Current State of Indian Banking

An important metric to determine the level of financial outreach/inclusion is the ratio of the
number of deposit accounts to population. Figure 3 gives a snapshot of the penetration of
deposit accounts and credit accounts in India in comparison with a few select countries with
similar socio-cultural and economic conditions. Even in comparison with other developing
economies, India has a significant opportunity for increasing penetration of both deposit and
credit accounts. Not only is there a large disparity between India and other countries in
banking penetration but there is also a large variation in banking penetration within urban
and rural India. While urban India seems to be over-banked with more than 100%
penetration (many urban Indians have more than one bank account), rural India lags far
behind with a 19% penetration. The variance in rural and urban deposit and credit account
penetration is not restricted only to few states but is common across all states (Figure 4,
see Page 4). In addition, the average value of a deposit account and a credit account is also
quite low in rural areas as compared to urban areas (Figure 4). Diamond believes that the
reasons for lower penetration levels are partly economic, as explained by the low GDP per
capita in the rural areas of the country, and partly a result of "controllable factors that are
inherent in formal banking systems in India today. The low deposit and credit account
penetration and low average values in deposit and credit accounts (Figure 4) demonstrate
that banking outreach in rural India is sub-optimal. This low outreach can be explained by
two key parameters: access and usage. Simply defined, access is the availability of financial
services, and usage is the actual use of those services. Access is influenced by issues such
as the basic economic state of rural India, lack of physical infrastructure facilities, regulatory
constraints, and the economics of rural banking. Usage is constrained by social issues such
as illiteracy, incomplete service offerings by banks, and high transaction costs in the formal
banking system. Access and usage are not synonymous, as people may have access to
financial services, but decide not to use them, either for socio-cultural reasons or because
opportunity costs are too high.


Key Drivers of Financial Exclusion in India Today:

According to Diamond estimates, approximately 245 million adults in rural India do not have
a bank account today. As depicted in Figure 5, this reflects 24% of the total population.
While 60 million out of 245 million may not need banking services because they are below
the poverty line, Diamond believes that approximately 185 million "potentially bankable
people do not use formal banking services because of reasons like poor access or usage.

Access Issues for Rural Customers:

Access is explained in terms of infrastructure, physical distance, limited delivery capabilities,
regulatory constraints and the economics of rural banking. The banking infrastructure in
rural India is not encouraging, with just 7% of villages housing a bank branch5. Whats
more, the poor physical and social infrastructure (Figure 6, see Page 6) also impacts the
access to fi nancial services, with 23% of villages going without electricity, 67% without a
Post Offi ce, and an average rural literacy rate of 59% and secondary school penetration of
12%. This lack of physical and social infrastructure in rural India is a key issue impacting
access to formal fi nancial services. The average distance to a branch in India is
approximately 3.8 Kms (Figure 7, see Page 6). While this compares favourably to the
average distance to a branch in a developed market like the U.S. (which is 6 Kms6), there
are signifi cant additional challenges in India in the form of unpaved roads and limited
access to modern transportation. Most rural customers are likely to sacrifi ce an entire days
wage to travel to a bank branch which is open between 10:00am and 5:00pm. While some
banking transactions could be done over phone, this is rarely an option in a country with
such low ruraltele-density. Limited delivery capability is a signifi cant challenge. Much of
rural India is serviced through branches because ATM penetration is low and other channels
such as Phone and Internet Banking are non-existent. Intermediaries likeNon-
GovernmentalOrganizations (NGOs),Self-Help Groups, and Micro FinanceInstitutions (MFIs)
are being used by banks to improve access to credit and savings. However, these channels,
in their current form, offer limited services (Figure 8 and 9, see Page 7). There are some
regulatory constraints imposed by the Reserve Bank of India (RBI) which may
inadvertently contribute further to the lack of formal banking services in rural areas. For
example, the RBI does not allow banks to post any person other than a security guard at
ATMs.Hence, banks cannot deploy many ATMs in rural areas as many rural customers
require in-person support. A second regulatory inhibitor is that new banks planning to
establish a branch in a rural area have to receive approval from the Lead Bank and District
Collector of that district. Hence, banks choose not to open new branches in certain areas
even when it is profi table to do so because there is no certainty of getting approvals. Many
banks view the rural market as a regulatory requirement rather than an economic
opportunity. Banks have from time to time borne the social cost of lending to the rural
economy at rates below their costs. They have also faced capital erosion because of the
writeoff of loans, particularly agriculture loans. Banks are required via regulatory
requirements to open branches in rural areas to provide loans to agriculture and other
priority sectors. These branches are
often unprofi table because of low ticket size, high cost to serve, higher risk of credit,
information asymmetry, and high proportion of non-performing loans (NPLs)

