Project Report On A Comparative Study of Business Models of Co-Operatives Mfis and Financial Inclusion

Business model for financial inclusion
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
Institute for Development and Research in Banking Technology
Castle Hills, Masab Tank

Hyderabad – 500 057
Phone: 90-40-23534981 (8 Lines); Fax: 90-40-23535157
Web: http://www.idrbt.ac.in
1
Certificate
This is to certify that project has been successfully completed to my

satisfaction and that the goals set upon at the outset of this endeavor have
been worked upon to the best of the students abilities and resources. I hereby
allow this project to be presented for evaluation with my full consent.
Dr.Mahil carr,
Associate. Professor,
IDRBT
2
Contents
1.Introduction 4
4
1.1Financial exclusion
1.2Business model 5
1.3Financial inclusion 7
7
1.4 Financial Inclusion – Steps
Taken
2. Cooperative movement in India 8
3. RRBs 13
22
4.MFIs
5. Evolution of Banking In India 28
6. RBI and financial inclusion 30
7. Business correspondent Model 33
8. Electronic Benefit Transfer 36
39
9.Mathematical model For Financial
inclusion
10.Business model for financial 41
inclusion
3
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
husband’s 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.
4
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 interior-
most 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.
1.2 Business Model
A business model describes the rationale of how an organization creates,

delivers, and captures value - economic, social, or other forms of value. The
process of business model design is part of business strategy.
5
Infrastructure
• Key Activities: The activities necessary to execute a company's

business model.
• Key Resources: The resources those are necessary to create value for
the customer.
• Partner Network: The business alliances, which complement other
aspects of the business model.
Offering
• Value Proposition: The products and services a business offers.. It

describes the way a firm differentiates itself from its competitors and
is the reason why customers buy from a certain firm and not from
another."
Customers
• Customer Segments: The target audience for a business' products and

services.
• Channels: The means by which a company delivers products and
services to customers. This includes the company's marketing and
distribution strategy.
• Customer Relationship: The links a company establishes between
itself and its different customer segments. The process of managing
customer relationships is referred to as customer relationship
management.
Finances
• Cost Structure: The monetary consequences of the means employed in

the business model.
• Revenue Streams: The way a company makes money through a
variety of revenue flows.
6
1.3 Financial inclusion
Financial inclusion is delivery of banking services at an affordable cost to
the vast sections of disadvantaged and low income groups.
Financial Inclusion should include access to financial products and
services like,
• Bank accounts – check in account
• Immediate Credit
• Savings products
• Remittances & Payment services
• Insurance - Healthcare
• Mortgage
• Financial advisory services
• Entrepreneurial credit
1.4 Financial Inclusion – Steps Taken
• Co-operative Movement
• Setting up of State Bank of India
• Nationalization of banks
• Lead Bank Scheme
• RRBs
• Service Area Approach
• Self Help Groups
7
2.Cooperative movement in in India
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
8
of societies reached impressive proportions and diversified their
activities well beyond agricultural credit. Debates centered on
whether or not each village should have a cooperative and whether
there should be a single purpose or a multipurpose cooperative at the
village level.The Cooperative Movement in India was formally
introduced with the promulgation of Cooperative Societies Act in
1904.The National Cooperative Union of India (NCUI), the apex
organization of the Indian Cooperative Movement traced back its
origin in 1929. When All India Provincial Cooperative Institutes
Association came into being with Shri Lallubhai Samal Das Mehta
as its first President. Having been reorganised as Indian Cooperative
Union, it was renamed later as All India Cooperative Union in 1954
and re-christened as National Cooperative Union of India in 1961.
Principles
Cooperatives are based on the cooperative values of "self-help, self
responsibility, democracy and equality, equity and solidarity" and
the seven cooperative principles.
1. Voluntary and Open Membership

2. Democratic Member Control
3. Member Economic Participation
4. Autonomy and Independence
5. Education, Training and Information
6. Cooperation among Cooperatives
7. Concern for Community
Co operative acts in India

