RURAL Banking in India Project

8/17/2019 RURAL Banking in India Project

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RURAL BANKING IN INDIA

Submitted in partial fulfilment of the requirements for the award of degree

f

!BA

In

"INAN#IAL !ANAG$!$N%

Submitted B&'

(ARUN %RI#)AL

*++,,-,./

D$0AR%!$N% " !ANAG$!$N%

SIKKI! !ANI0AL UNI($RSI%1

SIKKI!

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D $#LARA%IN

I hereby declare that the project entitled 2Rural Ban3ing in India4 which is being submitted

in partial fulfilment of the requirement for the award of the Degree of Master in Business

Administration to “SIKKIM MAI!A" #I$%&SI'() SIKKIM* is an authentic record of our

own wor+ done under the guidance of !r5Atul Dube&6 Department of Management) SIKKI!

!ANI0AL UNI($RSI%16 SIKKI!5

'he matter reported in this project has not been submitted earlier for the award of any other

degree,

!r5 Atul Dube& (arun %ri7hal

-.D ./ D%!A&'M%' S'#D%' AM%

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A #KN8L$DG$!$N%

I sincerely e0press indebtedness to esteemed and re1ered guide “Ms, Deepti 'arani*) for her

in1aluable guidance) super1ision and encouragement throughout the wor+, 2ithout her +ind

patronage and guidance) the project would not ha1e ta+en shape,

I ta+e this opportunity to e0press deep sense of gratitude to “Mr, Atul Dubey*) -ead of

Management Studies) for his encouragement and +ind appro1al, 2e would li+e to e0press

our sincere regards to him for ad1ice and counseling from time to time,

I owe sincere than+s to all the lecturers in “&ural Ban+ing in India* for their ad1ice and

counseling time to time,

(arun %ri7hal

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ABSTRACT

"ummary o Project

Rural 0ankin1 in #ndia has 0een the su0ject o study "urey Committee Report in

23456 literally thousands o reports hae e7amined and inesti1ated the

pro0lems relatin1 to the credit deliery or a1riculture and rural area! .atest

ma1num opus on the su0ject is the %ational &1ricultural Credit Reiew report

8999! The (7pert Committee on Rural Credit :Chairman) Proessor V!"!Vyas;

su0mitted its report in 8998!One more *i1h Power Committee headed 0y

Proessor Vyas set up 0y the Resere Bank o #ndia recently to reiew and adice

on improin1 credit deliery to a1riculture has also 1ien its report!

,inancial li0erali


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0orne out 0y the market reolution that is takin1 place in #ndia@s illa1es!

The %arasimham committee on rural credit recommended the

esta0lishment o Re1ional Rural Banks :RRBs; in meetin1 the needs o

rural areas!

The purpose o this essay is not to ealuate

the rural credit policy o the 'nited Pro1ressie &lliance 1oernment!

%eertheless6 it is clear that i any 1oernment is seriously to address the crisis

in rural 0ankin16 it must reaArm the commitment o the state to the policy o

social and deelopment 0ankin16 and reaArm the part played 0y the credit

system in redistri0ution and poerty alleiation!

The o0jectie o the study is to study marketin1 o rural 0ankin1 in #ndia and to

study comparatie marketin1 o rural and ur0an 0ankin1 in #ndia!

Research in common parlance reers to a search or knowled1e! +escriptie

research desi1n studies are those studies6 which are concerned with descri0in1

the character o a 1roup!

The researcher makes a plan o the study his research work! The study was

0ased on uestionnaire method! The primary data are those6 which are collected

a resh and or the frst time happen to 0e ori1inal in character!

"econdary data are those which hae already 0een collected 0y someone else

and which hae already 0een passed throu1h the stratifed process! #t has

collected throu1h the 0ooks6 journals #nternet!

RRBsD perormance in respect o some important indicators was certainly

0etter than that o commercial 0anks or een cooperaties! RRBs hae

also perormed 0etter in terms o proidin1 loans to small and retail

traders and petty non=arm rural actiities! #n recent years6 they haetaken a leadin1 role in fnancin1 "el=*elp $roups :"*$s; and other micro=

credit institutions and linkin1 such 1roups with the ormal credit sector!

RRBs should really 0e stren1thened and proided with more resources

with which they can undertake more o these important actiities! &nd

most certainly they should 0e kept apart rom a proft=oriented corporate

motiation that would reduce their capacity to proide much needed

fnancial serices to the rural areas6 includin1 to a1riculture!

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The num0er o rural 0ranches should 0e increased rather than reducedE

they should 0e encoura1ed to deelop more sophisticated methods o

credit deliery to meet the chan1in1 needs o armin1E and most o all6

there should 0e 1reater coordination 0etween district plannin1 authorities6Panchayati raj institutions and the 0anks operatin1 in rural areas! Only

then will the RRBs ulfll the promise that is so essential or rural

deelopment!

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REFERENCE

Books:

• &aker :2332; Building Strong BrandsE %ew /ork) ,ree Press

• Chatterjee6 Fauchius6 >aas and "atpathy no! 26 :8998;) DRein1 up auto

0randin1D6 McKinsey Quarterly !

• +aid! &! &aker6 V!>umar $eor1e "! +ay6 :8992; +escriptie Research)

Marketing Research, Seventh Edition, pp 17

• "a7ena6 Rajan! :899G;)@-arketin1 -ana1ement@ Tata -c1raw=*ill

Pu0lishin1 Company .imited! %ew +elhi

• "ontakki6 C!%! :233H;)@-arketin1 -ana1ement@ >ayali Pu0lisher!6 %ew

+elhi! 3

• >otler6 Philip! :2333;)@-arketin1 -ana1ement@ Prentice *all o #ndia Pt!

.td!6 %ew +elhi!

• >othari6 C!R :8992;)@Research -ethodolo1y@6 Vishwa Pu0lication!6 %ew

+elhi

• "harma6+!+:8998;)@-arketin1 Research@6 "ultan Chand "ons6 %ew +elhi

Magazines:

• Business Today

• Business Ieek!

• Business Iorld

Newspapers

•

(conomic Times• The *indu

• Times o #ndia

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QUESTIONNAIRE

%&-( ? "(J =

&$( ? +("#$%&T#O% ?

+ear sirKmadam6

2; Central "cheme to proide #nterest "u0sidy or the period o moratorium onloans taken 0y armer rom economically weaker sections rom schedule

0anks under the loan scheme o the #ndian Banks &ssociationL

M To 1reat e7tent

M To some e7tent

M To ery little e7tent

8; To what e7tent is "ales Promotions hae 0een used 0y 0anker to increase

sales in the short termL

M Completely

M Partially

M %il

G; +oes your marketin1 policy o 0ank hae ocus marketin1 on a1ro= sectorL

M stron1ly a1ree

M &1ree

M +isa1ree

M stron1ly disa1ree

M can@t say

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5; -ultiple N0asic@ fnancial serices and loan 1ateway is product marketin1 o

the 0ankL

M /es M %o

4; +eised to ensure usa1e as well as profta0ility uantity discounts6 and ease in

payment modes is pricin1 marketin1 o the 0ankL

M /es M %o

; Comprehensie oQerin1 o diQerent serices is placement marketin1 o the

0ankL

M Traditional M -odern

H; Colla0oratin1 with %$O@s to deelopment >nowled1e marketin1 o the 0ank

M /es M %o

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INDEX

1. INTRODUCTION

2. BANKING POLICY IN RURAL INDIA

3. DISTRIBUTION CHANNEL OF RURAL BANKING

4. MARKETING STRATEGIES OF RURAL BANKING PLAYERS IN INDIA

5. AN ICT STRUCTURE FOR RURAL BANKING ENABLEMENT

6. OBJECTIVE OF THE STUDY

. RESEARCH METHODOLOGY

!. DATA ANALYSIS AND INTERPRETATION

". CONCLUSION

1#. BIBLIOGRAPHY

11. ANNEXURE

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INTRODUCTION

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INTRODUCTION

Rural banking in India has been the subject of study Survey Committee Report in 1954

literally thousands of reports have e!amined and investigated the problems relating to the

credit delivery for agriculture and rural area" #atest magnum opus on the subject is the $ational %gricultural Credit Revie& report '(((" )he *!pert Committee on Rural Credit

