SUBMITTED BY:

Vanita Shetty 97 Sushil Tripathi 108 Prafulla Kharote 46 Sudesh Narkar 64

CONTENTNo. Particulars

1 Current State of Rural Banking in India

2 Key Drivers of Financial Exclusion of Rural Banking in India

3 Reasons for Unprofitable Rural Banking in India

4 Market Opportunity of Rural Banking in India

5 Usage issues for Rural Customers

6 Improving Access of Rural Banking in India

7 Conclusion

8 Bibliography

Rural India 69% - India’s Population. 86% - earns less than $2/day. 0.33% - reached graduation level (0.29% men & 0.04%

women). 50% - economy contributes nearly half of the country’s

GDP 50% - the sales FMCG and Durable companies come

from the rural areas. 2% - had to travel > 30 minutes (whereas 13% in

2010). 24% - don’t have a bank account today (of below

poverty line and reasons like poor access or usage).

The McKinsey report on the rise on consumer market in India predicts that in twenty years the rural Indian market will be larger than the total consumer markets in countries such as South Korea or Canada today

What Is Rural Banking???

It is a form of services that provide solution to the financial needs of the consumers in Rural areas.

Dynamics of Rural Economy

Banking Structure in India

Started since the establishment of banking sector in India.

Mainly focused upon the agro sector.

14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas.

SBI – Largest bank catering to Rural banking.

A high proportion of rural lending is from informal sources.

About 500-600 million people in India still do not have bank accounts.

Current demand for credit in Rural India is around Rs.1,33,000 Crs.

Commercial Bank branches cover only 7% of rural sector and large market is still untapped.

Rural Banking - Introduction

Institutional Structure of Rural Banking

Services Required for Rural Sector

Loans

Risk Mitigatio

n Products

Insurance

Insurance

Financial Counselin

g

Remittance

Savings

Pensions

Credit CardsCredit Cards

TERM OF RURAL FINANCE

Short term loan - 12 to15 monthsSHORT TERM LOAN are issued to the farmer for the purpose of cultivation or domestics expenses such buying seeds, manure and fodder for cattle, etc.

Medium term loan -3 to 5 yearsMEDIUM TERM LOAN are given to farmer to purchase cattle, agriculture implement and to make improvement on land.

Long term loan -15 to 20 yearsLONG TERM LOAN are given to the farmer to purchase land, pay of old debt and purchase useful machinery for long term usage. These loans are for comparative long period since the farmers can repay them gradually over a number of years.

Funds needed by Indian farmers can be categorized into three types:

Institutional Credit

Private Credit

Co-operative Commercial

Money Lenders

Traders Commission Agents

Landlords

SOURCES OF RURAL FINANCE

RBBs

Objectives Of Banking Services

In Rural Areas

Poverty Alleviation Objectives:The objectives is to uplift the mass of population residing in the rural areas who are currently below the poverty line by extending credit to the smallest-scale economic activity.

Financial Intermediation Objectives: The approach involves increasing the accessibility of

banking services to the poor in a commercially sustainable manner.

Services Provided

Financial Needs and Service Requirements

Current Rural Banking Channels

Rural banking faces twin challenges

Regulation with respect to banking has been designed for delivery in urban India.

Distribution requires more manpower to be deployed in rural area.

Rs 1-crore business in microfinance required 30 people in terms of manpower, the same volume of business in other portfolios requires only one person.

Regulation Distribution

The Government

Constitute an authority for National Mission on Financial inclusion.

Draw a road map for replicating the successful pilots. Establish open standards for technology to be used. Source BC from diverse streams to get at the required number. Undertake a massive program for financial literacy and credit

counseling. Dovetail Govt. payments under various programs through

bank accounts. Strategic action plan for remittance facility both inter

bank/intra bank and post office. Implement a time bound plan for training of BC. Include SHGs as BC.

Reserve Bank of India

The regulator of the formal banking system, has a critical role in improving rural access and usage.

Changes in technology, banking systems, and market conditions may require to revisit guidelines governing the licensing of new branches, operations of ATMs, and use of technology.

