LOVELY PROFESSIONAL UNIVERSITY DEPARTMENT OF MANAGEMENT

PENETRATION OF COMMERCIAL BANKS IN RURAL AREAS - A COMPARATIVE STUDY

SUBMITTED TO LOVELY PROFESSIONAL UNIVERSITY IN THE PARTIAL FULFILLMENT OF THE REQUIREMENT OF AWARD OF DEGREE OF MASTER OF BUSINESS ADMINISTRATION SUBMITTED BY: NITISH REDDY (11202156) GAURAV SINGH (11201140) RUPINDERJEET KAUR (11200909) ABDULLA FANAZ (11203073) UNDER THE SUPERVISION OF: ASST. PROF. DEEPIKA CHAUHAN
DEPARTMENT OF MANAGEMENT LOVELY PROFESSIONAL UNIVERSITY JALANDHAR-NEW DELHI G.T ROAD PHAGWARA PUNJAB
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TABLE OF CONTENTS
S.No. 1.)
2.)

Topic Introduction
Review of Literature

Page no. 4-10

11-15

3.)

Research Methodology

16-18

4.)

References

19-20

5.)

Annexure

21-23

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INTRODUCTION

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Introduction
In India, more than half of the population is based in rural areas. Even though Indian banks are penetrating the rural areas light on the rural customers' needs, but still, they have not attain the set target. In this light, there was a need to assess the performance of the banks functioning mostly in rural areas and compare with those that are not working, or are present on a very low scale in rural areas. The present helps to understand the performance of the Scheduled Commercial Banks that have more branches and fewer branches in rural areas. The paper also highlights the main concern of rural area and suggests measures to penetrate the rural sector which will help the Indian economy to grow as a whole. Indian banking plays a vital role in the development of the nation and its people. Banking has helped in expanding the vital sectors of the economy and guiding in a new dawn of development on the Indian horizon. The sector has converted the hopes and desire of millions of people into reality. But it wasnt an easy journey, it has had to overcome miles and miles of difficult terrain, bear the indignities of foreign rule and the pangs of partition. Today, Indian banks can compete with current banks of the world. Banking plays a crucial role in the growth and development of developing economies like India. Banks lubricate the monetary and financial system and ensure smooth operations, with the introduction of globalization and liberalization of the economy. The financial sector especially, the commercial banks, not only in urban areas but also in rural areas were the first to face the winds of change. However, these changes were occurred more in urban areas, than rural areas. The present paper throws light on the performance of the scheduled commercial banks, those that have more branches and those that have fewer branches in rural areas. The banking system is the back bone of a nations economy. It furnishes the necessary funds for the nations growth and development. Banks play a pivotal role not just accepting deposits and deploying large amounts of public funds, but also leveraging such funds through credit creation. The Indian banking system has played a vital role in the socio-economic advancement of the country. The sector is expected to continue to be sensitive to the growth and development needs of all segments of the society. The banking system in India is different from that of other Asian nations because of the countrys unique social, geographic, and economics characteristics. India has a large land size and population.

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In the Indian Banking System, Cooperative banks exist side by side with commercial banks and play a commendable role in providing need-based finance, especially for agricultural and agriculture-based operations including hatchery, farming, milk, cattle, personal finance etc. along with some small industries and self-employment driven activities. Generally, co-operative banks are governed by the respective co-operative acts of state governments. But, since banks began to be regulated by the RBI after 1st March 1966, these banks are also regulated by the RBI after amendment to the Banking Regulation Act 1949. The Reserve Bank is responsible for licensing of banks and branches, and it also regulates credit limits to state co-operative banks on behalf of primary co-operative banks for financing SSI units. The massive and speedy expansion and diversification of banking has not been without its strains. The banking industry is entering a new phase in which it will be facing increasing competition from non-banks not only in the domestic market but in the international markets also. The operational structure of banking in India is expected to undergo a profound change during the next decade. With the emergence of new private banks, the private bank sector has become enriched and diversified with focus spread to the wholesale as well as retail banking. The existing banks have wide branch network and geographic spread, whereas the new private banks have the clout of massive capital, lean personnel component, the expertise in developing sophisticated financial products and use of state-of-the-art technology. Gradual deregulation that is being ushered in while stimulating the competition would also facilitate forging mutually beneficial relationships, which would ultimately enhance the quality and content of banking. In the final phase, the banking system in India will give a good account of itself only with the combined efforts of cooperative banks, regional rural banks and development banking institutions which are expected to provide an adequate number of effective retail outlets to meet the emerging socio-economic challenges during the next two decades. The electronic age has also affected the banking system, leading to very fast electronic fund transfer. However, the development of electronic banking has also led to new areas of risk such as data security and integrity requiring new techniques of risk management. Cooperative (mutual) banks are an important part of many financial systems. In many of the countries, they are among the largest financial institutions when considered as a group. Moreover, the share of cooperative banks has been increasing in recent years; in the sample of banks in advanced economies and emerging

