CAPSTONE PROJECT

ON

“India’s Rural Banking and Its Future”

PHASE- II

SUBMITTED IN PARTIAL FULFILLMENT OF THE REQUIRMENTS FOR THE

MASTER’S DEGREE IN BUSINESS ADMINISTRATION

OF

CHANDIGARH UNIVERSITY, GHARUAN, MOHALI

SUBMITTED TO

Supervised by: Submitted by:

Name: ANJALI SINGH Name: PRIYA BRATA PANIGRAHI

Designation: Professor UID: 21MBA3513

CHANDIGARH UNIVERSITY, GHARUAN, MOHALI

BATCH : 2021-2023
 LITERATURE REVIEW

Haslem (1968) revealed that the internal determinants originate from the balance sheets and
the profit and loss accounts of the bank concerned and are often termed as micro or bank
specific determinants of profitability. The external determinants are systematic forces that
reflect the economic environment. The literature provides mixed evidence on the impact of
liquidity on profitability.

Revell (1979) studied the relationship between bank profitability and inflation. He noted that
the effect of inflation on bank profitability depends on whether bank wages and other
operating expenses increased at a faster rate than inflation.

Chippa and Sagar (1981) discussed the variations in the level of banking in Eighteen States
in 1977 and studied its relationship with other social, economic and infrastructural variables.
The analysis revealed that literacy rate followed by the infrastructural development emerged
as the most dominant variables influencing the level of banking development.

Angadi (1983) measured the extent of concentration of priority sector advances in general
and agriculture advances in particular in selected states in India. The analysis revealed that
the degree of concentration of both priority sector advances and agricultural advances in the
selected states had reduced in 1979 as compared to 1969-1970.

Bhattacharya (1986) analysed the impact of branch expansion on the deposit mobilization in
different Indian states. The broad conclusion drawn by the researcher was that all the four
types of deposits were satisfactorily responsive to branch expansion in Maharashtra, Uttar
Pradesh, Karnataka, Tamil Nadu, Andhra Pradesh, Gujarat, Punjab, Kerala, New Delhi.
However in the states like Himachal Pradesh, Jammu & Kashmir, Assam, Orissa, Bihar, the
extent of branch expansion was very small in relation to the above mentioned states.

Bal Krishna and Sooden (1991) made an attempt to ascertain the extent of inter-state
disparities with respect to commercial banking services in rural India during 1975 to 1985.
The analysis suggested that the extent of disparities, with respect to all indicators of banking
development except rural deposits per rural branch had come down in the year 1985 with
respect to the year 1975.
Rao (2002) analyzed the impact of new technology on the banking sector. Technology
changes the way businesses are done and opened new opportunities for doing the same work
differently and more efficiently.

Sinha (2003) in a field study of 5 RRB’s found that non-priority sector advances increased
sharply in the second half of the 1990’s for all the sample banks, of which 4 banks have a
significant 25 percent of their portfolio invested in non-priority sector.

RESEARCH METHODOLOGY

NEED FOR THE STUDY:

RRBs were formed to serve the rural inhabitants of India, the majority who were not
having access to banking. There are many institutions set up by the state government and
central government and some in collaboration. The main objective of this institution is to
serve the rural population. But the question is how effectively these banks have
performed? To accomplish the objectives of the paper, we collected various data from
secondary sources. We used several data published in annual statistics of RRBs, several
news articles, books, newspapers and internet.

OBJECTIVES OF THE STUDY:

 Reviewing capital structure of RRBs
 Study the state wise and region wise RRBs
 Examine deposits and outstanding loans of RRBs
 To understand overall performance of RRBs

TOOLS OF ANALYSIS:
To analyse the collected data, average, standard deviation, coefficiency of variation,
percentages and growth rate were used.

