Sbi Monthly Review Sep12 PDF

September 2012
Challenges of Inclusive Banking

Sustainable Excellence Through Engaged
Customers Employees and Right Use of Technology
The Pursuit of Complete Financial
Inclusion - The KGFS Model in India
Banks' exclusion from the commodity derivatives
market in India – A case of missed opportunities
INDIAN
TO EVERY
THE BANKER
INDIAN
TO EVERY
THE BANKER
Highlights of Previous Issues

June 2012
Assigning Importance to Creation of Dr. Ashok Sahu
Green Jobs in Environmental Impact Principal Adviser
Assessment in India Planning Commission, Government of India
IFRS Demystified Shri Ram Iyer
Chartered Accountant
Partner, Sudit K Parekh & Co.
Russia's Economic Growth and Dr. R.G.Gidadhubli
Challenges: With Special Reference Professor and Former Director
to Finance and Banking Center for Central Eurasian Studies
University of Mumbai
Winning the War for Talent Smt Vrushali Pitre
in a Competitive Marketplace State Bank of India
Marketing Executive, Dharwad
Legal Decisions on Banking Shri M.Karuthaiah Thalaivar
Manager (Law), Law Section, State Bank of India
Administrative Office, Madurai.
July 2012
What's behind India's Investment Ms. Laura Papi
Weakness? Assistant Director
(Asia and Pacific), International Monetary Fund
Profitable Financial Inclusion Model Shri Umesh Chandra Sahu

Manager (Systems), IT Services Department
Chandigarh LHO
Empowerment of Staff: Ms. Paromita Ghosh

A Roadmap Assistant (Banking) North Eastern Circle
Legal Decisions on Banking Smt. K.K.Sethulakshmi

Dy. Manager (Law), Law Section, SBI
Administrative office, Ernakulam
August 2012
State Bank Staff College Golden Dr. Duvvuri Subbarao
Jubilee Celebrations Governor, Reserve Bank of India
India's Financial Sector: Case for a Shri Pratip Chaudhuri

Level Playing Field Chairman, State Bank of India
Society, Economic Policies Shri YV Reddy
and the Financial Sector Former Governor, Reserve Bank of India, (2003-08)
Legal Decisions on Banking Smt Sudha Radhakrishnan
Manager (Law), State Bank of India, Corporate Centre, Mumbai
INDIAN
TO EVERY
THE BANKER
State Bank of India Monthly Review September 2012

Challenges of Inclusive Banking Shri A. Krishna Kumar 03
MD & GE (NB), State Bank of India
Sustainable Excellence Through Shri Hemant Contractor 10

Engaged Customers, Employees MD & GE (IB), State Bank of India
And Right Use Of Technology
The Pursuit of Complete Financial Ms. Bindu Ananth 15

Inclusion - The KGFS President at IFMR Trust, Kanagam Village
Model in India Taramani, Chennai
Mr. Gregory Chen
Regional Representative for South Asia, CGAP
Mr. Stephen Rasmussen
Regional Manager Asia, CGAP
Banks' exclusion from the commodity Shri Debojyoti Dey 23
derivatives market in India Economist
– A case of missed opportunities Multi Commodity Exchange of India, Mumbai
Profitable Financial Inclusion Shri Pulak Kumar Sinha 33

Models General Manager (Payment Solutions)
New Businesses Department
Corporate Centre, Mumbai
Empowerment Shri Renjith Kumar B 41
of Staff: A Roadmap Assistant, State Bank of India
Alleppey Main Branch, Alappuzha
Legal Decisions on Banking Shri M. Manoharan 48

Manager (Law), Law Department, State Bank of
India, Local Head Office, Chennai
SBI Monthly Review Editorial Committee

1. Dr.Brinda Jagirdar GM, ERD, SBI, CC, Mumbai
2. Shri S.D.Kelkar GM, Law Dept, SBI, CC, Mumbai
3. Shri Atul Kumar DGM, Vigilance Dept, SBI, CC
4. Dr.A.R.Chansarkar AGM (Economist), ERD, SBI, CC, Mumbai
5. Shri Bharat B. Sharma AGM, ERD, SBI, CC, Mumbai.
6. Shri V.S. Dikshit Chief Manager, ERD, SBI, CC, Mumbai
7. Shri Sumit Jain Dy. Manager (Economist), ERD, SBI, CC, Mumbai
8. Shri M.Ramachandran Asst.Manager (Systems), ERD, SBI, CC, Mumbai
Views expressed in the State Bank of India Monthly Review are not necessarily those of the State Bank of India or its Associates.
INDIAN
TO EVERY
THE BANKER
Monthly Review I September 2012
Shri A. Krishna Kumar

Managing Director & Group Executive
(National Banking)
State Bank of India1
It is an honour to be here in this distinguished gathering to share our

experiences in 'inclusive banking'.
State Bank of India has been at the forefront of financial inclusion efforts
mandated by the Government and Reserve Bank of India. After all, SBI
was created pursuant to All India Rural Credit Survey (Gorewala)
Committee Report which recommended creation of a strong bank to
meet the need for formal credit in rural areas. SBI Act in fact mandated
setting up of a minimum 400 branches in 5 years (between 1955 and
1960). In other words, financial inclusion and reaching out to the
customer are the very reason for creation of SBI.
Inclusive growth basically means broad based or shared growth which
does not bypass the poor. Sustained poverty reduction requires inclusive
growth that allows people to contribute to and benefit from economic
growth.
Financial inclusion, which envisages access to formal financial sector
for all segments of the society, is one of the enablers for inclusive
growth.
Why Financial Inclusion:
Financial Inclusion has great significance on an economy such as India
where a vast number of people with low incomes do not have access to
formal financial sector.
1
Speech at Bombay Chamber of Commerce, Mumbai on 4th Sept 2012
03
State Bank of India
Benefits of inclusion:
For the community as a whole, Inclusion
Uplifts financial conditions and standard of living.
Increases economic activities.
Reduces class conflicts in the society.
Overall, Financial Inclusion and levels of human development move closely
with each other. A comparison of Index of Financial Inclusion (IFI) values
with Human Development Index (HDI) shows that all countries with high
and medium IFI also have high HDI. Higher the exclusion - greater the
income disparities. Since income disparities result in social tensions,
increased financial inclusion is essential for ensuring social stability.
For banks, Inclusion results in
Increased and wider customer base for low cost deposits (due to
higher disposable incomes)
Greater business opportunities in loans and other financial products
(such as insurance, mutual funds, etc.)
A large base of small value customers provides stability to the banks (and
financial system) even during crisis period. The poor customers that we
include today will be a better off, loyal customer of the Bank tomorrow.
How does India fare in the global community in terms of Financial
Inclusion?
India ranks quite low in terms of financial inclusion. Ranking based on 2
dimensions [banking penetration (Ratio of number of accounts to total
population) and availability of banking services (Number of bank outlets
per 1,000 population)] shows India at 50th position amongst 100
countries surveyed. China (rank: 32), South Africa (rank: 43) and Brazil
(rank: 44) rank above us. In BRICS countries, only Russia (rank: 83) is
behind India. (ICRIER Working paper).
Indian approach to Financial Inclusion:
Unlike many other countries which relied on single product (like
remittance led model of Kenya, Loan led model of Chile), Indian
approach has been to provide a bouquet of products.
04
“Financial Inclusion is the process of ensuring access to appropriate

financial products and services needed by all sections of the society in
general, and vulnerable groups such as weaker sections and low
income groups in particular, at an affordable cost in a fair and
transparent manner by regulated mainstream institutional players”
- Dr. KC Chakraborty, Dy. Governor, RBI.
Minimum products to be offered are:

Savings,
Loan,
Remittances and,
Non-banking financial products like Insurance
There are multiple delivery channels - commercial banks, RRBs, Urban
Cooperative Banks, Post Offices, SHGs and MFIs.
Challenges:
Since the Banks cannot reach out to all the customers through the
traditional brick and mortar branches, they have to necessarily depend
on alliances with Business Correspondents, Micro Finance Institutions,
etc.
i) Alliances:
Business Correspondents (BCs):
The Business Correspondent (BC) channel approved in 2006 by RBI is
one of the major innovations that helped financial inclusion in the last
decade. The channel is more cost effective than the brick & mortar
branch channel branches and can be scaled up more rapidly. RBI has
been liberalizing the channel gradually and now all entities (except
NBFCs) can be engaged as BCs.
Challenges with all outsourcing models are associated with this channel
also. Some of these are,
a) Reputation risk: Since it is the intermediary who sells the services,
the banks are exposed to the risk of 'mis-selling' – either by an
uninformed BC or by a motivated BC who is pushing his 'other'
services.
05
State Bank of India
b) Violation of KYC/AML rules: BCs may violate KYC/AML rules

either due to 'business considerations' or due to lack of training.
c) Operational risk: What the banks need to appreciate is that there
should be good training for the BCs and there should not be any
slackness in oversight.
d) Viability: A crucial risk with the BC model is the poor viability of the
channel in general. Income levels are pretty low, especially in rural
areas due to low levels of transactions. There may be case for
financial support from the Government for FI efforts in rural areas.
Sharing of income by Corporate BCs with their field level
staff/agents is another area of concern.
e) The BC model works only on technology. Development of user
friendly and cost effective technology and introduction of multiple
products is essential to make the channel sustainable in the long run.
f) Expectations: The stake holders (Banks, GoI and RBI) should not
have unduly high expectations from this channel which is still in its
infancy. The mandate of covering > 74,000 villages with population
2,000+ in 2 years (2010-12) and the addition to this by addition of
villages with population >1,000 and <2,000 to be covered in one year
(2012-13) possibly has no parallel anywhere else in the world.
Perhaps, banks would need to pause and strengthen their internal
systems & procedures and controls and build oversight and control
mechanism of the outsourced agents.
MFIs:
MFIs have been able to reach the last mile more efficiently as compared
to the commercial banks and have been able to serve the unbanked/under
banked and have met their need for micro credit. There have been,
unfortunately, issues of corporate governance and ethics with regard to
conduct of business.
While MFIs will most certainly need to re-visit at their business models,
the key to the sustainability of this delivery channel depends on
development of due oversight. Acceptance of voluntary code of conduct
recently by MFIs and the Micro finance legislation on the anvil will
perhaps ensure that this channel not only survives but also gains in
strength.
06
SHGs:
The SHG project is a major success in terms of
a. reaching the small value customers
b. Lowered transaction costs; and
c. Improved recovery rates (the NPA levels are very low).
Challenges in this channel are:
a. Delay in opening of accounts/disbursal of loans
b. Non-renewal of loans; and,
c. Multiple memberships and multiple borrowings by members.
One reason for delays in opening of accounts/disbursal of loans is that
the ticket size is small (even when aggregated due to the group
borrowing). This issue can be overcome by migration of the transactions
in SHG accounts to the lower cost BC channel. SHGs will thus get to
transact at the BC counter much closer to their habitations, bank branch
gets decongested and the BC sees increased foot falls and improved
earnings – a truly win-win situation.
ii) Technology: Technology is critical for success of all delivery
platforms (branches or BCs) if the operations have to happen in a cost
effective and user friendly manner. Banks should invest substantially in
development of technology in spite of the fact that reaching the
unbanked/under banked shall be profitable only in the long term.
iii) Products and processes: Banks should develop simple (to
understand and use) products exclusively for use by the under-reached
customers who may not have the ability to use more complex products
that elite customers use. The processes, too, should be revisited to make
them simple. For example, an account opening form in vernacular
language will make it much more user friendly compared to a document
in English.
External challenges:
Infrastructure: The country is not evenly developed and many
locations suffer from lack of network connectivity, power supply,
etc.
Law & Order: Many areas are affected by Left wing extremism.
07
State Bank of India
Financial literacy: Mere availability of financial services is not of