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markets studied in this paper, the market share of cooperative banks in terms of total banking sector assets increased from about 9 percent in mid- 1990s to about 14 percent in 2004. Structure of banking sector in India:

Scheduled Banks - Those banks which have been included in the Second Schedule of Reserve Bank of India (RBI) Act, 1934 Criteria for Scheduled banks 1.) Scheduled banks are those banks whose minimum paid up capital and reserve amount to 25lakh. 2.) These banks have to submit details of their activities to the Reserve bank of India every week. 3.) These banks are listed on the second schedule of the RBI act,1934

1. Commercial banks - The main function of these types of banks is to provide financial services to the entrepreneurs and businesses. It gives financial service to the businessmen
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like with banks accounts, debit cards, short term deposits, etc. with the money deposited by customers in such banks. The commercial banks provide money to these businessmen in the form of credit cards secured loans, unsecured loans, mortgage loans and overdrafts. It got the tag of a nationalized bank in the year 1969 and hence the various policies regarding the rates of interest, loans, etc are regulated by the RBI. i.)Public Sector banks - these kinds of banks are operated by the Government. The shares of such are listed on stock exchanges. List of Public Sector Banks in India are - State Bank of India and its associates , Allahabad Bank , Andhra Bank , Bank of Baroda , Bank of India , Bank of Maharashtra , Canara Bank , Central Bank of India , Dena Bank , IDBI Bank , Indian Bank , Indian Overseas Bank , Oriental Bank of Commerce , Punjab and Sind Bank , Punjab National Bank , Syndicate Bank , UCO Bank , Union Bank of India , United Bank of India , Vijaya Bank , ii.) Private Sector Banks - These banks are owned and operated by the private institutes and are controlled by the market forces. The sizeable share of the private sector banks is held by private players and not the government. List of Private sector banks in India - Capital Local Area Bank Ltd., AXIS bank Ltd. , City Union Bank Ltd. , Development credit bank Ltd. , Coastal Local Area Bank Ltd. , Dhanlaxmi Bank Ltd , ICICI Bank Ltd. , ING Vysya Bank Ltd. , IndusInd Bank Ltd. , Karnataka Bank Ltd. , Krishna Bhima Samruddhi Local , Kotak Mahindra Bank Ltd. , The Catholic Syrian Bank Ltd , SBI Commercial and International Bank Ltd., Tamil Nadu Mercantile Bank , The Federal Bank Ltd. , Jammu & Kashmir Bank , The HDFC Bank Ltd. Lakshmi Vilas Bank Ltd. , Karur Vysya Bank Ltd , The Nainital Bank Ltd. , The South Indian Bank Ltd. , The Ratnakar Bank Ltd. , Yes Bank Ltd. iii.) Foreign Banks - Foreign banks are those banks that do their operations and services at a foreign country List of foreign banks in India - AB Bank Ltd. , Abu Dhabi Commercial Bank , American Express Banking Corporation , , Bank of Bahrain and Kuwait , Barclays Bank PLC , BNP Paribas ,