+Chairman, -rofessor ."S".yas/ submitted its report in '(('"0ne more igh -o&er

Committee headed by -rofessor .yas set up by the Reserve 2ank of India recently to revie&

and advice on improving credit delivery to agriculture has also given its report"

%s the majority of the Indian population lives in rural areas

there is an urgent need to deliver citi3en services to them in a cost effective &ay &ith assureduality" )his involves mainly the follo&ing,

1" *nabling the ready access at the place of the villagers"

'" Reducing transaction cost to make the services affordable"

" Reduction in delays"

4" Improving the uality of services available"

)he criticality of this need may be seen from the fact that

even &ith concerted and e!tensive attempts to meet the credit needs of the farmers for

agricultural operations etc" informal agencies including money lenders are currently

providing substantial portion of the total credit to this sector" 2esides the agricultural credit

flo&s themselves are inadeuate and the gross capital formation can be improved only if

substantial amount of investment funds flo& to the rural areas in the form of credit" #ike&ise

there is also a need to provide market information e!tension services marketing support and

government and other public services to the people in a cost6effective manner" 7or achieving

financial inclusion and economic gro&th the IC) can play an important role by increasing

effective access and improving delivery and governance in banking services" %gainst this

background the key issue is ho& technology can be harnessed for improving the efficacy of

the credit delivery and for the minimi3ation of the transaction costs involved for ensuring

that bank credit actually increases and promotes productive

capital formation and investment in rural areas and helps address the critical problem of the

rural6urban service divide"

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)he Rural *conomy

7inancial liberali3ation after 1991 decimated the formal system of institutional credit in rural

India" It represented a clear and e!plicit reversal of the policy of social and development

banking such as it &as and contributed in no small &ay to the e!treme deprivation and

distress of &hich the rural poor in India have been victims over the last decade" )his paper

e!amines the impact of changes in banking policy and structure on the rural economy and on

the rural poor in particular"

7inancial liberali3ation is a crucial component of the programmes of economic reforms that

are being imposed on the people of less6developed countries" )he demand that financial

markets be liberali3ed uickly is high on the agenda of imperialism8 in India as &ell

advocates of economic reform: see financial liberali3ation as being at the core of structuraladjustment" )here are many components of the package of reforms associated &ith financial

liberali3ation in India" Chandrasekhar and ;hosh +'(('/ classify the policies of financial

liberali3ation in India into three types, first policies to curtail government intervention in the

allocation of credit secondly policies to dismantle the public sector and foster private

banking and thirdly polices to lo&er capital controls on the Indian banking system"

It is &ell kno&n that the burden of indebtedness in rural

India is very great and that despite major structural changes in credit institutions and formsof rural credit in the post6Independence period the e!ploitation of the rural masses in the

credit market is one of the most pervasive and persistent features of rural life in India" Rural

households need credit for a variety of reasons" )hey need credit to meet short6term

reuirements of &orking capital and for long6term investment in agriculture and other

income6bearing activities" %gricultural and non6agricultural activities in rural areas typically

are seasonal and households need credit to smoothen out seasonal fluctuations in earnings

and e!penditure" Rural households particularly those vulnerable to &hat appear to others to

be minor shocks &ith respect to income and e!penditure need credit as an insurance against

risk" In a society that has no la& of free compulsory and universal school education no

arrangements for free and universal preventive and curative health care a &eak system for

the public distribution of food and very fe& general social security programmes rural

households need credit for different types of consumption" )hese include e!penditure on

food housing health and education" In the Indian conte!t another important purpose of

borro&ing is to meet e!penses on a variety of social obligations and rituals"

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If these credit needs of the poor are to be met rural

households need access to credit institutions that provide them a range of financial services

provide credit at reasonable rates of interest and provide loans that are unencumbered by

e!tra6economic provisions and obligations"

istorically there have been four major problems &ith

respect to the supply of credit to the Indian countryside" 7irst the supply of formal sector

credit to the countryside as a &hole has been inadeuate" Secondly rural credit markets in

India themselves have been very imperfect and fragmented" )hirdly as the foregoing

suggests the distribution of formal sector credit has been uneual particularly &ith respect to

region and class caste and gender in the countryside" 7ormal sector credit needs specially to

reach back&ard areas income6poor households people of the oppressed castes and tribes

and &omen" 7ourthly the major source of credit to rural households particularly income6

poor &orking households has been the informal sector" Informal sector loans typically are

advanced at very high rates of interest" 7urther the terms and conditions attached to these

loans have given rise to an elaborate structure of coercion < economic and e!tra6economic


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BANKING POLICY IN

RURAL INDIA

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2%$?I$; -0#IC@ I$ RAR%# I$BI%

2%$?I$; -0#IC@ I$ RAR%# I$BI%, 19=9 )0 )*

-R*S*$) )he period from 19=9 to the present can be

characterised as representing broadly speaking three phases in banking policy vis66vis the

Indian countryside" )he first &as the period follo&ing the nationali3ation of IndiaDs 14 major

commercial banks in 19=9" )his &as also the early phase of the Egreen revolutionD in rural

India and one of the objectives of the nationali3ation of banks &as for the state to gain access

to ne& liuidity particularly among rich farmers in the countryside" )he declared objectives

of the ne& policy &ith respect to rural banking 6 &hat came to be kno&n as social anddevelopment banking: 6 &ere +i/ to provide banking services in previously unbanked or

under6banked rural areas8 +ii/ to provide substantial credit to specific activities including

agriculture and cottage industries8 and +iii/ to provide credit to certain disadvantaged groups

such as for e!ample Balit and Scheduled )ribe households

)he introduction of social and development

banking policy entailed a radical shift from prevalent practice in respect of the objective and

functioning of commercial banks" %n important feature of the policy of social and

development banking &as that it recast completely the role of commercial banks in rural

banking" -rior to 19=9 the countryside &as not considered to be the problem of commercial

banks"5 It &as only after 19=9 that a multi6institutional approach to credit provision in the

countryside became policy &ith commercial banks Regional Rural 2anks and cooperative

institutions establishing &ide geographical and functional reach in the Indian countryside"

)he Reserve 2ank of India +R2I/ issued specific

directives &ith respect to social and development banking" )hese included setting targets for

the e!pansion of rural branches imposing ceilings on interest rates and setting guidelines for

the sectoral allocation of credit" Rural credit &as an important component of the Egreen

revolutionD package8 the first post6nationali3ation phase of e!pansion in rural banking sa& a

substantial gro&th in credit advances for agriculture" Specifically a target of 4( per cent of

advances for the priority sectors: namely agriculture and allied activities and small6scale

and cottage industries &as set for commercial banks" %dvances to the countryside increased

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substantially although they &ere as &as the green revolution itself biased in respect of

regions crops and classes"= )he t&o main crops that gained from the green revolution as is

&ell recogni3ed &ere &heat and rice and the application of the ne& technologies &as

primarily in the irrigated areas of the north6&est and south of India &ith the benefitsconcentrated among the richer classes of cultivators"

In 19F5 the ;overnment established by ordinance and

then legislation a ne& net&ork of rural financial institutions called the Regional Rural 2anks

+RR2s/ &hich &ere promoted by the ;overnment of India State governments and

commercial banks" )hese &ere created on the basis of recommendations by a &orking group

on commercial credit also called the $arasimham Committee and &ere intended to

combine the cooperativesD local feel and familiarity &ith the business acumen of commercial

banks: +Gagan Hohan '((4 p ''/"F )he number of such banks e!panded rapidly and

covered 4F= districts by 19>F

)he second phase &hich began in the late 19F(s and early

19>(s &as a period &hen the rhetoric of land reform &as finally discarded by the ruling

classes themselves and a period &hen the major instruments of official anti6poverty policy

&ere programmes for the creation of employment" )&o strategies for employment generation&ere envisaged namely &age6employment through state6sponsored rural employment

schemes and self6employment generation by means of loans6cum6subsidy schemes targeted at

the rural poor" )hus began a period of directed credit during &hich credit &as directed

to&ards the &eaker sections": )he most important ne& scheme of this phase &as of course

the Integrated Rural Bevelopment -rogramme or IRB- a scheme for the creation of

productive income6bearing assets among the poor through the allocation of subsidi3ed credit"

