MANAGEMENT OF FINANCIAL SERVICES

A
PROJECT REPORT
ON
RURAL BANKING IN INDIA

SUBMITTED TO:

M/S. Khushbu shah

(Faculty member of M.B.A department of
S.P.B.Patel engineering college)

S.P.B.Patel Engineering college, Linch

Affiliated to Hemchandracharya North Gujarat University

SUBMITTED BY:

Kinjal Prajapati (0848)

Aisha Shah (0851)

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MANAGEMENT OF FINANCIAL SERVICES

ACKNOWLEGMENT

“Chain of mistakes leads towards failures, chain of failures leads to experience and chain
of experience leads to success.” That’s what a life’s path is.

Some is applicable to my project work. I do not claim that I have a complete knowledge
of the subject. First, I would like to thanks my friends and many persons who directly or
indirectly helped me during my project.

Doing most favorable my project part, who help me and acknowledge me, I would like to
express my profound gratitude to M/s. Khushbu Shah, Assistance faculty, S.P.B.Patel
eng. college for guiding me right related to topic.

Kinjal prajapati
Aisha shah
(M.B.A. 4th sem)

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MANAGEMENT OF FINANCIAL SERVICES

CONTENT

No. Particulars Page

No.
1. Current State of Rural Banking in India 4
2. Key Drivers of Financial Exclusion of Rural 8
Banking in India

3. Reasons for Unprofitable Rural Banking in 11

India
4. Usage Issues for Rural Customers 13
5. Market Opportunity of Rural Banking in 16
India
6. Improving Access of rural Banking In India 18
7. Conclusion 21
8. Bibliography 22
9. Annexure 23

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CURRENT STATE OF RURAL BANKING IN INDIA

The Indian Economy

India is the 12th largest economy in the world in terms of gross

domestic product (GDP), and fourth in terms of purchasing power parity
(PPP)1. The growth of the economy is equally impressive with an
average of over 8.0% during the last three years2. However, in terms
of GDP per capita, India ranks a lowly 160th among other nations.
Within the country, there is a stark divide in the incomes of urban and
rural areas with the average monthly per capita consumption
expenditure (MPCE) in urban India being almost double that of rural
India.

In addition, there are significant disparities in urban and rural

consumption expenditure between different states. Jharkhand and
Orissa, for example, have an MPCE of approximately Rs. 900 in urban
areas and Rs. 410 in rural areas4. In other states like Punjab and
Haryana, the urban rural disparity is significantly lower. A fifth of the
Indian population is below the poverty line (BPL) today with a MPCE
below Rs 340. In some states like Jharkhand and Orissa, the proportion
of BPL is greater than 40%. Diamond believes that the segments that
are not considered BPL should all be considered as “potentially
bankable” with genuine financial needs that could be met by formal
financial and banking systems.

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. It 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.

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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.
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 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.

List of Rural Banks in India

Rural banking in India started since the establishment of banking

sector in India. Rural Banks in those days mainly focused upon the agro
sector. Regional rural banks in India penetrated every corner of the
country and extended a helping hand in the growth process of the
country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural
banks of SBI is spread in 13 states extending from Kashmir to
Karnataka and Himachal Pradesh to North East. The total number of
SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in
rural banking in India, there are 14,475 rural banks in the country of
which 2126 (91%) are located in remote rural areas.

Apart from SBI, there are many other banks which function for the
development of the rural areas in India. These banks are listed below:
Andhra Pradesh
Bihar

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• Andhra Pradesh Grameena Vikas • Madhya Bihar Gramin Bank

Bank
• Andhra Pragathi Grameena Bank
• Deccan Grameena Bank
• Chaitanya Godavari Grameena
Bank
• Saptagiri Grameena Bank
• Bihar Kshetriya Gramin Bank
• Uttar Bihar Kshetriya Gramin Bank
• Kosi Kshetriya Gramin Bank
• Samastipur Kshetriya Gramin Bank
Gujarat

• Dena Gujarat Gramin Bank

Chhattisgarh
• Baroda Gujarat Gramin Bank
• Chhattisgarh Gramin Bank • Saurashtra Gramin Bank
• Surguja Kshetriya Gramin Bank
• Durg-Rajnandgaon Gramin Bank
Himachal Pradesh

• Himachal Gramin Bank

Haryana
• Parvatiya Gramin Bank
• Harayana Gramin Bank
• Gurgaon Gramin Bank
Punjab

• Punjab Gramin Bank

Jammu & Kashmir
• Faridkot-Bhatinda Kshetriya Gramin Bank
• Jammu Rural Bank • Malwa Gramin Bank
• Ellaquai Dehati Bank
• Kamraz Rural Bank
Kerala