High Non-performing Loans (NPL):

Banks have higher non-performing loans in rural areas because rural households have
irregular income and expenditure patterns. The issue is compounded by the dependence of
the rural economy on monsoons, and loan waivers driven by political agendas. NPLs from
the agriculture sector are 7.7%, compared to 3.5% across non-agriculture sectors8. In
order for banks to view rural India as a growth opportunity, rather than a regulatory
requirement, a combination of these issues must be addressed. Increasing fi nancial access
to rural areas is contingent upon basic conditions such as proper infrastructure and an
enabling regulatory framework, as well as innovative thinking on the part of commercial
banks. Access issues, however, explain only one part of the problem. Usage is an equally
important issue for rural customers.

Low Ticket Size:
The average ticket size of both a deposit transaction and a credit transaction in rural areas
is small (Figure 4). This means that banks need more customers per branch or channel to
break even. Considering the small catchment area of a branch in rural areas, generating a
customer base with critical mass is challenging.

High cost to serve:
Branches are the most used channel in rural areas. This is because many rural people are
not literate and are not comfortable using technology-driven channels such as ATMs, phone
banking or internet banking. On the other hand, a branch is an expensive channel for banks
(Figure 9). In addition, rural people, whenever they have access to banks, have frequent
low ticket and cash-based transactions, which increase the overall transaction cost for their
bank.

Higher risk of credit:
Rural households may have highly irregular and volatile income streams. Irregular wage
labor and the sale of agricultural products are the two main sources of income for rural
households. The poor rural households (landless and marginal farmers) are particularly
dependent on irregular wage employment. Rural households also have irregular expenditure
patterns. The typical expenditure
profile of rural households is small, with daily or irregular expenses incurred through the
month. Furthermore, a majority of households incur at least one unscheduled expenditure
per year, with the most frequent reasons being medical or social emergency7. In short, the
rural customer is generally considered
to be a risky one.

Information Asymmetry:
Since many rural people do not have bank accounts, there is a lack of information on
customer
behaviour in rural India. Absence of a Credit Information Bureau also complicates the
problem as banks have to rely on informal sources to learn the credit history of rural
customers. A lack of reliable information can result in either missed opportunities in not
approving otherwise eligible loan candidates, or nonperforming loans

&sage Issues for Rural Customers:

Even if access to formal banking is provided to rural customers, there is no guarantee that
these services will be used. According to a study conducted by the World Bank, many
households, even in developed countries, choose not to have a bank account as they do not
engage in many fi nancial transactions-they collect wages in cash, spend in cash and do
not wish to be burdened by a bank account9. To compound the situation many customers in
rural India, who have access to and would otherwise choose to use formal fi nancial
services, do not do so because the product and service mix do not meet their needs. The
financial service needs of rural customers are not confi ned to just savingsand credit, as is
usually assumed. Their financial needs are linked to their life cycle needs, ranging from
savings to credit to insurance to remittances (Figure 10). In fact, even the savings and
credit products currently offered to rural customers do not entirely meet their needs. Access
to savings and investment facilities is critical for the poor. The two critical needs for the
rural poor are micro-savings and frequent withdrawals. These needs facilitate a
customer in building capital over the long term, as well as coping with income shocks in the
near term.10. However, banks do not offer adequate services to address these needs. The
lack of services, therefore, leaves the rural poor with little option than to transact with the
informal banking market. A study conducted by MicroSave also concludes that the poor
transact with the informal sector because it will accept small amounts, provide doorstep
service, and ensure ease of enrolment11. Rural customers need loans not only for
productive purposes but also for consumption needs (Figure 11). As shown in Figure 10,
apart from agricultural support, rural customers need microcredit for consumption,
education and emergencies. Though banks offer purposefreeloans (personal loans and credit
cards) in urban areas quite liberally, in rural areas sanction of such loans is signifi cantly
restricted. Therefore, the poor raise these loans through the informal fi nancial system (it is
worth noting that these loans taken from the informal system are almost always repaid or
renewed12). In addition, larger households need occasional high value micro-enterprise
loans for small capital investment. Though banks offer these loans, they require excessive
documentation and time-

Financial Needs and Service Requirements:

Critical Needs Description Current Availablity Via Formal Banking

Frequent and daily surplus savings To meet contingencies, social functions and working
capital

Rationale

Banks do not offer daily small savings deposit Savings schemes Credit Insurance &
Remittance Rural banks generally do not give loans for consumption & emergency
purposes Banks have not targeted the rural poor for insurance For consumption, education
and emergency purposes Working capital or small capital investments requirements Asset
Protection, Health, Life and Savings Protection To Access fundsremitted by relatives Branch
channel is costineffective for rural
Customers Banks provide seasonal and long-term agriculture loans but there are delays and
excess documentation Rural branches are not computerized and usually remittances take
more than 2 weeks to reach th


beneficiary
Micro-savings
Micro-credit
Micro-enterprise Loans
Micro-insurance
Remittance & Transfers
Frequent withdrawals


consuming processes which discourage customer applications. Insurance reduces the
vulnerability
of poor households by replacing the uncertain prospect of large losses with the certainty of
payout against small, regular premium payments. It is integral to a comprehensive risk
management strategy for poor households. This includes life, health, accident and asset
(dwelling, crop, and livestock) insurance. Banks and insurance firms do not offer these
services in many rural areas, leading the poor to rely on the informal financial system.
There are many rural households which depend on weekly or monthly remittances from
their family members who have moved to urban areas. At present, they depend
on informal channels to remit the money and consequently either risk the loss of money or
pay high transaction fees. Banks do not offer seamless remittance facilities between urban
and rural branches as many of the rural branches are not computerized and connected to
the main banks computer systems. This often results in the benefi ciary receiving the
amount two weeks after it has being transferred.This represents yet another key service
which is not provided.The transaction cost for a rural customer to receive credit primarily
constitutes four attributes: the interest rate, loan amount received as a percentage of
amount applied, bribes paid, and the lead time to processthe loan. Though the formal
banking system offers loans at interest rates lower thaninformal banking systems, the time
taken for a loan to be sanctioned (Figure 12) is high which increases uncertainty and
opportunity cost. In addition, the customer needs to pay almost 10% of the loan amount in
bribes and eventually receives an amount that is less than what was applied for. Therefore,
while the interest rates are usurious in the informal financing system, rural customers still
resort to this channel because the waiting time to receive the loan is negligible and there
are no indirect costs or commission. Banks also insist on collateral security which many
rural poor cannot afford. As far as savings are concerned, though the formal banking
system provides financial security, the cost of opening and operating an account is high.
The overall cost of transacting with the formal financial system increases for a rural person
because of additional costs such as expenses incurred to reach a branch and the opportunity
cost of lost wages. Since rural banks are generally not within an accessible area and do not
operateat convenient times, the rural customermust forgo a days wage to reach a
branch.Informal systems, on the other hand, involve a lower transaction cost, but they are
risky and in some cases result in the loss of ones entire capital. In short, this leaves the
rural customer to choose between two unfavourable options.In summary, the services being
offered by the formal banking system do not seem to meet the needs of the rural poor. A
World Bank study suggests that the poor apply a set of criteria to judge the services being
offered by any fi nancial service
provider, including: Products-Are fi nancial services
available and tailored to my needs?