Focus on non farm rural business. Reach out to the needy through micro credit/SHGs(Self Help

Group). Easy and affordable financial services through the best use of

technology. Expand reach through alternate channels. exclusive focused attention to the financial Inclusion of unbanked

rural area. To extend banking services at the customer’s convenience. Improvement in service levels in Rural Areas.

Banks

Market Opportunity

Money lender and informal financing are always synonymous.

Informal markets are less significant now than before, and have to face competition or at least accept benchmarking of formal credit.

Financing of consumption and at interest rates comparable to those prevailing in the rural informal debt markets.

The informal market is providing a range of financial products, which the formal banking system is not able to.

Studies have demonstrated that expansion of literacy and education tends to increase the access of rural folk to formal credit, reduce the informal transaction costs in dealings

A Large Untapped and Deposit Market

Role of RBI in RURAL CREDIT Providing timely and adequate credit through NABARD. Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40 % of net bank credit should go to the priority sector, out of which at least 18 % of net bank credit should flow to agriculture. Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percent sub-target would have to go to the corpus Rural Infrastructure Development Fund(RIDF). Recapitalization of Regional Rural Banks (RRBs) and setting up of local area banks(LABs). Developing and strengthening cooperative credit structures. Establishment of RRBs in 1975 By 1982, to consolidate the various arrangements made by the RBI to promote/ supervise institutions and channel credit to rural areas, NABARD was established. “Service Area Approach”

Hurdles In Rural Banking

Concerns regarding current approach

Non Performing Assets

Difference between the cost of resources and the commercial rates of interest of cooperative banks in the deregulated interest rate regime is on the high side.

Institutional credit is more likely to be available for well to do among the rural community.

Relatively backward regions have less access to institutional credit than others do.

Non-availability of timely credit and the cumbersome procedures for obtaining credit

For Government sponsored schemes, there has been overlap in accountability.

Multiple financing - over financing and under financing.

Different agencies often fail to formulate and develop meaningful agriculture programs in given blocks and districts.

Different procedures and policies in the matter of providing loans and their recovery.

Problems in the recovery of loans lent to same person by different agencies.

Flow of formal credit to agriculturally developed regions and to relatively larger farmers leaving the backward regions and small farmers.

The transaction costs vary with type of credit agency involved, the type of borrower and farm-size.

Effective cost of borrowings for smaller loans tends to be relatively higher than for a larger loan.

Concerns regarding current approach

Purpose of Borrowings

Cost Per Transaction in Indian Banks

Current Status of Rural Infrastructure

Branch Access in Rural India

OFFICES OF COMMERCIAL BANKS IN INDIA 2006 TO 2010

Bank Groups

As on March 31

2006 2007 2008 2009 2010

(1) (2) (3) (4) (5)

State Bank of India and its Associates 14310 14673 15846 16878 18114

Nationalised Banks $ 35858 37431 39234 40854 43187

Public Sector Banks 50168 52104 55080 57732 61301

Old Private Sector Banks 4819 4826 4690 4908 5174

New Private Sector Banks 2016 2598 3632 4328 5213

Private Sector Banks 6835 7424 8322 9236 10387

Foreign Banks 259 272 279 295 310

Regional Rural Banks 14807 14843 15070 15485 15723

Non-Scheduled Commercial Banks 41 46 46 46 47

All Commercial Banks 72110 74689 78797 82794 87768

Notes :

1. Data on number of offices include administrative offices.

2. Data for 2006 to 2009 have been revised and data for 2010 are provisional.

3. $ includes IDBI Bank Ltd.