• Narmada Malwa Gramin Bank

Assam
• North Malabar Gramin Bank
• Assam Gramin Vikash Bank
• Langpi Dehangi Rural Bank
Tamil Nadu

• Pandyan Grama Bank

Jharkhand
• Pallavan Grama Bank
• Jharkhand Gramin Bank
• Vananchal Gramin Bank
Maharashtra

• Marathwada Gramin Bank

Madhya Pradesh
• Aurangabad -Jalna Gramin Bank
• Narmada Malwa Gramin Bank • Wainganga Kshetriya Gramin Bank
• Satpura Kshetriya Gramin Bank • Vidharbha Kshetriya Gramin Bank
• Madhya Bharath Gramin Bank • Solapur Gramin Bank
• Chambal-Gwalior Kshetriya • Thane Gramin Bank
Gramin Bank
• Rewa-Sidhi Gramin Bank • Ratnagiri-Sindhudurg Gramin Bank
• Sharda Gramin Bank
• Ratlam- Mandsaur Kshetriya
Gramin Bank
• Vidisha Bhopal Kshetriya Gramin
Bank
• Mahakaushal Kshetriya Gramin

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Bank

• Jhabua Dhar Kshetriya Gramin

Bank

Karnataka Rajasthan

• Karnataka Vikas Grameena Bank • Baroda Rajasthan Gramin Bank

• Pragathi Gramin Bank
• Cauvery Kalpatharu Grameena
Bank
• Krishna Grameena Bank
• Chikmagalur-Kodagu Grameena
Bank
• Marwar Ganganagar Bikaner Gramin Bank
• Rajasthan Gramin Bank
• Jaipur Thar Gramin Bank
• Hodoti Kshetriya Gramin Bank
• Mewar Anchalik Gramin Bank

• Visveshvaraya Gramin Bank

Orissa West Bengal

• Kalinga Gramya Bank • Bangiya Gramin Vikash Bank

• Utkal Gramya Bank • Paschim Banga Gramin Bank
• Baitarani Gramya Bank
• Neelachal Gramya Bank • Uttar Banga Kshetriya Gramin Bank

• Rushikulya Gramya Bank

Meghalaya Arunachal Pradesh

• Arunachal Pradesh Rural Bank

• Ka Bank Nogkyndong Ri Khasi-
Jaintia
Manipur
Nagaland
• Manipur Rural Bank

• Nagaland Rural Bank

Mizoram
Tripura

• Mizoram Rural Bank

• Tripura Gramin Bank

Uttar Pradesh Uttaranchal

• Purvanchal Gramin Bank • Uttaranchal Gramin Bank

• Kashi Gomti Samyut Gramin
Bank • Nainital Almora Kshetriya Gramin Bank
• Uttar Pradesh Gramin Bank
• Shreyas Gramin Bank
• Lucknow Kshetriya Gramin Bank
• Ballia Kshetriya Gramin Bank

• Triveni Kshetriya Gramin Bank

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MANAGEMENT OF FINANCIAL SERVICES

KEY DRIVERS OF FINANCIAL EXCLUSION OF

RURAL BANKING
According to Diamond estimates, approximately 245 million adults in
rural India do not have a bank account today. As depicted in Following
Table, 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.

120 100
100
80
47 53
60 37 Series1
40 24 18
16 13
20 6
0

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Source: Census India ;BSR 2008—Reserve Bank of India; World Bank &
NCAER (2008).

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 branch. What’s more, the poor physical
and social infrastructure also impacts the access to financial services,
with 23% of villages going without electricity, 67% without a Post
Office, 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 financial services.

The average distance to a branch in India is approximately 3.8 Kms.

While this compares favorably to the average distance to a branch in a
developed market like the U.S. (which is 6 Kms6), there are significant
additional challenges in India in the form of unpaved roads and limited
access to modern transportation. Most rural customers are likely to
sacrifice an entire day’s wage to travel to a bank branch which is open

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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
rural tele-density.

Limited delivery capability is a significant 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 like Non-Governmental Organizations (NGOs), Self-Help
Groups, and Micro Finance Institutions (MFIs) are being used by banks
to improve access to credit and savings. However, these channels, in
their current form, offer limited services.

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 profitable 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 write-off 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.