)he IRB- &as initiated in 19F>6F9 as a pilot project and e!tended to all rural blocks of the

country in 19>(" )here is much &riting on the failure of IRB- to create long6term income6

bearing assets in the hands of asset6poor rural households"> %mong the many reasons for this

failure &ere the absence of agrarian reform and decentrali3ed institutions of democratic

government the inadeuacy of public infrastructure and public provisioning of support

services and the persistence of employment6insecurity and poverty in rural society"

$evertheless the IRB- strategy did lead to a significant transfer of funds to the rural poor"

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)he second phase also involved an e!pansion and

consolidation of the institutional infrastructure of rural banking" *ven ardent critics of

IndiaDs gro&th strategy: &rote a noted scholar of IndiaDs banking system &ould admit that

&hat the country achieved in the area of financial sector development before the present

reform process began particularly after bank nationali3ation &as unparalleled in financial

history: +Shetty 199F '5/" %fter bank nationali3ation as Shetty points out there &as an

unprecedented gro&th of commercial banking in terms of both geographical spread and

functional reach:

)he third and current phase &hich began in 1991 is that of liberali3ation" )he policy objectives of this phase are encapsulated in the Report of the

Committee on the 7inancial System &hich &as chaired ironically by the same person &ho

recommended the establishment of Regional Rural 2anks H" $arasimham +R2I 1991/" In

its very first paragraph the report called for a vibrant and competitive financial systemto

sustain the ongoing reform in the structural aspects of the real economy": )he Committee said

that redistributive objectives should use the instrumentality of the fiscal rather than the

credit system: and accordingly that directed credit programmes should be phased out": It

also recommended that interest rates be deregulated that capital adeuacy norms be changed

+to compete &ith banks globally:/ that branch licensing policy be revoked that a ne&

institutional structure that is market6driven and based on profitability: be created and that

the part played by private Indian and foreign banks be enlarged"

#et us make it clear that before the 199(s the banking system&as open to much criticism particularly of its bureaucratic failures its insensitivity to the

social and economic conte!ts in &hich it functioned and class and regional ineualities in

lending patterns" )he reforms proposed in 1991 ho&ever &ere not attempts to bring rural

banking closer to the poor but to cut it back altogether and thro& the entire structure of social

and development banking overboard"

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DISTRIBUTION

CHANNEL OF RURAL

BANKING

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D$%&'$()&$*+ C,-++/ *0 R)'-/ B-+$+ M)/&$-+

A'*-, &* R)'-/ L+7$+

Rural credit has been a laboratory for various policies

initiatives investigations and improvements since 1955")he first major strategy adopted for improving rural credit delivery &as the institutionali3ation of the credit delivery system &ith

the cooperative as the primary channels" )he multi6agency approach to the rural credit

delivery emerged &ith the induction of the commercial banks into the scene" In 19F9

speciali3ed institutions called Regional Rural 2anks and subseuently another breed of

institutions called #ocal %rea 2anks came on the scene" Jith the operationalisation of the

#ead 2ank Scheme the area approach to rural lending &as formali3ed and attempts &ere

made to match infrastructure development &ith bank credit flo&s for ensuring developmentof the rural areas" )he Scheme sought to give a special supply6leading role to the banking

system in rural development and also to ensure access of the rural population to bank services

through rural branch e!pansion" % multi6agency credit delivery system is in place for

financing credit6based development activities under the #ead 2ank Scheme" In 19>> the

Service %rea %pproach &as also introduced as a strategy for improving the uality of rural

lending" )he #ead 2ank Scheme Information System and Service %rea Honitoring

Information System +S%HIS/ have also been operationalised using monitoring arrangements"

)he micro6finance and linkage of the banks to the self6 helpgroups K $;0s and the issue of

?isan Credit Cards are among the recent developments in the area of rural lending in India"

)he latest policy initiatives are the enabling of the $on6bank 7inancial Companies and of the

correspondent banking for increasing delivery of rural credit"

)he $ational %gricultural Credit Revie& Committee

+$%CRC/ headed by -rof" % S ?husru has established that the cost of rural lending by

commercial banks and cooperative banks is unsustainable and does not break even In fact it

has been sustained through cross subsidi3ation" )he t&o elements of the costs namely capital

costs and the current e!penses are of the rural branches" Rural bank branches are such that the

transaction in the rural area cannot support them"

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)he e!periment of having lo& cost institution for rural lending in

the form of Regional Rural 2anks also has not been successful in as much as the RR2 staff

e!penses are reuired by la& to be on par those of the commercial banks" )herefore it is

clear that the rural credit delivery system is not performing efficiently and in a cost effective

manner" It is against this background that &e position a technology based solution for

improving the speed efficiency and effectiveness of the credit delivery of the rural people

through the application of information technology tools and systems" Je propose Hodel for

using

Information )echnology for improving rural credit delivery system by reducing the cost

increasing the speed of delivery and also increasing the value addition in the service delivery

and improving the accountability"

)he $ational %gricultural Credit Revie& Committee Report

documents the history development and the status of the various important issues involved in

rural credit delivery in India in great detail" It is interesting to kno& from this voluminous

report that solutions have been advised and implemented for almost all the real as &ell as

perceived: problems in rural credit" @et this area remains a problem defying adeuate

solution" 7or e!ample some of the key concerns like the end6use of credit infrastructure

gaps and the high costs of lending have been repeatedly attended to" Bespite that the

delivery of credit for agriculture and rural development still remains unsatisfactory"

It has been a matter of concern that the multi6 institutional rural

credit delivery system has not been very successful in delivering reuired amount of credit to

agriculture and small scale industries and small and medium enterprises" i )he share of bank

credit for agriculture has declined from 1F"= percent in 19>5 to 9"> percent in '(('" i )he

institutions are in place the systems repeatedly revamped several times on the basis of

multiple committees are alsoin place" In spite of this the gro&ths of the agricultural credit in the country during the last

three years have been less than the gro&th of credit for services and corporate sector" )he

value addition to the ;B- by the agriculture has been lo& as compared to the industry sector

and the services sector" )he income disparities as reflected in the poverty are still a matter of

serious concern"

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.arious approaches have been adopted for improving rural

credit from time to time" It &as felt that project lending &ill revolutioni3e rural credit" )his

&as follo&ed by area approach and e!tension6 based schemes and then the lead bank scheme

providing for for&ard and back&ard linkages and the scheme of linking banks to -rimary

%gricultural Credit Societies and the linkage of bank to microfinance institutions" Ander the

hypothesis that social factors like education training and social pressures have critical

bearing on the credit off6take and its productive deployment in rural areas8 several attempts

have been made and are being made to address them" %ccordingly the group6lending the

family approach and entrepreneurial development programme the involvement of $;0s and

voluntary agencies the social groups and the use of self6help6groups are all being tried out

for channeling adeuate credit to agriculture and rural sectors" Jith considerable enthusiasm

follo&ed by disappointment the cooperatives &ere positioned as the primary rather the

e!clusive channel for rural credit delivery for about t&o decades and the latest reports on the

cooperatives is that by and large they themselves reuire assistance rather than being of any

assistance to the farmers" Bespite concerted efforts by a multitude of agencies the

agricultural credit delivery still remains a problem" )he '(( $ovember Revie& of the

Honetary and Credit -olicy takes up this and provides for the constitution of an %dvisory

Committee to revie& the various e!iting arrangements and to suggest appropriate changes in

the institutional and procedural arrangements for the smooth flo& of credit to agriculture:

)he -olicy also states that the Committee is e!pected to help in capturing technological

developments in the cause of improving credit delivery: L4M"

Bespite the large number of initiatives the rural credit delivery system still reuires

improvements" Credit off6take and its uality have to increase to facilitate rural capital

formation employment and gro&th" )he speed of loan processing should be faster and the

cost of delivery should be reduced" )hese issues are currently relevant and important and

have been identified as such in the $ovember '(( credit policy statement of the Reserve2ank of India as &ell"

