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MANAGEMENT OF FINANCIAL SERVICES
A PROJECT REPORT ON RURAL BANKING IN INDIA
SUBMITTED TO: M/S. Khushbu shah (Faculty member of M.B.A department of S.P.B.Patel engineering college)
S.P.B.Patel Engineering college, Linch d to Hemchandracharya North Gujarat University
SUBMITTED BY: Kinjal Prajapati (0848) Aisha Shah (0851)
S.P.B.PATEL ENGINEERING COLLEGE, LINCH
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MANAGEMENT OF FINANCIAL SERVICES
ACKNOWLEGMENT
“Chain of mistakes leads towards failures, chain of failures leads to experience and chain of experience leads to success.” That’s what a life’s path is. Some is applicable to my project work. I do not claim that I have a complete knowledge of the subject. First, I would like to thanks my friends and many persons who directly or indirectly helped me during my project. Doing most favorable my project part, who help me and acknowledge me, I would like to express my profound gratitude to M/s. Khushbu Shah, Assistance faculty, S.P.B.Patel eng. college for guiding me right related to topic.
Kinjal prajapati Aisha shah (M.B.A. 4th sem)
S.P.B.PATEL ENGINEERING COLLEGE, LINCH
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MANAGEMENT OF FINANCIAL SERVICES
CONTENT No.
Particulars
1.
Current State of Rural Banking in India
2.
Key Drivers of Financial Exclusion of Rural Banking in India
8
3.
Reasons for Unprofitable Rural Banking in India Usage Issues for Rural Customers
11
4. 5. 6. 7. 8. 9.
Market Opportunity of Rural Banking in India Improving Access of rural Banking In India Conclusion Bibliography Annexure
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13 16 18 21 22 23
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CURRENT STATE OF RURAL BANKING IN INDIA The Indian Economy
India is the 12th largest economy in the world in of gross domestic product (GDP), and fourth in of purchasing power parity (PPP)1. The growth of the economy is equally impressive with an average of over 8.0% during the last three years2. However, in of GDP per capita, India ranks a lowly 160th among other nations. Within the country, there is a stark divide in the incomes of urban and rural areas with the average monthly per capita consumption expenditure (MPCE) in urban India being almost double that of rural India. In addition, there are significant disparities in urban and rural consumption expenditure between different states. Jharkhand and Orissa, for example, have an MPCE of approximately Rs. 900 in urban areas and Rs. 410 in rural areas4. In other states like Punjab and Haryana, the urban rural disparity is significantly lower. A fifth of the Indian population is below the poverty line (BPL) today with a MPCE below Rs 340. In some states like Jharkhand and Orissa, the proportion of BPL is greater than 40%. Diamond believes that the segments that are not considered BPL should all be considered as “potentially bankable” with genuine financial needs that could be met by formal financial and banking systems. Current State of Indian Banking
An important metric to determine the level of financial outreach/inclusion is the ratio of the number of deposit s to population. It gives a snapshot of the penetration of deposit s and credit s in India in comparison with a few select countries with similar socio-cultural and economic conditions. Even in comparison with other developing economies, India has a significant opportunity for increasing penetration of both deposit and credit s. Not only is there a large disparity between India and other countries in banking penetration but there is also a large variation in banking penetration within urban and rural India. While urban India seems to be over-banked with more than 100% penetration (many urban Indians have more than one bank ), rural India lags far behind with a 19% penetration. The variance in rural and urban deposit and credit penetration is not restricted only to few states but is common across all states.
