1. RURAL BANKING IN INDIA 2.

Rural banking & microfinance need to be addressed for sustainable growth : RBI Deputy Governor Microfinance Focus , Nov. 11, 2009: Reserve Bank of India s Deputy Governor Ms. Shyamala Gopinath recently said the rural banking and microfinance , infrastructure finance and broader regulatory approach for financial sector are precisely the issues which need to be addressed to achieve balanced and sustainable growth over the long term for emerging market economies. Whats Making NEWS ???

3. Rural Banking - Introduction Rural banking in India started since the establishment of banking sector in India. Rural Banks mainly focussed upon the agro sector. In rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. SBI Largest bank catering to Rural banking. Haryana State Co-operative Apex bank limited, NABARD, Sindhanur Urban Souharda Co-operative bank ,United bank of India are other banks operating in rural markets. Source :Indian Finance & Investment guide

4. Rural population of about 780 million with limited access to financial services. A high proportion of rural lending is from informal sources. About 500-600 million people in India still do not have bank accounts. Rural economy (Agriculture + on-agriculture) constitutes about 50% of GDP. Banks have woken up to the potential in the rural sector . Current demand for credit in Rural India is around Rs.1,33,000 Crs. Commercial Bank branches cover only 7% of rural sector and large market is still untapped. Rural Banking - Current Status

5. Banking Network in India Source : Seminar - Rural Banking Through ICT

6. Still the level of exclusion is nearly 60 % with regional variances Banking Network in India

7. Rural Banking : A new growth opportunity

8. Major Milestones in India One Million Self Help Group Linkage achieved in 2005 Committee on Financial Inclusion set-up in 2006 1969 1975 1982 1992 2000 2007

9. Rural banking faces twin challenges Regulation with respect to banking has been designed for delivery in urban India. Distribution requires more manpower to be deployed in rural area. Rs 1-crore business in microfinance required 30 people in terms of manpower, the same volume of business in other portfolios requires only one person. Regulation Distribution

10. Microfinance Provision of thrift (Savings),Credit and other financial services and products of very small amounts to the poor for enabling them to raise their income levels and improve living.

11. Microfinance 12. Case Study 13. Largest commercial bank in India Bank with largest branch network 9247 Rural and Semi-urban branches 6473 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 are 2349 (16%).

14. The Bank is actively involved since 1973 in non-profit activity called Community Services Banking. Micro finance deeply ingrained in SBI. Social obligation services like E-Ticketing. Comprehensive financial services, viz., savings, credit, remittances, insurance and financial products through ICT.

15. Some Rural Projects Of SBI TINY ACCOUNT Opening of simple savings accounts for the villagers with zero balance. One of the villagers as SBI Mitra. Drop Box for depositing cash at the SBI Mitras shop / house. Small emergency loan. SBI Mitra assists in opening account. Piloted in Bahirgaon village in Maharashtra .

16. SBI TINY SMART CARDS A smart card with photo and fingerprint. Card serves as the account. Can be used for govt disbursals, insurance and loan disbursals. KCC This is medium limit card of Rs.20,000. Farmers can withdraw partial amount from card. 2.5% annual interest only on withdraw led amount.

17. Self Help Groups Credit linked 677 thousand SHGs as on December 2006 with total disbursement of US$660 million benefiting 9.48 million families. Market share of 43% of total SHGs financed by Commercial Banks in the country. 734 thousand SHGs are having thrift account with total thrift of US$108 million in these accounts.

18. Impact of SHGs 6400 thousand women beneficiaries. Increase in income. Increase in expenditure on education, clothes and health. Improvement in status of women and their confidence level.

19. Improved health and hygiene. Better housing. Decline in social evils. Impact of SHGs

20. Ultimate Goal of SHG Being.. 21. Goals (2009-10) Issue one crore IT enabled No Frill Accounts through alternate channels. Open 15 lac No Frill accounts through Banks branch channel. Cover 1,00,000 unbanked villages through BC (Business Correspondents) / BF (Business Facilitators) and opening new branches. Increase outreach through 25,000 Customer Service Point Outlets of BC/ BF. Set up additional processing capacity of Rural and Semi urban branches by setting up 300 Rural Credit Processing Centres. Open 870 new branches under second wave of branch expansion program. Open at least 250 rural household accounts at each Rural and Semi Urban branch every year as per GOI directives.