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M-'&$+ %&'-&$% *0

')'-/ (-+$+ /-'% $+

I+7$-

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)o echo the thoughts of C"?" -rahalad the bottom of the pyramid: segments &ill be the

gro&th drivers of the future < this is certainly being borne out by the market revolution that is

taking place in IndiaDs villages" )he $arasimham committee on rural credit recommended

the establishment of Regional Rural 2anks +RR2s/ in meeting the needs of rural areas"

Indian mobile banking has t&o major segments, the urban segment and the rural segment"

Celent estimates that urban mobile banking subscribers &ill reach =5 million by '(1'" )he

rural mobile segment represents a huge opportunity to bank the unbanked population thereby

adding a revenue stream"

In a ne& report M*($/ B-+$+ $+ I+7$-8 D)-/ S&'-& 0*' R)'-/ -+7 U'(-+ S9+&%

Celent e!plains the mobile banking ecosystem in India and looks at the trends driving thegro&th in its urban and rural subsegments" )he report looks at the prospects of mobile

banking from both a regulatory perspective and an industry perspective"

In IndiaDs urban segment mobile banking is an enabling fifth channel and in the rural

segment mobile banking is a primary mode of financial inclusion" In both segments the t&o

fundamental factors affecting the gro&th of mobile banking are regulations and technology"

$ontransactional users &ill remain the majority in India because they &ill continue to use

online banking and other payment mechanisms" ;overnment6to6person +;'-/ payments &ill

be the major gro&th driver for rural mobile banking" Regulatory changes are also a big driver"

Celent believes that by '(1' over =( million rural users &ill be beneficiaries of mobile

banking through business correspondence"

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Jhile the urban banking market is dominated by information services the payment

transactions segment has not picked up mainly due to regulatory limitations: says Rajesh H

R an analyst &ith Celent and coauthor of the report" o&ever recent rela!ation of payment

norms by R2I has presented a huge opportunity for this segment":

)he rural mobile banking segment is a high gro&th area due to the adoption of the business

correspondent model and rela!ed ?no& @our Customer norms but financial literacy remains

a big issue for retaining the rural adopters: says Sreekrishna Sankar Celent analyst and

coauthor of the report"

M-'&$+ %&'-& -+7

)he Reserve 2ank of India has a mandate to be closely involved in matters relating to rural

credit and banking by virtue of the provisions of Section 54 of the R2I %ct" )he major

initiative in pursuance of this mandate &as taken &ith sponsoring of %ll6India Rural Credit

Survey in 195165'" )his study made agency6&ise estimates of rural indebtedness and

observed that cooperation has failed but it must succeed" )he Report of the Committee on

Birections is still considered a classic on the subject and t&o of the four members &ere

incidentally from %ndhra -radesh" )his is the origin of the policy of e!tending formal credit

through institutions &hile vie&ing local traditional and informal agencies as usurious" In the

first stage therefore efforts &ere concentrated on developing and strengthening cooperative

credit structures" )he Reserve 2ank of India has also been making financial contributions to

the cooperative institutions through evolving institutional arrangements especially for

refinancing of credit to agriculture"

Jhile enacting the State 2ank of India %ct in 1955 the objective &as stated to be the

e!tension of banking facilities on a large scale more particularly in rural and semi6urban

areas" S2I therefore became an important instrument of e!tending rural credit to supplement

the efforts of cooperative institutions" In 19=9 14 major commercial banks &ere nationalised

and the objective inter alia &as Nto control the heights of economyN" )he nationalised banks

thus became important instruments for advancement of rural banking in addition to

cooperatives and State 2ank of India" )he ne!t step to supplement the efforts of cooperatives

and commercial banks &as the establishment of Regional Rural 2anks in 19F5 in different

states &ith euity participation from commercial banks Central and State ;overnments"2y 19>' to consolidate the various arrangements made by the R2I to promoteK supervise

26

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institutions and channel credit to rural areas $%2%RB &as established" )hough several

efforts &ere made to increase the flo& of institutional credit for agricultural and rural lending

there &ere mismatches in credit and production" 7ield studies conducted to determine the

reason revealed that it &as due to absence of effective local level planning" It &as felt that

&ith the establishment of large net&ork of branches a system could be adopted to assign

specific areas to each bank branch in &hich it can concentrate on focussed lending and

contribute to the development of the area" Jith a vie& to implementing this approach R2I

introduced a scheme of NService %rea %pproachN for commercial banks" )o further

supplement the institutional mechanism the concept of #ocal %rea 2anks &as taken up in

199=69F and in6principle approval has been given for > #ocal %rea 2anks"

%s regards cost of credit for most of the period the administered interest rate regime &as

applicable for bank lending and this included concessional terms for priority sector"

Currently all interest rates on bank advances including in rural areas are deregulated and

there is no link bet&een priority sector and interest rate though there are some regulations on

interest rates by si3e of advance i"e" belo& Rs" ' lakh in respect of commercial banks"

%s regards policy measures to enhance flo& of credit to rural areas apart from availability of

credit lines from the Reserve 2ank of India the concept of priority sector &as evolved to

ensure directed credit" Currently the stipulation is that domestic commercial banks should

e!tend credit to the e!tent of 4( per cent of the total net bank credit to priority sector as a

&hole of &hich 1> per cent should be specifically for agriculture" 0ut of the target of 1> per

cent for agriculture at least 1"5 per cent should be by &ay of direct loans to agriculture and

remaining could be in the form of indirect loans"

Jhere a bank fails to fulfil its commitment to&ards priority sector lending it is currently

reuired to contribute to Rural Infrastructure Bevelopment 7und set up by $%2%RB"

$%2%RB in turn provides these funds to State ;overnments and state o&ned corporations to

enable them to complete various types of rural infrastructure projects" It is pertinent torecognise that there are a large number of credit linked programmes sponsored by the

;overnment for direct assault on poverty" In programmes relating to self6employment and

&omen &elfare the multiplicity of programmes has been reduced by having a comprehensive

and consolidated programme named S&aranjayanti ;ram S&arojgar @ojna" )he financial

sector reforms &hich &ere introduced from 1991 on&ards &ere aimed at transforming the

credit institutions into organisationally strong financially viable and operationally efficient

units" )he measures introduced include reduction in budgetary support and concessionality of resources preparation of Bevelopment %ction -lans and signing of Hemoranda of

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Anderstanding &ith the major controllers and introduction of prudential norms relating to

income recognition and asset classification for RR2s and cooperative banks" )he lending

rates for these institutions have also been deregulated" 0ther measures of liberalisation

include allo&ing non6target group financing for RR2s direct financing for SC2s and CC2s

and liberalisation in investment policies and non6fund business"

)hese measures have contributed to many RR2s turning around and becoming more vibrant

institutions" In the case of cooperative banks there is greater a&areness of the problems of

officialisation and politicisation and initiatives in this regard include legislative actions on

cooperative banks in %ndhra -radesh"

Recently several policy initiatives have been taken to advance rural banking" )hese includ

additional capital contribution to $%2%RB by the R2I and the ;overnment of India

recapitalisation and restructuring of RR2s simplification of lending procedures as per the

;upta Committee recommendations preparation of a special credit plans by public sector

banks and launching of ?isan Credit Cards" 7inally a scheme linking self6help groups &ith

banks has been launched under the aegis of $%2%RB to augment the resources of micro

credit institutions" % Committee has gone into various measures for developing micro credit

and has submitted its report &hich is under the consideration of the R2I" In respect of

cooperatives a )ask 7orce

under the chairmanship of my esteemed and affectionate colleague Shri Gagdish Capoor

Beputy ;overnor has been constituted to revie& the status and make recommendations for

improvement"

Andeniably these initiatives have enabled a very &ide net&ork of rural financial institutions

development of banking culture penetration of formal credit to rural areas and a counter to

the dominance of moneylenders" )hese initiatives have also financed modernisation of rural

economies and implementation of anti6poverty and self6employment programmes" o&ever

for the purpose of focussing on the future generalisation on some concerns regarding thecurrent approach to rural credit and banking &ould be appropriate"

7irstly the cooperative banks have different layers and many of them have significantly large

non6performing assets +$-%s/" Hany cooperatives are undercapitalised" )he public sector

banking system also e!hibits $-%s and some of them have so far been provided &ith

recapitalised funds" )he RR2s also e!hibit $-%s and these have been recapitalised from the

;overnment of India so far &hich &ould imply a total recapitalisation of double the amount