- Cost-What is the total cost of the service (including opportunity cost)?
- Convenience-How easy is it to access and use?
- Eligibility-Am I eligible for fi nancial services and can they be accessedrepeatedly?

As explained earlier, the savings products offered in the current format do not qualify as a
flexible, convenient and cost-effi cient service. Similarly, loan products do not meet product
and eligibility criteria. In addition, insurance and remittance services are not even available.
The cost of services, despite lower interest rates, is high because of other indirect costs
which make the banking services cost-ineffi cient. The access and usage issues need to be
addressed to improve fi nancial inclusion. The next segment of the paper looks at some
changes that the government, RBI and banks need to make.


The Way Forward:

In building an inclusive fi nancial system, each of the three key stakeholders-the
government, RBI and commercial banks- has a role to play. The following chapter briefl y
examines the desired actions to be taken by the government and RBI, and then provides
more in-depth recommendations for banks. We focus on the actions to be taken by banks
because they are able to more rapidly implement change than the government or RBI, even
within the current regulatory environment.

Stakeholders
The Government: As noted, weak infrastructure is an important factor limiting access to
rural branches even in areas where it would seem that customers are within a reasonable
distance of a bank branch. The government has initiated the Bharat Nirman plan13 to
improve infrastructural conditions in rural India, but there is a need to ensure rapid
implementation. The two critical elements of rural infrastructure which
have a direct impact on the accessibility of banking channels are road and transportation
infrastructure and electricity and power infrastructure. Similarly, high levels of illiteracy
deter rural customers from actively engaging in formal financial channels. Hence, the
government has an additional responsibility to improve social infrastructure by improving
literacy rates and education facilities. In addition, the government should educate rural
people about the negative effects of debt-trap and the benefi ts of using formal banking
channels. Finally, to regulate the informal credit market, the government can not only enact
laws such as the Moneylenders Act, but also needs tosuccessfully implement them.


Reserve Bank of India:

The Reserve Bank of India, as 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 that the RBI revisit some of its guidelines governing the licensing of
new branches, operations of ATMs, and use of technology. The following are a few
suggestions to address each of these three issues.First, with improvements in banking
technology, it may not be essential to have a bank branch to reach rural customers. The
RBI need not require banks to open a branch in rural areas as a requirement to grant
licenses for urban branches. Instead, banks should be allowed to explore alternative, more
economical
channels to reach the rural customers.


Second, ATMs are an effective channel to deliver many services at significantly lower cost
than a branch. However, ATMs are not effective in rural areas if they are unattended, as
required by the current RBI guidelines. The RBI should consider the option of allowing banks
to appoint customer service agents in rural ATM kiosks subject to some stringent rules to
prevent fraud. Last, the RBI should examine the potential impact of allowing bank business
correspondents to use point-of-sale technologies such as Palmtops to deliver financial
services in rural areas. While there are additional regulatory reforms which would enhance
banking access and usage for rural customers, Diamond believes that addressing these
three points would be a signifi cant start.

Banks:
Even within the sub-o ptimal infrastructure and regulatory framework laid out by the
government and RBI, there is an opportunity for banks to improve the rural customers
access and usage. Access can be enhanced through new and innovative channels which the
RBI already permits, and by leveraging cost effective technology in existing channels. Usage
can also be improved if banks revise their product and service offerings to meet the needs
of the rural customer.