much use unless the target beneficiaries have financial literacy/
awareness to utilize these services. Banks have set up Financial
Literacy Centers (FLCs) as part of their financial inclusion efforts.
These have to be supplemented by general education channels by
introduction of financial literacy subject in the school curriculum.
Financial inclusion/availability of banking services can happen only as
part of overall development of economy.
Conclusion:
As I said earlier, Financial Inclusion is an enabler for inclusive growth
which in turn results in sustained and rapid decline in poverty. The
increased 'disposable surplus' with the hitherto unbanked and under-
banked results leads to increased consumption (of goods produced by
factories). The broad basing of consumption also helps the industry in
meeting the down turns of the type being witnessed now. Such an
increased consumption may encourage the industry to move closer to the
consumers leading to increased employment opportunities in the rural
areas leading to further increase in disposal surplus/consumption – a
virtuous circle.
SBI's journey in Financial Inclusion:
SBI has been reaching out to the customers through the traditional Brick
& Mortar branches and alternate channels such as ATMs and Business
Correspondents.
Between March 2007 and June 2012, the reach of the bank has grown in
rural and semi urban areas as under.
Branches: 6,647 to 9,401
ATMs: 1,649 to 8,984
Outlets of Business Correspondents: 13 to 26,517
Accepting the Business Correspondent Channel as a viable, long term
business model, SBI has developed the channel after putting the requisite
infrastructure in place.
Building enablers:
A separate vertical – Outreach department responsible for financial
08
inclusion (in both urban and rural areas)

Operational manuals for Business Correspondents and Business
Facilitators prepared
Channel Management Software for tracking the performance of the
BCs and BFs developed.
All products and transactions and transactions in BC channel
technology enabled.
Incentives to branches for Financial Inclusion introduced through
Transfer Pricing Mechanism.
Intermediary Structure for managing BCs – Financial Inclusion
Centers set up
Customer charging introduced to improve viability of the channel.
Central Processing Centers set up for improving credit processing
capacity in rural areas.
All accounts are in Bank's CBS and online.
As at the end of FY 2011-12, BC channel acquired 105 lakh No Frills
Accounts with aggregate balance of Rs. 305 Crores (Average balance
per account Rs. 290 – up from Rs. 62 in 2009-10) and handled 203 lakh
transactions (up from 100 lakh transactions in 2009-10)
09
State Bank of India
Shri Hemant Contractor

Managing Director &
Group Executive
(International Banking)
2
State Bank of India
Ram Charan and Larry Bossidy in their book Execution have said that
excellence is about two things: Doing the same things over and over and
following through incessantly. Therefore, it is evident that being
“sustainable” is inherent in being “Excellent” and they complement each
other.
The Indian service industry has evolved from the brick and mortar level
to a very sophisticated service sector, which today uses world class
infrastructure and employs internationally accepted norms and practices
to best meet the customer's needs. This progression and application of
internationally benchmarked norms and practices has, however, resulted
in the dissolution of the fine line of differentiation between competitors
placed in the same market space targeting the same customer and trying
to reach out to them by means of people having similar or near similar
skill sets. So the question then becomes: “How do players gain a
competitive advantage in the market place?” Competing on the pricing
front is not always the best, or even the only answer and it is bound by a
level beyond which it becomes counter-productive, as we have seen in
the case of the Indian aviation industry.
The answer to the above question, therefore, lies in differentiation. One
of the most common ways to distinguish oneself is based on the quality of
service and the value for money one provides to the customer. In the
2
This article was first published in the FIBAC 12 Conference booklet brought out by FICCI
and IBA. The Conference was held in Mumbai from 4-6 September 2012.
10
1990's the Indian banking sector saw the advent of new generation banks
which came with world class technology and who also had no legacy
baggage to carry. Similarly, we saw intense competitive forces being
unleashed in the consumer goods space in India and customers getting,
perhaps for the first time, a taste of high quality goods, complemented
with high class post sales service. The waiting list for various consumer
goods vanished and the customer became the king in the real sense of the
term. Such new products and services whether in the banking or in the
consumer goods market space were of course available at a premium.
Initially, general response from the competitors who were entrenched in
the market was on expected lines – the Indian consumer looks for value
for money and will not pay a premium for a quality product or service,
was the general refrain. But a few years down the line they had to sit up
and take note and brace up for the competition - innovate and improvise,
engage with customer, understand his expectation and try to meet it. The
Ambassador's had to give way to the Maruti's, the Hyundai's, the Merc's,
the BMW's and the Audi's. This shows that selling price marked on a
product solely to make it competitive in the market does not always
work. The Service provider/ seller must go beyond that. Increasing use
of technology has made it possible for the marketer to analyze and
understand customer behavior which ensures that they can offer
products which have been designed after intense customer surveys and
research of end consumers tastes and preferences. This has made product
positioning easier for the producer who can now also design suitable and
focused market campaigns. Marketing does not end with initial sales and
first customer connects. Cross selling and Up selling are the new
buzzwords now in every organization. Bankers who were accustomed to
walk in customers for whom they had nothing but plain vanilla basic
banking products to offer now engage with customers to cross sell their
other products.
However, Cross Sell and Up Sell will remain mere management jargons
unless an organization provides a quality product and service in the first
place and follows it up with consistently excellent post sales service.
Mere extension of quality service also has limitations as it is prone to
lose its sheen with the competition catching on and customers getting
exposed to better service levels. Therefore, the need is to keep the
customer engaged and this can only be achieved by fully engaged
employees who are the tools for delivering excellence in sales and
service in a sustained manner.
11
State Bank of India
It is the engaged workforce that is the key to delivering what the customer
wants on a consistent basis and which keeps the customer engaged. An
engaged employee naturally supplements organizational excellence by
keeping the customer involved with the organization, thus providing a
high performance organization. To achieve sustained excellence through
engaged employees, clarity of goals and objectives of the organization
has to be ingrained in the employees and this can only happen under a
leader who can provide right values and leadership to the employees so
that they know what is expected of them and what they can expect from
the leader. Besides this, employees need to be allowed some space so that
they can apply some discretionary effort to engage with the customer. As
a matter of fact, by tracking the employee's view of product and services
quality and measuring employee commitment and willingness to apply
discretionary efforts, an organization can achieve excellence and sustain
it over a long period.
But how do we get to know if an employee is engaged with Corporate
objectives? It is a normal practice, particularly in the banking industry, to
teach a new or an existing employee about the way of doing a certain
thing. This may be done through on the job or institutional training.
“How do we do it “takes precedence over “Why do we do it or why do we
do it the way we do it”. An engaged employee is one who focuses on the
second question and not the first. HR training principles, being applied
by progressive organizations across the country, have now turned around
the old fashioned concept of simple class room training of lecturer- pupil
structure, into modern HR modules comprising case studies, group
activities and exercises on behavioral science. For any organization to
stay competitive in the market it is imperative that they keep their
employees engaged by inspiring trust and confidence in the future.
Organizations can engage with employees by recognizing and respecting
them and ensuring that they are growing and developing. Employee
engagement, when unleashed in the context of high performance work
value and practices, yields the highest return because such an engaged
employee helps the organization in keeping the customer engaged and
achieving excellence on a sustained basis.
At the State Bank of India, we faced immense challenges when we
embarked on the path to address legacy issues confronting the
organization about a decade ago. These issues touched every aspect of
the way we functioned and encompassed issues like banking systems and
procedures, use of technology, business processes employed by us to do
1
transactions and HR practices. The need of the hour was not only to
12
implement the changes but also to ensure that these changes were
accepted by employees. It was of the utmost importance to ensure that
changes, particularly with regard to IT, should not come as an overnight
shock to employees, which could have led to management disconnect
with the workforce.
The Bank, therefore, had to embark on a massive training and
sensitization program with emphasis on explaining to the employee why
the changes were required and what the Bank was doing to empower
them to face the changes. The rest is all history. Today State Bank of
India runs its entire operations on the best of the centralized technologies
and has transformed the entire system and procedures relating to
processing of customer requirements encompassing the whole set of
assets and liability products by means of Business Process Re-
engineering. Various tools have been launched on the Banks intranet that
helps employees in updating their knowledge and skill levels. Given the
scale of operation and the number of employees that we have, it was no
mean feat. Today bank is drawing dividends out of the transformation
that has been brought about and is in a position to leverage the
technology deployed to meet customers' expectations and requirements.
We are leveraging IT to create value for our customers and evolve a
business model, taking into account the profile of existing and targeted
customers and their needs vis-à-vis the range of products offered.
Product innovations and their timely deployment across various
delivery channels has become our management mantra. Beyond an
engaged employee who in turn will ensure an engaged customer we have
also emphasized on optimum use of technology.
Today the customer is more aware about the environment around him, he
has immense product knowledge, has seen and experienced superior
products and services. Above all he has a whole lot of service providers,
competing with each other, to choose from. Therefore, he wants more
choices in terms of product selection, simplified procedure, promptness
in service, transparency of charges and fees and he wants to be serviced
at a Single Stop Shop. While the implementation of Core Banking has
immensely helped banks to have a complete view of account
relationship, as mentioned by Mr. Anand Sinha, Dy Governor, RBI in
one of his addresses, “changing customer requirements coupled with
increasing use of alternate channel has made the rules, in managing
channels and the process of reaching customers a moving target.” Only
those organizations which are agile enough to innovate quickly would
have the potential of meeting this moving target. The right use of
13
State Bank of India
technology which is conscious of customer needs and does not cram too
many features into products that can potentially disengage customers as
well as employees, has to be ensured because a complex product would
be difficult to understand and use.
Today there is paradigm shift when it comes to engaging with employees
and with the customers. This has happened due to adoption of best
principles and norms and right use of technology. Adoption of the new
practices and the technology has empowered both the management and
the employees to reach out to the customers. The need is now to sustain
this engagement by being continuously innovative with the technology
and strategies when it comes to interacting with customers as well as
employees.
14
Ms. Bindu Ananth Mr. Gregory Chen Mr. Stephen