• 1904-cooperative society act which enabled formation of
“agriculture credit cooperatives” in villages under the government
sponsorship
• 1912-cooperative societies act (amendment of 1904 act)-formation
of non-credit cooperative societies.
• 1942-multi-unit cooperative societies act- which enabled
cooperatives to open more branches
• 1984-multi state cooperative societies act-, which enabled them to
start the business in other states
9
Evolution of co-operative sector in India
The Indian cooperative movement was initiated by the government.
It spread and diversified with the encouragement and support of the
government its present condition is also to a great extent because of
the intrusive involvement of, and interference by the government
The First Phase: 1900-1930
The Second Phase: 1930 - 1950
The Third Phase: 1950 – 1990
The Fourth Phase: 1990s and onwards
REASONS FOR FAILURES IN COOPERATIVES IN INDIA

• Government interference
• Poor quality of management
• Lack of awareness
• Restricted in coverage
• Functional weakness
• Minimum capital requirement
• CRR IS LOW
• CRAR norms not prescribed
• Prudential accounting norms are not followed by PACs
Advantages:
• Easy to tackle the problems like
• Poverty alleviation
• Food security
• Employment generation
• High interest rates
Recent Developments
Over the years, primary (urban) cooperative banks have registered a

significant growth in number, size and volume of business handled.
As on 31st March, 2003 there were 2,104 UCBs of which 56 were
scheduled banks. About 79 percent of these are located in five states,
- Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu.
Recently the problems faced by a few large UCBs have highlighted
some of the difficulties these banks face and policy endeavours are
geared to consolidating and strengthening this sector and improving
governance.
10
• The cooperative banks/credit institutions constitutes the second
segment of Indian banking system, comprising of about 14% of the
total banking sector asset (March 2007).
• Bulk of the cooperative banks operate in the rural regions with

rural co-op banks accounting for 67% of the total asset and 67% of
the total branches of all cooperative banks.
• Share of rural cooperatives in total institutional credit was 62% in

1992-93 34% in 2002-03 and 53% in 2006-07.
• Cooperative banks have an impressive network of outlets for

institutional credit in India, particularly in rural India (1 PACS per 7
villages).
• In March 2007, there were 97,224 PACS in rural India against

30,393 branches of commercial banks (more than 3 times of outlet of
coop banks).
• In March 2007, there were 102 savings A/C and 113 cooperative
bank members per 1000 rural in India.
• Cooperative banks (both rural and urban) cater to small and
marginal clients.
• Financial health of the cooperative credit institutions, particularly
the rural Cooperatives, has been found to be poor by several
Committees
11
Cooperative credit structure
The distinctive feature of the cooperative credit structure in

India is its heterogeneity. The structure differs across rural and urban
areas as well as across States and tenures of loans (The urban areas
are served by Urban Cooperative Banks (UCBs), which are further
sub-divided into scheduled and non-scheduled UCBs. Scheduled
UCBs form a small proportion of the total number of UCBs. The
operations of both scheduled and non-scheduled UCBs are limited to
either one State (single-State) or stretch across States (multi-State).
Most of the non-scheduled UCBs are primarily single State UCBs
having a single tier structure.
Rural cooperatives structure is bifurcated into
short-term and long-term structure. The short-term cooperative
structure is a three tier structure having State Cooperative Banks
(StCBs) at the apex level followed by District Central Cooperative
Banks (DCCBs) at the intermediate district level followed by
Primary Agricultural Credit Societies (PACS) at the village level.
This structure is often referred to as federal structure of the short-
term credit cooperatives. The unitary structure is mainly observed in
the North-eastern region, wherein the StCBs provide credit directly
to PACS instead of any district level intermediary.
12
3.Regional rural banks

Introduction
India lives in its villages and in rural India a substantial portion of the
population is engaged in agriculture or allied activities. The farming
community consists mainly of small farmers and agricultural laborers.
Poverty is generally wide spread in the rural areas, with hardly any pockets
of prosperity. As rural economy is running short of capital, it must be
assisted with adequate capital, appropriate technology and required training
in modern technology of production. Hence provision of adequate financial
assistance to agricultural, rural industries and rural artisans is necessary. The
welfare and prosperity of the nation rests on the development of agriculture
and allied activities.
13
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
14
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 Cooperative Regional Rural

