rural banking in india pdf

7/28/2019 Rural Banking in India PDF

1/49

1

PROJECT ON

RURAL BANKING IN INDIA

MBA FINANCE

FINAL PROJECT


2/49

2

PROJECT ON

RURAL BANKING IN INDIA

Submitted By

.

In Partial Fulfillment of the requirements

For the award of the Degree of MBA FINANCE

FINAL PROJECT


3/49

3

C E R T I F I C A T E

This is to certify that Miss. of MBA

FINANCE FINAL PROJECT has successfully completed the

project on Rural Banking In Indiaunder the guidance of A.C. VANJANI.

Project guide


4/49

4

DECLARATION

I .. student of MBA Banking &

Insurance Semester V (2008-2009) hereby declare that I

have completed the Project on Rural Banking In

India

The information submitted is true and original to the best if my knowledge.

Signature of the student

Name of the student


5/49

5

ACKNOWLEDGEMENT

I would like to thank a lot of people without whom this project would not

have been complete. First DR A. C. VANJANI he was of utmost help in

guiding me structures this project. He helped me throughout and was always

present to help me whenever I had a doubt.

Expert opinion is always required to complete the project so it was Mr.DARIRA who has the experience of working in PUNJAB NATIONAL

BANK, explained me the concept and helped me structure the project. It

wouldnt have been easy for me to tackle such a topic without his practical

guidance

A research can never be over without access to a good library and in this

case I was blessed as our college library, is very well stocked with books.

And the lending policy made life a lot easier. Also not to forget the library of

INDIAN MERCHANT CHAMBER which made it easier to get through to

matter that helped me understand concepts well

And not to forget the unconditional support provided by my parents and

friends.


6/49

6

RURAL

BANKING IN

INDIA


7/49

7

INDEXINDEXINDEXINDEX

SR. NO CONTENTS PAGE NO.

1 EXCUTIVE SUMMARY 8

2 INTRODUCTION 10

3 STRUCTURE OF RURAL BANKING 12

4 HISTORICAL PERSPECTIVE 13

5 NEED FOR RURAL BANKING 20

6 ROLE OF PUBLIC SECTOR BANKS IN

RURAL BANKING SYSTEM

23

7 CHALLENGES AFFECTING

PERFORMANCE

24

8 FUTURE OF PUBLIC SECTOR BANKS IN

RURAL BANKING SYSTEM

31

9 RECENT DEVELOPMENTS 37

10 LATEST INITIATIVES BY REGULATORY

AUTHORITIES

41

11 ISSUUES IN AGRICULTUTAL CREDIT-

DEVELOPING COUNTRIES PERSPECTIVE

44

12 CONCLUSION 47

13 BIBLOGRAPHY 49


8/49

8

The Indian national planners have taken up the banking sector as an

instrument for accelerating the process of rural development. After

nationalization both the Cooperatives and Commercial banks played a

significant role in providing credit for the development of agriculture which

is classified as a priority sector by the RBI in its credit policy. Due to rapid

growth and development of rural areas of the country both the cooperatives

and commercial banks could not meet the credit needs of the weaker section

of the community. After the introduction of modern technology in

agriculture the small marginal

EXCUTIVE SUMMARY


9/49


10/49


11/49


12/49

12

in public and private sector with a large network of rural branches,

Regional Rural Banks (RRBs) and Cooperative credit structure with

State Cooperative Banks (SCBs) at state level, the affiliated District

Cooperative Banks (DCCBs) at district level and Primary Agriculture

Credit Societies (PACSs) at village level, the long term credit through

State Cooperative Agriculture and Rural Development Banks at State

level (SCARDBs) with branches or affiliated Primary Cooperative

Agriculture and Rural Development Banks (PCARDBs) at grassroots

level.

HISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVEHISTORICAL PERSPECTIVE

he Reserve Bank 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 RBI Act. The

major initiative in pursuance of this mandate was taken with

sponsoring of All-India Rural Credit Survey in 1951-52. This

committee had found that cultivators depended on private

moneylenders for about 94% of their credit needs. The All India Rural

Credit Survey Committee (1954) proposed an integrated scheme for

rural credit. It suggested that the RBI should take steps to strengthen

the cooperative movement. An important step towards gearing the

banking system for rural credit was the formation of the State Bank of

T


13/49

13

India by amalgamating the Imperial Bank of India with other state-

associated banks. It was felt that with the assistance of the RBI, the

State Bank would play a crucial role in providing rural credit.

Adoption of a policy of social control over banks in 1967 and the

nationalization of 14 major scheduled commercial banks in 1969 have

proved to be two major turning-points in the history of commercial

banks in India. The period from 1969 to the present can be

characterized as representing, broadly speaking, three phases in

banking policy vis--vis the Indian countryside.

The first was the period following the nationalization of Indias 14

major commercial banks in 1969. This was also the early phase of

the green revolution in rural India, and one of the objectives of thenationalization of banks was for the state to gain access to new

liquidity, particularly among rich farmers, in the countryside. The

declared objectives of the new policy with respect to rural banking-

what came to be known as social and development banking were

(i) to provide banking services in previously unbanked or under-

banked rural areas;

(ii) to provide substantial credit to specific activities, including

agriculture and cottage industries; and

(iii) to provide credit to certain disadvantaged groups such as,

for example, Dalit and Scheduled Tribe households.

(iv) the agricultural sector be included in the category of priority

sectors


14/49


15/49

15

were, as was the green revolution itself, biased in respect of regions,

crops and classes.

The Reserve Bank hived off a part of its role in agricultural credit to a

separate national level institution, viz, Agriculture Refinance and

Development Corporation (ARDC) in 1975. Soon thereafter, the

Government established by ordinance and then legislation a new

network of rural financial institutions called the Regional Rural Banks

(RRBs), which were promoted by the Government of India, State

governments and commercial banks. These were created on the

basis of recommendations by a working group on commercial credit,

also called the Narasimham Committee. Subsequently, the ARDC

was converted into NABARD.

Where a bank fails to fulfill its commitment towards priority sectorlending, it is currently required to contribute to Rural Infrastructure

Development Fund set up by NABARD. NABARD in turn provides

these funds to State Governments and state owned corporations to

enable them to complete various types of rural infrastructure projects.

It was felt that with the establishment of large network of branches, a

system could be adopted to assign specific areas to each bank

branch in which it can concentrate on focused lending and contribute

to the development of the area. With a view to implementing this

approach, RBI introduced a scheme of "Service Area Approach" for

commercial banks. To further supplement the institutional


16/49

16

mechanism, the concept of Local Area Banks was taken up in 1996-

97.

The second phase, which began in the late 1970s and early 1980s,

was a period when two strategies for employment generation were

envisaged, namely wage- employment through state-sponsored rural

employment schemes and self-employment generation by means of

loans-cum-subsidy schemes targeted at the rural poor. Thus began a

period of directed credit, during which credit was directed towards

the weaker sections. The most important new scheme of this phase

was, of course, the Integrated Rural Development Programme or

IRDP, a scheme for the creation of productive income-bearing assets

among the poor through the allocation of subsidized credit. The IRDP

was initiated in 1978-79 as a pilot project and extended to all rural

blocks of the country in 1980.

The second phase also involved an expansion and consolidation of

the institutional infrastructure of rural banking. After bank

nationalization, there was an unprecedented growth of commercial

banking in terms of both geographical spread and functional reach.

The third and current phase, which began in 1991, is that of

liberalization. The policy objectives of this phase are encapsulated in

the Report of the Committee on the Financial System, which was

chaired by M. Narasimham (RBI, 1991).


17/49


18/49


19/49

19

NEED FOR RURAL BANKINGNEED FOR RURAL BANKINGNEED FOR RURAL BANKINGNEED FOR RURAL BANKING

n the period before the nationalization of banks, key sectors of the

economy including agriculture remained thoroughly neglected in

terms of availability of institutional credit. Whereas the industrial

sector at that time accounted for about 15 per cent of national output,

it appropriated two-thirds of commercial bank credit, whereas the

agricultural sector contributing about half of national output was

almost completely neglected by the commercial banks.