President at IFMR Trust Regional Rasmussen
Kanagam Village Representative Regional
3
Manager Asia
Taramani Chennai for South Asia, CGAP CGAP
Alakudi is a remote farming village near the southernmost tip of India in

Tamil Nadu State. It would take 30 minutes or more by foot to reach the
nearest dilapidated bank branch, though most Alakudi residents have
never bothered to make the trip. Within a short bicycle ride or walk along
dirt lanes, all 2,000 households in Alakudi can reach a Kshetriya Gramin
Financial Services (KGFS) branch. Each branch is painted in KGFS
green and orange with an open front, rows of wooden benches, a teller
window, two online computers, and three uniformed staff. But the
villagers' first contact with KGFS probably would not have happened at
the branch.
When the KGFS branch opened in Alakudi in September 2008, staff
visited every household to conduct a village and household mapping
exercise to demarcate the service area for the branch. They also invited
villagers to come to the branch to enroll. As part of enrollment, staff
completed a comprehensive know your customer (KYC) check,
including a household visit, and compiled a household financial well-
being report based on data provided by each household. This report
established a household profile, specified financial goals, and formed
the basis for KGFS staff to recommend a tailored portfolio of two to
three financial products to meet each client's goals. KGFS staff visits
each client's home every six months to update the report and give
financial advice. Since KGFS arrived in Alakudi,76 percent of all
households have enrolled; of these, 89 percent have already begun to use
3
This article was first published in 'Access to Finance Forum', May 2012,
released by CGAP. Reproduced with permission of the authors. 15
State Bank of India
some of the 15 financial products available at the branch. The approach

used in Alakudi illustrates how the KGFS model is being applied in
various parts of India. Three core operating principles differentiate the
KGFS model:
1. complete coverage of the population in a focused geographic area
2. customized client wealth management services, and
3. abroad range of products.
The KGFS approach is still fairly new, though it has moved beyond being
a small experiment. Five separate KGFS institutions are working in very
different regions of the country and serve a total of 200,000 clients. The
oldest KGFS has been in operation since June 2008, and the most recent
commenced operations in February 2012. At the end of 2011 KGFS
institutions had 110 branches and managed a loan portfolio of $10
million. Some branches of these institutions have become profitable,
though none of the five KGFS institutions has broken even yet on a
consolidated basis. Early client response to these institutions shows a
significant proportion of households, over 50 percent; enroll within the
first 18 months of a KGFS branch opening nearby.
The model's customized wealth management approach starts with
identifying household needs and goals to provide services centered on
client needs and without biases to sell one product or another. Clients
have begun to use multiple financial services centered on client needs
from KGFS institutions, especially insurance and pensions. More than
60 percent of enrolled clients across all KGFS institutions use insurance
services; 22 percent use only insurance. At the same time, credit remains
important, with slightly more than 55 percent accessing a loan product. The
ultimate aim is meaningful improvement in the financial well-being of
households, an outcome KGFS is evaluating with external research help.
This publication explores lessons from the KGFS model. The intent is
not to endorse the model, but rather to use early experience to share ideas
and observations. The first three sections explore the three core
principles of the KGFS design, explaining how each is implemented and
how together they deliver results. The fourth section summarizes the
client response so far, reviews how far the financial viability of the model
has progressed, and explores the applicability of the three core KGFS
principles to contexts beyond India. Throughout this publication data
from December 2011 are used unless otherwise noted. In some cases,
data from the oldest 14 branches (each having been in operation more
than two-and-a-half years) are used to illustrate how the model has
16
evolved in its more mature settings. That said, the patterns seen at the end
of 2011 can show only a work in progress.
4
Background on Kshetriya Gramin Financial Services :-
The KGFS model is promoted by IFMR Trust (http://www.ifmr.co.in)
whose mission is to “ensure that every individual and every enterprise
has complete access to financial services.” IFMR Trust provided the
initial capital of $10 million to launch the first three KGFS institutions5,
targeting a return on its equity of 20 percent annually. Each KGFS
institution leverages additional financing from capital markets as well as
loans from domestic commercial banks. No grant funds have gone into
any KGFS. As new investors show interest, additional KGFS institutions
will be opened in different parts of India.
In addition to the initial capital for the original KGFS institutions, IFMR
Trust invested $4 million in IFMR Rural Finance. This company owns
and licenses the KGFS brand, incubates new KGFS institutions,
develops new products, and ensures a consistent approach across all
KGFS operations. This licensor–licensee model aims to preserve the
core approach of KGFS while tapping into wider pools of capital to
accelerate replication. IFMR Rural Finance receives a license fee linked
to KGFS revenues. One KGFS institution in Tamil Nadu is a nonbank
finance company (NBFC) licensed and supervised by India's central
bank; it is not permitted to take deposits. NBFCs can make loans and can
serve as agents for pension funds, insurance companies, and securities
brokerages. However, NBFCs are barred by regulation from serving as
agents of commercial banks for savings account operations.
The four other KGFS institutions are using different legal structures that
facilitate client access to a full range of financial products, including
savings accounts, while permitting appropriate risk-sharing with partner
financial institutions. KGFS management believes that the ideal
eventual structure is for each KGFS to be registered as an NBFC. The
legal structures will, however, have to evolve given the changing
regulatory landscape for NBFCs and use of bank agents in India.
Although all KGFS institutions have a common parent company that
provides equity capital to each KGFS, each KGFS institution is designed
to be an autonomous, self-contained regional operation with its own
4
4The literal translation is Regional Rural Financial Services.
55
IFMR Trust was provided seed funding by ICICI Bank in 2008 to incubate new
business models in financial inclusion.
17
State Bank of India
management team hired locally. KGFS management believes that this

separation, in contrast to a single national institution, enables region-
specific innovations as well as superior internal control to emerge.
KGFS institutions were set up in very distinct regions of the country with
a view to understanding the design implications of the model in diverse
regional contexts. One KGFS serves Thanjavur and Thiruvarur districts
of Tamil Nadu, which are fertile agrarian economies. Another operator in
Orissa serves Ganjam and Khurda districts, which are economies
characterized by subsistence agriculture supplemented by domestic
migration. The KGFS in Uttarakhand serves five hilly districts that are
sparsely populated, where the underlying economies are dominated by
trade and services. The three core elements described in this paper are
standard across all KGFS institutions; however, serving diverse
geographies has enabled KGFS to learn, adapt, and apply the learnings
to new KGFS institutions.
Three Operating principles of KGFS
The Model is based on three basic operating principles. These
principles are the proponents of a different approach towards financial
inclusion of its customers
1. Geographic focus
Each KGFS institution is designed to be a regional institution serving a
specific territory with distinct geographic, economic, and linguistic
characteristics. As a rule of thumb, a single KGFS institution serves a
rural population of 2 million to 3 million through a network of 200–300
branches. The branch is the fundamental business unit. Each branch
serves a population of roughly 10,000 individuals or 2,000 households.
Branches have two or three staff, called “wealth managers,” who
perform all administration and customer service functions. Regional
managers oversee 35–40 branches and 90–120 wealth managers. Each
KGFS institution has its own chief executive officer and head office
structure. All KGFS staffs are local residents who have deep knowledge
of their respective regions.
The geographic focus of the model makes sure that uniqueness of each
service area is captured fully. This helps in getting better knowledge of
the customer, local economy which in turn helps in providing better
products for the costumers. To practice this, KGFS model has processes
and organisation structure which emphasises the geographic specific
focus, for instance all the signage's and documents are in local language,
staff for each branch is also selected from local area. For the customer, a
18
focused approach helps in building trust, which is paramount for a

sustained client engagement.
2. Wealth management approach
The second principle of the KGFS model is to provide tailored financial
advice to every enrolled client. This is called a “wealth management”
approach, adopting a term common in private banking for affluent
clients. The goal of this approach is to ensure that every client uses a
tailored combination of financial services that best promotes the
financial well-being of the client's household. The term is paradoxical,
as we are talking of wealth management for those people who doesn't
really have it. But the concept of wealth management is much more
appropriate in the context of KGFS operating demographics.
The model believes that clients can make better choices if they have a
better understanding of financial products and services available. To
align this in this processes and operations KGFS employs a team of
Wealth managers (WM), who are trained to analyse each household's
financial conditions and provide sound financial recommendations to
achieve its financial goals. To help WM's, KGFS takes help of
technology like automated financial wellbeing report of the household
generated based on data provided by client. These reports match
household goals with optimal set of services to meet goals. WM
discusses report with client before advising any service. This approach
ensures that KGFS takes responsibility for the appropriateness of the
adviceabout the services offered inspite of relying on official product
disclosure and customers judgement. Going forward KGFS seeks to
align incentives of staff with the goals of wealth management so that it
furthers the integration of the approach in organisation's DNA.
3. Wide Range of financial products
Central to the KGFS vision of complete financial inclusion is the
conviction that households need a diverse range of financial services.
Financial inclusion should not be restricted to providing bank account
facility and credit facility to the customers. For KGFS, complete
financial inclusion is profound, which is reflected in its PGPD approach.
PGPD (plan, grow, protect, diversify) divides its products offering
depending on the needs of customers. When a product is available for all
the diverse financial needs then a real financial inclusion is possible, this
is what KGFS model believes.
From operational point providing range of products builds an economy
19
State Bank of India
of scope which adds to feasibility of sustainable operation for the model.