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Credit Agricole Corporate and Investment Bank , Deutsche Bank AG , Mashreq Bank , United Overseas Bank Ltd.. iv.) Regional Rural Banks - The banking organizations being operated in different states of India. They have been created to serve the rural areas with banking and financial services. However, RRB's may have branches set up for urban operations and there area of operation may include urban areas too. Some of the regional rural banks - Allahabad UP Gramin Bank , Andhra Pradesh Grameena Vikas Bank , Andhra Pragathi Grameena Bank , Arunachal Pradesh Rural Bank , Aryavart Gramin Bank , Assam Gramin Vikas Bank , Baitarani Gramya Bank , Ballia Etawah Gramin Bank 2.) Cooperative bank - is retail and commercial banking organized on a cooperative basis. Cooperative banking institutions take deposits and lend money in most parts of the world. i.) Urban Cooperative banks Located in urban and semi-urban areas Ahmedabad Mercantile Cooperative bank ltd., Kalupur Commercial cooperative bank Ltd. , Nutan Nagarik Sahakari Bank Ltd. , Surat Peoples cooperative Bank ltd. , Andhra Pradesh Mahesh Cooperative urban bank Ltd. , Bharati Sahakari bank Ltd. , Goa Urban Cooperative Bank Ltd. ii.)State Cooperative banks - The state co-operative bank is a federation of central co-operative bank and acts as a watchdog of the co-operative banking structure in the state. The funds are obtained from share capital, loans, overdrafts and deposits, from the Reserve Bank of India. The state co-operative banks lend money to central co-operative banks and primary societies and not directly to farmers. Some of the state co-operative banks are - Andhra Pradesh State cooperative bank Ltd. , The Delhi State Cooperative bank ltd. , The Himachal Pradesh State Cooperative bank ltd. , The Mizoram Cooperative Apex Bank Ltd. , The Punjab State Cooperative Bank Ltd, Rajasthan State Cooperative Bank Ltd.

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Penetration of banks
To improve the living conditions of specific groups of rural people their policy-makers should come up with development programmes. Rural people include marginal farmers, landless agricultural labourers and socially and economically backward classes and castes. Credit is one of the most important aspects to make rural development strategy and programmes successful. Here lies the importance of banks. Banking services in rural areas help to ushering in economic revolution that changed the profile of the village and the life of its residents. Banks should start more branches or diversify their operations into rural India. In the current scenario, declining growth of banks in urban area and the huge gap between demand and supply in rural India makes rural area attractive for banking Industry. The major problems faced in rural India with respect to supply of credit are

1) Supply of total formal credit to rural people has been inadequate 2) Rural credit markets in India themselves have been very imperfect and fragmented. 3) The distribution of the formal sector credit has been unequal, with respect to class and region, gender and class in the countryside 4) The major source of credit to rural area particularly has been from the informal sector. Informal sector loans are provided at very high rates of interest

Keeping track of the problems in the rural areas, banks now started concentrating on the rural area. The RBIs monetary policy statement for 2012-13 has said that penetration of banks in rural areas has increased. It said that banks are now providing banking services in rural areas through 138,502 outlets. This includes 24,085 rural branches, 111,948 business correspondent outlets, and 2,469 outlets through other modes. In early March 2010, banks had only 21,475 brick and mortar branches in rural areas. Banks now are providing many services to rural area including atm facility.There is 12.53% increase in the bank branches in rural areas from 2010. As per the new guidelines of RBI, a bank should have a minimum 25% branches in non urban areas. Indian largest banks like State bank of India, Punjab National Bank, HDFC, ICICI, OBC, etc are focusing to target the rural market. Bank like HDFC, which is second largest private bank, is looking forward for aggressive rural penetration for Punjab at a time when several new banks are
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to enter the banking industry. HDFC is targeting 84% braches in rural and semi urban areas in Punjab by the end of 2013. Rural market HDFC has focussed on format of two-three member branches to keep low operating costs. The bank has introduced Grameen Banking Officer (GBO) initiative in Punjab to reach out to the door step of rural customers.Under this program, an executive of the bank visits targeted villages 4-8 times in a month to cater to financial needs. A GBO carries a mobile swipe device that acts as an ATM. "Customers have welcomed the GBO initiative and already 3.5 transactions per village per day are being achieved Priority Sector Lending by banks (Amount in Rs. billion) As on the Last Reporting Public Sector Private Sector Friday of March 2011 Banks 10,215 (41.0) 2012 11,299 (37.4) Banks 2,491 (46.7) 2,864 (39.4)

