumerated in Section 20 of the Indian Trusts Act, 1882 and shall
be deemed to be approved securities for the purposes of the Banking
Regulation Act, 1949.
Business of a Rural Bank
A Rural Bank carries on the normal banking business i.e. the business as
defined in Section 5 (b) of the Banking Regulation Act, 1949 and engages in
one or more forms of business specified in Section 6(1) of that Act. A rural
bank may, in particular, undertake the following types of business, namely:
The granting of loans and advances, particularly to small and marginal
farmers and agricultural labourers, whether individual or in groups
and to co-operatives societies (including agricultural marketing
societies, agricultural processing societies, Co-operative farming
societies, primary agricultural credit societies or farmers service
societies) for agricultural purposes or agricultural operations or for
other connected purposes.
The granting of loans and advances, particularly to artisans, small
entrepreneurs and persons of small means engaged in trade, commerce
or industry or other productive activities within the notified area of a
Rural Bank.
Management of Regional Rural Banks
The Management of Regional Rural Banks is largely governed by the RBIs
Act, 1976, Banking Regulation Act 1949 and the guidelines of RBI and
NABARD and sponsor banks. The general superintendence, direction and
management of affairs and business of RRBs are vested in Board of
Directors. They exercise the powers and discharge all the functions of the
RRBs. In discharging its functions, the Board of Directors act on business
principles and shall have due regard to public interest.
The Board will consist of a chairman and not more than 8 directors. The
Central Government will appoint a Chairman and three Directors, the
concerned State Government nominates not more than two Directors and the
sponsor bank will nominate not more than three Directors. The Chairman is
responsible for the overall management of the management of the bank and
hold office for a period of 5 years. The Chairman is required to devote the
whole time to the affairs of the RRBs and subject the superintendence,
control and jurisdiction of the board of directors. The tenure of office of a
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director will be 2 years and he shall hold office until his successor is
nominated and will also be eligible for renomination.
The RRBs Act has also facilitated the creation of business committees by the
Board of Directors. These committees may consist wholly of directors or
wholly of other persons or partly of directors and partly of other persons for
such purpose as it may decide. Most RRBs constitute Business Committees
for examining the feasibility of advances, mobilization of deposits,
deployment of funds in other institutions and to find ways and means of
recovery performance.
Banking Environment
Banking Organization is an open adaptive system. It has its own internal and
external environments. Internal environments of RRBs consist of Banking,
Personnel, and Public Relations etc. The external environment consists of
uncontrollable economic, social, political and legal factor governing the
success or otherwise of RRBs
RRBs external Environment comprises of:
1. Legal Environment dealing with rules, regulations and legislative
measures such as General Laws, RRBs Act, Banking Regulation Act
etc.
2. Economic environment consisting of change in economic activity
such as competition, changes from other banks, financial markets and
the prescriptions of the lead banks also effect the working of RRBs.
Change in the economic environment will affect refinance from
NABARD.
3. Political environment dealing with Regional and national Politics.
RRBs activities are affected by monetary and fiscal policies of
government.
4. Social Environment describing the religious activities, social attitudes,
behavior, education and deep-rooted connections. This plays a major
role in rural villages where due to illiteracy and poverty, social and
cultural forces influence business patterns.
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participation in the overall national rural scene there need be set up at least
20,000 branches of RRBs. Compared to the present number of branches
(about 8000) this only shows the magnitude of the task before RRBs and the
others who have a stake in its success.
Outreach
Total no .of RRBs in 2004 was 196 out of 166 reported profits with coverage
of 518 districts and network of 14466 branches. After amalgamation no. of
RRBs reduced from 196 to 133 out of which 111 reported profit with
coverage of 525 districts with a network 14494 branches
Banking
Regulation
Act
General
Laws
National
Politics
RRBs
Act
Legal
Environment
Religion
Social
Environment
RRBs
Economic
Political
Environment
Environment
Regional Politics
Financial
Markets
Education
Culture
Competition
from other banks
Economic
Administration and
relations with other
institutes
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Micro Finance
Micro finance has been defined by the task force set up by the NABARD as
"provision of thrift, credit and other financial services and products of very
small amounts to the poor in rural, semi-urban or urban areas for enabling
them to raise their income levels and improve living standards. Micro
finance institutions can include NGOs (Non-Government Organisations), cooperatives, banks (commercial, RRBs, other nationalized and public sector
banks) and NBFCs (Non-Banking Financial Companies). The NABARD felt
that banks would be unable to efficiently organize such grass-root level
groups and thus NGOs and Voluntary Agencies were introduced into the
picture. New micro credit companies such as Basix and the SEWA-aided
bank represent a primarily NGO-driven effort to charge market linked, risk
adjusted rates of interest on small loans to small borrowers. At the same time
they ensure hurdle free access to borrowers and high repayment rates for
themselves.