Banks Societies Banks
Rural Branches Branches
Long term Credit Short term credit

(investment credit) (production credit)
State Cooperative Banks
Federal Structure Unitary structure

District Central
Cooperative Banks
State level State level
Agricultural and Agricultural and
Rural Development Rural Development Primary Agricultural
Bank Bank Credit Society
Primary Branches
Development
banks
15
Formation and Development of Regional Rural Banks
Cooperatives have been encouraged since 1904 and the commercial banks
were made to accept the responsibility of financing rural economic activities
from 1968 under social control to relieve the poor peasants from the clutches
of moneylenders. Previously banks felt that financing agriculture was not
their job and that his responsibility would be withdrawn soon. So the results
of control and the working of cooperatives had not been significant. Hence,
the government of India had nationalized the 14 major commercial banks
with the objective to channelise the resources the resources of commercial
banks to rural areas. The impact of bank nationalization on the growth of
scheduled commercial banks in rural areas is clear: the share of rural bank
offices in total bank offices jumped from 17.6 per cent in 1969 to 36 per cent
in 1972. The share rose steadily thereafter, and attained a peak of 58.2 per
cent in March 1990. Consequent to the adoption of intensive agricultural
programmes under IADP and DPAP, Green Revolution etc. the demand for
financial inputs has increased enormously in the rural areas. Therefore it was
felt that cooperative and commercial banks alone would not be in a position
to meet all the credit needs of the expanding rural economic sector. Between
1966 and 68 various committees suggested that the rural credit structure was
weak, therefore some system of rural banks should be created to fill up the
credit gap in rural areas. These banks should extension in the rural areas for
rural people as such they must be located in rural areas and understand the
rural economic environment. Thus Regional Rural Banks were a new type of
institution, which combined
a. Local feel and familiarity with rural possess problems which co-
operative banks have.
b. Degree of business organization ability to mobilize deposit, access to
money market and modernized outlook which commercial banks
have.
The Government of India promulgated the Regional Rural Banks Ordinance

on 26th September 1975, which was later replaced by the Regional Rural
Bank Act 1976. At to the end of June 1985, 183 Regional Rural Banks with
a network of 10,245 branches have been opened in the states of the Indian
Union. The total number of Regional Rural banks functioning in the country
as at the end of June 1999 was 196 covering 451 districts spread over 23
states with the network of 14,467 branches These banks have been
established by the Government of India in terms of the provisions of
Regional Rural Banks Act, 1976. The distinctive feature of a rural bank is
16
that though it is a separate body corporate with perpetual succession and
common seal, it is closely linked with the commercial bank, which has
sponsored the proposal to establish it. The central Government, while
establishing a rural bank at the request of a commercial bank, specifies the
local limits within which it shall operate. The rural Bank may establish its
branches or agencies at any place within the notified area.
Objectives of Regional Rural Banks
Regional Rural Banks were established with the following objectives in

mind:
i.) Taking the banking services to the doorstep of rural masses,

particularly in hitherto unbanked rural areas.
ii.) Making available institutional credit to the weaker sections of the
society who had by far little or no access to cheaper loans and had
perforce been depending on the private moneylenders.
iii.) Mobilize rural savings and channelise them for supporting productive
activities in rural areas.
iv.) To create a supplementary channel for the flow the central money
market to the rural areas through refinance
v.) Generating employment opportunities in rural areas and bringing
down the cost of providing credit to rural areas.
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
17
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 RBI’s

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
18
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.
19
Characteristics of Indian Rural Economy and Rural Borrower and the