22. Analysis & Recommendations 23. Gap Analysis Banks 24. Hurdles in Micro Banking 25. Possible Rural Financial Inclusion

26. Roadmap for Financial Inclusion 27. What is needed from Banks ?? Focus on non farm rural business. Greater levels of financial inclusion. Reach out to the needy through micro credit/SHGs(Self Help Group). Easy and affordable financial services through the best use of technology.

28. What is needed from Banks ?? 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.

29. What is needed from 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.

30. 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. What is needed from Government ??

31. 1. Expand Reach Tie-up with India Post to penetrate the rural market Partner with NGO / MFI to act as Business Facilitators

32. 2 .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.

33. 3. Educate Customers

34. 4. 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.

35. 5.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.

36. 6. 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.

37. Thank You

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Slide 1: RURAL BANKING PRIYANKA SANGOLGI CONTENT : CONTENT Sources of Rural Finance Credit Delivery Mechanism in Rural Finance The Role of Commercial Bank Regional Rural Banks (RRBS) Service Area Approach (SAA) WHAT IS FINANCIAL EXCLUSION? : WHAT IS FINANCIAL EXCLUSION? Financial Exclusion No Savings No Insurance No assets No bank account No access to money advice No affordable credit Who are Financially Excluded : Who are Financially Excluded Poor Socially under-privileged Disabled Old as well as children Women Uneducated Ethnic Minorities Un-employed Slide 5:

Financial Inclusion - Definition The process of ensuring access to financial services and timely and adequate credit where needed by vulnerable groups such as weaker sections and low income groups at an affordable cost. - NABARD Slide 6: Financial Inclusion Credit Cards Bank A/Cs - Savings Empowerment of SHGs Insurance Lack of Assets (for Collateral) Affordable Credit Financial Advice Payments + Remittances Slide 7: 1904 - Cooperative Societies Act 1954 - Rural Credit Survey Committee 1955 - State Bank fo India created for rural penetration 1969 - 19 Commercial Bank Nationalized, All India Rural Credit Review Committee 1970 - Lead Bank Scheme - States/Districts 1975 - Regional Rural Bank - Hybrid banks 1981 - 6 more Commercial Banks nationalized 1992 - SHG - Bank Linkage Programme 2001 - Kisan Credit Card / Swarojgar Credit Card / Gramin Tatkal Card - Committee on Financial Inclusion Set up Financial Inclusion Institutionalization milestones since early 1900s Slide 8: Rural finance comprises credit, savings and insurance (or insurance substitutes) in rural areas, whether provided through formal or informal mechanisms. The word 'credit' tends to be associated with enterprise development, whereas rural finance also includes savings and insurance mechanisms used by the poor to protect and stabilize their families and livelihoods (not just their businesses). Slide 9: An understanding of rural finance helps explain the livelihood strategies and priorities of the rural poor. Rural finance is important to the poor. Slide 10: The poorest groups spend the highest proportion of their income on food typically more than 60% and sometimes as much as 90%. Under these circumstances, any drop in earnings, or any additional expenditure (health or funeral costs, for instance) has immediate consequences for family welfare unless savings or loans can be accessed. Slide 11: Financial transactions are therefore an integral part of the livelihood system of the poor. Rural finance consists of informal and formal sectors. Examples of formal sources of credit include: banks; projects; and contract farmer schemes. Reference is often made to micro-credit. Slide 12: Micro underlines the small loan size normally associated with the borrowing requirements of poor rural populations, and micro-credit schemes use specially developed pro-poor lending methodologies. Rural populations, however, are much more dependent on informal sources of finance (including loans from family and friends, the local moneylender, and rotating or accumulating savings and credit associations). Slide 13: Rural Finance is a set of financial services that are not limited to credit only. Financial services in rural finance include: loans, savings, investment, guarantee funds, remittance services, inventory credit, trader finance and insurance. SOURCES OF RURAL FINANCE : SOURCES OF RURAL FINANCE Depending upon the requirement and purpose, the funds needed by the Indian farmers can be categorized into three types: Short term loans - 12 to 15 months Medium term loan 3 to 5 years Long term loans 15 to 20 years Slide 15: SHOT TERM LOANS are issued to farmers for the purpose of cultivation or domestic expenses such buying seeds, manure and fodder for cattle, etc. MEDIUM TERM LOANS are given to farmers to purchase cattle, agricultural implement and to make improvements on land. Slide 16: LONG TERM LOANS are given to farmers to purchase land, make improvements on land, pay-off old debts and purchase useful machinery for long-term usage. These loans are for comparatively long periods since the farmers can repay them gradually over a number of years.