Foreign Banks

667 (39.7) 805 (40.8)

Figures in parentheses are percentages to ANBC or credit equivalent of off balance sheet exposure (OBE), whichever is higher, in the respective groups. Source: RBI Annual Report 2012

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REVIEW OF LITERATURE

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Review of literature
Anukrati Sharma et.al(2013) studied the trends of the selected private, public and foreign banks having more and less, number of branches in rural areas and came to a conclusion that banking in India is fairly mature in terms of product range, reach, supply in rural India. But still, there are more requirements to develop the rural areas. His study concludes in light of the performance of some selected banks having the lowest and the highest number of branches in rural areas. Rai Alok Kumar et.al(2012) in his paper aims to compare customer's expectations and perceptions of service quality, performance and overall service quality of rural bank branches in Varanasi. It then highlights performance of rural banks to see to what extent they differ from expected quality and also identify the dimension of service quality to which banks should give greater emphasis to make customers more satisfied.The paper attempts to bring forth service quality gaps in the rural bank branches to facilitate understanding of disparity in service expectations and performance of rural banks.

De Young et.al(2012) studied the data of 18000 small business loans made by small banks in rural and urban markets and found that the loans made by community banks in the rural areas have a lower default rate than those made by the urban banks. The authors attribute the performance advantage of community bank loans in rural markets to the ruralness of the borrower-lender relationshipthat is, where information, institutions, and culture are most conducive to relationship. The performance advantage diminishes for loans made by a bank in one rural market to a borrower in a different rural market, as well as with increasing distance between borrowers and lenders Pascaline Dupas (2012)in his paper combined expire- mental and survey evidence from Western Kenya to document some of the supply and demand factors behind such low levels of financial inclusion. Our experiment had two parts. He waived the fixed cost of opening a basic savings account at a local bank for a random subset of individuals who were initially unbanked. While 63% of people opened an account, only 18% actively used it. Survey evidence suggests that the main reasons people did not begin saving in their bank accounts are that: (1) they do not trust the bank, (2) service is unreliable, and (3) withdrawal fees are prohibitively expensive. Analysis
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generates several important prescriptions for effectively expanding financial services to the poor. First, trust is an important reason that people do not use current banking services. Providing stronger consumer protection through tighter regulation and deposit insurance could be very important. Second, many people are uninformed about banking options

Dhananjay Bapat (2010) : In his paper, assessed the level of banking penetration in a sample village and found the relationship between bank accounts and related factors, such as,

occupation, income and asset-holding status. The findings indicate that 75.2 per cent of the respondents have bank accounts and 26.7 per cent of the respondents avail credit facilities. Twothirds of the respondents have inclination to avail credit facilities for dairy and for other business activities. He suggested that existing gap in the credit facilities offers manifold opportunities to bankers for providing various credit facilities. The reasons for the low credit intakes by the rural people can stem from two major factors- the supply side and the demand side. Pankaj Kumar et.al(2009)SHG- bank linkage mode as a indigenous model of micro-credit evolved in India and widely acclaimed as a success model. He suggested SHG-Bank linkage programme as a promising approach to reach the poor. In his study, he concluded that banks