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Current Rural Banking Channels

Description Service Provided Remarks

- Full fledged Branches and - Deposit Accounts -

96% of total deposit and 95% of
Extension Counters of - Credit Accounts
Branch
total loans are with scheduled
Scheduled Commercial Banks - Remittances
commercial banks with
including Regional Rural Banks - Cards
cooperative banks holding
Cooperative Banks - Third-Party Products
the difference
Intermediaries
- Has a high cost-to-serve

- NGOs, SHGs, MFIs and - MFIs directly lend to the poor - This
channel delivers limited
Cooperatives that act as and also act as agents for
services in its current form
ATM Intermediaries to take financial he banks
Services to the rural areas - SHGs borrow from banks and
are beneficiaries of loans
themselves

- Onsite - Cash Withdrawal

- Negligible presence of this
Others ATM installed at a branch - Cash Deposit
channel in rural areas
- Offsite - Money Transfer
ATM installed at a remote - Cheque Book Request
Location - Bill Payments
Source: Reserve Bank of India; Diamond analysis.

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REASONS FOR UNPROFITABLE OF RURAL

BANKING IN INDIA

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 financial 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. This means that banks need more
customers per branch or channel to break even. Considering the small
catchments 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 (Following Table). 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.

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Cost Per Transaction in Indian Banks

60
48
50

40

30 25 Series1
18
20
8
10 4

0
Branch Phone (Call ATM Phone(IVR) Internet
Centre)

Source: Reserve Bank of India; CGAP, World 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 behavior 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.

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USAGE 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 financial 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 financial services, do not do so because
the product and service mixes do not meet their needs.

The financial service needs of rural customers are not confined to just
savings and credit, as is usually assumed. Their financial needs are
linked to their life cycle needs, ranging from savings to credit to
insurance to remittances. 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. 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 Micro Save also concludes that the poor transact with the
informal sector because it will accept small amounts, provide doorstep
service, and ensure ease of enrolment.

Rural customers need loans not only for productive purposes but also
for consumption needs (Following Table). A part from agricultural
support, rural customers need micro credit for consumption, education
and emergencies. Though banks offer purpose free loans (personal
loans and credit cards) in urban areas quite liberally, in rural areas
sanction of such loans is significantly restricted. Therefore, the poor
raise these loans through the informal financial 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

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documentation and time-consuming processes which discourage

customer applications.

Purpose of Borrowing
Rural Household Borrowing

Other business
Other business
expenditure, 14% expenditure
Agriculture
Household
expenditure, 38% expenditure
Agriculture
expenditure
Household
expenditure, 48%

Bank Lending to Rural Households

Personel Loans, 12%

Personel Loans
Other Business Loan, Agriculture Loan
52% Agriculture Loan, 36% Other Business Loan

A significant percentage of borrowing is toward consumption and other household expenditure, whereas
formal financial institutions in rural India provide loans primarily for productive purposes.
Source: AIDIS—2008, National Sample Survey Organization (NSSO);
Diamond analysis.

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

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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 bank’s computer
systems. This often results in the beneficiary 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
process the loan. Though the formal banking system offers loans at
interest rates lower than informal banking systems, the time taken for
a loan to be sanctioned 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 operate at convenient times, the rural customer must forgo
a day’s 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 one’s entire capital. In short, this leaves the rural
customer to choose between two unfavorable 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 financial service provider, including:

• Products—Are financial services available and tailored to my needs?

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• 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 financial services and can they be
accessed repeatedly?

As explained earlier, the savings products offered in the current format

do not qualify as a flexible, convenient and cost-efficient 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-inefficient.

MARKET OPPORTUNITY OF RURAL BANKING

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 over banked. 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 profitability 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 figure 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 significant opportunity to grow the 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. These
estimates clearly suggest that there is sufficient demand in the rural
market to encourage banks to think seriously about rural areas as an
alternative growth opportunity.

As we identified 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 profitable channels that
meet the needs of rural customers. With regard to usage, banks need
to understand the requirements of the rural customer and customize
products and services

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Accordingly (Following Table).

Proposed Approach to Tap Potentially Bankable Population

Address
Access Needs
Of Rural
Improve Customers
Access
For Rural
Customers Ensure
Channel
Profitability

Convert
Potentially
Bankable
Address
Usage Needs
Of Rural
Encourage Customers
Usage of
Services
Bank
Initiatives
To Improve
Usage
Source: Diamond analysis

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IMPROVING ACCESS FOR RURAL BANKING

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 villages. Opening more branches is not
necessarily profitable as many pockets of rural areas do not have
business enough to justify an 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 confidentiality and data
leakage, in the long run banks will only benefit 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

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fingerprint 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 run an 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 Offices can be appointed as
Business Correspondents. Business Correspondents can provide
several services which are not currently offered by SHGs and MFIs,
including: (i) identification of borrowers and fitment of activities; (ii)
collection and preliminary processing of loan applications including
verification 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.