Slide 17: The two credit sources available to the farmers are institutional and private. Institutional sources consist of the co-operatives and commercial banks including Regional Rural Banks (RRBS). Non-Institutional or private sources include money lenders, traders, commission agents and landlords. Slide 18: Non-institutional sources or private sources of farm credit refer to credit supplied by moneylender, landlords and traders. Money lending is often combined with farming by the village money lenders as they lend to farmers for both the productive and non-productive purposes charging high rate of interest. Slide 19: They enter larger than actually borrowed sums through false pretences by obtaining promissory notes and give no receipts for repayments and often deny such repayments. They commit many other rogueries and have been responsible for many of the ills of Indian agriculture. Slide 20: Their main interest has been to exploit the farmers and grab their lands. Institutional credit has been introduced to stop such activities of the money lenders CREDIT DELIVERY MECHANISM IN RURAL FINANCE: MULTI-AGENCY APPROACH : CREDIT DELIVERY MECHANISM IN RURAL FINANCE: MULTI-AGENCY APPROACH In all agricultural development programs agricultural credit is one of the most crucial inputs. Private money lenders are the major source for agricultural finance, which is inadequate and highly expensive and exploitative. Since Independence, a multi-agency approach consisting of co-operatives, commercial banks and Regional Rural Banks (RRBS) has been adopted to provide timely, adequate and relatively cheap credit to farmers; this is known as institutional credit. Slide 22: The major objective of the credit policy of the Government of India is to provide increasingly institutional credit to small and marginal farmers to enable them to adopt modern technology and improved agricultural practices and thus increase agricultural production and productivity. Slide 23: INSTITUTIONAL SOURCES OF FINANCE At present three agencies supply institutional finance to farmers. They are Co-operatives, Commercial banks, and RRBs Slide 24: Bank network for rural credit Reserve Bank of India Government of India NABARD Public Sector Banks (27) RRBs (196) June 2002 Private Banks (31) Rural Semi-urban Urban Metro Total 19,275 10,903 8,737 7,203 46,118 12,060 2,037 359 17 14,473 1,138 1,761 1,322 1,155 5,376 Foreign Banks (41) 0 2 20 180 202 + the cooperative banks Slide 26: The Primary Agricultural Credit Societies (PACSs) provide mainly short-term loans, and Land Development Banks (LDBs)- these are now called Co-operative Agricultural and Rural Development Banks (CARDBs)- provide long term and medium term loans to the agricultural sector. Slide 27: Agricultural credit to farmers and refinancing to above-mentioned banks is provided by the National Bank for Agricultural and Rural Development (NABARD), which is the apex institution for agricultural credit at the national level. RBI as the central bank of the country plays a crucial role by giving over-all direction to rural credit and financial support to NABARD for its operations. Slide 28: SUPERIORITY OF INSTITUTIONAL FINANCE Weakness and inadequacy of private agencies to supply credit to farmers aroused the need of institutional credit. Private finance, for example, is defective because: It is based on profit motive and, therefore, it is always unfair; It is very expensive, moneylenders charge very high rates of interest, and it is not related to productivity of land; and It does not flow into the most desirable channels and is not available to the most needy persons. Slide 29:

The motive of the institutional credit is always maximize the farmers income and raise his productivity. The rate of interest is relatively low compared to moneylenders and can be different for different purposes. Institutions also make a clear distinction between short term credit and long term requirements and give loans accordingly. Slide 30: EVOLUTION OF MULTI-AGENCY APPROACH IN INDIA Much was expected of the co-operative credit movement. As the movement was led by and was for farmers, it was expected to cover all the needs of the farmers. The Co-operatives were expected to protect the farmers from the clutches of the moneylender. A survey for the year 1950-51 shows that the co-operative met only 3.3% of the total requirement of the farmers. Slide 31: Then, State Bank of India (SBI) was set-up in 1955 after taking over the Imperial Bank of India to show special concern for agricultural credit. The All-India Rural Credit Review Committee (1969) recommended that the adoption of Multi-Agency Approach was necessary to the rural sector, as banks and societies alone could not meet the needs of farmers. SBIs e-Gram Project in Gujarat : SBIs e-Gram Project in Gujarat To provide all banking products / services Customers not to visit branches personally Target more than 5,000 rural ICT kiosks Villagers to start a bank a/c with Rs. 50 Zero balance accounts also permitted MOU with Indian Postal Dept to act as a facilitator for 50 Post Offices at Surendra nagar, Anand and Bharuch districts Also signed with Gujarat Agro Ind Corp to market banks products in 700 out of its 1200 outlets Slide 33: So commercial banks have to play an important role in the rural sector also. This is one of the main reason for the Nationalization of the 14 top commercial banks in 1969. Later in 1976, the commercial banks were asked to set-up RRBs to helps the small and marginal farmers and the rural artisans. Slide 34: Thus the multi-agency approach to institutional credit to agriculture- co-operative societies and cooperative banks, commercial banks and RRBs- evolved over a number of years. Slide 35: PROBLEMS OF MULTI-AGENCY APPROACH The problem were: There was multiple financing, over-financing in some areas and under financing due to lack of co-ordination between the agencies in the same areas. Despite the adoption of lead bank scheme and district credit plans, the different agencies often failed to formulate and develop meaningful agricultural programs in given blocks and districts. Slide 36: Despite guidelines issued by RBI, different agencies adopted different procedures and policies in the matter of providing loans and their recovery. When different agencies had lent loans to the same persons there were some practical problems in the recovery of loans. Slide 37: ROLE OF RBI IN RURAL CREDIT Since it was set up in 1934, RBI has been taking keen interest in expanding credit to the rural sector. After NABARD was set up as the apex bank for agriculture and rural development, RBI has been taking a series of steps for providing timely and adequate credit through NABARD. Slide 38: Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture. Slide 39: 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).RBI has also taken steps in recent years to strengthen institutional mechanisms such as recapitalization of Regional Rural Banks (RRBs) and setting up of local area banks (LABs). Slide 40: MICRO-FINANCE Micro-finance is a novel approach to "banking with poor as they attempt to combine lower transaction costs and high degree of repayments. The major thrust of these micro-finance initiatives is through the setting up of Self Help Groups (SHGs), Non-Governmental organizations (NGOs), Credit Unions etc.

Post Offices (for savings, the figure is small) : Post Offices (for savings, the figure is small) Indian MFIs in the Top 50 List in the World 2007 : Indian MFIs in the Top 50 List in the World 2007 Slide 43: KISAN(FARMERS') CREDIT CARD Another notable development in recent years is the introduction of Kisan Credit Cards (KCC) in 1998-99.The purpose of the Kisan Credit Cards (KCC) scheme is to facilities short term credit to farmers. The scheme has gained popularity and its implementation has been taken up by 27 commercial banks, 187 RRBs and 334 Central cooperative banks. Slide 44: AGRICULTURAL INSURANCE As Agricultural is highly susceptible to risks such as drought, flood, pests etc. It is necessary to protect the farmers from natural calamities and ensure their credit eligibility from the next season. Towards this purpose, the Government of India introduced a comprehensive crop insurance scheme through the country in 1985 covering major cereal crops, oilseeds and pulses. Among commercial crops, seven crops viz., sugarcane potato, cotton, ginger, onion, turmeric and chilies are presently covered. Slide 45: for development of fruit and garden crops, for leveling and development of land, for purchase of ploughs, animals, etc. Commercial banks also extend loans for allied activities viz., for dairying, poultry, piggery, bee keeping, fisheries and others. These loans come to 15 to 16%. Slide 46: Outstanding Credit to Priority Sector from Banking Sector (Rs in Crore) Slide 47: COMMERCIAL BANKS AND SMALL FARMERS The commercial banks identifying the small farmers through Small Farmers Development Agencies (SFDA) set up in various districts and group them into various categories for credit support so as to enable them to become bible cultivators. As regard small cultivators near urban areas and irrigation facilities, commercial banks can help them to go in for vegetable cultivation or combine it with small poultry farming and maintaining of one or two milk cattle. Slide 48: IRDP AND COMMERCIAL BANKS Since October 1980, the Integrated Rural Development Programme (IRDP) has been extended to all the blocks in the country and the commercial banks have been asked by the government of India to finance IRDP. Slide 49: The lead banks have to prepare banking plans and allocate the responsibility of financing the identified beneficiaries among the participating banks. Commercial banks have been asked to finance all economically backward people identified by government agencies. Slide 50: COMMERCIAL BANKS AND RURAL CREDIT The commercial banks at present provide short term crop loans account for nearly 45 to 47% of the total loans given and disbursed by the commercial banks. Term loans for varying periods are given for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and tube well, Slide 51: DIRECT FINANCING BY COMMERCIAL BANKS Commercial banks were expected to vigorously support the farmers in general and small cultivators in particular. For obvious reasons the nationalized banks concentrated their attention on cultivators and other special category farmers such as those engaged in raising high-yielding verities of food grain. Slide 52: Term loans for varying periods are given for purchasing pump-sets, tractors and other agricultural machinery, for construction of wells and tube wells, for development of fruit and garden crops, for leveling and development of land, for the purchase of ploughs, animals etc. Slide 53:

INDIRECT FINANCING BY COMMERCIAL BANKS Even though the scope for direct financing by commercial banks would be limited for some tears to come, there is a considerable scope for indirect financing by them: Commercial banks finance co-operative societies to enable them to extend their production credit to the farmers. More especially, they provide finance increasingly to co-operatives engaged in the marketing and processing of agricultural produce or in activities ancillary to agriculture such as dairy, poultry, etc. Slide 54: Commercial banks are undertaking indirect provision of production credit through agencies engaged in the supply of inputs for the marketing or processing of agricultural produce. They extend credit to manufacturing or distribution firms and agencies and co-operatives engaged in the supply of pump-sets and other agricultural machinery on a hire-purchase basis or otherwise. Slide 55: They finance the operations of the Food Corporation of India, the state governments and others in the procurement, storage, and distribution of food grains. Commercial banks increasingly subscribing to the debentures of the central and development banks and also extend advances to the latter. This enables land development banks to expand their medium and long term advances to farmers for the purpose of land improvement and land development. Slide 56: PROBLEMS OF COMMERCIAL BANKS IN RURAL CREDIT In the field of financing agriculture, the problems concern quantitative and coverage aspects. The RRBs have been under severe financial strain on account of higher transaction costs involved in handling of a large number of small-sized loan accounts; and somewhat lower interest income as a result of confessional rates of interest on small-sized loans. REGIONAL RURAL BANKS : REGIONAL RURAL BANKS 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 Slide 58: WEAKNESSES OF RRBS NARSIMHAM COMMITTEE (1991) ON RRBS SERVICE AREA APPROACH(SAA) : SERVICE AREA APPROACH(SAA) Public sector banks adopted a new strategy for lending on the basis of a study on the impact of bank credit in the rural sector viz., Service Area Approach under which each semi-urban and rural branch of commercial banks was assigned a specific area comprising a cluster of villages within which it would operate, adopting a planned approach. It was to avoid duplication of efforts and scattered lending over wider areas. Slide 60: The implementation was: Identification of service area, Survey of the service area for assessing the potential for lending, Preparation of credit plans on annual basis, Coordination on a continuing basis, and A continuous system of monitoring the implementation plans. Slide 61: Some of the advantages claimed of SAA are as follows; Attention to the development of the service area for each branch Avoidance of duplication of efforts Organized and planned lending Easier and effective monitoring of the end-use of credit Assessment of its impact on production levels. Slide 62: The problems during implementation of the SAA were with respect to: Allocation of villages Organizational issues Summary : Summary Sources of Rural Finance Credit Delivery Mechanism in Rural Finance The Role of Commercial Bank Regional Rural Banks (RRBS) Service Area Approach (SAA) Slide 64: Article in paper about SMEs Slide 65: http://www.ventureinfotek.com/PDF/Financial%20Chronicle_Dec%2005_2008_Mumbai_Pg%2010.jpg

Slide 66: THANK YOU