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provided by ;overnment of India" Secondly according to the %ll6India Bebt and Investment

Survey 199169' the share of debt to institutional agencies in the case of rural households has

increased marginally from =1"' per cent to =4 per cent bet&een 19>1 and 1991" o&ever it

must be noted that this figure relates to debt outstanding and the overall share of the

institutional credit in the total debt market is likely to be smaller than &hat this figure

indicates" )hirdly the cost of financial intermediation by the various rural financial

institutions is considered to be on the high side" )he difference bet&een the cost of resources

made available to $%2%RB by Reserve 2ank of India and the commercial rates of interest at

&hich the cooperative banks lend for agriculture in the deregulated interest rate regime is also

considered to be on the high side"

7ourthly empirical studies indicate that institutional credit is more likely to be available for

&ell to do among the rural community"

7ifthly empirical studies also indicate that relatively back&ard regions have less access to

institutional credit than others do" Si!thly the non6availability of timely credit and the

cumbersome procedures for obtaining credit are also attributed to the functioning of the

financial institutions though this is eually valid for rural and urban banking"

7inally in regard to ;overnment sponsored schemes there has been overlap in accountability

in as much as the beneficiaries are identified on a joint basis" 2anks have been indicating that

$-%s are proportionately more due to this overlapping"

%n important development in the formal segment of the rural financial markets is the gro&ing

significance of non6banking financial companies in particular in hire purchase and leasing

operations" )hey also finance traders of agricultural inputs and output" )he $27Cs have only

recently been brought under the regulatory regime of R2I" Jhile their importance is

recognised in financing diversified rural agriculture its e!tent and scope of operations has not

been adeuately researched"

M-'&$+ %&'-& -+7 D+-9$% *0 R)'-/ E*+*9

-roblems prospects and solutions to many of the issues mentioned have been researched and

debated primarily &ith a vie& to strengthening revamping or re6orienting rural financial

institutions" o&ever there is merit in vie&ing the problems of rural credit and rural banking

in a &ider conte!t" In this regard it &ill be useful to recognise some dynamics of rural

economy" 7irst services sector is getting increasing importance in the rural areas also 6from

coffee shops to cable television operators" %ssessing and meeting of credit needs of thissector is important" Second the integration bet&een rural and urban areas has increased

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significantly &ith the result mobility of labour capital products and even credit bet&een the

t&o is increasing" )hird commercialisation of agriculture particularly the increasing role of

cash crops like cotton has resulted in substantial role for suppliersO and buyersO credit" )hus

fertiliser and pesticide are supplied to farmers on credit often on deferred payment basis" In

such deferred payment arrangements credit terms are built into price and hence it is difficult

to isolate terms" Similarly the commission6agents advance money to&ards purchase of output

from farmers &hich amounts to providing credit and includes an element of for&ard trading"

)hese arrangements are often entered into on a voluntary basis" )he present banking system

does not generally encourage financing the transactions of this nature" o&ever a fe& non6

banking financial companies do provide indirect finance for such purpose"

7ourth compared to cereal production other food items including poultry and fish are

gro&ing at a faster pace" In other &ords rural agriculture is getting increasingly diversified in

terms of products and processes"

7ifth in areas &here commercialisation of agriculture has reached significant levels the

traditional landlord6based tenancy is replaced &ith commercial6based tenancy" Jhere

intensive cultivation of cash crops such as cotton is called for this has become uite

common" o&ever the present credit and banking procedures do not cater to the &orking

capital needs of such commercial based tenancy relationship"

Si!th given the diversified activities and large &ork force in rural areas there is increasing

recourse to multiple occupations to earn a decent livelihood" 7or e!ample a small farmer is

also a petty trader and may also be a satellite based cable television operator in the village"

)he end use specification and monitoring of credit is more difficult in such circumstances"

Seventh to the e!tent employment and indeed incomes could be seasonal especially for

agricultural labour there is reason to seek and obtain consumption loans" Such assurance is

possible &ith prosperity in rural employment" -resent arrangements in formal credit markets

are inadeuate to meet such reuirements"*ighth &hile there is significant commercialisation and diversification of rural economies

progress is very uneven in different parts of the country" So there are still many areas &here

e!ploitation of tribals by money lenders or of agricultural labourers by landlord6money

lenders still persists" $orms and procedures of credit therefore need to be different to meet

varying circumstances"

$inth from the data on credit deposit ratios it is clear that the banking system is a conduit

for net transfer of financial savings from rural to non6rural sectors" 0n the other hand a major

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part of informal markets &ould be local and hence savings &ould be locally deployed &ithin

the rural areas"

M-'&$+ %&'-& -+7 R)'-/ C'7$& M-'&%: N; R-/$&$%

%s mentioned earlier in the approach to rural banking the basic thrust of our policy has been

to promote institutional credit and eliminate or ignore informal finance" o&ever in reality

&hile formal credit has e!panded its share informal finance continues to be significant" )he

idea of promotion of Self6elp ;roups and micro financing is an indirect admission of

necessity of informal finance" )he future of rural banking cannot be appreciated &ithout fully

understanding both formal and informal rural credit markets especially their linkages" Since

in the earlier sections organisation and functioning of the formal credit system in the rural

areas has been e!plained in this section nature of informal markets and the linkages &ill be

e!plored"

)he informal financial market &hich is legal but officially unrecorded comprises unregulated

financial activities i"e" outside the orbit of officially regulated financial intermediaries" In the

informal financial transactions one could treat borro&ing and lending among friends and

relatives as occasional and not part of such an informal market" Conseuently there are three

broad types of informal financial transactions vi3" &ell6defined group tied6

lendingKborro&ing8 and untied lendingKborro&ing activities" In the literature on &ell6defined

groups there are three broad types namely Rotating Savings and Credit %ssociations

+R0SC%/8 %ccumulated Savings and Credit %ssociations +%SCR%/ and hybrid forms of

both" )here are some variations under each category" 2asic characteristics of these groups are

that they are voluntary in nature usually among euals &ith little or no outside support or

interference" 0ften members have some special bonds based on religion caste status

neighbourhood etc" In brief there is no patronclient frame&ork" In essence therefore these

arrangements among &ell6defined groups though important should not in my vie& beincluded in the concept of informal financial markets" In the recent past there have been

efforts to provide a bridge bet&een formal financial markets and these &ell6defined groups in

the form of Emicro6financeO initiatives" o&ever these initiatives do not constitute

marketisation of activities of &ell6defined groups" )hus the informal financial markets are

those &hich are outside the orbit of officially regulated institutions" )hese informal debt

transactions may involve tied debt transactions and untied debt transactions" )he general

approach at least at the policy level to informal market &hether tied or untied has not been positive since informal debt market has been historically euated &ith either landlord or

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moneylender" )he transactions are considered to be e!pensive especially in vie& of &hat is

held to be of usurious nature of interest rates" It is considered to be financing unproductive

e!penditures since consumption needs are financed" Sometimes it is said that there are often

uneual and e!ploitative arrangements say bet&een the landlord and the tenant or the

agricultural labourer" 7inally it is held that since these are unregulated they are prima facie

not desirable"

@et the fact remains that informal debt markets do prevail and studies have sho&n that in

some areas in our country they account for F( to >( per cent of debt transactions" Studies

have also sho&n that many poor people have no access to institutional credit" )he

arrangements in informal debt markets are said to be fle!ible and sometimes have in6built

risk sharing arrangements" )hese credit arrangements do provide for smoothening of

consumption and production reuirements" )ransaction costs in terms of certainty timeliness

procedural reuirements number of trips etc" are some&hat negligible although there may be

hidden costs in tied lending" Horeover &hile formal markets tend to cater to less risky

borro&ings informal markets provide for the more risky borro&ings and thus serve a

purpose" 7inally it has been stated in the literature that financial repression like directed

credit high reserve ratios interest rate ceilings branch licensing etc" make informal financial

markets relatively attractive and popular"