The rural population of India has been suffering from a great deal of

indebtedness and is subject to exploitation in the credit market due to

the high interest rates and lack of convenient access to credit. Rural

household need credit for investing in agriculture and smoothening

out of seasonal fluctuations in earnings .Rural household need

access to financial institution that can provide them with credit at a

lower rates and at reasonable terms than the traditional

moneylenders and there by help them avoid debt traps that are

common in rural India

But after the adoption of the New Economic Policy in 1991, the

Indian economy is becoming more and more mature with the

passage of time on account of structural changes undertaken in

different sectors and areas. The GDP growth rate has been much

higher and it has averaged over eight per cent during the past three

I


20/49


21/49


22/49

22

ROLE OF PUBLIC SECTOR BANKS INROLE OF PUBLIC SECTOR BANKS INROLE OF PUBLIC SECTOR BANKS INROLE OF PUBLIC SECTOR BANKS IN

RURAL BANKING SYSTEMRURAL BANKING SYSTEMRURAL BANKING SYSTEMRURAL BANKING SYSTEM

ublic sector banks continue to have about 75% share in the

banking system. Despite the rapid growth of the new private

sector banks, the share of public sector banks will continue

to remain high. Hence the continued health of Indian banking system

will depend on the performance of public sector banks.

About half the branches of public sector banks (PSBs) are in the rural

sector. These are often regarded as part of the rural community.

Rural branches of PSBs have played a significant role in the past

three decades. They came to the rescue of the agricultural sector in

the wake of the Green Revolution, as the cooperative banks, on

which the agricultural sector had been mainly dependent in the pre-

nationalization period, were proving unequal to the job of meeting

higher credit requirements. Emerging as the focal points for catering

to the localized needs of the rural communities, they helped to

significantly reduce the role of professional moneylenders and

brought about a qualitative transformation in the savings and

investments activities in the rural sector.

PSBs have been able to percolate to the rural areas accompanied by

an increase in priority sector lending, which private banks have not

P


23/49

23

been able to do. The probable reason is the low level of social

responsibility of business on the part of private and foreign banks.

Another notable thing is that by and large PSBs have been ethical as

compared to their counterparts in private sector.

PSBs are incorporating new technology, reducing manpower and

extending the ambit of customer facilities. While these measures will

reduce the cost overburden in the urban and metropolitan branches,

the relief is not likely to be substantial enough to offset the heavyadministrative and operational burden of running hundreds of rural

branches.

CHALLENGES AFFECTINGCHALLENGES AFFECTINGCHALLENGES AFFECTINGCHALLENGES AFFECTINGPERFORMANCEPERFORMANCEPERFORMANCEPERFORMANCE

anking System :

Historically, there have been four major problems with

respect to the supply of credit to the Indian countryside.

The supply of formal sector credit to the countryside as a whole

has been inadequate.

B


24/49


25/49

25

lending. There have been external pressures on the banking sector to

lend to weaker sections. In addition, the priority sector lending has to

be at a low concessional rate of interest.

The deposits collected by banks from rural areas were not totally

deployed there. This indicates that institutional sources of credit such

as banks and co-operative societies are unable to meet the farmers

needs.

Inadequate branches: The spread of bank branches in rural areas is

quite inadequate. In fact, the number of such branches has declined

in the post-liberalization era. The number of rural bank branches in

the country has come down from 35,000 in early 1990s to as low as

30,572 by March 2006 through mergers and swapping of rural

branches. At one time, rural India accounted for 57 per cent of total

bank branches in the country. This share has now come down to 47

per cent. What is more disappointing, they generate only 14 per cent

of deposits and 12 per cent of advances.