Related Problems in the working of Regional Rural Banks
There are certain characteristic features of the Indian rural economy and the
rural borrower. Each of these features creates some hindrance in the
effective development of rural banking.
• The Indian rural socio-economic scene is still feudal in nature largely

still in the midst of illiteracy. Besides this, the Indian rural psyche is
deeply entwined with the cultural ethos.
• Rural borrowing may be seasonal in nature due to the heavy
dependence in these areas on agriculture and allied activities. Timely
availability of funds is crucial.
• The economic profile of most rural borrowers is very weak. The
average amount of credit required is relatively low and savings
deposited may be as low as Rs. 10 or 20 per month.
Other factors leading to non-viability of Regional Rural Banks:
Non availability of adequate infrastructure facilities, like pucca houses

to locate branches, access roads to villages, police protection on the
one hand and availability of staff to keep pace with needs, on the other
hand, constitute the major handicaps of RRBs in making progress in
branch expansion.
Natural calamities in successive years leading to loss of assets.
Price fluctuations for farm produces as well as in the cost of inputs.
Inadequate support and interest of the government to the RRBs. With
50% shareholding in each RRB, Government has the right to
nominate 3 Directors on the Board of RRBs. How best the GOI could
get over the difficulty of finding enough number of the right type of
people to be nominated as directors and what steps are needed to
make the Boards function effectively are aspects receiving the
attention of GOI and NABARD.
Thus, the problem of effectively reaching the masses still remains unsolved.
In other words, rural banks as they are cannot be expected to become
genuinely rural in the outlook and operations. For any meaningful
20
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
The RRBs external Environment consists of:
RRBs
Banking Act
Regulation Religion Education
Act
Legal
General Environment Social Culture
Laws Environment
RRBs
Economic Competition
National Political Environment from other banks
Politics Environment
Economic
Administration and
Regional Politics relations with other
Financial
Markets institutes
21
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), co-
operatives, 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 don’t 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.
22
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 collateral-

free 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
SHG-Bank Linkage Program in India

In India, three types of SHG models have emerged:
1. Bank-SHG-Members: The bank itself acts as a self-help
group promoting institution (SHPI).
2. Bank-Facilitating Agency-SHG-Members: Facilitating
agencies like NGOs, government agencies, or other
23
community-based organizations form groups.
3. Bank-NGO-MFI-SHG-Members: NGOs act both as facilitators
and microfinance intermediaries. First they promote
groups, nurture them, and train them, and then they
approach banks for bulk loans for lending to the SHGs.
10.2 Partnership model of SHG-Bank Linkage:

1. Predominant model of microfinance:
Loan to group
Bank SHG/
Individuals
Repayment
Commission
NGO
(Group formation and linkage)
2. Recently emerging model: financial intermediation by MFIs:
Loan Loan
Bank MFI SHG/Individual
(Banks lends to MFI

based on their capital) (MFI on lends)
24
On lending of same funds
Partnership model:
Loan 9% - 11%
Repayment Monitor
Bank MFI SHG/
Individual
Originator
Repayment
Collection
NGO
Micro finance is thus a potent method of rural credit delivery with

tremendous potential for serving the rural masses.
A New Business Model for Micro finance

Dimension Traditional Model New Business 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 Retail outlets, payment
systems, (ATMs, POS,
cards, cell phones)
25
Relationship Manager Loan officer Promoters

Organizational Structure Decentralized 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
Technological Platform Personalized MIS & Common, networked
applications (if systems, standardized
automated) software
Plusses for clients

• Flexible • No need for literacy
• No need for bank at • No need for
all members’ initiative
• Highly empowering • Protected from
• Members can save internal and external
and borrow as needed exploiters
• Free to chose • Poorer people are
suppliers included
• No enforced loan • Belong to and are
ladder supported by the bank
• Can evolve from • Bank can offer a
existing groups, chit range of additional
funds, credit unions tailor-made services
etc.
• Can access the full
range of bank services
• Can evolve into
Federations, and Co-
operatives
26
Minuses for clients
• Need management • Must meet frequently
skills and time • Little freedom or
• Depend on good flexibility
accounts • Group composition
• Can be hijacked not wholly under
internally or externally member’s control
• Cash may not be • Pressure to borrow
secure • Interest rates
inflexible
Plusses for Banks

• Lower transaction • Can resist subsidized
costs ‘schemes’
• Can fit into any • Tighter control
branch • Standardized MIS
• Graduation easier • Standardized
• Can build on existing procedures
groups • Easier to forecast
• Savings mobilization need for funds
easier • Can use lower-grade
• Groups can absorb staff
odium of expelling
members
Minuses for Banks