In addition to financial intermediation, many micro finance institutions
provide social intermediation such as group formation, training in financial
literacy and management capabilities. Micro finance is therefore not just a
banking tool but also a development tool. Along with benefits to the rural
population, the financial institutions advancing the credit also enjoy better
recovery rates.MFIs dont accept savings like banks.
Methods for providing micro finance
SHG
JLG
Both banks and MFIs are providing micro finance.
JLG
In India most of the MFI s are following joint liability group approach.
Characteristics
A joint liability group consists of 5-10 women.
5-10 these type of groups are combined As centers
for every one week these groups have to meet.
As name suggest joint liability,all the people in the group are liable
for every loan taken by anyone in the group.
This model looks like grameen model to some extent. Which is
popular in Bangladesh.
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Advantages of JLG
o Credit worthiness of borrower can be easily assessed by bank or
mfi
o Credit can be easily avail by borrowers since joint liability
o Operation cost , average collection period will be less for bank
o Credit risk is very low
SHG
The most prevalent method of providing micro finance in India is through
Self-Help Groups (SHGs
A SHG is a group of individuals ranging from 5 to 20 members, who come
together for a mutually beneficial purpose. They are homogenous in some
respect and have certain pre-defined social binding factors.
Members of a SHG contribute to a common fund from which collateralfree loans are given to needy members as per the group decisions.
After at least 6 months if a bank is convinced, the SHG can become
eligible for linkage to the bank for availing credit and can open a savings
account in its name and can receive up to 4 times its savings balance as
credit. The members of the SHG in turn receive credit as per their needs.
This linkage was introduced by the NABARD in 1991-92 through pilot
project.
. The SHG decides the rate to be charged to its members.
Similarly, the bank negotiates about appropriate repayment period with
the SHG and the SHG decides on the repayment schedule for its
members, generally in weekly installments.
If members require larger amounts of loans they can approach the bank
for individual loans, with the SHG accepting responsibility for proper
credit utilization, repayment by the member and monitoring of the same
Loan to group
SHG/
Individuals
Bank
Repayment
Commission
NGO
Loan
Bank
Loan
MFI
SHG/Individual
(MFI on lends)
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Repayment
Bank
Monitor
SHG/
Individual
MFI
Originator
Repayment
Collection
NGO
Traditional Model
Target Market
Micro enterprise
Low-income
households
Core Product
Working
capital Full financial services
loans and other (savings, remittances,
business credit
insurance,
education,
etc.)
Delivery Channel
Branches
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Relationship Manager
Loan officer
Promoters
Centralized
Credit Underwriting
Integrated,
Specialized functions,
personalized, high- increased automation
touch services
Risk Management
6th
sense, Statistical
modeling,
experience,
risk-based pricing
delinquency - zero
tolerance
No
need
for
members initiative
Protected
from
internal and external
exploiters
Poorer people are
included
Belong to and are
supported by the bank
Bank can offer a
range of additional
tailor-made services
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Interest
rates
inflexible
Lower transaction
costs
Can fit into any
branch
Graduation easier
Can build on existing
groups
Savings mobilization
easier
Groups can absorb
odium of expelling
members
Standardized
procedures
Easier to forecast
need for funds
Can use lower-grade
staff
Hard to monitor
May be tempted by
other banks or by
politicians
Slow to develop
May form own
federations
MIS more complex
Need NGOs or highly
committed staff to
develop groups
Higher transaction
costs
Need continuous
guidance and presence
Need
dedicated
system
Hard to evolve and
change
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Suitable conditions
Existing
bank
network in rural and
poor areas.