-erhaps one &ay of reconciling the conflicting vie&s on usefulness of informal credit is to

recognise some emerging realities of both formal and informal markets" )his &ould also help

a rethink on approaches to rural credit and rural banking" 7irst it is no longer the case that the

money lender and informal financing are al&ays synonymous in vie& of the dynamics of

rural economy already described involving suppliers credit buyers credit and credit for

services sector" Second informal markets are less significant no& than before and have to

face competition or at least accept benchmarking of formal credit" )he concept of monopoly

of moneylender in rural areas is not true in many areas no&")hird &hen informal financial market is linked to socially undesirable activities there is

certainly a cause for concern though the available evidence sho&s that such a link is more a

metropolitan or urban phenomenon rather than a rural one"

7ourth bank credit is really not severely restricted to &hat can be officially determined as

productive since most of the credit6card financing by the banks is in fact financing of

consumption and at interest rates comparable to those prevailing in the rural informal debt

markets" In other &ords it is no longer unethical for banks to finance consumption credit

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through the credit card route" Credit card business so far is an essentially urban

phenomenon" ence the financing of consumption by informal markets in rural areas cannot

be fro&ned upon &hen it is being done by banks through their credit card business"

7ifth the real e!tent of informal markets is grossly understated in any survey that vie&s data

on outstanding debt since the turnover of debt is admittedly much lo&er for public

institutions than for private lending" )he turnover6differential is on account of several factors

including preference for short term finance and better recovery6performance in informal

markets" Si!th the social significance of informal credit is more than its proportion in

financial terms since the poorer sections dra& far larger amounts from informal than formal

markets" Seventh a significant part of informal market is through leasing hire purchase

deferred payment etc" &ith finance often provided by $27Cs" )he informal market is

providing a range of financial products &hich the formal banking system is not able to"

*ighth studies have demonstrated that e!pansion of literacy and education tends to increase

the access of rural folk to formal credit reduce the informal transaction costs in dealings &ith

formal credit institutions and improves their resistance to malpractices attributable to landlord

or moneylender" )he e!ploitative nature of informal markets is more pronounced in tribal or

less developed areas &hile productive nature of informal markets is more pronounced in

prosperous villages" Indeed one can argue that in many areas the formal credit structure has

provided a positive institutional alternative to the moneylenders and thus marginalising his

role in providing credit to rural masses"

M-'&$+ %&'-& -+7 L$+-% $+ R)'-/ D(& M-'&%

aving recognised that one cannot &ish a&ay informal markets some tentative

generalisations on the relative roles of formal and informal markets and on the linkages

bet&een them &ould also be necessary to capture the emerging but comple! realities" Suchgeneralisations are possible on the basis of empirical studies"

7irst the formal credit has a tendency to flo& more easily to agriculturally developed regions

and to relatively larger farmers leaving the back&ard regions and small farmers to be largely

served by the informal market" )his phenomenon is generally e!plained by four factors vi3"

poor6resource endo&ment features of the borro&er poor personal factors +education social

contact etc/ underdevelopment of a region and higher transaction costs"

Second as per empirical studies transaction costs associated &ith formal credit include feesfor procuring necessary certificates +open/ travel and related e!penses including loss of

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&ages etc" and informal or unofficial commissions +hidden/" )he transaction costs vary &ith

type of credit agency involved the type of borro&er and farm6si3e"

)hird uncertainties and delays usually associated &ith formal credit can also be treated as

additions to the transaction costs"

7ourth the true cost of borro&ing from the formal credit system is thus higher than nominal

cost if the above informal transaction costs are also included" )o the e!tent some transaction

costs are fi!ed the effective cost of borro&ings for smaller loans tends to be relatively higher

than for a larger loan"

7ifth there are usually hidden costs or concealed interest rates in respect of informal credit

also &hich have to be added to the nominal costs to arrive at the true cost" )hese hidden

costs generally relate to tied lending tied to land labour input or output" )he tied advance in

respect of labour is particularly relevant for migratory labour" )he hidden costs are usually in

the form of undervaluation of labour and output of borro&ers and overvaluation of inputs

supplied by lender"

Si!th the choice bet&een formal and informal credit depends on both the access and relative

true costs" )hus recourse to informal credit admittedly at far higher nominal costs is to be

e!plained partly in terms of effective costs and the e!tent of supply of formal credit" Seventh

in assessing relative roles both supply and demand side bottlenecks of formal credit need to

be appreciated" )he former relate to asset6based lending policies and comple! formalities

and procedures &hile the latter relate to poor endo&ment lo&er education and social6

contact usually caste6based in back&ard regions" .ie&ed differently a larger role for

informal credit may arise due to lo& level of commercialisation and monopoly po&er of

moneylender8 and it may also arise due to high level of commercialisation of agriculture

&hen supply from formal channel cannot match significant demand for credit"

*ighth it is also necessary to recognise that to the e!tent informal markets tend to lend to

borro&ers &ho are relatively less credit&orthy risk6premium is bound to be higher" )his&ould also get reflected in higher nominal interest rates in informal markets and indeed

higher true cost though it may not be so high if it is net of risk premium"

It is clear that the critical issue in respect of informal credit is the manner in &hich the

linkages among the participants in the market operate and result in varying degrees of hidden

costs" It is possible to make some e!ploratory postulates here" 7irst trader6lenders are likely

to provide most of production 6 credit &hile farmer6lender or moneylender is likely to

provide most of consumption 6 credit" It is of course possible that some individuals combinethe functions of farmer trader and moneylender" Second informal markets are unlikely to

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finance credit for investment purposes given the time preference" )hird the levels of

education are likely to reduce the scope for gross overvaluation or undervaluation in linked6

transactions" 7ourth the inter6linked transactions among parties &ith eual bargaining po&er

are likely to minimise the hidden costs" 7ifth from the supply side farmer6lenders may tend

to be associated &ith land and labour market linkages &hile trader6lender is likely to be

associated &ith input6output markets" 0n the demand side agricultural labour may be

associated &ith land and labour markets &hile the farmer6cultivator &ith input6output

linkages" In the process it is likely that a farmer &ould be a borro&er from a trader and a

lender to agricultural labour a common phenomenon in villages" It &ill therefore be over

simplification to divide the rural population into lenders and borro&ers or e!ploiters and

e!ploited" Si!th similarly it is necessary to appreciate the role of linkages in credit6risk6

mitigation" In fact the risk reducing element of linkages are not built into formal credit6

channels" Incidentally to the e!tent the transaction costs are front loaded in respect of formal

credit there is no incentive to repay &hile the true costs of informal credit are spread out"

Seventh in terms of bargaining po&er among the class of borro&ers the agricultural labour

and migratory labour appear to be &eakest e!cept in agriculturally prosperous areas &here

labour6shortage is acute to cater to agricultural and other operations" Similarly the differential

in bargaining po&er bet&een large and small borro&ers is similar to that bet&een large

corporate and small6industrialists in urban areas"

In brief the linkages bet&een formal and informal markets are comple! conte!tual and

dynamic" )he t&o markets appear to compete &ith and also supplement each other"

T,+*/* -+7 9-'&$+ %&'-&

Je should recognise that the role of banks &hich is central to formal credit in rural areas is

fast changing" Hany non6banks are providing avenues for savers and funds for investment purposes" 2anks themselves are undertaking non6traditional activities" 2anks are also

becoming &hat are called universal banks and are already providing a range of financial

services such as investments merchant banking and even insurance products" Similarly non

banks are also undertaking bank like activities" %t present in India these are mostly confined

to urban areas but they &ill sooner than later spread to rural areas"

%nother development relates to the gradual undermining of the importance of branches of

banks" )he emergence of ne& technology allo&s access to banking and banking services&ithout physical direct recourse to the bank premise by the customer" )he concept of

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%utomated )eller Hachines +%)Hs/ is the best e!ample" %t present %)Hs are city oriented

in our country" It is inevitable that %)Hs &ill be &idely used in semi6urban and rural areas"

)he technology6led process is leading us to &hat has been described as virtual banking" )he

benefits of such virtual banking services are manifold" 7irstly it confers the advantage of

lo&er cost of handling a transaction" Secondly the increased speed of response to customer

reuirements under virtual banking vis-à-vis branch banking can enhance customer

satisfaction"

)hirdly the lo&er cost of operating branch net&ork along &ith reduced staff costs leads to

cost efficiency" 7ourthly it allo&s the possibility of improved uality and an enlarged range

of services being available to the customer more rapidly and accurately at his convenience" It

may not be possible to deny these facilities to rural areas in our country since if banks do not

provide them some non6banks &ill do it"