• Hard to monitor • Higher transaction
• May be tempted by costs
other banks or by • Need continuous
politicians guidance and presence
• Slow to develop • Need dedicated
• May form own system
federations • Hard to evolve and
• MIS more complex change
• Need NGOs or highly
committed staff to
develop groups
27
Suitable conditions
• Existing bank • Very poor,
network in rural and homogeneous
poor areas. communities
• Diffused • Marginalized people,
communities, castes, with little hope and
wealth levels initiative
• Tradition of informal • Few traditional
financial services informal financial
• Wide variety of scale mechanisms.
and nature of • Lack of financial
investment institutions
opportunities • Resource poor, little
• Some local leadership hope of graduation
• NGOs and/or • Large numbers of
committed bank staff 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
Evolution of Banking In India
• 1786 General Bank of India formed followed by another bank known

as Bank of Hindustan.
• 1806June 2 Bank of Calcutta established -It was later renamed as
Bank of Bengal
• 1809 Jan 2 Bank of Calcutta becomes Bank of Bengal
28
• 1840 Apr 15 Bank of Bombay is established
• 1843 July 1 Bank of Madras is formed
• 1861 Paper Currency Act is passed
• 1865 Allahabad Bank is established.This was the first fully Indian
owned Bank
• 1920 Oct 31AITUC formed under Lala Lajpat Rai's presidentship at
New Delhi
• 1921 Jan 27 Imperial Bank of India established by merging 3
Presidency Banks –Bank of Bengal,Bank of Bombay and Bank of
Madras. 1920 July 09 Imperial Bank of India Indian Staff Association
is formed under the Benevolent Societies Act at Calcutta (now
Kolkata). It was duly registered under Indian Trade Unions Act only
on 24th May’1932.
• 1926 Indian Trade Unions Act comes into existence
• 1946 Aug01 First ever Strike in Imperial Bank of India by Imperial
Bank of India Indian Staff Association continuing for 46 days. It was
withdrawn on the 15th September’1946.
• 1947 May 3 INTUC formed at New Delhi
• 1955 July 1 State Bank of India is formed by replacing Imperial Bank
of India. It becomes the first Bank in India to be nationalized.
• 1959 State Bank of India (Subsidiary Banks) Act is passed enabling
State Bank of India to take over 8 former State associated banks as its
subsidiaries.
• 1969 July 19 Nationalisation of Banks -14 major Banks in India
nationalised
• 1971 Oct 01 State Bank of India’s Banyan Tree emblem changed to
‘Shoonya’ (Zero)
• 1980 July 15 Nationalization of Banks -6 other Banks in India
nationalized.With this Government of India owned banking in the
country rose to 91%.
• 2007 June 29 Government of India acquires the entire Reserve Bank
of India shareholding in State Bank of India consisting of over 314
million equity shares at a total amount of over 355 billion rupees.
29
RBI AND FINANCIAL INCLUSION
As the central bank of the country, the Reserve bank of India has taken steps
to ensure financial inclusion in the country. It has tried to make banking
more attractive to citizens by allowing for easier transactions with banks. In
2004 RBI appointed an internal group to look into ways to improve
Financial Inclusion in the country. It came out with a report in 2005 (Khan
Committee) and subsequently RBI issued a circular in 2006 allowing the use
of intermediaries for providing banking and financial services. Through such
policies the RBI has tried to improve Financial Inclusion. Financial
Inclusion offers immense potential not only for banks but for other
businesses. Through an integrated approach the businesses, the NGOs, the
government agencies as well as the banks can be partners in growth. RBI has
realized that a push is needed to kick start the financial inclusion process.
Some of the steps taken by RBI include the directive to banks to offer No-
frills account, easier KYC norms, offering GCC cards to the poor, better
customer services, promoting the use of IT and intermediaries, and asking
SLBCs and UTLBCs to start a campaign to promote financial inclusion on a
pilot basis. So far the campaign for 100% financial inclusion has been said
to be a success with many states now reaching near-total financial inclusion.
Policy initiatives by reserve bank of India
30
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 income group in urban and rural areas do not face
difficulty in opening accounts has been simplified for those persons
with balances not exceeding rupees fifty thousand rupees (Rs. 50,000)
and credits in the accounts not exceeding rupees one lakh (Rs.
1,00,000) in a year.
3. Overdraft facilities in No-frill Accounts: RRBs have been
specifically advised to allow limited overdraft facilities in `No-frills`
account without any collateral or linkage to any purpose. The idea is
that provision of such overdraft facility provides a ready source of
31
funding to the account holder who is thereby induced to open such
accounts.
4. One-Time Settlement: For all borrowers where the principal amount
is less than RS.25000/-, banks have been asked to offer a one-time
settlement scheme. As there is large number of such very small NFA s
with banks, offer of such an OTS was expected to restore borrowing
relationship with the formal system and thereby obviate the need to go
back to the informal system. in case where the loans are under
government sponsored schemes the state level banker’s committee
(SLBC) was expected to evolve a suitable policy.
5. General purpose Credit Card: Banks have been advised by RBI to
provide a General purpose Credit Card (GCC) facility at their rural
and semi urban branches. The credit facility extended under the
scheme will be in the nature of revolving credit. The GCC-holder will
be entitled to draw cash from the specified branch of bank up to the
limit sanctioned. Banks would have flexibility in fixing the limit
based on the assessment of income and cash flow of the entire
houdehold, without insistence on security or purpose.however, the
total credit facility under GCC for an individual should not exceed
RS. 25,000/- . it is expected that banks will come out with their own
schemes to popularise this product amongst the rural client.
6. Business Facilitators and correspondents: with the objective of
ensuring greater financial inclusion and increasing the outreach of the
banking sector, banks were permitted to use the services of NGOS/
SHGs, MFIs and other civil society Organisations as intermediaries in
providing financial and banking services through the use of business
facilitator and correspondent models.
32
7. Broader definition of financial inclusion: RBI subsequently
observed that a family satisfying the following conditions also would
be treated as financially included:
A. Member of SHG
B. Member of a PACS
C. If have a post office savings account
D. Member covered under govt schemes
Business Correspondent (BC) Model