KGFS provided these products by acting an agent for bigger financial
institutions. It also helps in product customization. For a seamless
integration between larger FI and KGFS, each branch supports computer
terminals linked online to real time computerized information system.
This keeps variable cost low and helps in building trust among partners.
4. Client Response So Far
Enrollment is the gateway to accessing any service from KGFS.
Although the client does not have to pay a fee, it takes about 30 minutes to
enroll, and a wealth manager has to physically verify the place of residence.
Enrollment grows most quickly right after branch opening, but continues to
rise more than 30 months later. Branches in existence for more than 30
months have average enrollment rates of nearly 70 percent, with some even
higher. These are penetration levels few financial institutions achieve in
any geography, let alone remote rural India. KGFS staff talks about a
“learning effect” whereby more recently established branches that have
learned from earlier experiences are seeing even faster enrollment rates.
Faster enrollment may also be linked to growing familiarity with the KGFS
brand as well as a broadening of the product offerings since the first KGFS
institution started its operations. Despite persistent enrollment efforts, some
clients have not enrolled even after 30 months.
Spatial analysis shows that distance-to-branch is a factor. Although no
household is located more than five kilometres from the branch, those
nearest to the branch tend to enroll sooner than those in the periphery.
Households headed by seasonal migrants also tend to have lower
enrollment rates, possibly due to not feeling as much need for a local
service. And households with large landholdings stay out more often,
possibly based on their perception that KGFS is a brand for less affluent
households.
Financial Performance So Far
At this stage of their development, KGFS institutions rely on net interest
income on loans for 85–90 percent of total revenues, with fees for other
services, such as insurance and pension distribution accounting for the
remaining 10–15 percent. Fee revenue related to the distribution of non-
credit products is expected to increase as a portion of total revenue as new
services like domestic payments gain momentum. But even then the
overall contribution of fees for non-credit products is expected to remain
under 20 percent. Since fees are determined by KGFS partners under
20
rules that are often set by regulators, opportunities to raise further

revenues from fees are limited.
The multi-product approach means that prices charged to clients per
product can be reduced as economies of scope kick in. Once enrolled, the
marginal cost to KGFS of clients using additional services is very low,
especially since all services are provided at the branch and do not require
additional household visits. Beyond recovering branch costs, the
profitability of each KGFS as a whole depends on recovering fixed costs
incurred by regional hubs and headquarters. KGFS estimates that 30–40
branches operating at full capacity will be needed to cover these
additional costs and lift a KGFS to overall profitability.
The depth of penetration (inclusion of most households and more than
one client in many households) in a single local area enables KGFS
branches to reach scale in a relatively small geography. It is projected
that the Tamil Nadu KGFS institution will achieve full profitability
during 2012, based on depth of penetration and the increasing
maturation of its 66 branches. This matches KGFS's initial expectations,
which took a four to five year view on what is required to achieve deep
financial inclusion.
Can the KGFS Approach Be Applied More Widely?
Initial experience shows that clients are increasingly responding to the
KGFS approach, operational challenges can be overcome, and financial
viability is within reach. Client acceptance is reflected in the high
enrollment and take-up rates across multiple products, especially in the
significant demand for insurance and pensions. Operational challenges
presented by using the intensive wealth management approach and the
partnership model have largely been overcome.
The next step was taken with the launch of the fourth and fifth KGFS
institutions in early 2012, which was partly funded through equity
contributions from strategic investors. Wholesale funding from
domestic financial institutions is being developed to finance expansion.
The process of adapting to new geographies will remain an on-going
challenge as KGFS institutions open across India. Beyond India,
however, how transferable are the three core operating principles in
other parts of the world?
The commitment to work with the entire population of a small
geographic area should be possible in other environments. The coverage
21
State Bank of India
area of one institution may need to be expanded or contracted, depending

on the population density of the area covered and how varied the area is
economically and linguistically. Branch service areas and regional
coverage will have to be adjusted to ensure viability while not losing the
emphasis on deep local knowledge.
Of course, the acid test for the KGFS model is whether it improves
household financial well-being, especially relative to other models and
approaches. Globally there have been a series of micro finance impact
evaluations recently, most of which aim to measure the short-run (12–18
months) household impact of access to a single financial service,
typically short-term credit (Bauchet et al. 2011). With a view to
understanding what outcomes can be attributed to the KGFS approach,
IFMRTrust has commissioned an impact evaluation of the KGFS
institution in Tamil Nadu. This randomized evaluation6 will examine the
following:
Household impacts from access to a broad range of financial
services, not just credit.
Impact on client outcomes from a wealth management approach that
tries to better match service needs with use.
Aggregate village-level impacts on variables, such as social
networks, wage rates, and migration behavior.
Impact over a three-year duration, twice as long as most randomized
impact studies.
An even longer duration to fully understand transmission pathways
would be ideal, but randomization is difficult to sustain over longer time
frames. The baseline work for this impact study is already underway
with results expected in 2014-2015. But even with what can be observed
today, the KGFS model demonstrates how a business model can be
reconfigured to pursue complete financial inclusion: committing to
reach as many households as possible in a service area, putting client
needs at the center, and offering a wide range of needed services. The
KGFS experience introduces new financial inclusion ideas that deserve
further consideration in India and around the world.
6
The principal investigators for this evaluation are Rohini Pande (Harvard
University) & Erica Field (Duke University)
22
The Kenya Commercial Bank (KCB) is a leading Bank in Africa. The

bank has bulk of its landing operations to entities involved with
commodities such as Cotton, Coffee, Tea, Sugar, Wheat, Maize, Rice,
Pyrethrum, Cashew nuts etc. Because of its loan portfolio KCB was
exposed to various risks associated with financing commodity players
like production risk, price risk and transactional risk. To allay these risks
and improve the quality of loan book, KCB implemented a stringent risk
management process that included backing the loans with forward or
price guarantee contracts. As a result bank was able to reduce its NPA
provisions by 57%.
The above and several other examples from the developing world
demonstrate the significant values waiting to be unlocked through
creation of an enabling legal framework that permits institutions to
leverage markets for risk management. Thanks to the forces of
globalization, the financial services sector in general and the banking
industry in particular, have grown significantly in recent years. In India,
this has manifested as increased penetration of banks through use of
technology and global best practices.
However, with increased penetration, the industry is also exposed to
risks of various degrees and types. Banks have been adopting a host of
measures to manage such risks, schematically depicted in Chart 1 below.
23
State Bank of India
Chart - 1: Risk Management in Banks

Forms of Risks Risk Management
Avoidable risk Best business practices
Risk in
Banking
Manageable risk Better adherence to
(Management regulatory practices
Perspective)
Transferable risk Participating in

markets
However, unlike the example of KCB mentioned above, Indian banks do

not seem to have taken to utilizing the market institutions adequately to
manage their risks. The reason for Indian banks eschewing markets for
managing transferable risks squarely falls on the regulatory system.
Over the years, banks have been permitted to manage several of their
risks by use of derivative instruments: Interest Rate Futures, Options and
Futures in forex, and, recently, Credit Default Swaps. Yet, in the case of
banks' risks owing to volatility of commodity prices are concerned, they
are deprived of the risk management platform of the regulated
commodity derivatives market, barred as they are from participating in
this market under the Banking Regulations Act, 1949. The policy of not
permitting banks in this market actually stands out as an outlier in a
paradigm where banks are allowed in virtually all markets under the dual
oversight of the market regulator as well as the central bank.
Commodity price risk management getting increasingly important
In what form and how much of commodity price risks do banks bear?
Besides the direct credit exposure to the commodity sector, banks are
also exposed to commodity price risks owing to their other activities,
viz. sale of gold coins, (proposed) issuances of gold bonds, investment in
commodity centric companies etc. Mentioned below are a few
arguments that highlight the risks faced by banks on account of their
exposure to commodities, all of which call for price risk management
through active participation in the exchange-traded commodity
derivatives market.
24
a. Banks are denied the opportunity of risk management in the

commodity derivatives market while they have huge exposure in
agricultural and other commodities whose prices have been displaying
significant volatility in recent years. An analysis of Indian banks' total
exposure outstanding to commodity related sectors of the economy and
the annualized volatility of related commodity prices shows that bank's'
average risk stands at 15.6 percent of their total lending outstanding to
various industries in March 2011 (Table 1)
Table 1: Approximate risk exposure of Indian banks (in Rs. Crores)
Sectors Outstanding credit % Annualized Volatility Risk
(1) (2) (2010-11) Exposure
(3) (2) X (3)
Gems & Jewellery 39,427 11.57(MCX Gold futures) 4,562
Metal & Metal
Products 209,894 12.27(MCX Metal index) 25,754
Agri & Allied
Activities 460,333 17.40 (MCX agri index) 80,098
Total outstanding
credit 709654
Total Annual Price Risk Exposure of banks in commodities 110,414
Note : All figures above are in Rs. crores, unless mentioned; outstanding figures are as on
March 2011, Source: RBI, MCX
b. Apart from lending to commodity-based user groups, banks are also

directly exposed to commodity price risks owing to operations such as
sale of gold and silver bars and coins at retail level. In 2011, 40 percent of
gold demand was in the nature of investment demand (bars and coins),
valued at Rs 86,464 crore. While banks play the key role in gold imports,
they are also not missing any opportunity from the current gold frenzy by
offering gold coins and bars (in some cases even silver bars)at the retail
level. As a result, banks are assuming the ownership of bullion till they
are sold, thereby getting exposed to price vagaries (annualized bullion
price volatility was 17 percent in 2011).
Moreover, with buzz going around of banks issuing gold bonds in an
attempt to convert the stockpile of gold assets into productive form, gold
price risk management would be a compulsion for the issuer to take note of.
c. Banks, by the very nature of their operations, face three types of risks
— operational risk, credit risk and market risk. Under Basel II (and
recently announced Basel III) frameworks, they would have to provide
for additional capital commensurate to the higher risks they are exposed
to. If allowed to trade in commodity derivatives, banks will be able to
25
State Bank of India
mitigate these risks efficiently and, thus, have to set aside less capital in
order to comply with Basel norms.
d. Indian banks' risk perception with regard to fluctuating commodity
prices can be reduced if they are allowed to hedge their exposure to
commodities. Low risk perception can translate into low risk premium in
the cost of capital, resulting in lower interest rates for borrowers.
Moreover, with increasing warehouse receipt financing in the wake of
implementation of the Warehouse Development and Regulation Act
(WDRA), banks can provide loans to farmers with competitive haircut
margins enabled by their commodity price risk management, when
allowed. With lower risks, banks can enhance their funding of margins or
trading capital requirements. All these factors would also contribute to
enabling banks meet their mandatory priority sector lending targets.
Risk Management on behalf of clients
Besides proprietary hedging, banks can also participate on behalf of their
clients to manage the latter's risks, following which collateral-based
loans will become less risky owing to the clients' hedged position. There
is ample evidence supporting the view that enabling farmers to better
manage risk exposure, increases their incomes. This can happen through
aggregation of small participation, whereby banks act as the aggregator
which can enable even the small farmers to reap the benefits of hedging
through exchange traded commodity derivatives market.)
Box 2: Price risk management related to agricultural lending – A

case of CRDB Bank
CRDB Bank Ltd, a commercial bank based in Tanzania, was privatized
and restructured in 1996. Before restructuring and privatization, it was a
loss-making bank focused on agricultural lending. The bank with a
significant role in cotton and coffee financing and agricultural
commodities, carried heavy risk and faced difficulties due to price
volatility in the commodities market. The bank's lending to cotton,
coffee, tobacco and cashew sectors constitute more than 50 percent. In
2002, the bank expressed interest in adopting price risk management
with regard to their lending activities. In fact, the bank had one of the
largest agricultural portfolios in Tanzania primarily lending to coffee,
cotton and cashew sectors. The lending to coffee and cotton was $9.7
million and $16 million respectively in 2003 and its agricultural lending
has been fast expanding in the recent times. In the past when the bank
26
was facing considerable problems of default in the cotton and coffee

sector, the bank adopted collateral management system to exercise
tighter control over the lending to these high-risk sectors rather than
pulling out of it. This new program like lending against warehousing
receipt increased the bank's capability to lend to farmers in rural areas.
The bank implemented price risk management in two ways – one is
hedging its own overall portfolio related to coffee and cotton sectors by
using risk management instruments and two hedge its own exposure by
way of acting as a market intermediary in carrying hedging transactions
on behalf of borrowers.
Source: Rural Finance Innovations, April 2005, The World Bank, Agriculture and
Development Department, Report No. 32726-GLB
A Committee set up by the Government of India to examine the impact of