Market Opportunity
At present, a rapidly growing urban India is the focus of the banking sector; however, as
the deposit penetration numbers suggest (Figure 3 & 4), the market is highly competitive
and overbanked. Despite this, most banks are still not shifting their focus to the rural
opportunity, as they are apprehensive about the total market potential of the rural market
and the profi tability of rural banking channels. Contrary to the widely held notion, however,
the rural market is attractive from both a credit and deposit perspective. The credit demand
in rural areas is approximately Rs 1,330 billion (based on an estimate by World Bank).
There are other studies by the Planning Commission and ICICI Bank which put the fi gure
even higher at Rs 1,440 billion and Rs 1,500 billion respectively. Similarly, on the deposit
side, a large segment of the rural population does not save with formal banking channels
because banks are not accessible and do not provide the appropriate products and service,
leaving a signifi cant opportunity to growthe deposit base. At present, the penetration of
banking in rural areas is sub-optimal with a large market remaining untapped in both the
liability (~ Rs 215 billion) and asset (~ Rs 1,204 billion) sides of the business (Figure 14).
These estimates clearly suggest that there is suffi cient demandin the rural market to
encourage banks to think seriously about rural areas as an alternative growth opportunity.
As we identifi ed earlier, access and usage are two broad concerns which explain why the
potentially bankable are unbanked.
With regard to access, the challenge for banks is to identify profi table channels that meet
the needs of rural customers. With regard to usage, banks need to understandthe
requirements of the rural customer
and customize products and services accordingly (Figure 15).



Improving Access:

Today, branches are the primary delivery channel in rural areas. Though there are 32,000
commercial bank branches in India, they cover less than 7% of total villages14. Opening
more branches is not necessarily profitable as many pockets of rural areas do not have
business enough to justifyan expensive branch channel. Therefore, to improve access in
rural areas, banks need to modify existing channels, introduce new channels and identify
innovative ways to integrate the two.

Modify Existing Channels
Fortunately there are a variety of options available for banks looking to modify their existing
channels.
To reduce the costs imposed by branches, banks should consider the option of sharing
their branch infrastructure.This would not be too dissimilar to the example of the
telecom industry sharing network infrastructure or the fast food industry sharing food courts
in urban areas. Though infrastructure sharing may raise concerns over client confi dentiality
and data leakage, in the long run banks will only benefi t from such collaboration. ATMs are
an effective channel which can deliver many of the services frequently used by a branch
customer. However, ATMs, in their current form, are not suitable for rural areas as the
literacy level and transaction ticket amount is too low. ATMs can, however, be designed to
meet the needs of rural customers. For example, ICICI Bank is working with IIT Chennai to
develop an ATM that has a biometric fi ngerprint login, accepts soiled notes, and lower value
denominations. In addition to modifying the design of the machines, banks should also hold
discussions with the RBI to allow an attendant to be posted at ATMs. This will enhance the
usability of ATMs.
Though phone banking and internet banking are cost-effective channels, given very low
tele-density and low internet penetration in rural areas, the ability to use these channels to
reach the rural customer
is low. However, phone and internet banking should be considered once infrastructure and
literacy levels improve in rural India. A business correspondent could then runan e-kiosk to
assist customers to transact
over these channels. For example, Centenary Bank in Uganda uses internet and phone
banking to provide bill payments, money transfers and loan repayments. Business
correspondents can be provided
with point-of-sale (POS) functionality to allow customers to deposit and withdraw cash
from their accounts. Combining POS with a smart card is one way to improve access. Brazil
has successfully used banking correspondents who use POS and card readers to provide
current accounts, loans, and insurance, accept bill payments, and perform other
transactions.