Eligibility to become a Business Correspondent :
As per the RBI guidelines, the following entities are eligible for appointment
of
Business Correspondents (BCs) for banks:
• NGOs/ MFIs set up under Societies/ Trust Acts,
• societies registered under Mutually Aided Cooperative Societies Acts
or the
• Cooperative Societies Acts of States,
• Section 25 companies that are stand alone entities or in which NBFCs,
banks,
• telecom companies and other corporate entities or their holding
companies did
• not have equity holdings in excess of 10 per cent,
• post offices ,
• retired bank employees,
• ex-servicemen ,
• retired government employees.
• Individual kirana/medical/fair price shop owners
• Individual Public Call Office (PCO) operators
• Agents of Small Savings Schemes of Government of India/Insurance
Companies
• Individuals who own petrol pumps
• Retired teachers
33
• Authorised functionaries of well run Self Help Groups (SHGs) linked
to banks
• Non deposit taking NBFCs (non-banking finance companies) in the
nature of
• loan companies whose micro finance portfolio is not less than 80 per
cent of their
• loan outstanding in the financially excluded districts as identified by
the
• Committee on Financial Inclusion
• RBI has now permitted banks to engage any individual, including
those
• operating Common Service Centres (CSCs) as BC, subject to banks’
comfort
• level and their carrying out suitable due diligence as also instituting
additional
• safeguards as may be considered appropriate to minimise the agency
risks
Appointment of BCs
· Must be a permanent resident of the area in which they propose to operate.
· They should be well established, enjoy good reputation and have the
confidence
of the local people.
· The ability of BCs to invest in POS machines and other equipments.
· In case of individuals selected as BCs, the criterion are as under :
· A minimum education qualification of Xth pass.
· Field Investigation /RCU for verification of residence and dealings, etc. to
be
conducted.
Scope of Activities to be undertaken by BCs