futures market headed by Planning Commission member, Prof. Abhijeet
Sen unequivocally supported banks' presence in commodity markets,
terming their participation 'critical'. “Their presence is required not only
to extend finance against warehouse receipts (WRs) but also to enable
small and marginal farmers to access the commodity market.” (para
7.11). Similarly, the Working Group on Risk Management in Agriculture
for the Eleventh Five Year Plan advocated for allowing banks in the
commodity derivatives market as aggregators, since “……aggregators
can hedge on behalf of the farmers in the futures market, as they have the
requisite knowledge and operational skills needed to participate in the
futures market…” (para 7.5). A December 2011 Report of the
Parliamentary Standing Committee of the Ministry of Consumer Affairs,
Food and Public Distribution aptly noted “The Committee further opine
that participation of Banks/ Financial Institution will also promote
greater credit flow to farmers for post-harvest marketing”. (Para 1.35 of
the Standing Committee's Report).
An investment opportunity for banks
Commodity derivatives offer an attractive and hitherto overlooked
investment opportunity for banks. Investment profile of Indian banks
displays a strong bias towards government securities, indicating a bias
towards risk aversion. It is probably such risk aversion that made the
banking industry allocate a mere 6.4 percent of its collective portfolio to
shares and debentures in 2010. Besides, although banks are mandated to
park a minimum of 24 percent of their deposits in government bonds, the
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State Bank of India
banking industry on the whole has kept no less than 29 percent in this
class of instrument– indicating the lack of safe and liquid investment
option at their disposal. Evidently, the nature of banking business
–balancing social obligations with profitability in an increasingly
competitive environment – would make investment options with low
risk and sound returns an attractive proposition. Besides, the sheer size
of investible corpus available with banks not only gives enough room
for, but also necessitates diversification of the banks' investment
portfolios.
Commodities as an asset class fulfill all the above criteria. Here's how:
a. Low risk in comparison to equity market
Commodities as an asset class possesses one of the least risks vis-à-vis
others. Price risk measures by annualized volatility in equity markets
(NIFTY) has been significantly higher at 26.7 percent than the same for
MCX COMDEX (a composite commodity index based on commodity
futures prices on MCX platform) at 17.3 percent for the period between
June 2005 (i.e. inception of MCX COMDEX) and December 2011.
Moreover, annualized price volatility (for aforementioned period) in
MCX futures on gold (one of the most traditionally favored investment
asset class) also stood at just 17.3 percent, much less than that of NSE-
NIFTY. Thus commodity futures and within it, MCX gold futures, on
back of their low risk proposition, clearly present a good case for their
inclusion in banks' investment portfolio.
b. Higher returns than other asset classes
Risks may be low for commodities, but what of returns? The returns
from investment in the commodity derivatives market are better than
those in other comparable asset classes. Between 2005 and 2011
(aforementioned period), the compounded annual growth rate (CAGR)
of benchmark equity index, NIFTY was 11.2 percent, that of the safest
10-year government security paper was 3.0 percent, while at 13.9
percent, the CAGR for the MCX Comdex was higher than both these
asset classes . Taking individual commodities, CAGR for gold futures
was significantly high at 26.1 percent while that for a base metal - copper
– CAGR was an impressive 14.8 percent. Thus, even on the returns'
front, exposure to commodities augurs well for their inclusion in banks'
investment portfolio.
28
A longer-term comparison of returns across asset classes reveals the

following:
Table 3: Annualized Monthly Returns in Commodity Futures, Stocks and
Bonds: July 1959 - December 2004
Commodity Stocks Bonds
Futures
Average 5.23 5.56 2.22
Sharpe ratio 0.43 0.38 0.26
Source: Gorton G and K.G. Rouwen horst, 2006
Table 3 clearly shows that even after considering long term cyclical
behavior, the average annualized return in commodity futures has been
comparable to the return on the investment in equities over 45 long years.
a. 'Risk adjusted return' favors commodities
With returns from commodities faring better than the returns from other
asset classes and at the same time with commodities carrying lesser risks
than equities, the crucial risk-adjusted-return (RAR) factor strongly
favours investment in commodities. A quick analysis shows that between
2005 and 2011, while the RAR of benchmark equity index, Nifty and
safest 10-year government security paper was 42.0 percent and 21.9
percent respectively, the RAR for the MCX Comdex stood at 80.7
percent. During the same period, RAR for individual commodities
namely gold (MCX futures) was as high as 150.8 percent, along with
copper from base metal segment registering an impressive 51.3 percent.
Thus, for similar risks, the commodity derivatives market has clearly
been giving higher returns than other asset classes – something that
banks should take a note of.
b. Useful as a portfolio diversifier
Inclusion of commodities offers great portfolio diversification benefits
too, as prices of commodities such as bullion have a tendency to be
impacted differently from that of asset classes such as equities. The
comparison below in the context of Indian markets, clearly demonstrates
the role of gold as portfolio diversifier owing to its weak and negative
correlation with other asset classes. A point in case is Reserve Bank of
India's buying of 200 tonnes of gold from IMF in October 2009, which is
largely seen as its attempt to diversify its foreign exchange reserve.
29
State Bank of India
An analysis (Table 5) on historical price movement clearly shows the

utility of commodities in an investment portfolio (US markets). With
commodities in the portfolio, not only do the returns of the portfolio
improve, risks also subside substantially. Sharpe ratio, which is often
used to characterize how well the return of an asset compensates the
investor for the risk taken, is also higher in the portfolio with
commodities as against portfolio without commodities.
Table 5: Effects on portfolio returns and Sharpe ratios of adding
commodities to portfolio:
31 August 1959, through 30 April 2009
parameters/portfolio 100% 60% equities / 80% equities / 80% (60% equities /

composition equities 40% bonds 20% 40% bonds) / 20%
commodities commodities
Total return 9.05% 8.45% 9.51% 8.94%
Standard deviation 15.34% 10.46% 12.86% 8.98%
Sharpe ratio 0.29 0.31 0.35 0.40
Source: Vanguard calculation based on Commodity Research Bureau; Datastream, Thomson
Reuters
a. As a hedge against inflation

Unlike stocks and bonds, commodities are real assets, containing
intrinsic value based on their actual commercial or industrial application.
It is also seen that commodities' price fluctuations are more in tandem
with inflation than stock or other asset classes are. Hence while
investment in commodities helps to diversify the portfolio as they have
weak or negative correlation with stocks and bonds, it can also help in
attaining natural hedge against inflation, as Table 6 shows:
30
Table 6: Correlation of Commodity Futures Returns with Stocks, Bonds, and

Inflation overlapping return data: July, 1959 - December, 2004
Strocks Bonds Inflation
Monthly 0.05 -0.14 0.01
Quarterly -0.06 -0.27 0.14
1-year -0.10 -0.30 0.29
5-year -0.42 -0.25 0.45
Source : Gorton G and K.G. Rouwenhorst, 2006
As seen from above table, commodity futures returns are positively

correlated with inflation and the correlation is larger at longer horizons.
Hence, it is clear that the inflation-hedging properties of a portfolio
comprising of commodities can provide higher real returns too.
Conclusion and policy implication
The commodity market in India has been growing at rapid rates since
national commodity derivatives markets came into existence in early
2000s. This growth is reflective of the large and growing unmet demand
for a risk management platform for millions of stakeholders exposed to
commodity price volatility. The necessity of such a platform has been co-
terminus and accentuated by the gradual liberalization and concomitant
withdrawal of government intervention in agricultural markets as well as
the globalization of the Indian economy. These forces have created
enormous demand for risk management solutions which the exchange-
traded market institutions have been quick to reap.
Sadly, the Indian banking industry is yet to be part of this growth story
and has not been able to either unlock or exploit the socio-economic
values that this institution is pregnant with. Non-participation of banks is
particularly conspicuous in the Indian scenario as it is this class of
financial institutions alone whose participation can bring the biggest
benefits to all stakeholders connected to the commodity economy. In
most developing countries, banks act as aggregators of farmers, acting on
their behalf to hedge their risks on the commodity derivatives platform.
Additionally, banks need the commodity derivatives market for their
own risk management and investment needs.
By acting as clearing banks and institutional clearing members, banks
already act as important support institutions in this market. Banks are
also the single largest shareholder group for most commodity derivative
exchanges in India. Yet, the doors of their direct entry in this market have
remained shut. Hence, it is high time banks are allowed to directly
31
State Bank of India
participate in the commodity derivatives market, in the interest of banks'

own sustainable growth and that of the economy at large.
References
1. Gorton, G. and Rowenhorst, K, “Facts and Fantasies about
Commodity Futures”, Working Paper No. 10595, National Bureau of
Economic Research, 2006
2. Gross, Adam, “Role and Benefits of Financial Institutions and Banks
on Commodity Derivatives Markets and Their Price Discovery
Process”, Research in Financial Derivatives, Pondicherry University,
2011
3. Indian Institute of Management Bangalore, “Performance of Futures
Market and Their Impact on Farmers of Wheat, Chana, Sugar,
Guarseed, Urad and Tur”, 2006
4. Mattos, F. and Garcia. P. “Identifying Price Discovery and Risk
Transfer in Thinly Traded Markets: Evidence from Brazilian
Agricultural Futures Markets”, The Review of Futures Markets, 2006
5. Report of the Expert Committee (under Chairmanship of
Abhijeet Sen) to Study the Impact of Futures Trading on Agricultural
Commodity Prices, Ministry of Consumer Affairs, Food and Public
Distribution, Govt. of India, 2008
6. Report of the Working Group on Risk Management in Agriculture,
Eleventh Five Year Plan (2002-2012), Planning Commission,
Government of India.
7. Rutten, Lamon “Researching Commodity Futures Market” in M.
Pavaskar (ed.) 'Effects of Futures Market on Agricultural
Commodities', TAER, 2009
8. UNCTAD, “Development Impacts of Commodity Exchanges in
Emerging Markets”, 2009
32
Shri Pulak Kumar Sinha

General Manager (Payment Solutions)
7
New Businesses Department, Corporate Centre, Mumbai
What is Financial Inclusion?

According to RBI, Financial Inclusion is the process of ensuring access
to appropriate financial products and services needed by all sections of
the society in general and vulnerable groups such as weaker sections and
low income groups in particular at an affordable cost in a fair and
transparent manner by mainstream institutional players.
To this end, RBI has further clarified
i. Banking Coverage - A village is covered by banking service if either
a bank branch is present or a BC is physically present or visiting that
village.
ii. Availability of Banking Services – It means availability of a
Minimum of Four Products:
a. A basic No-Frills banking account with Overdraft Facility.
b. A Remittance Product for Electronic Benefit Transfer and other
remittances.
c. A Pure Savings Product ideally a recurring or a variable
recurring deposit
d. Entrepreneurial Credit such as General Credit Card, Kisan
Credit Card.
7
2nd prize winning essay in SBI Essay Competition – 2012 under Supervising Staff
Category. 33
State Bank of India
Why is Financial Inclusion?