Introduce New Channels
The RBI allows banks to appoint business correspondents and facilitators to be used as
intermediaries in providing banking services. NGOs, MFIs, Societies, Section 25 companies,
registered NBFCs
not accepting public deposits, and Post Offi ces can be appointed as Business
Correspondents. Business Correspondents can provide several services which are not
currently
offered by SHGs and MFIs, including: (i) identifi cation of borrowers and fitment of
activities; (ii) collection and preliminary processing of loan applications including verifi
cation of primary information/data; (iii) creating awareness about savings and other
products and education and advice on managing money and debt counseling; (iv)
processing and submission of applications to banks; (v) promotion and nurturing Self Help
Groups/Joint Liability Groups; (vi) post-sanction monitoring; (vii) monitoring and
handholding of Self
Help Groups/Joint Liability Groups/Credit Groups/others; and (viii) follow-up for
recovery; (ix) disbursal of small value credit, (x) recovery of principal/collection of interest
(xi) collection of small value deposits (xii) sale of micro-insurance/ mutual fund products/
pension products/ other third-party products and (xiii) receipt and delivery of small value
remittances/ other payment instruments. The introduction of Business Correspondents may
face some challenges from labour unions. However, Diamond believes that there may be
some options to address the concerns of the current workforce while
using Business Correspondents to capture more value from rural customers. Caixa
Economica, a state-owned bank in Brazil, manages the countrys lottery network and
distributes government benefi ts. To increase the access of its services, Caixa extensively
utilizes the Banking Correspondent channel, with
14,000 banking correspondents covering all of Brazils 5,500 municipalities. In less than 2
years, Caixa opened about 2.8 million new accounts and estimates that 40% of its banking
transactions are handled through the banking correspondent channel. Satellite offi ces are
a cost-effective alternative to branches. These offi ces can be established at fi xed premises
in villages and are controlled and operated
from a base branch located at a block headquarters. All types of bankingtransactions may
be conducted at these offi ces. Banks have, however, not used this channel actively, despite
the argument that this channel is relatively less expensive, as it can draw personnel from
the main branch and can remain open for just two days a week. This channel, therefore, is
appropriate in blocks and districts which are densely populated. In the urban areas, most
Indian banks opt for an extension counter where the business does
not justify a full-fl edged branch. Similarly, satellite branches can cater to rural areas which
do not justify a large branch. Where banks do not fi nd it economical to open full-fl edged
branches of satellite offi ces, mobile offi ces may be more appropriate. Mobile offi ces
extend banking facilities through a well-protected truck or van. The mobile unit visits
villages on specifi ed days/ hours. The mobile offi ce would be affi liated with a branch of
the bank, and serve areas which have a large concentration of villages.
This will not be dissimilar to the mobile ATMs implemented by some of the Indian banks in
the urban areas.


Determine the Combination of Channels
There is no one right channel or solution to improve access in rural areas. Banks have to
evaluate the trade-offs between those channels that are most convenient to customers and
those that are the most profi table. Banks are not comfortable opening new rural branches
because many of those that already exist are unprofi table. Therefore, determining the right
combination of channels is critical to improving access in profi table ways. An innovative
approach to improving access will consider a combination of these channels. For example:

- Branches and Satellite Branches- In addition to providing regular banking operations,
providing backend support to manage and audit the operations of business correspondents.

- A low-cost, custom-made ATM- Managed by a business correspondent to bring down the
operating cost and scale the channel.

- An e-kiosk-Managed by a business correspondent with internet banking, ATM and POS
terminal in relatively large rural areas.

- A business correspondent-Using manual ledgers or POS/Palmtop to act as deposit
collector and remitting agent in smaller rural areas. While this list is not exhaustive, it
highlights the need for creative solutions that apply the right channel to the right market
and transaction. In South Africa, Capitec has combined convenient branches along
transportation routes (for example, train and bus stations, and taxi stops). In addition, it
has rolled-out debit cards and automatic teller machines across 200 of these branches to
stimulate savings among low-income earners. Between February and August
2004, the number of customers jumped from around 18,000 to more than 60,000.

Encouraging &sage
The presence of a banking channel does not guarantee that the rural customer will actually
use that channel. In addition to access issues there are usage issues. To stimulate usage,
banks need to improve their product mix, reduce total transaction cost, provide
convenience, and clearly outline the eligibility criteria for products and services (Figure 17,
see Page 14).