The scope of activities undertaken by BCs are as under :
· Creating awareness about savings and other products and education and
advice
on managing money and debt counseling.
· Identification of potential customers
· Collection and preliminary processing of various forms for deposits
including
verification of primary information / data
34
· Filling of applications / account opening forms including nomination
clause and
submission to the Bank.
· KYC will also be completed by the BCs.
· Opening of no frill deposit accounts and other products as permitted from
time to
time by leveraging technology.
· Collection and payment of small value deposits and withdrawals ; Min :
nil; Max :
Rs. 2000/- per transaction.
· In respect of all such transactions, the BC/his agent will be authorized to
accept
/ deliver cash either at his place of work or at any convenient location
subject to the
ceilings per customer (Rs 2000/- in each case).
· Furnishing of mini account statements and other account information, for a
period of 3 months.
· Any other service on behalf of the Bank, duly authorized by the
appropriate
authority.
· The activities undertaken by the Business Correspondents would be within
the
normal course of the Bank’s banking business, but conducted through and
by the
entities at places other than the Bank’s premises.
· In respect of all such transactions, the BC/his/her agent will be authorized
to
accept / deliver cash either at his place of work or at any convenient location
subject
to the ceilings per day / per customer as laid down. The Business
Correspondents
will be linked to a nearby branch (base Branch).
· Cross-selling of other financial products like insurance / mutual fund
products /
pension products / any other third party product, as and when they are
assigned to
do so.
· In case duly appointed sub-agents of BCs, BCs to take care of reputational
risks involved
35
4.3 Electronic Benefit Transfer (EBT) and Financial Inclusion
In India to improve the living standard of unprotected section of society

which has little means of earnings with no savings for their old age,
Government introduced social welfare programme which includes payment
of cash to beneficiaries to raise their standard of living in area of health,
insurances, education etc.
In India there are schemes for below poverty line people such as
- Social Security Pension
- National Rural Employment Guarantee Schemes (NREGS)
- Insurance Schemes.
But such scheme payments should be disbursed in time and there should not
be any misuse and leakages in the system. To ensure this Government of
Andhra Pradesh came out with a plan of Smart-card based on electronic
payment.
Financial Inclusion is categories into two phases, first phase is an EBT it

means Government transaction such as Social Security Pension and
NREGAs and second phase is Total Financial Inclusion such as dealing in
recurring deposits, saving banks and General Credit Card etc.
Electronic Benefit transfer is a platform of Financial Inclusion created by

banks through Business correspondent. Since banks do not have branches at
remote location the services of BC is utilized. In first phase BC work is
enrolment of government beneficiaries with their biometric identification.
Than banks open a “No Frill” accounts in their books. Every account holder
is issued smart cards which contain basic data of the account holder along
with the biometric data and photograph. BC is provided with hand held
devices in which all beneficiaries’ details and biometric identification is
stored which facilitates banks to carry out cash-in and cash-out functions on
behalf of the banks. Banks credit the accounts of the beneficiaries enabling
the BC to access the account through points – of- access devices which are
36
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 non-
viable 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
37
Govt
Bank Service Provider
BC1 BC2 BCn
District Co-coordinator
Mandal Co-coordinator
CSP1 CSP2 CSPn
Beneficiaries
38
9.A Mathematical business model for financial inclusion
This model illustrates us a business model for financial inclusion and also it
gives us a break even point for financial inclusion.
Outcome of the model:
Estimation of the principal amount that must be invested along with other
components like personnel, bank terminal, cards and connectivity to make
the model sustainable
Assumptions:
1. A business correspondent/bank branch serves a population space of
1000 customers
2. Business correspondent/business facilitator disburses loans
3. The backend costs are not taken into account.
Terms :
T-time taken for which debt is taken
P=Principal to be invested
Pd=deposit amount
Pl=loan amount
t=time taken for which loans are made
r=interest rate for debt
R=interest rate for loans
Kc=total capital costs
Oc=total operating costs for running a BC unit
Tc=capital cost of a bank terminal
Ccard=cost of card
m=number of customers to be carded
n=period of amortization(years)
Sbc salary of the bc unit
Oexp-operating expenses such as electricity, connectivity
cost,stationary,rent etc.
Fc-cost of funds
NPAprov
Here we are treating BC outlet as a point of contact with the formal
banking system and presume that it operates like a bank branch
39
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))*Oc……………7
This is the principal required for Break Even
40
Building Blocks of a business model
Customer Segments
Value propositions
Channels
Customer relationships
Revenue streams
Key resources
Key activities
Key partners
Cost structure
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
41
Channels
Customer Relationship
As Most of the customers are illiterates,
CSP s should be trained by banks in Various aspects
Knowledge about products
Customer relationship
responsibilities
Revenue Stream
From govt benefit programs .25%for every transaction
From other programs
Income from interest
Other charges from ancillary services
Key Resources
BC/BFs
CSPs,
One employee has to be employed in the bank for fi transactions
Technology providers
Key activities
42
Educating CSPs
Key Partners
Technology partners
Other institutions
NABARD
RBI
Cost structure
Banks have to minimize their equipment costs
Banks have to concentrate on NPAs
Banks can use ZSN cards instead of smart cards
43