Financial exclusion: The main problem is the lack of access to

banking. More than half of the Indian population suffers from financial

exclusion, with a substantial portion of the households, especially in

the rural areas, still outside the coverage of the formal banking

system. Almost 40 per cent of the adult population of the country is

unable to access mainstream financial products. Such a high level of

financial exclusion obviously imposes social costs.


26/49

26

Poor Financial Viability: Banks may not find operations economical,

as sometimes the transaction and follow up costs are more than the

amount of credit. Rural banks and rural branches that are compelled

to operate in this milieu do so unprofitably.

Non consumption loans: Another problem is that banks generally

do not give loans for consumption. In cases where day-to-day living

itself is at question, banks, their strict conditions on the use of money

borrowed and the numerous delays are avoided.

Nature of transactions: Rural transactions are cash based. Majority

of the rural populiace has the capacity to engage in micro-savings

and would require depositions and withdrawals at their convenience.

Moreover, the timing of the transaction does not necessarily coincide

with the bank branch timings. Since most transactions are cash

based, this increases the total cost of transactions because of the

cost of idle cash, and the cost of handling infrastructure, that is

branch setup, manpower and the cost of cash security.

Education and Awareness level of the people: Rural India at 59

percent rate of literacy is behind urban India. It affects the acceptance

of formal banking by villagers as they feel a natural hesitation towards

a structured and rigid environment. They also find it difficult to fulfill

the formalities required for carrying out banking transactions. Hence,

they need a higher level of guidance and support which requires

deploying more manpower; again a cost escalating factor. Lower

education and awareness also act as an impediment in effective

utilization of proposed and existing ATMs.


27/49


28/49


29/49

29

which were too large to be made use by the very poor. These

practices led to a high default.

The difficulty is that, faced with the demands made on them by the

advocates of liberalization and the effects of competition from the

private sector banks, banks in the public sector are also being forced

to change. They are trying to trim operating expenses, by reducing

the wage bill by reducing employment through retrenchment under

the VRS scheme and computerization. They are also seeking toreduce costs by limiting branch expansion and reducing the number

of bank branches.

The latter, which affects the rural areas first, reduces access to credit

in rural areas that were well-served by the post-nationalization branch

expansion drive, and worsens the tendency towards reduced

provision of credit to the agricultural sector.

What is however worrying the PSB management is the structural drag

of these branches on the profitability of the banks. Costs had been no

consideration when these branches were established at breakneck

speed in the Seventies. But today the exact benchmarks forprofitability and viability have put the PSBs in an unenviable position.

The big challenge in promoting rural banking is to keep the costs low

in view of the fact that while the number of transactions in such areas

may be high, they are mostly small-value transactions. However,

technology can play an important role in keeping the costs of such


30/49

30

transactions low. Unfortunately, public sector banks (PSBs), which

account for 70 per cent of assets, have been slow in making use of

modern technology to bring down transaction costs.

While public sector banks have the potential, with their spread and

reach, to enable financial inclusion, they also have to face difficult

challenges in human resource development. Public sector banks

need to invest significantly in skill enhancement at all levels, for

delivering new service modes in the face of greater competition. Theywill also face new recruitment challenges in the face of adverse

compensation structures in comparison with the private sector banks.

FUTURE OF PUBLIC SECTOR BANKSFUTURE OF PUBLIC SECTOR BANKSFUTURE OF PUBLIC SECTOR BANKSFUTURE OF PUBLIC SECTOR BANKS

IN RURAL BANKING SYSTEMIN RURAL BANKING SYSTEMIN RURAL BANKING SYSTEMIN RURAL BANKING SYSTEM

he future of banking in rural areas depends on several

factors, namely, how the current concerns are addressedtaking into account the dynamics of transformation in rural

economies, the new realities in credit markets, the linkages between

formal and informal markets, and the impact of financial as well as

technological progress on the systems of financial intermediation.

Consequently, public policy will have to address several issues to

T


31/49


32/49


33/49


34/49


35/49


36/49


37/49

37

On financing development

The 11th Plan must ensure that our policies are sufficiently flexible to

support the development of micro finance. Interest rates in the micro

finance sector have to be significantly higher than in the banking

sector reflecting the much higher cost of doing business. It is

important to remember that most micro-finance institutions charge

rates which are much lower than rates charged by money lenders.