have the major drivers of the SHG movement so far in the country. The study shows that there is a positive correlation between SHG spread and credit- deposit ratio of the Scheduled Commercial Banks. As per the study, he concluded that Scheduled commercial banks in India have played a pivotal role in the development and transformation of rural and agrarian economy. The Spread and depth of banking is much higher in the southern, western and northern regions as compared with their north-eastern, central and eastern counterparts even after accounting for the diverse economic growth and development across regions. Dr. Manas Chakrabarti (2009)Financial inclusion has become one of the most critical aspects in the context of inclusive growth and sustainable development in the developing countries like India. Financial inclusion is a process of ensuring access to suitable financial products and services needed by susceptible groups such as weaker sections and low-income groups at an affordable cost in a fair and transparent manner by mainstream financial institutional players. In our country, Reserve Bank of India (RBI) has formulated the policy of financial inclusion with a view to provide banking services at an affordable cost to the disadvantaged and low-income
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groups. Since 1975, Regional Rural banks (RRBs) are being regarded as a significant Rural Financial institution for promoting the sustainable economic growth. The research topic is a study on the role of RRBs in West Bengal State of India in financial inclusion. An effort has been made in the instant project to study and find out whether RRBs in this region has made any progress towards ensuring broader banking services for the rural poor people in strengthening the Indias position in relation to financial inclusion. Berger et.al (2005) compared private and public banks and came to a conclusion that compared to private banks , public banks can communicate with the local business customers face to face through office visits and develop more longterm relationships with the customers.The cost of relationship lending is lower in rural areas than in urban areas and rural markets have high percentage of borrowers but a little information. Brickley et.al (2003) found that in both California and Texas, the probability that a given bank office is owned by a bank with total assets exceeding $1 billion increases with the population of the offices market. Further, controlling for population, the probability of large bank ownership is higher in large cities but smaller in suburban areas, smaller metropolitan areas and rural areas Robin Burgess et.al(2003) in his research paper said that lack of access to finance is often cited as a key reason why poor people remain poor. This paper uses data on the Indian rural branch expansion program to provide empirical evidence on this issue. Between 1977 and 1990, the Indian Central Bank mandated that a commercial bank can open a branch in a location with one or more bank branches only if it opens four in locations with no bank branches. This exploits this fact to identify the impact of opening a rural bank on poverty and output. Since the findings indicate that majority of the respondents show an inclination for availing credit for dairy activities, suggestions are offered for tapping potential customers. The article offers not only valuable suggestions to bankers and academicians but also to the government and policy bodies for designing and monitoring financial inclusion targets. Jaffe et.al (2001) through his research found that the demand for banking services varies across economies and is dependent on demographic,economic and geographic features of each country and confirms that suggests that as the demand for banks increases in the locations where there are more industries and more population.
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Claessens et al. (2001) through his research confirmed that on the basis of a dataset comprising 80 countries that foreign banks in emerging markets have higher interest rate margins and profitability than domestic banks(while the opposite is true for developed markets). Foreign bank entry also leads to a reduction in the profitability and margins of domestic banks, leading to the conclusion that foreign entry enhances the efficiency of the domestic banking system.

Rutherford et.al(1999) in his research paper mentioned that Rural financial markets in developing countries face several critical constraints that limit the availability of financing for both agricultural and off-farm activities. In some cases, the menu of financial services is limited to short term credit. In other cases there are significant geographical gaps where no formal financial intermediaries are present. Thus, the growth of rural markets is often impeded by a scarcity of viable financial institutions and by a limited range and lack of affordability of financial services available. Even when short-term working capital credit is available, rural communities may not have reliable access to savings services, long-term financing for equipment, payments and money transfer services, or insurance products

Vijay Mahajan et.al (1996) through his surveys concluded that credit from rural financial institutions is not easily available despite the network expansion. A large proportion of the borrowers surveyed had received loans linked to government poverty alleviation programmes, such as the Integrated Rural Development Programme (IRDP) in which the Government gives an upfront capital subsidy to the borrower. However, these loans have been given only once (sometimes twice) since these programmes were initiated in the seventies. The only exception to this is crop loans provided by Primary Agricultural Cooperatives (PACs) in the better run states. Coke et.al(1995) carried out surveys which indicated that small enterprises get their banking services from banks located in their own communities. Hence to cater to the needs of every firm, he explained the scope for development of banks in rural areas as most of the small firms belong to those areas.