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The introduction of Business Correspondents may face some

challenges from labor 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 country’s

lottery network and distributes government benefits. To increase the
access of its services, Caixa extensively utilizes the Banking
Correspondent channel, with 14,000 banking correspondents covering
all of Brazil’s 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 offices are a cost-effective alternative to branches. These

offices can be established at fixed premises in villages and are
controlled and operated from a base branch located at a block
headquarters. All types of banking transactions may be conducted at
these offices. 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 find it economical to open full-fl edged branches of

satellite offices, mobile offices may be more appropriate. Mobile
offices extend banking facilities through a well-protected truck or van.
The mobile unit visits villages on specified days/ hours. The mobile
office would be affiliated 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
profitable. Banks are not comfortable opening new rural branches
because many of those that already exist are unprofitable. Therefore,
determining the right combination of channels is critical to improving
access in profitable ways. An innovative approach to improving access
will consider a combination of these channels. For example:

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• 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
2007, the number of customers jumped from around 30,000 to more
than 90,000.

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

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needs, and adapt their delivery models to ensure commercial viability

of their rural banking operations.

BIBLIOGRAPHY
1. World Bank 2008
2. Reserve Bank of India 2008
3. www.cia.gov
4. National Sample Survey Organization (NSSO), Household Consumer
Expenditure in India (2006)
5. Census 2006
6. Access to and Usage of Financial Services, World Bank 2008
7. RFAS, 2008, World Bank & NCAER
8. Reserve Bank of India, www.rbi.org.in
9. Access to Financial Services by Stijin Claessens, World Bank 2005
10. Rutherford Stuart, “The Poor and their Money,” January 2000
11. www.microsave-africa.com
12. RFAS 2008, World Bank

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13. Bharat Nirman is a four year business plan of the Government of

India to
improve rural infrastructure
14. National Sample Survey Organization (NSSO) 2007
.

ANNEXURE

Table – 1 : Bank Loan outstanding against SHGs – Agency-wise Position

(Amount
Rs. crore)
Agency During Total Bank Loan outstanding Per Out of Total :
the against SHGbank Bank
year SHGs as on 31 March 2008 loan loan outstanding
Outstanding against SHGs
(Rupees) under
SGSY

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No. of % Amount % No. of Amount

SHGs Shar Shar SHGs
e e
Commercial 2007-
Banks 08 2378847 65.6 11475.47 67.5 48,240 638283 3225.92
(Public & 2008-
Private 09 2831374 67.1 16149.43 69.6 57,037 645145 3961.53
Sector) %
growth 19.0 40.7 18.2 1.1 22.8
Regional 2007-
Rural 08 875716 24.2 4421.04 26.0 50,485 223191 1332.33
Banks 2008-
09 977834 23.1 5224.42 23.0 53,428 258890 1508.10
%
growth 11.7 18.2 5.8 16.0 13.2
Cooperative 2007-
Banks 08 371378 10.2 1103.39 6.5 29,711 55504 258.62
2008-
09 415130 9.8 1306.00 5.8 31,460 72852 392.09
%
growth 11.8 18.4 5.9 31.3 51.6
TOTAL 2007-08 3625941 100.0 16999.90 100.0 46,884 916978 4816.87
2008-
09 4224338 100.0 22679.85 100.0 53,689 976887 5861.72
%
growth 16.5 33.4 14.5 6.5 21.7

Table – 2 : Agency-wise NPAs of Bank loans to SHGs

(Amount Rs.
crore)
Agency Total no. of NPAs as on 31 March 2009
Banks
reported data Outstanding Amount of % of NPAs to
on NPAs Loans NPAs Outstanding
against bank
SHGs** loans
Commercial 26 15086.65 363.27 2.4
Banks

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(Public Sector )

Commercial 12 1376.93 23.83 1.7

Banks
(Private Sector)
Regional Rural 72 4203.46 177.79 4.2
Banks
(RRBs)
Cooperative 182 894.00 60.97 6.8
Banks
TOTAL 292 21561.04 625.86 2.9

Table – 3 : Recovery Performance – Agency-wise (All SHGs)

Agency No. of No. of banks based on percentage distribution of

Banks recovery performance of bank
reported loans to SHGs as on 31 March 2009
recovery =/> 95% 80-94% 50-79% < 50%
data
Commercial 25 6 12 7 0
Banks
(Public Sector)
Commercial 7 5 1 0 1
Banks
(Private
Sector)
Regional Rural 65 12 31 15 7
Banks
Cooperative 170 56 58 37 19
Banks
TOTAL 267 79 102 59 27
Percentage of Banks 29.6 38.2 22.1 10.1

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