Project Report On A Comparative Study of Business Models of Co-Operatives Mfis and Financial Inclusion

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Project Report On A Comparative Study of Business Models of Co-Operatives Mfis and Financial Inclusion

Uploaded by

Copyright:

Available Formats

Business model for financial inclusion

Institute for Development and Research in Banking Technology

Castle Hills, Masab Tank

This is to certify that project has been successfully completed to my

8. Electronic Benefit Transfer 36

o Underprivileged section in rural and urban areas like, Farmers,

Causes of Financial Exclusion

1.2 Business Model

A business model describes the rationale of how an organization creates,

• Key Activities: The activities necessary to execute a company's

• Value Proposition: The products and services a business offers.. It

• Customer Segments: The target audience for a business' products and

• Cost Structure: The monetary consequences of the means employed in

1.4 Financial Inclusion – Steps Taken

2.Cooperative movement in in India

1. Voluntary and Open Membership

Co operative acts in India

REASONS FOR FAILURES IN COOPERATIVES IN INDIA

Over the years, primary (urban) cooperative banks have registered a

• Bulk of the cooperative banks operate in the rural regions with

• Share of rural cooperatives in total institutional credit was 62% in

• Cooperative banks have an impressive network of outlets for

• In March 2007, there were 97,224 PACS in rural India against

Cooperative credit structure

The distinctive feature of the cooperative credit structure in

3.Regional rural banks

Purposes of Rural Credit

Institutional Arrangement for Rural Credit

Commercial Cooperative Regional Rural

Rural Branches Branches

Long term Credit Short term credit

State Cooperative Banks

Federal Structure Unitary structure

The Government of India promulgated the Regional Rural Banks Ordinance

Objectives of Regional Rural Banks

Regional Rural Banks were established with the following objectives in

i.) Taking the banking services to the doorstep of rural masses,

The authorized capital of each Regional Rural Bank is Rs.1crore, divided

Business of a Rural Bank

The granting of loans and advances, particularly to small and marginal

Management of Regional Rural Banks

The Management of Regional Rural Banks is largely governed by the RBI’s

RRBs external Environment comprises of:

Characteristics of Indian Rural Economy and Rural Borrower and the

• The Indian rural socio-economic scene is still feudal in nature largely

Other factors leading to non-viability of Regional Rural Banks:

Non availability of adequate infrastructure facilities, like pucca houses

The RRBs external Environment consists of:

In addition to financial intermediation, many micro finance institutions

Methods for providing micro finance

• 5-10 these type of groups are combined As centers

A SHG is a group of individuals ranging from 5 to 20 members, who come

Members of a SHG contribute to a common fund from which collateral-

SHG-Bank Linkage Program in India

10.2 Partnership model of SHG-Bank Linkage:

(Group formation and linkage)

2. Recently emerging model: financial intermediation by MFIs:

(Banks lends to MFI

Micro finance is thus a potent method of rural credit delivery with

A New Business Model for Micro finance

Relationship Manager Loan officer Promoters

Plusses for clients

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

From other programs

One employee has to be employed in the bank for fi transactions

Banks have to minimize their equipment costs

Banks have to concentrate on NPAs

Banks can use ZSN cards instead of smart cards