%nother development relates to the increasing popularity of credit cards &hich are bound to

reach rural areas" Hany -ublic Sector 2anks are already in credit card business" In fact

multipurpose cards could be a facility that I) could usher in for rural population" )he

potential can be illustrated &ith SH%R) cards" SH%R) cards < &hich are basically cards

using computer circuits in them thereby making them EintelligentO < &ould serve as

multipurpose cards" SH%R) cards are essentially a technologically improved version of

credit and debit cards and could be used also as %)H cards" )hey could be used for credit

facilities at different locations by the holders" SH%R) cards could also be used for personal

identification and incidentally for monitoring credit usage"

7or the spread of virtual6banking and SH%R) cards to rural areas it is essential that electric

po&er and telecom connectivity are continuous and supplies do not drop especially during the

hours &hen a bankOs transactional activity is at relatively high levels" )he banks could under

such assured supply conditions acuire the reuired banking soft&are and also put in place

the necessary net&orking for providing any&here banking facilities in rural and semi6urbanareas also"

#ike banks in other parts of the &orld Indian banks &ill have to get interested in providing

diversified range of financial products and services along &ith those that they are already

providing by using technological advances" %s the level of education in rural areas rises and

affluence spreads customers &ill start seeking efficient uicker and lo& cost services" %s the

financial system diversifies and other types of financial intermediaries become active in rural

areas savers &ould turn to&ards mutual funds or the savers themselves decide to deploy partof their financial surpluses into euities and debentures as also other fi!ed income securities"

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)he bulk of bank deposits in the rural areas are currently longer term deposits and as these

come do&n there &ould be a distinct shortening of the average maturity structure of bank

deposits &ith an increase in asset liability mismatches" )he spreads that the banks no& enjoy

&ill progressively shrink making it more difficult for them to survive" %s more and more

intermediaries enter rural areas &ith greater level of technology traditional banking business

&ill come under pressure" In order to face the competitive pressures being e!erted by the

recently set up market savvy banks banks &hich have e!tensive branch net&ork in most of

the e!isting and potential rich rural and semi6urban areas may have to provide such services"

I%%)%

It is clear that significant progress has been made since independence in e!panding bank

branches and banking habits in the rural areas through a variety of institutional innovations"

%n impressive segment of rural economy has been brought into the ambit of formal financial

intermediation mainly through the public sector banking system and to some e!tent through

cooperatives and RR2s" )he future of banking in rural areas &ould ho&ever depend on

several factors that have been described namely ho& the current concerns are addressed

taking into account the dynamics of transformation in rural economies the ne& realities in

credit markets the linkages bet&een formal and informal markets and the impact of financial

as &ell as technological progress on the systems of financial intermediation"

Conseuently public policy &ill have to address several issues to ensure a sound and efficient

banking system in the service of rural areas" )he more important of such issues relate to the

approach institutions supply cost and related policies

M-'&$+ %&'-& -+7 A'*-,

In the past the major instruments of public policy &ere cooperatives and public6sector banking system" o&ever &ith the diversification of o&nership of public sector banks and

the overall thrust of financial6sector reform a revie& of institutional arrangements mainly in

the incentive frame&ork for credit6delivery appears necessary" Similarly in the area of

cooperatives also a reduced role for ;overnment including in providing refinance is being

advocated" )his desirable approach &ould also need a revie& of institutional arrangements in

particular in delayering and debureaucratising the cooperatives"

7urther there are ne& institutions and ne& forms of financial intermediation that areemerging < be it mutual funds or more important for rural areas non6banking financial

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companies" %ny approach to rural6development should consider capturing at least the

activities of non6banking financial companies as part of formal rural financial markets"

Horeover in many parts of the country gro&th of literacy and diversification of the economy

have brought about ne& characteristics and linkages bet&een formal and informal financial

markets in rural areas" )he latter does play a significant part in rural economy" ence the t&o

markets should be treated as competing and co6e!isting and in fact the policy should seek to

utilise informal markets also for public interest" % small beginning has been made in this

direction through initiatives on micro finance" % policy of analysing and monitoring of rural

financial markets as a &hole is critical for the future and devoting attention only to banks and

cooperatives may not suffice" I &ould hasten to add that a policy6focus on informal markets

does not at all imply e!tending regulation to informal markets" In fact the Report of )ask

7orce on micro6finance of $%2%RB +1999/ has recommended e!tending regulatory

frame&ork for micro6finance institutions and in my vie& this recommendation is fraught

&ith difficulties"

7unding by banks and regulated $27Cs of micro6finance institutions should be encouraged

and guidelines provided but regulation of micro6finance institutions may not be prima facie

&ise"

In any case research and micro studies encompassing both formal and informal segments

&ould help the policy makers appreciate relative roles and linkages in rural financial markets

as a &hole" In other &ords policy analysis should perhaps consider e!panding its attention

from rural banking to rural financial markets"

*nhancing effective supply of credit in such rural financial markets &ould be a logical

objective of policy thus enlarging the current attention to include both directly disbursed

credit by the banking or cooperative sectors and indirect supply" Similarly reducing the true

cost of credit availability to rural areas &ould be yet another objective e!panding the

attention of policy to include both nominal cost of credit from banking or cooperative sector and true cost in formal and informal markets" In an increasingly deregulated environment

this objective &ould imply attention to competitive efficiency involving procedural6

simplification also in respect of banks and cooperatives"

7inally the approach may e!pand from delivery of credit to rural areas to making available

financial services and products to savers investors and consumers in the rural areas" In other &ords it should be recognised that rural financial markets comprise both depositors or savers

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and borro&ers or investors"

I+%&$&)&$*+%

%mong the institutions involved in rural credit cooperatives have a special place in the R2I"

)here is full appreciation of the problems and efforts are under&ay to &orkout a package for

revival and may be rebirth of rural cooperative banks by a Committee headed by Beputy

;overnor Shri Gagdish Capoor" )he Committee &ould naturally address issues relating to

legal frame&ork and incurring costs of addressing problems related to overhang of the past"

In addition the Committee I trust &ould consider desirability of cooperative banksO foray

into non6fund6based activities such as fee6based financial services on behalf of mutual funds

or insurance6products" )he cooperatives could in fact help retail )reasury 2ills and

;overnment Securities in rural areas" Biversified financial products &ill be increasingly

demanded and supplied in the rural areas and co6operatives should not be left out of this

trend of providing multiple6products through a single &indo&" )his &ould also imply going

beyond the some&hat closed loop of preferred financial relations &ithin cooperative system

into a multiple contacts bet&een cooperative banks and other financial intermediaries largely

utilising technological improvement"

Commercial banks are being reformed in accordance &ith recommendations of the

$arasimham Committee" )he RR2s are being recapitalised" )hese efforts in regard to banks

&ould presumably recognise the trends in providing financial services to enable them to

e!ercise necessary fle!ibility and dynamism that is &arranted by fast changing &orld"

Similarly the future role of $%2%RB could be addressed because the organisational setup

funding and activities &ill have to reflect the basic logic of financial sector reform vi3"

changing roles of o&ner regulator refinancing subsidised credit government6funding and

cooperatives"

E+,-+$+ E00&$


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amount to availability of supply" Similarly mere prescriptions of priority lending &ould not

ensure supply"

7or e!ample prescription of priority6sector lending relates to percentage of credit outstanding

rather than advances" 7urther there is no re&ard for overshooting the target and

undershooting is not really penalised since amounts of shortfall need to be placed in a fund

administered by $%2%RB &ith a totally risk6free return of 11"5 percent for a five6year

advance" )hese funds are actually lent to State ;overnments thus to an e!tent replacing rural

credit to agriculture &ith credit to State ;overnment for rural development" Jhile as a

transient measure during a period conspicuous for incomplete projects such an arrangement

&as justifiable this should not become a permanent feature as it &ould have obviously

perverse effects" )he coverage of definition of priority sector also leads to some difference

bet&een apparent supply and effective supply" )hus the base for calculating priority sector

e!cludes commercial banksO investments &hich are e!panding rapidly" )he procedural

bottlenecks resulting in delayed supply also in some &ays amount to erosion of effective

supply"