LIMITATIONS:
The study was restricted to only some particular areas because of the ongoing pandemic
and other reasons.
 A SAMPLE OF QUESTIONNAIRE

Name:

Age: 25-35 ▢ 36-45 ▢ 46-60 ▢

Gender: Male ▢ Female ▢

Qualification: Graduate ▢ Post Graduate ▢ Professional ▢

Occupation: Job Service ▢ Business ▢

1. How aware are you of the concept of regional rural banks (RRBs) in India?
a. Very aware
b. Somewhat aware
c. Not very aware
d. Not aware at all

2. Have you ever availed of any banking services provided by a regional rural bank?
a. Yes
b. No

3. What do you think are the advantages of RRBs over other banking institutions in rural
areas?
a. Lower interest rates
b. Better understanding of the needs of rural customers
c. More accessible locations
d. Other (please specify)

4. What are some of the challenges faced by RRBs in India?

a. Limited resources
b. Lack of technological advancements
c. Difficulty in attracting and retaining skilled personnel
d. Other (please specify)

5. How important do you think the role of RRBs is in promoting financial inclusion in India?
a. Very important
b. Somewhat important
c. Not very important
d. Not important at all

6. Do you think the Indian government should invest more in the development of RRBs?
a. Yes
b. No
c. Not sure
7. What suggestions do you have for improving the performance and reach of RRBs in India?
a. Better use of technology
b. More training for staff
c. Increased government support
d. Other (please specify)

8. In your opinion, what impact have RRBs had on the economic development of rural India?
a. Significant positive impact
b. Moderate positive impact
c. No impact
d. Negative impact

9. How do you think RRBs can better serve the needs of marginalized communities, such as?
Women and minorities?
a. Special loan schemes
b. More outreach programs
c. Awareness campaigns
d. Other (please specify)

10. Would you recommend RRBs as a viable option for rural communities in India?
e. Yes, strongly recommend
f. Yes, recommend with reservations
g. No, not recommend
h. Not sure.
 PROBLEMS OF RRBS

The Regional Rural Banks, in most cases, apparently have a mixed record of ‘successes’ and
‘failures’, especially in achieving business goals. Their failure in achieving their targets may
be the result of some unsolved problems and challenges they come across during their regular
operations. It is known that, many big businesses face several challenges. Regional Rural
Banks are no exception. So here are some challenges or difficulties faced by RRB’s:

The major problems faced by Regional Rural Banks are as follows:

1. Lack of capital: The authorized capital of RRBs is very low as compared to that of
commercial banks. This limits their ability to expand their business and serve the rural people
effectively.
2. Lack of trained personnel: Most of the RRBs are located in remote and backward areas,
where it is difficult to attract and retain trained personnel. As a result, they have to depend
heavily on their sponsor banks for advice and guidance.
3. High cost of operations: The high cost of operations is another problem faced by RRBs.
This is due to the small size of their business and the lack of economies of scale.
4. Dependence on Sponsor Banks: RRBs are generally dependent on their sponsor banks
forday-to-day operations as well as for financial assistance. This dependence often leads
to aconflict of interest between the two institutions.
5. Political interference: Another major problem faced by RRBs is political interference. This is
because they are often used as a tool for political patronage.

SOME OTHER PROBLEMS FACED BY RRBS

Lack of Co-ordination in Branch Expansion

The branch expansion programme of the RRBs, in many cases has shown irregularities due to
lack of coordination. It could not be ensured that the branches of the RRBs are opened at
regions where there are no provisions of commercial or co-operative banking facilities. Lack
of coordination is another important cause for the slow progress of the regional Rural Banks.

Difficulties in Deposit Mobilization

The RRBs faced a number of practical problems in deposit mobilization. As a result of the
restrictive lending policy of the RRBs, which excludes the richer sections of the village
 Society; these potential and prospective depositors show minimum interest in depositing
their money with the RRBs. The RRBs are aiming at catering to the needs of the poor class of
the rural areas and are not serving the needs of the rich, this is another reason, and the RRBs
are not able to draw the attention of the potential customers, and deposit from that potential
sectors.

Constraints in depositing Mobilizing

The RRBs forbid the richer sections of the village society in providing direct financial
services and assistance. These sections of the society are the eligible mass, which have
potential savings to deposit. But, because of the stringent and restrictive credit policy of the
RRBs they are least interested in depositing their savings with the RRBs. Moreover the state
and local government agencies also have not cooperated much in maintaining their deposits
with the RRBs. The RRBs have not succeeded in mobilizing the accounts within themselves.