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RESEARCH METHODOLOGY

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Research Methodology
1) Objectives To analyze and compare the performance of banks in terms of Net Profitability Ratio, Credit Deposit Ratio and Non Performing Assets (NPA) To study which selected public and private banks have more and less, number of branches in rural areas. To find out the preference of rural people towards public and private sector banks

2)Scope of the study This can be further used by banks to increase their market share by increasing the penetration in rural areas. By using this study banks can improve their services to be provided in the rural areas. Banks can know the untapped rural areas and target them. 3)Research design - The type of research used is descriptive research as well as exploratory research. Descriptive research is conducted to describe the business or market characteristics. It attempts to address who should be surveyed, what, at what time, from where and how this information should be obtained. Exploratory research is mainly used to explore the insight of general research problem. It is also used to find out the relevant variables to frame the theoretical model. 4)Collection of data Primary Data Sources Primary data means the data being collected or obtained from a first-hand experience. It can be through questionnaires filled by the rural people who avail banking services. Secondary Data Sources Secondary data on the other hand refers to data that has been collected by another party. a) Through internet, various official sites of banks. b) Research paper by various researchers
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c)Journals & Magazines.

5) Sample size

100 samples

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REFERENCES

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REFERENCES
Dhananjay Bapat""Perceptions of banking service" International Journal of Rural Management 6, no. 2 (2010). Robin Burgess""Do Rural Banks Matter? Evidence from the Indian Social Banking Experiment." The American Economic Review 95, no. 3 (2005). DR. Manas Chakraborthi "The role of regional rural banks in financial inclusion." Journal of research in commerce and management 2, no. 8 (2009). Claessens. "Foreign bank penetration and bank credit stability in Central and Eastern Europe." Research Series Supervision (discontinued) from Netherlands Central Bank, Directorate Supervision, 2002. Coke. "Nationwide branch banking and presence of large banks in rural areas." Federal Reserve Bank of St. Louis Review 82, no. 3 (2000). Pascaline Dupas "Challenges in Banking the Rural Poor:Evidence from Kenyas Western Province." National Bureau of Economic Research Working paper, 2012. Jaffe. "Banking Structure in India - The Way Forward." RBI occasional papers, 2013. Pankaj Kumar "Bank penetration and SHG-bank linkage programme-A critique." Reserve bank of India Occasional papers, 2009. De Young "Big Banks in Small Places: Are Community Banks being driven out of rural markets?" Federal Reserve Bank of St. Louis Review 95, no. 3 (2005). Vijay Mahajan "Financial services for the rural poorand women in india-access and sustainability." Journal of International Development 82, no. 2 (n.d.). Rutherford. "Strategic Alliances to Scale Up Financial Services in Rural Areas." World bank working paper no.76, n.d. Anukrati Sharma "Scheduled commercial banks in rural areas,A boon:Comaprative study of public,private and foreign banks." International Journal of Business Management & Research (IJBMR) 3, no. 1 (2013): 127-130.

Websites http://www.indiaonline.in/About/Utilities/Types-of-Banks.aspx www.rbi.org.in http://research.stlouisfed.org/publications/review/article/9723 http://www.princeton.edu/rpds/seminars/pdfs/burgess_rural_banks

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ANNEXURE

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QUESTIONNAIRE
Name: Age: Occupation:

1. Have you ever made any transaction through banks? a) Yes b) No

2.

Which Sector bank do you have your account? a) Public sector b) Private sector c) Foreign banks

d) Others

3. How satisfied are you with your banks overall performance? a) Excellent b) Very good c) Good d)Satisfactory

4. Have you ever faced any problem regarding the services provided by your preferred bank? a) Yes b) No c)Sometimes d) Usually

5. From the past how many years you have account with this bank? a) 1 to 2 yrs b)3-4yrs c) 4 to 6yrs c) More than 7 yrs

6. Do you use the service of alternative bank? a) Yes b) No

7. 8.

In case you want to open another bank account, which sector bank would you prefer? a) Private sector b) Public sector c)Foreign banks d)Others Would you recommend this banking sector to your friends and relatives? a) Yes b) No If an option is given to you, would you like to shift from the present bank sector? a) Yes b) No c) May be
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9.

10. Which bank you feel is the best to open a bank account? _____________________ 11. Reasons why you choose this bank? a) Security b) Trusted c) Easy availability of loans d) Offers more interest on savings account e) If any others please specify __________________________

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