Provision of basic financial services is indispensable for tapping
economic opportunities and development of any society. Unless all the
sections of the society are financially included, the growth will be
lopsided which may lead to instability in the society. While Indian
economy has been growing at the rate of over 8% for a decade or so, its
fruit could not be enjoyed by majority of population. In a fast growing
economy like ours, low level of financial inclusion is associated with
high income disparities which are witnessed by the stint reality that still
around 50% of people lack access to even basic financial services.
Financial Inclusion as a concept is not new. Both the Government of
India and Reserve Bank of India have been pursuing the goal of financial
inclusion over several decades. To this end, the following Steps were
taken in the Past:
Co-operative Movement
Setting up of State Bank of India
Nationalisation of Banks
Lead Bank Scheme
Opening of RRBs
Service Area Approach
Self Help Groups, etc.
However, all these failed to produce the desired results mainly because of
the following:
Absence of Banking Technology.
Absence of Reach and Coverage.
Absence of Viable Delivery Mechanism.
Not having a Business Model.
And, as a consequence, the extent of financial exclusion in the country
got staggered which can be corroborated from the following facts:
Only 55% of the population have deposit accounts and less than 10%
have credit accounts with banks.
India has the highest number of households (14.5 crore) excluded
from Banking.
34
There was only one bank branch per 14,000 people.

6 lakh villages in India, rural branches of SCBs including RRBs
number 33,495.
Only 20% of the population have any kind of life insurance and 10%
of the population have non-life insurance coverage.
Just 18% have debit cards and less than 2% have credit cards.
Again, Financial exclusion varies across regions, social groups and asset
holdings.
Steps so far: The new concept of financial inclusion was first mooted by
RBI in its Annual Policy Statement of 2005-06 when all the Banks were
advised to open 'no frills' accounts, with nil /very low minimum balances
and make the facility available to vast majority of the population.
Subsequently, SLBCs in each State were advised to identify at least one
district to start 100% financial inclusion on a pilot basis. As a result, 431
out of 623 districts in the country had been identified for financial
inclusion. A series of measures viz. Simplifying KYC norms,
introduction of General Credit Cards, Business Correspondent and
Business Facilitator models, financial education, etc. were undertaken
by RBI for financial inclusion. It may also be observed that in the last few
years, the financial sector has been witnessing policy support, enabling
environment, co-ordinated efforts and quick responses to the demands of
the financial inclusion strategies. GOI, RBI and NABARD have ensured
that Banks give financial inclusion the priority it deserves with a series of
instructions, guidelines based on field studies, formation of working
groups and policy prescriptions. RBI has taken the following steps so far
with a view to facilitating the Financial Inclusion by Banks:
ICT based Business Correspondent (BC) Model for low cost door
step banking services in remote villages.
Board approved Financial Inclusion Plans (FIPs) of banks for 3
years, starting April 2010 .
Roadmap to cover villages of above 2000 population by March 2012.
Availability of minimum four banking products through ICT model
has been ensured.
Mandatory opening of 25 % of new branches in unbanked rural
centres.
35
State Bank of India
Significantly simplified KYC documentation requirements for small

accounts.
Pricing for banks totally freed. Interest rates on advances totally
deregulated, etc.
Achievements so far: While Banks have been acting as per guidelines
prescribed by the Government and the RBI, the progress in this area is
miniscule, that too, limited to opening of 'No Frills' accounts only, when
assessed in the backdrop of the scope and need associated with this
programme. The reasons for this slow progress need not far to seek which
can be shortlisted, as under:
Perceived more as an obligation than a business opportunity.
Lack of appropriate Business Models for FI activity for Banks,
Technology Providers and BCs.
Inadequate Physical capacity of Banks including RRBs vis a vis the
requirement.
It can thus be inferred that unless the Banking industry drives the activity
on its own, Financial Inclusion may never be a real success. Establishing
appropriate Business Models through the involvement of all
stakeholders is, therefore, critical in making Financial Inclusion a reality.
The Model must generate reasonable profits to make itself a self-
sustaining one as otherwise it will always be perceived as an obligation
on the part of Banks and will not be taken up with required zeal.
Various Models for Financial Inclusion: When the needs of the poor
are properly understood, it would be easier to design the appropriate
model of financial inclusion by Banks. To this end, the following factors
need consideration:
a. Convenience in being able to transact where they live and work,
b. Trust in putting their money with organizations that seem to care for
them and who they feel will be there for them at the time of their
needs,
c. Affordability, being able to transact in small amounts at reasonable
cost.
It thus makes sense to integrate the existing peoples' groups, village co-
operatives/organisations, community based organisations, etc. with the
financial inclusion infrastructure, wherever feasible.
36
Let us now discuss a few Financial Inclusion Models which are capable
of generating profits.
A. Self Help Group (SHG) Linkage Model:
Despite progress in banking networks and financial outreaches across
the country, of late, it is noticed that there is relative decline in supply of
credit in rural areas and this, in turn, has posed a serious challenge before
the Indian formal financial system to achieve the financial inclusion in
true spirit. SHG bank linkage model launched by NABARD in 1992 can
very well be considered for this purpose. It facilitates extending all the
required financial services to unbanked areas. This model is widely
accepted as the most successful micro finance model. On the issue of
SHGs' role in inclusion, it is felt that SHGs are far better equipped to
achieve the objectives of inclusion and as such, they should be suitably
supported.
This underscores the role of SHGs and their members in the inclusion
dynamics and their number is too large to be ignored. RBI has thus
permitted all Banks to appoint authorized functionaries of well-run
SHGs which are linked to Banks as BCs. Banks have to seize this
opportunity to increase their outreach for financial inclusion through the
channels of SHGs. This would also help Banks to address the issue of
viability of BCs as the volumes that could be reached, would be much
higher. It is pertinent to mention that NABARD has also extended
financial support to RRBs for capacity building and training of the
authorized functionaries of SHGs to be appointed as BC/BF for financial
inclusion.
B. Business Correspondent (BC) Model – To Be Re-visited:
The predominant model adopted by the banks so far has been the
branchless model through Business Correspondents. Most of the banks
that have employed BCs have appointed Section 25 Companies /
Societies as BCs. Further, almost all the Section 25 Companies
appointed as BCs have been floated by Technology Service Providers
who have provided the Smart Card or Biometric solutions for the
account opening. Many of the BCs have reported huge losses and have
closed down operations. The model can be successful only if sufficient
businesses are generated. As almost all BC transactions are cash based,
they suffer from increased cost and operational risk besides logistics of
handling large volumes of cash. Illiterate clients perceive BCs as Banks
and their agents went about claiming to be Bank employees.
37
State Bank of India
As a result, there were a number of frauds leading to numerous disputes

and litigation. There has also been a mismatch between revenue
projected and cost incurred for BC operation resulting in non-viability of
the model. Commissions paid by Banks to BC are not considered
adequate for a viable business model. Banks utilize BCs only for opening
of no-frills accounts, through which various payments such as NREGA,
pension, etc. are routed. Banks have toprovide a wide range of services
such as suitable small savings, micro credit, micro insurance, small value
remittances, etc. for the model to be viable. A few Loan products can also
be thought of under the close surveillance of the Banks. In all, Banks
have to develop models with customer centric approach to make BC
model a viable one.
C. Micro Finance Institute (MFI) – A Game Changer:
The Microfinance Sector which had witnessed remarkable growth in the
last few years, has decelerated now due to the recent developments,
particularly in Andhra Pradesh. There are lots of changes taking place in
the sector with MFIs trying to reposition themselves to achieve economy
of scale. The client acquisition ratio of MFIs has declined sharplydue to
the political interferences in the sector, the interest cap of Malegam
Committee, hesitation of Banks in funding MFIs on account of
uncertainties, non-profitability of operations, fall in recovery rates, etc.
Over time, the stronger and fitter MFIs may survive and they will find
their own space in the financial sector.
However, the model to be effective, successful and viable, RBI needs to
change the rules and regulations governing MFIs. The ideal and viable
model will be one where the MFIs will be sponsored by Banks including
RRBs. These outfits will work in all the unbanked areas under the close
supervision of the sponsoring Bank. They may also be allowed to accept
deposits at the market rates, to sell mutual fund and insurance products,
etc. in addition to their main activity of lending. This will help them to
charge lower rates for loans. MFI model will thus become a real game
changer.
D. Primary Agricultural Credit Societies (PACS):
There are nearly one lac Primary Agricultural Credit Societies (PACS)
with membership of over 14.50 crore, located in the rural hinterlands of
the country. PACS are ideally suited to provide a comprehensive range of
services like savings, credit, insurance and remittances to their clients,
provided there is a workable tie up with the higher tier cooperative banks.
38
Thus, their role in financial inclusion cannot be underestimated.

Consequent upon implementation of the recommendations of
Vaidyanathan Committee, many PACS are well poised to take up viable
business activities. On realizing their importance, a few States have
started utilizing their services for all activities related to agriculture. In a
few states, PACS have started extending remittances, insurance, etc.
NABARD has started supporting PACS for computerization. It would
be, therefore, feasible to have CBS for integration of technology based
inclusion models for PACS as well. The model would also improve the
viability of these institutions.
E. HUB n SPOKE Branch Model:
No model can be better than a Brick & Mortar branch banking with full-
fledged facilities. However, because of the cost implications, it may not
be feasible for the present. To this end, the ideal model would be Hub n
Spoke Model. While Hub is one of the existing/new full-fledged Branch,
Spokes are 'N' number of Mini Branches in and around the Hub and are
linked to it. Mini Branch can work in self-service mode or in an assisted
mode. While the former is suitable for urban FI, the latter is for rural FI.
Self-service mode includes ATM, Kiosk, Internet Banking, Phone
Banking (IP based), e-Form Channel (Smart Account Opening), etc.
Teller /SWO assisted mode requires Desktop/Laptop, Cash Recycler
(safe), Printer/Scanner, etc. In this particular model, while a few services
can be on real time basis, others like application for opening of accounts,
loan, MF / Insurance products, etc. can be procured for processing at
Hub subsequently. To make this model cost effective and operationally
efficient, the facilities can be provided with the help of mobile vans.
F. Post Offices–Emerging Institutions for Financial Inclusion:
The Expert Committee on harnessing the India Post Network on
Financial Inclusion came up with a wide range of recommendations on
the role of post offices in financial inclusion by entering into partnership
with Banks, upgrading the technological infrastructure, modernising
transaction platforms, developing low cost small ticket remittance
mechanisms and facilitating electronic fund transfers.
The Committee also recommended for are view of the role of post office
as an agent of GOI and to enable the institution to act as its own account
in the financial inclusion space. India Post, with a network of more than
1.55 lac post offices – mostly in rural areas is in the process of getting
Cabinet approval for Bank linkage. Since post offices already accept
39
State Bank of India
deposits, converting into a full-fledged bank branch may be quite