On agriculture sector policy

The failure of the organized credit system in extending credit has led

to excessive dependence on informal sources usually at exorbitant

interest rates. This is at the root of farmer distress reflected in

excessive indebtedness.

There is evidence that farm debt is increasing much faster than farmIncomes and the larger issue of the overhanging debt stock, as

distinct from credit flow, have not even been on the agenda except

of a few State governments. Admittedly, there are limits to the extent

that banks can be expected to play a purely social role in todays

more competitive environment. However, too conservative an

approach on settling debt that has turned bad, due to contingencies

of poor weather or prices, is not even prudential banking if this serves

only to show bank balance sheets to be better than they are, and

prevents profitable new lending. There are several suggestions,

ranging from a Stabilization Fund to be run by the Centre for

automatic write-off under some specified conditions, to the setting up

by States of standing professional Debt Commissions to examine


38/49


39/49


40/49

40

LATEST INITIATIVES BYLATEST INITIATIVES BYLATEST INITIATIVES BYLATEST INITIATIVES BY

REGULATORY AUTHORITIESREGULATORY AUTHORITIESREGULATORY AUTHORITIESREGULATORY AUTHORITIES

uring the Ninth Plan period, the total amount of

agriculture/rural credit was to the extent of Rs. 229956

crore. This is sought to be increased to Rs. 736570 crore.

For this to happen, the Government has directed that:

Commercial Banks, cooperative banks and RRBs should

double the credit to agriculture in the next three years.

Periodic review and enhancement of credit delivery in rural

areas should be undertaken.

Stepping up of rural infrastructure for long term sustainable

growth should be made.

Innovative way of providing finance e.g. micro-finance, Kisan

Credit Card should be evolved on an ongoing basis.

Self-Helf-Group (SHG) micro-finance programme through

NABARD should be encouraged.

D


41/49


42/49


43/49


44/49


45/49


46/49

46

CONCLUSIONCONCLUSIONCONCLUSIONCONCLUSION

ublic sector banks, entrenched as they are in rural banking

for over three decades appear to be holding on their

business. When the banking industry is surging ahead the

world over, they find that nearly one half of their branches generate

less than 15 per cent of their business. About 17 per cent of their staff

is deployed for handling this business.

Banking sector being on the threshold of major technological

innovation, public sector banks are at the cross-roads: whether to

shed the historical baggage and adopt sophisticated banking.

A plea is made for functional specialization and structural

reorganization of rural banking business, with a view to strengthen

the competitive edge of the banking sector to be in tune with the fast

changing banking scenario. While the new banks prefer to flourish in

cities, gramin banks are directed to operate in rural areas and public

sector banks struggle to remain in both the worlds. They have donethis balancing act for over three decades. Hiving of the rural business

into a subsidiary and amalgamating the gramin banks into it is a

radical suggestion made.

P


47/49

47

The process of partial privatization is changing drastically the

perceptions of the state owned banks. The increasing stress on

transparency is pushing them towards reducing NPA and improving

the bottom line. This shift in emphasis is slowly resulting in the

elimination of less remunerative business. They have virtually

stopped rural branch expansion. As a part of the rationalization of the

branch network, some rural branches are being shifted the semi

urban centre or closed, unlamented.

Reorganization of rural business, however, should not result in

creating monolithic, impersonal banking giants. Rural India needs

user-friendly, rural oriented banks, an amalgam of the rustic simplicity

of gramin banks and business concentricity of commercial banks.

Finally, it can be said that rural India provides ample opportunities forprofitable banking and the public sector banks should take advantage

of these latent opportunities and expand rural credit by repositioning

themselves and delivering better services in the financial system.

Only then can PSBs meet the expectations of becoming vibrant rural

financial institutions capable of meeting the growing requirements of

rural India.


48/49


49/49

rural banking in india pdf

Documents