Slow Development in Lending Activity

 The RRBs’ rate of growth in loan business is slow, in comparison with
Other types of banks because of the restrictive policies of the RRBs, as known till
1996 the RRBs were only permitted to lend money only to the priority sectors. The
following reasons may be cited for this:
 There was limited scope for the RRBs to lend money directly
 It is always complicated to understand and identify the potential small borrowers and
it was a requirement for the bankers to make sincere efforts in this aspect;
 Most of the small borrowers do not understand the bank formalities and procedures
and prefer to borrow finance from the moneylenders;
 The variations in the Differential Interest Rate (DIR) Scheme also posed an unusual
dilemma to the Regional Rural Banks, while the interest charged by the RRBs is 14
percent, the other commercial banks charge only 4 percent interest under the DIR
Scheme in rural areas. Therefore, every borrower would always prefer going to a
commercial bank, rather than RRBs or co-operative societies would always prefer
going to a commercial bank, rather than RRBs or co-operative societies.
 There is no useful link between the RRBs and the farmers’ service societies.
 There is lack of co-ordination and cooperation between officials of the district credit
planning committees and the Regional Rural Banks.
Urban-Orientation of Staff and Lack of Training and Development Facilities
A critical problem which is experienced while banking with the RRBs is the urban orientation
of the staff that is rarely inclined to serve the rural and backward areas, as the staffs don’t
have any true local involvement in the village where they serve. Generally they are from
The urban areas, and may not aware of the problems faced by the rural people; moreover lack
of training facilities also creates problems resulting in the low growth prospects of the RRBs.

Running into losses

During 1997-During 1997-98, out of 196 RRBs, 70 RRBs incurred losses amounting to Rs.
230.76 crore in total. The total loss of all the RRBs up to the end of March 1998 amounted to
Rs. 3116.00 crore. The reason may be heavy overhead costs, decrease in lending rates, low
profit margins, and increase in salaries and allowances of the bank staff, etc. During 2001-02,
out of 196 RRBs, 167 made a net profit of Rs. 699.93 crore while 29 suffered losses
amounting to Rs. 92.05 crore. The total loss of all the RRBs declined to Rs. 2792.59 crore as
on March, 2001. But ultimately RRBs have become loss making concerns.

Scope of investment is limited

The scope of investment of the surplus fund for the RRBs are very limited as the basic
objective of RRBs is to provide cash and credit facilities to poor and weaker sections of
society, especially to small and marginal farmers, artisans, and other weaker

sections.

Delay in decision making

The RRBs are controlled directly and indirectly by the sponsoring bank, NABARD, RBI, and
Central Government, therefore these organizations also holds the decision making power of the
RRBS resulting in delayed decision on important issues. Therefore it hinders the of RRBs.
Since the end of 1997, the operational responsibility of RRBs has been approved, and taken by
the sponsor bank.
Poor recovery rate
The recovery performance of the RRBs is not up to the mark, the rate of recovery is only
around 55 percent.

Capital inadequacy
As most of the RRBs are suffering from huge losses, there is no financial soundness for the
RRBs, capital inadequacy is such a problem faced by the RRBs. The huge loss incurred by
the RRBs is eating away the capital.
Also, poor marketing strategies, poor knowledge of customers, low production, low
awareness about savings have created many hurdles for RRB’s. 6. Lack of proper co-
ordination between RRB’s and other financial institution like commercial banks, NABARD
and other cooperative bank has badly affected the performance of these banks. Though there
Though there are so many challenges the RRBs are facing in their day to day operations, they
are trying hard to achieve their social objectives and responsibilities. Till date, they have
succeeded in many fronts, and they have successfully projected their image, and are known
as ‘small man’s bank’. They are, in fact, development banks of the rural poor. They have
been trying to fill up the regional and functional disparity and gaps in rural finance area in
our country. To overcome these problems, efficient financial decisions are necessary as rural
banks are a crucial part of Indian Economy. Developing the rural banking sector will develop
our country financially in an impressive way. Serving the poor people of our country is really
important for the bright future of our country.