feasible. The department proposes to acquire ATMs in a bid to
modernizeits operations. India Post is reportedly finalising tie up with
various banks. Some banks have already forged partnerships with post
offices for expanding their outreach. SBI and India Post have entered into
a partnership in which, postmen will act as BCs for SBI in more than
12,000 villages. They will be collecting deposits, offer small credits and
remittance facilities in those villages.
Conclusion:
Financial inclusion offering all financial services to the rural poor is a
mighty challenge and a complex task. As such, no single model can act as
a panacea for this purpose. Banks and developmental agencies have to
devise innovative methods and design models to suit the varying needs of
rural poor. Group as well as community approach together with
technological infrastructure, particularly Mobile Technology, would
bring economies of scale for Banks. It needs no elaboration that the
success of financial inclusion will finally depend on the whole hearted
support of all concerned coupled with financial literacy / counseling of
under-privileged. It is certain that financial inclusion will turn out to be a
business opportunity in the long run.
40
“Empowerment is the process of enhancing feeling of self-efficiency

and a sense of 'owning' a job” – Mahatma Gandhi
Empowerment is one of the concepts discussed much in Human resource
management. Empowerment is what young aspirants are looking for in
organizations in the present scenario. More than monetary rewards, it is
the feeling that the employee 'owns' the job that motivates him or her.
Empowerment may be understood as “a process of enhancing feelings of
self- efficacy among organizational members through the identification
of conditions that foster powerlessness and through their removal by
both formal organizational practices and informal techniques of
providing efficacy information”. Empowered employees are energetic
and passionate. They aspire to do better job because they get personally
rewarded for doing so. It could be monetary or otherwise. Empowerment
is facilitated by a combination of factors including values, leadership,
job structure and reward system. Empowerment occurs when power of
decision making and authorities to share resources go to employees who
thereby experience a sense of ownership and control over jobs.
Empowered employees know that their jobs belong to them. Given a say
on how things are done, employees feel more responsible. When they
feel responsible they show more initiative and interest in their work and
enjoy the work more.
8
2nd prize winning essay in SBI Essay Competition – 2012 under Award Staff
Category. 41
State Bank of India
Empowering Employees:
Many organizations have achieved substantial value creation due to their
employees sharing wonderful ideas. Toyota is a great example. Toyota's
suggestion scheme, operational for decades now, nets almost 20,00,000
suggestions a year, that is, about 33 suggestions per employee every year.
Important fact to remember is that, 95 per cent of the suggestions are
implemented. Another case in point is that of Jet Airways whose cost has
been cut by 30percent by accepting the ideas of their employees. Satyam,
started its companywide suggestion scheme, the idea junction, in Jun
2001. To ensure that the ideas, suggestions and complaints submitted to
each circle are acknowledged, evaluated and taken to a logical
conclusion, a responsible person is identified in each circle.
The suggestion schemes are increasingly used by progressive
management. Our own State Bank of India has Staff suggestion
scheme that invites the suggestions from its staff and they are rewarded
suitably at Corporate as well as Circle level. The suggestions flow from
various levels, though mainly from award staff. The ideas range from
changes in inspection procedure to design changes, process
simplification, inventory management and the like. SBI receives a few
hundred suggestions every year. On receiving the suggestions from staff,
it deputes a technical officer at LHO level to discuss the suggestions, its
feasibility and ways for implementation. On satisfying at LHO level, the
suggestions are forwarded to corporate level and judged by a group of top
officials. If the suggestions are valued, they are implemented and the
employee is suitably rewarded for his innovative thought. The benefit to
the company could range from marginal to substantial. The rewards to
the employees are commensurate with the benefits derived from the
suggestions. By doing so, the organization makes the employee
empowered to treat his job more than a routine one.
Scope and Ways of Empowerment:
Empowering refers to passing on authority and responsibility.
Empowerment occurs when power goes to employees who in turn
experience a sense of ownership and control over their jobs. Empowered
employees feel a sense of belonging. Given a say on how things are done,
employees feel more responsible. When they feel responsible, they show
more initiative in their work by doing more work and enjoy the work
done. Empowerment is facilitated by a combination of factors,
including, values, leadership initialization, job structure and reward
systems. Empowered teams are also being called self- directed teams.
42
Empowerment consists of five stages. The first stage involves

identifying the conditions existing in the organization that lead to the
feeling of powerlessness on the part of the organizational members.
These conditions manifest through poor communication, centralized
resources, and authoritarian styles of the leadership, low incentive value
rewards, low task variety and unrealistic performance goals. Diagnosis
being completed as above, the next stage is to introduce empowerment
strategies and techniques. Use of participative management,
implementing merit pay systems and job enrichment are some of the
examples of possible empowerment practices.
The use of progammes is designed to accomplish two objectives in the
third stage. One is simply to remove the conditions identified in the first
stage as contributing to powerlessness. The second, and more important,
is to provide self-efficacy information to subordinates. Self-efficacy,
describes a belief in ones effectiveness. Individuals high in self-efficacy
tend to be confident and self-assured and feel they will be successful in
whatever endeavors they undertake.
Self-efficacy information results the feelings of empowerment in the
fourth stage. This is because of the fact that increasing self-efficacy
straightens effort-performance expectations. Finally, the enhanced
empowerment feelings from stage four are translated into performance
in the fifth and final stage. These behavioral consequences of
empowerment include increased activity directed towards
accomplishment.
Information sharing is another building block of empowerment.
Employees need to be informed about the business and demonstrate how
their work fits in. One of the most important measures of job satisfaction
is whether the employees find meaning in their work- if they know what
they are working towards and understand how their work affect other
employees and the organization as a whole.
Evolution of Empowerment of Staff in State Bank of India:
The organizations, worldwide, start thinking of the importance of the
empowerment of its employees. However, State Bank of India thought
of this empowerment way back in 1960s. The Nationalization of banks
in India by Smt Indira Gandhi has brought up the self-image of the
banking sector, particularly State Bank of India and its people, being No.
1 bank in the country.The Bank introduced decentralization of powers
from corporate centre to circle level by appointing various cadres in the
43
State Bank of India
management. The bank introduced the concept of Local Head Office,

thereby, delegating more authority to lower level. The operational
decisions were taken there, whereas, the strategic decisions kept with
corporate center. The widened span of control and decentralization
helped the organization in taking quick decisions at ground level. When
an empowered branch manager takes a decision at his level with his own
capacity, he unknowingly becomes whole hearted part of his
organization and starts introducing new strategies in the operational
structure of the branch.
This is the case with clerical staff also. In order to complete the task of the
day at the branch, they are given officiating powers and are paid
allowances for the job being done. At present, fifty percent of the staff in
SBI is working in the higher capability level due to scarcity of staff at
various branches. When one thinks that granting of officiating powers is
not because of the scarcity of man power at the work place; it is the result
of the organization's belief on him; he is empowered by intrinsic
motivation. By getting officiating/ acting power, he gets authority along
with the responsibility over his job. Job rotation provides new work
experiences to the employee which helps him in future career. The
organization must be able to motivate the employees in this aspect.
Sharing information with the employees is another useful tool to
empower them. Only a knowledgeable staff can visualize the problems at
the branch and thereupon, extend his wholehearted support in achieving
the organizational objectives. 'Regular staff meeting' must be an
unavoidable programme in the branch weekly activities. Through these
meetings, Branch Manager would be able to explain the incomplete task
of the branch, its reasons, and remedial measures to be taken and project
the target for the next week. He can provide staff with increased
information about the bank's finances and operations and this helps
employee to give better quality suggestions. 'Brain storming' sessions
creates intuitive ideas. Moreover, such briefing, help the employee
reassure his importance in the organization. On receiving such
information, he understands the need of working harder, extend his own
ideas to bring his organization to the highest level of its functioning.
Through such participative management, the organization unites its
members and these empowered employees commit themselves for the
organizational build up. Participation through ownership has the distinct
advantage of making the staff committed to the job and to the
organization. Participative Management is a constitutional commitment
in India. Article 43-A of the constitution (42nd amendment) provides:
44
The state shall take steps, by suitable legislation or any other way to
secure the participation of workers in the management of undertaking,
establishments or other organizations engaged in any industry.
The following tips may be useful in empowering employees:
1. Delegate responsibility along with its authority
2. Replace the role of managerial 'parent' role with that of 'partner' role
3. Have tolerance for mistakes committed by subordinates.
Demonstrate this tolerance through deeds and words.
4. Share information with subordinates. Empowered employees need
sufficient information to get full perspective.
5. Allow teams to form. Teams are the best vehicles to empowerment.
6. Performance feedback is always important: it is particularly
important for newly empowered employees. Feedback enhances
learning and can provide needed assurance that the job is being
mastered.
The empowered staffs are able to share various management and
leadership functions. They plan, control and improve their own work
processes. They set their own goals and inspect their own wok. They
often create their own schedules and review their performance as a
group. They may prepare their own budgets and co-ordinate their
performance as a group. The empowerment of employees allows them
more control and responsibility over their work. One's role as manager
shifts from control to facilitation and coordination of work processes.
There is less focus on decision making and more focus on good
communications, education and training, and leadership. One of the
primary roles becomes to help team members develop the confidence
and skills to make good decisions and to maximize their full potential.
Job rotation on half yearly/ yearly basis, as we do in our bank, provides
job enrichment to the employees. It means that additional motivators are
added to the job so that they are rewarding. The purpose of job
enlargement and job enrichment is to relieve the boredom of the worker
which flows from excessive specialization so that the job itself becomes
a source of self-satisfaction. The job enlargement and job enrichment do
provide for staff's participation because they offer freedom and scope to
them to employ their judgment.
45
State Bank of India
Introduction of Quality Circles empowers the staffs in the bank. The

quality circle which consists of seven to ten people from the same work
area who meet regularly to define, analyse and solve operational
problems in their area, would be an added support to the Branch
Manager. Membership must be strictly voluntary and meetings to be held
once a week for an hour. In the beginning, Branch Manager does not
influence their activities. He must borrow help from trained people from
outside the organization so that the members are eased in projecting
themselves neglecting their professional positions in the bank. Branch
Manager is only a facilitator.
It is a mistake to assume that staff members will naturally understand or
accept empowerment. Many times we heard from staff that something is
not their responsibility or that it's not what they were paid to do? In many
ways, traditional organizations have encouraged conformity and loyalty
from employees at the expense of innovation and flexibility. The Branch
Managers must avail the services of Senior Special assistants/ Special
assistants etc in finding suitable customers while sanctioning advances.
Often the field officers are new to the region and due to the ignorance of
the geographical area, they might be easily cheated by a bad customer
and in turn the business becomes NPA. The presence of the Senior
Assistant, being a resident employee, at the dialogue table would a great
help to the field officer in finding a valued and trustworthy customer.
Moreover, participation tends to improve motivation because staff feels
more accepted and involved in the situation. His self-esteem, job
satisfaction and co-operation with the field officer will also improve. The
empowered staff may also reduce absences when he began to feel that
working conditions are satisfactory and that he is becoming more
successful in his job.
Staff may become more involved in the bank's activities by making them
shareholders of the bank. This may be done by inducing them to buy
equity shares of our bank. The management may promote the scheme by
allowing the staff to make payments in installments. It may also advance
loans or even give financial assistance to such staffs to enable them to
buy equity shares. As the share value of State Bank of India is more
compared to the value of other banks, majority of staff may find
difficulty in buying them and giving advance to buy the shares is the
proactive step. Personal loan limit to 4 lakhs be raised to 7 lakhs for the
staff to buy our shares. But its effect is limited because ownership is
different from management in the company form of ownership.
46
Sometimes, empowered employee may not provide full support as