Source : Master Office File (latest updated) on commercial banks, Department of Statistics and Information Managemenr, RBI

GROUP-WISE DISTRIBUTION OF OFFICES OF COMMERCIAL BANKS -

2010

0

5000

10000

15000

20000

Rural 5108 1219 7533 7988 3889 6791

Urban 10113 1073 6946 9429 9812 17867

Northern Region

North Eastern

Eastern Region

Central Region

Western Region

Southern Region

GROUP-WISE DEPOSITS OF SCHEDULED COMMERCIAL BANKS

(Rs.in 000 crores)

0

1000

2000

3000

4000

5000

6000

7000

8000

Rural 227 258 303 365 424

Urban 1867 2341 2926 3572 6788

2006 2007 2008 2009 2010

BANK GROUP-WISE DEPOSITS (Rs.in 000 crores)

0

500

1000

1500

Nationalised Banks 759 68 443 443 1010 702

RRBs 21 7 32 45 8 30

Private Banks 186 4 47 34 325 211

Northern Region

North Eastern

Eastern Region

Central Region

Western Region

Southern Region

Way Forward……Way Forward……

Expand Reach1. Tie-up with India Post to penetrate the rural market.

2. Partner with NGO / MFI to act as Business Facilitators.

Banks currently have to invest 40% in priority sector lending (Agriculture, SME & Government Securities).

MFI lending provides 10-14% return as against 6-7% in Government instruments.

Risks could be mitigated further by partnering with MFI in specific markets and while dealing with SHG directly in others.

Thus entering the micro finance business makes a lot of commercial sense for SBI in the long run.

Focus on Micro Finance

“Kiosk Banking”…Offer Convenience

• Kiosk Operator owns the kiosks at the villages, enroll as agents of the Business Correspondent.

• Banking services can be offered to the rural population at close vicinity like a mini branch.

• Making Kiosk –operators as the agents of the Business Correspondent, helps in building rural entrepreneurs.

• The bio-metric authentication helps illiterate people also operate bank accounts comfortably.

• The Bank in turn would benefit greatly because of the improved business adding to the bottom line of the Bank.

Educate Customers

Be Cost Effective

Low cost ATM for Wage Disbursement with finger print authentication and local language interface.

This ultra low cost ATM costs just 1/10 th that of the traditional ATM used in cities.

Will enable transfer of funds from NREGA directly to the rural workers.

It is not just an ATM but an e-governance model that is people friendly and empowers the poorest labor to assert his/her rights.

Smart Cards, Biometric scanning for signatures and

Handheld Devices and other innovative technology

needs to be explored. It will help bring down the cost per transaction as well as help improve the Service Delivery in Rural Areas.

Innovate & Adopt Technology

Latest Updates…

22nd August 2011 - The government has told banks to open branches in over 43,000 new rural locations during the current financial year that would bring all habitations with population of over 2,000 under banking net, parliament has been told.

19th August 2011 - Association of India (EFCAI) has urged Reserve Bank of India (RBI) to allow post offices function as Banks. In a memorandum submitted to RBI deputy governor, H R Khan here, the EFCAI has pointed out that India has the world's largest postal network in India with over 1.55 lakhs post offices, out of which 1.40 lakhs are in the rural areas. If the RBI allows Indian Posts to start their own banking operations it will have the potential to emerge as one of the biggest banks in the country and also ensure inclusive growth.

Major Commercial banks nationalized

NABARD - APEX agency for rural finance

Comprehensive crop insurance

Kisan(Farmers') Credit Card

Establishment of RRBs

1969

1975

1982

1985

1992

1998Major Milestone

NABARD launches SHG bank linkage program

Establishment of SIDBI Foundation of Micro-credit

Marketing of Mutual Fund Units - RRBS

2000

2006

2007

Major Milestone

Proposed bill on microfinance regulation

Conclusion

There are 185 million bankable adults in rural India who are unbanked because of access and usage issues. This presents a significant opportunity for commercial banks.

However, to reach this market and subsequently build an inclusive financial system, there must be a coordinated and concerted effort by the three key stakeholders: the Government of India, the Reserve Bank of India and the commercial banks.

In addition, a partnership between banks and business correspondents, and collaboration amongst banks is critical.

Furthermore, banks should tailor their product and service mix to meet rural needs, and adapt their delivery models to ensure commercial viability of their rural banking operations.

Referred from…

Indian Finance & Investment guide. Seminar Rural Banking through ICT`