%t the same time there may be some effective supplies &hich are not reckoned for supply

under priority6sector" )here may be funds channelled by banks to rural area through urban6

branches or through other intermediaries such as $27Cs"

)here is perhaps a case for some research and studies on policy of directed lending so that &e

could improve on the incentive and policy frame&ork to enhance effective supply" 7or

e!ample the definition and coverage of priority sector for agriculture could be revisited and

lending to agriculture by banks through $27COs could be considered for inclusion in priority6

sector as has been done to ensure flo& of credit to truck operators"

@et another area in effective supply relates to lending by banks under government sponsored

programmes &hich has significant non6commercial considerations" Several issues relating to

both supply and accountability arise due to involvement of both ;overnment and banks" %more transparent approach for e!ample by separately accounting for them as policy6induced

lending &ould help isolate and monitor this supply apart from isolating the non6performing

assets on this account in the balance sheets of banks"

%n important bottleneck in the delivery of credit has been the negligible use of bill6

discounting for services sector" Current policies and procedures restrict this instrument to

goods" It has been decided by the R2I to constitute a Committee to e!plore &ays by &hich

bank finance can be made available to service sector" )he Committee &ith representationfrom public private sector and foreign banks also is e!pected to study international

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e!perience our policies and procedures and make recommendations in t&o months" )his

important step recognises that about half of our ;ross Bomestic -roduct is in services sector

and &ould also help flo& of bank finance to the gro&ing services sector in rural areas"

R7)$+ T') C*%&

)he major reasons for the true cost of credit from rural financial institutions being higher than

nominal costs are mainly scarcity of supply and transaction costs" *nhancing effective supply

&ould be an important strategy of reducing the true cost" *ncouraging competition &ould be

yet another strategy" % revie& of procedural reuirements such as eliminating mandatory

forms and replacing them &ith locally determined procedures could also be considered" %ll

non6verified documentation could for instance be replaced &ith self6declaration by the

borro&er" Repeated visits and conseuent transaction costs can be avoided by several

procedural simplifications 6 going beyond ;upta Committee recommendation" In particular

gro&th of information

technology and its application in banking &ould &arrant a thorough revie& of products

procedures and linkages among rural financial institutions"

%rbitrage in financial markets is inevitable and prevalence of such operations cannot be

ignored" %rbitrage bet&een formal and informal markets and bet&een production loans and

consumption needs is also common" )hus keeping the true cost artificially lo& in formal

markets the rural financial institutions &ould encourage arbitrage and erode the clear

potential for profit" Indeed an appropriate strategy may be to reduce the difference bet&een

nominal and true cost and ensure that true cost reflects market conditions including premium

for credit risk" %s already mentioned provision of diverse financial products and services in

the rural areas &ould enhance income to banks and help reduce the admittedly large spreads

in interest rates" )hus among the efforts to reduce nominal and true costs of credit in ruralareas &ould be provision of multiplicity of financial services by rural financial institutions

taking advantage of developments in technology and financial markets"

R/-&7 P*/$$%

)here is increasing recognition that the spread of literacy and generation of gro&th impulses

in the rural sector &ould be very significant factors in enhancing effective supply andreducing true cost of rural credit" Hore specifically the desired spread of technology and

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trickledo&n of urban financial products to rural areas &ould reuire concerted action in four

areas" 7irst and foremost insurance especially of crops should penetrate the rural areas to

mitigate the risks to both farmer and lender" )he lack of penetration of insurance is perhaps

an important reason for lenders seeking tied and other risk6mitigation arrangements through

informal markets" Second there should be assured supply of electric po&er so that

functioning of systems is not disrupted" )hird telecommunication net&ork needs to be

dependable and financial sector needs to ensure a net&ork" Je in the R2I have already

launched I$7I$*)" 7ourth the institutional and regulatory frame&ork should enable rural

financial institutions to operate in diverse financial products and services" Je in the R2I are

currently engaged in a number of initiatives and studies" Je hope to continue the process and

focus on rural credit as mandated by the R2I %ct" Je &ould seek advice and guidance in this

endeavour"

AN ICT STRUCTURE FOR

RURAL BANKING

ENABLEMENT

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%n IC) Structure for Rural 2anking *nablement

Je have developed an IC) based Solution in &hich the

banking services delivery can be done using the electronic platform" )he three key principles

used in this model are,6

a/ unbundling and outsourcing non6statutory services needed for banking and

establishing digital rural information infrastructure"

b/ automating the &orkflo& the records management and follo&6up and recover

c/ the use of entrepreneurship model for achieving effectiveness efficiency and

economy in the performance of the rural information infrastructure rural

information services and other follo&6up functions e"g" credit rating of ruralindividuals and analytics for decision support"

;%$%S*.% RAR%# S*R.IC*S B*#I.*R@ H0B*#


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Its components are Bigital Rural Information Infrastructure

Customer Bata Integration and Credit rating a shared electronic platform for various

services -rovision of technology support to banking services including %)H Services"

2enefits include financial inclusion of rural population

providing the banking services in a pro6active manner enabling the banks to offer highly

individuali3ed bundle of services and reduction of costs through shared infrastructure for

data collection and updation and shared mobile service6delivery mechanism and generally

enabling the innovation and spread of banking and other services by providing an efficient

electronic platform and promote commerce and development"

)he solution proposes common infrastructure for the

rural data collection and information management and processing and the sharing of the

delivery channel by the banks &ith a vie& to substantially reducing the transaction costs and

improving the speed and uality of delivery" )he elements involved in the solution are the

establishment of a data center and ensuring its t&o &ay connectivity to the mobile multi6

service delivery system available at the villages for providing the banking e!tension and

other services as &ell as connectivity

to all the concerned banks and other service6providing agencies"

)he solution involves the outsourcing of the data management

as &ell as of the delivery channel establishment and operations &ith reuired safeguards

regarding the data o&nership and operations" )he model envisaged provides a cost6effective

but efficient technology platform for rural banking" )echnologically the solution involves

four main elements,

Q Q Q Q Q Q Q Q Q Q Q Q*S)%2#ISH*$) 07 BI;I)%# RAR%# I$70RH%)I0$ I$7R%S)RAC)AR*

Q Q Q Q Q Q Q Q Q Q Q QHA#)I S*R.IC* B*#I.*R@ S@S)*H +HSBS/

Q Q Q Q Q Q Q Q Q Q Q QI$)*;R%)*B HA#)I6*$)I)@ B%)%2%S* S@S)*H +IHBS/

Q Q Q Q Q Q Q Q Q Q Q QS*R.IC* -R0.IB*RDS J0R?S)%)I0$

)he special 7eatures of the Hodel are the follo&ing, Comprehensiveness of the solutions covering both front6end and back6end

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operations involving the delivery of credit and other services"

-roactive provision of services to the people

-rovision for e!ploiting the e!isting sources and interfacing &ith available data

services and other e6governance solution6 providers"

*!pert systems for processing of credit and other services

*asy and secure interface for the rural people &ith biometric security measures

%ssisted credit delivery &ith provision for clarification from the banks etc"

through the voice T video

-rovision of the information reuired for credit approvals

-rovision of a data base tool for capturing of the rural data and the technical

specifications of such rural data base and its architecture

7igure 1 belo& gives a diagrammatic representation of the Hodel"

7igure 1

BI%;R%HH%)IC R*-R*S*$)%)I0$ 07 )* H0B*#

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;%$%S*.% Hodel for Rural 2anking,

Implementation *!perience

)he project &as implemented in five villages in the onavar

block of the Attara ?annada district of ?arnataka India having appro!imately 4((( families

involved in essentially agricultural activity" )he banks &hich participated in this project are

State bank of India Syndicate 2ank &ho had agreed to use the data K documents available

through the system" 2esides the rural information service and credit rating there is support in

the system for the crop loan and ?isan Credit Card and Savings 2ank %ccount 0perations"

)he -roject also &anted to link the -rimary %gricultural Co6operative Societies +-%CS/ to

the system for providing banking services through their automation" )he project &as

e!pected to demonstrate the feasibility of the model on the ground"

Hethodology

Information System

RURAL Banking in India Project

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Transcript of RURAL Banking in India Project