desired by the management. The success of participation depends on a
suitable participative structure and a change of heart on the part of
managers and staff, which may take some time to develop.
Conclusion:
Employee empowerment is nothing new. It is old as the institution of
owners and workers. But its importance has increased and has been
brought into sharp focus with the industrial revolution and the advent of
large enterprises. In its real sense, empowering exists when employees
are involved in decision making process, not in mere job related
activities, but at all level of management.
However, empowerment needs to be implemented with caution. When
employees look for secured but not challenging jobs, empowerment
sounds hollow. Where employees suffer from inflated egos and are
highly self-centered, empowerment does not work. Many employees
entertain the feeling that they are to be led and not to lead.
Empowerment has no appeal to such subordinates. Therefore, steps for
employee empowerment or participative management are to be taken
with utmost care. With proper implementation, a better performance and
increased motivation at organizational level are achieved.
47
State Bank of India
Legal Decisions
on Banking
Shri M. Manoharan
Manager (Law), Law Department
State Bank of India, Local Head Office,
Chennai
DIVISION BENCH MADRAS HIGH COURT

K.R.CHANDRASEKARAN & ORS.
VS
UNION OF INDIA & ORS.
W.P.NO.950/2012, 30223 & 30184/2011,104&105/2012
CITATION : [2012(2) D.R.T.C. 52 (Mad)]
ISSUE:
Whether Sec.14 of the SARFAESI Act is valid while the Chief
Metropolitan Magistrate or the District Magistrate exercising the
power by way of measure to assist the Bank or financial institutions
to secure the secured assets.
FACTS :
The petitioner in the above Writ Petitions (W.P.No.950/2012 and
30220/2011) has availed from the respondent No.2/Bank on 31/01/2005,
a housing loan to the extent of Rs.8,82,000/- and on 23rd July 2008, a
Cash Credit Loan to the extent of Rs.20,00,000/-, in respect of which the
outstanding as on 01/03/2011 under the Cash Credit Loan facility was
Rs.21,58,531.40 and the housing loan outstanding was as on 19/03/2012
was arrived at Rs.7,28,644.42. As regards the recovery of the said
48
amount, the respondent No.2/Bank has issued a demand notice u/s 13(2)
under SARFAESI Act on 02/09/2009 and since the amount has not been
paid, possession notice was issued u/s 13(4) under the Act on 05/04/2011
for the claim of Rs.28,97,725.91. Thereafter the Respondent No.2/Bank
has approached the learned Chief Judicial Magistrate, Salem by filing
Crl M.P. No.946/2011 u/s 14 of the Act in which the Chief Judicial
Magistrate has passed the following order:
“All the legal formalities have already been complied with scrupulously
and accordingly this court is inclined to confer the relief sought for by
the petitioner under SARFAESI Act, 2002. Thus, the Inspector of Police,
Sooramangalam, P.S. is required to render all the necessary assistance
to the secured creditor (Bank) in taking over the possession of the
secured assets described in the description of the property. “
The petitioners have challenged the validity and correctness of the order
passed by the Chief Judicial Magistrate u/s 14 of the SARFAESI Act.
The petitioner in the W.P.No.950/2012 has chosen to challenge the
Section 14 of the Act having known that the validity of SARFAESI Act,
has been upheld by the Supreme Court, contending inter-alia that
Section 14 of the act confers an unfettered power without proper
guidance to the Chief Judicial Magistrate, that while passing order of
assistance under Section 14, there is no necessity for him to hear the
affected party who is in actual possession property sought to be taken
physical possession. The Section 14 of the Act has to be read down in the
interest of justice: that the said section is arbitrary and in violation of
fundamental rights guaranteed under Article 14, 19 (1)(e), 19(1)(g) and
21 of Constitution of India and therefore is liable to be struck down.
The petitioner counsel has also contended that due to various conflicting
views expressed by the various High Courts in respect of Section 14 and
in order to save the bonafide occupants from arbitrary eviction by
obtaining the order of assistance by the secured creditor by approaching
the Chief Judicial Magistrate, under Section 14 of the Act, validity of
said position needs a re-look. The High Court heard the respective
counsel and given our anxious thought and issues involved in the above
Writ Petition challenging the vires of the Section 14 of the SARFAESI
Act.
The Hon'ble High Court of Madras held that it is relevant to refer to
another later judgment of the Supreme Court of India in United Bank of
India Vs. SatyawatiTandon (2010) 8 S.C.C. 110, wherein the Supreme
Court has held that it is not only against the possession notice u/s 13(4),
31
49
State Bank of India
but also the order passed u/s 14 of the Act, an application can be filed u/s
17(i) of the Act. Strongly denouncing the conduct of the High Court in
interfering Article 226 of Constitution of India with an order passed u/s
13(4) and 14 of the Act. Therefore it is clear that even against an order of
possession taken through the administrative fiat from Chief
Metropolitan Magistrate or District Magistrate an application u/s 17 of
the Act can be filed by any person affected which includes a tenant in
lawful occupation, to the Debt Recovery Tribunal. While holding that
the secured creditor to enforce his right u/s 13(4) of the Act, in particular,
Section 13(4A) of the Act, may take recourse to Section 14 of the Act, it
was held in the latest judgment in Court in KanaiyalalLalchandSachdev
v. State of Maharashtra (2011) 2 S.C.C. 782 that it is after resorting to
Section13 (4), the assistance under Section 14 arises and against any
measure taken u/s 14 of the Act, any person can approach the Debt
Recovery Tribunal u/s 17 of the Act.
In its conclusion, the High Court held as follows: In view of the
judgments of Supreme Court commencing from Mardia Chemicals Ltd
vs. Union of India, 2004 (2) CTC 759 (SC) Supra, wherein SCI has
analyzed threadbare the various provisions of SARFAESI Act, we are
unable to accept the contention of counsel appearing for the petitioner in
W.P. of 950/2012 for declaration that Section 14 of SARFAESI is null
and void except issuing certain guidelines as stated above. Accordingly
W.P. 950/2012 stands dismissed and Section 14 is held valid. In the
result, all the Writ Petition is dismissed with above observations.
DECISION
The powers of the Chief Metropolitan Magistrate of District Magistrate
under Section-14 of the SARFAESI Act are constitutionally held valid,
while exercising the power by way of measure to assist the Bank or
financial institutions to secure the secured assets.
50
Notes
Notes
Monthly Review December 2011
SBI Monthly Review is brought out by the State Bank of India, Economic
Research Department, Corporate Centre, State Bank Bhavan, Madam Cama
Road, Mumbai - 400 021
Disclaimer: The SBI Monthly Review is not a priced publication. Data and
information is based on press and other reports and no responsibility is accepted for
the accuracy of facts and figures contained therein. The opinions expressed do not
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Sbi Monthly Review Sep12 PDF

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September 2012

Challenges of Inclusive Banking

Highlights of Previous Issues

Profitable Financial Inclusion Model Shri Umesh Chandra Sahu

Empowerment of Staff: Ms. Paromita Ghosh

Legal Decisions on Banking Smt. K.K.Sethulakshmi

India's Financial Sector: Case for a Shri Pratip Chaudhuri

State Bank of India Monthly Review September 2012

Sustainable Excellence Through Shri Hemant Contractor 10

The Pursuit of Complete Financial Ms. Bindu Ananth 15

Profitable Financial Inclusion Shri Pulak Kumar Sinha 33

Legal Decisions on Banking Shri M. Manoharan 48

SBI Monthly Review Editorial Committee

Shri A. Krishna Kumar

It is an honour to be here in this distinguished gathering to share our

“Financial Inclusion is the process of ensuring access to appropriate

Minimum products to be offered are:

b) Violation of KYC/AML rules: BCs may violate KYC/AML rules

Financial literacy: Mere availability of financial services is not of

inclusion (in both urban and rural areas)

Shri Hemant Contractor

Ms. Bindu Ananth Mr. Gregory Chen Mr. Stephen

Alakudi is a remote farming village near the southernmost tip of India in

some of the 15 financial products available at the branch. The approach

management team hired locally. KGFS management believes that this

focused approach helps in building trust, which is paramount for a

of scope which adds to feasibility of sustainable operation for the model.

rules that are often set by regulators, opportunities to raise further

area of one institution may need to be expanded or contracted, depending

The Kenya Commercial Bank (KCB) is a leading Bank in Africa. The

Chart - 1: Risk Management in Banks

Avoidable risk Best business practices

Transferable risk Participating in

However, unlike the example of KCB mentioned above, Indian banks do

a. Banks are denied the opportunity of risk management in the

b. Apart from lending to commodity-based user groups, banks are also

Box 2: Price risk management related to agricultural lending – A

was facing considerable problems of default in the cotton and coffee

A Committee set up by the Government of India to examine the impact of

A longer-term comparison of returns across asset classes reveals the

An analysis (Table 5) on historical price movement clearly shows the

parameters/portfolio 100% 60% equities / 80% equities / 80% (60% equities /

a. As a hedge against inflation

Table 6: Correlation of Commodity Futures Returns with Stocks, Bonds, and

As seen from above table, commodity futures returns are positively

participate in the commodity derivatives market, in the interest of banks'

Shri Pulak Kumar Sinha

What is Financial Inclusion?

Why is Financial Inclusion?

There was only one bank branch per 14,000 people.

Significantly simplified KYC documentation requirements for small

As a result, there were a number of frauds leading to numerous disputes

Thus, their role in financial inclusion cannot be underestimated.

deposits, converting into a full-fledged bank branch may be quite

“Empowerment is the process of enhancing feeling of self-efficiency

Empowerment consists of five stages. The first stage involves

management. The bank introduced the concept of Local Head Office,

Introduction of Quality Circles empowers the staffs in the bank. The

Sometimes, empowered employee may not provide full support as

DIVISION BENCH MADRAS HIGH COURT

CITATION : [2012(2) D.R.T.C. 52 (Mad)]

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Financial literacy: Mere availability of financial services is not of

There was only one bank branch per 14,000 people.

Significantly simplified KYC documentation requirements for small