Diffused
communities,
castes,
wealth levels
Tradition of informal
financial services
Wide variety of scale
and
nature
of
investment
opportunities
Some local leadership
NGOs
and/or
committed bank staff
Very
poor,
homogeneous
communities
Marginalized people,
with little hope and
initiative
Few
traditional
informal
financial
mechanisms.
Lack of financial
institutions
Resource poor, little
hope of graduation
Large numbers of
small
business
opportunities
Few NGOs
SHG are broadly categorized into 5 groups depend on the origin and
source of funding.
1. Pre exisisting groups
2. Promoted by NGOs
3. Promoted by BANKS/NBFCs
4. Promoted by government/local government agency
5. Promoted by SHG federations
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Keeping in view the tremendous scope for improving financial coverage, the
RBI as a proactive measure, has taken several initiatives to promote
financial inclusion:
1. No-frills Accounts: The RBI in its annual policy statement for the
year 2005-06 and also in the mid term review of the policy (2005-06),
exhorted the banks, with a view to achieving greater financial
inclusion, to make available a basic banking No-Frills account
either with nil or very minimum balances as well as charges that
would make such accounts accessible to vast sections of the
population. The nature and number of transactions in such accounts
would be restricted and made known of transaction in such accounts
would be restricted and made known to customers in advance in a
transparent manner. All banks have been urged to give wide publicity
to the facility of such No-Frills account. Banks are required to make
available all printed used by retail customers in the concerned regional
language.
2. Simplification of KYC norms: In order to ensure that persons
belonging to low
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linked to bank server by using mobile device and disburse cash at Gram
Panchayat (GP) level.
There are three model of EBT they are
- Bank-Branch model
- Bank-Led model and
- Non- Bank model
Bank-branch model operated through network of bank branches and other
two models operates through agents of banks or on their own.
In first phase of Financial Inclusion first enroll government beneficiaries and
complete government transactions and remaining people who are unbanked
in the villages need to enroll and open bank accounts under Total Financial
Inclusion and in second phase all banking products and services is to be
offered.
Currently there are some challenges in Bank- Led model such as multiplicity
banks and multiplicity correspondents in one area making the operation nonviable for any BC so to achieve objective of Financial Inclusion they should
adopt one district one branch model.
Flow of Electronic Benefit Transfer in India
Currently in India flow of electronic benefit transfer to weaker and rural
people is given in two ways Social Security Pension (SSP) and National
Rural Employment Guarantee Schemes (NREGS). SSP is given to old age
people, widow and physically handicapped. NREGS is given to those people
who work on government project in villages. Firstly government given total
amount to the bank that has to be disbursed to such beneficiaries through
technology use and give 2% of commission to bank on total disbursement of
cash as shown in the figure 4.1. Bank transfer such amount to service
provider to disburse on revenue sharing model. Bank gets a commission of
0.25% and 1.75% is service provider commission.
Figure 4.1 Flow of Electronic Benefit Transfer in India
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Govt
Bank
Service Provider
BC1
BC2
BCn
District Co-coordinator
Mandal Co-coordinator
CSP1
CSP2
CSPn
Beneficiaries
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Model:
Kc=(Tc+(Ccard*m))/n.(1)
The operating costs are (annual expenditure)
Oc=Sbc+Oexp+Cc+NPAprov.(2)
The cost of funds(debt) for disbursing loans
Fc=(r/100)*Pd(3)
The returns from customers
ROI=(R/100)*Pi(4)(Pi=Pl-NPA)
Therefore
Oc+Fc=ROI..(5)(at break even there are no
profits)
Oc+((r/100)*Pd)=(R/100)*Pi(6)(substituting 3 and 4 in 5)
Oc=((R-r)/100)*P
Therefore P=(100/(R-r))*Oc7
This is the principal required for Break Even
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Customer segments
Government beneficiaries
Non government benificiaries
Value proposition
Financial services
Innovative products like flexible RD for non government beneficiaries
Savings and credit facility for NREG beneficiaries
Implementation of other products like micro insurance and remittances
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Channels
Customer Relationship
As Most of the customers are illiterates,
Revenue Stream
From govt benefit programs .25%for every transaction
From other programs
Key Resources
BC/BFs
CSPs,
One employee has to be employed in the bank for fi transactions
Technology providers
Key activities
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Educating CSPs
Key Partners
Technology partners
Other institutions
NABARD
RBI
Cost structure
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