SUBMITTED BY:

Vanita Shetty 97 Sushil Tripathi 108

Prafulla Kharote 46 Sudesh Narkar 64
 CONTENT
No. 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% - Indias 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 countrys
GDP
50% - the sales FMCG and Durable companies come from
the rural areas.
2% - had to travel > 30 minutes (whereas 13% in 2010).
24% - dont 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
 Rural Banking - Introduction
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.
Institutional Structure of Rural Banking
 Services Required for Rural Sector

Loans Savings

Risk
Mitigation Pensions
Products
Remittance

Financial
Counseling
Credit Insurance
Cards
 TERM OF RURAL FINANCE
Funds needed by Indian farmers can be categorized into three types:

Short term loan - 12 to15 months

SHORT 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 years

MEDIUM TERM LOAN are given to farmer to purchase cattle, agriculture implement
and to make improvement on land.

Long term loan -15 to 20 years

LONG 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.
SOURCES OF RURAL
FINANCE Private Credit

Money Lenders Landlords

Institutional
Credit

Traders Commission
Agents

Co-operative Commercial

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 Distribution

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.
 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.

Banks
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 customers convenience.
Improvement in service levels in Rural Areas.
 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.
 Concerns regarding current approach
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.
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
As on March 31
Bank Groups 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
20000

15000

10000

5000

0
Northern North Eastern Central Western Southern
Region Eastern Region Region Region Region

Rural 5108 1219 7533 7988 3889 6791

Urban 10113 1073 6946 9429 9812 17867
 GROUP-WISE DEPOSITS OF SCHEDULED
COMMERCIAL BANKS (Rs.in 000 crores)

8000
7000
6000
5000
4000
3000
2000
1000
0
2006 2007 2008 2009 2010
Rural 227 258 303 365 424
Urban 1867 2341 2926 3572 6788
 BANK GROUP-WISE DEPOSITS
(Rs.in 000 crores)
1500

1000

500

0
Northern North Eastern Central Western Southern
Region Eastern Region Region Region Region

Nationalised Banks 759 68 443 443 1010 702

RRBs 21 7 32 45 8 30
Private Banks 186 4 47 34 325 211
Way Forward
 Expand Reach
Tie-up with India Post to penetrate the rural market.
Partner with NGO / MFI to act as Business Facilitators.

Focus on Micro Finance

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.
 Kiosk BankingOffer 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.
 Innovate & Adopt Technology

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.
 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 1998 Kisan(Farmers') Credit Card
Milestone
1992 NABARD launches SHG bank
linkage program

1985 Comprehensive crop insurance

1982 NABARD - APEX agency for rural

finance

Establishment of RRBs 1975

Major Commercial banks nationalized 1969

 Major
Milestone
Proposed bill on microfinance
2007
regulation

Marketing of Mutual Fund Units - RRBS

2006

Establishment of SIDBI
Foundation of Micro-credit 2000
 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`