With regard to products, rural customers have some critical needs, such as micro-savings,
micro-credit, remittances and others which will require banks to develop some innovative
offerings. For micro-savings, banks could develop a flexible savings product with daily
deposit collection and withdrawal facilities. A
business correspondent carrying a manual ledger or POS can facilitate such a product. For
micro-credit needs, consumption loans need to be designed. This is not entirely different
from giving purpose-free personal loans and credit cards in urban areas. Rather than not
offering these loans at all, banks should focus on managing credit risk. For instance, banks
may give such loans only under the Joint Liability Groups (JLGs) format. Similarly, for
remittances, banks need to accelerate the remittances between various channels by
improving technology and connectivity. Safe Save in Bangladesh is an example of how well-
designed financial services products can quickly become popular amongst rural populations.
Safe Save has designed savings products which allow the poor to save on a daily basis,
withdraw as needed at their doorstep, and access credit products with fl exible repayment
options. Rural customers are concerned not only about the interest rate, but also about
indirect costs (bribes, commissions,
etc.) and expenses associated with banking transactions. While interest rates of the formal
banking system are not high, the total transaction cost for a rural customer is. The
government and RBI can relax rules around interest rates for loans less than Rs 200,00015
to allow banks to manage the cost of credit risk. To reduce indirect costs to the customer,
banks have to adopt simpler processes and documentation, and transparent and clearly defi
ned norms. By allowing rural borrowers to use their approved credit limits through credit
cards, banks can reduce their visits to branches and intervention by a bank offi cer. This will
not only reduce the cost of bank operations but also reduce the burden of commissions
bribery at every stage of the process. In South Africa, cell phone companies are developing
low-cost, cell phone-based banking services using short message service technology, often
connected to mobile banking. Transactions, which are being used mainly by poor customers,
include balance inquiries, bill payments, money transfer, transaction alerts, and account
servicing. The primary convenience needs of rural customers are bank operating hours,
ease of transaction, and customer service.
Operating hours need to be tailored to better meet the needs of rural customers. In
agricultural communities, for example, opening the branch in the morning and evening
would allow farmers and
daily wage earners to bank without losing a days work or wage. Alternative operating hours
have, in fact, already been implemented in urban areas where banks are open from 8:00am
to 8:00pm or four hours in the morning and four hours in the evening. To improve the ease
of operating an account, banks can print signature-ready pay-in slips and withdrawal slips,
wherein the illiterate rural customer is required
only to tick the amount of deposit or withdrawal and place a thumb impression. Finally, to
improve customer service, banks can recruit staff locally. Banking correspondent channels
have been
successful in some countries because they recruit local staff who better understand the local
customer. Prodem in Bolivia is a successful example of how banks can increase customer
usage by improving convenience. Prodem installed ATMs that incorporate biometric
fingerprint readers and voice
instructions in three languages. These ATMs, along with smart cards, can support many
banking transactions and given their convenience, have been popular with customers.



Uncertain eligibility criteria traditionally have been a barrier to usage. The process and
guidelines to apply for loans are neither clear nor concrete. Rural customers are never
certain what is required to
apply for a loan or whether they qualify for a certain product. In order to encourage
consumption banks need to clear define the loan qualifi cation criteria in the local language.
In addition, banks should
ensure that otherwise qualifi ed candidates are not denied credit. This can be achieved
through proper credit scoring systems that assess credit risk of farmers and others who
have irregular cash fl ows, and
processes and systems which allow banks to share information. Most importantly,
developing and enforcing clearly defi ned rules and educating the customers will help them
to see the merits of the formal
banking system. CECAM in Madagascar and Prizma in Bosnia present two examples where
innovative methods in developing credit products and credit methods helped to include the
poor in their clientele.
CECAM developed credit products where the repayment of loans matches the cash fl ows of
the borrower, and Prizma developed customized credit score models which help it keep
track of customers credit histories.


Conclusion:
There are 185 million bankable adultsin rural India who are unbanked because of access
and usage issues. This presents a signifi cant opportunity for commercial banks. However,
to reach this market and
subsequently build an inclusive fi nancial 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, partnerships 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 viabiility of their
rural banking operations.