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MANAGEMENT OF FINANCIAL SERVICES In addition, the average value of a deposit and a credit is also quite low in rural areas as compared to urban areas. Diamond believes that the reasons for lower penetration levels are partly economic, as explained by the low GDP per capita in the rural areas of the country, and partly a result of “controllable” factors that are inherent in formal banking systems in India today. The low deposit and credit penetration and low average values in deposit and credit s demonstrate that banking outreach in rural India is suboptimal. This low outreach can be explained by two key parameters: access and usage. Simply defined, access is the availability of financial services, and usage is the actual use of those services. Access is influenced by issues such as the basic economic state of rural India, lack of physical infrastructure facilities, regulatory constraints, and the economics of rural banking. Usage is constrained by social issues such as illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system. Access and usage are not synonymous, as people may have access to financial services, but decide not to use them, either for socio-cultural reasons or because opportunity costs are too high. List of Rural Banks in India Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. Apart from SBI, there are many other banks which function for the development of the rural areas in India. These banks are listed below: Andhra Pradesh
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Bihar
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MANAGEMENT OF FINANCIAL SERVICES • • • • •
Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank Chhattisgarh
• • •
Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank Durg-Rajnandgaon Gramin Bank Haryana
• •
Jammu Rural Bank Ellaquai Dehati Bank Kamraz Rural Bank Assam
• •
• • • • •
• • •
Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank Himachal Pradesh
• •
Himachal Gramin Bank Parvatiya Gramin Bank Punjab
• • •
Punjab Gramin Bank Faridkot-Bhatinda Kshetriya Gramin Bank Malwa Gramin Bank Kerala
• •
Narmada Malwa Gramin Bank North Malabar Gramin Bank Tamil Nadu
• •
Pandyan Grama Bank Pallavan Grama Bank
Jharkhand Gramin Bank Vananchal Gramin Bank Madhya Pradesh
• • • •
Gujarat
Assam Gramin Vikash Bank Langpi Dehangi Rural Bank Jharkhand
• •
Madhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank Uttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank
Harayana Gramin Bank Gurgaon Gramin Bank Jammu & Kashmir
• • •
• • • • •
Narmada Malwa Gramin Bank Satpura Kshetriya Gramin Bank Madhya Bharath Gramin Bank Chambal-Gwalior Kshetriya Gramin Bank Rewa-Sidhi Gramin Bank Sharda Gramin Bank Ratlam- Mandsaur Kshetriya Gramin Bank Vidisha Bhopal Kshetriya Gramin Bank Mahakaushal Kshetriya Gramin
Maharashtra
• • • • • •
Marathwada Gramin Bank Aurangabad -Jalna Gramin Bank Wainganga Kshetriya Gramin Bank Vidharbha Kshetriya Gramin Bank Solapur Gramin Bank Thane Gramin Bank
•
Ratnagiri-Sindhudurg Gramin Bank
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MANAGEMENT OF FINANCIAL SERVICES Bank
•
Jhabua Dhar Kshetriya Gramin Bank Karnataka
• • • • •
•
Karnataka Vikas Grameena Bank Pragathi Gramin Bank Cauvery Kalpatharu Grameena Bank Krishna Grameena Bank Chikmagalur-Kodagu Grameena Bank
Rajasthan
• • • • •
Baroda Rajasthan Gramin Bank Marwar Ganganagar Bikaner Gramin Bank Rajasthan Gramin Bank Jaipur Thar Gramin Bank Hodoti Kshetriya Gramin Bank
•
Mewar Anchalik Gramin Bank
Visveshvaraya Gramin Bank Orissa
• • • •
Kalinga Gramya Bank Utkal Gramya Bank Baitarani Gramya Bank Neelachal Gramya Bank
•
Rushikulya Gramya Bank
West Bengal
• •
Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank
•
Uttar Banga Kshetriya Gramin Bank
Meghalaya
Arunachal Pradesh
• •
Ka Bank Nogkyndong Ri KhasiJaintia Nagaland
•
Arunachal Pradesh Rural Bank Manipur
•
Manipur Rural Bank
Nagaland Rural Bank
Mizoram
Tripura
•
•
Mizoram Rural Bank
Tripura Gramin Bank Uttar Pradesh
• • • • • •
Purvanchal Gramin Bank Kashi Gomti Samyut Gramin Bank Uttar Pradesh Gramin Bank Shreyas Gramin Bank Lucknow Kshetriya Gramin Bank Ballia Kshetriya Gramin Bank
•
Triveni Kshetriya Gramin Bank
Uttaranchal
•
Uttaranchal Gramin Bank
•
Nainital Almora Kshetriya Gramin Bank
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MANAGEMENT OF FINANCIAL SERVICES
KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL BANKING According to Diamond estimates, approximately 245 million adults in rural India do not have a bank today. As depicted in Following Table, this reflects 24% of the total population. While 60 million out of 245 million may not need banking services because they are below the poverty line, Diamond believes that approximately 185 million “potentially bankable” people do not use formal banking services because of reasons like poor access or usage. 100 47
53
37 16
13
Series1
24 6
18
To ta lP op ul N on at io A n du lt P op ul at io Ad n ul tP op U rb ul at an io Ad n ul tP op R ul ur at al io A n du lt Po pu la Ba tio nk n ed P op U ul nb at io an n ke d P op Fi na ul at nc io ia n lly C on st Po ra nt in ts en tia lly Ba nk ab le
120 100 80 60 40 20 0
Source: Census India ;BSR 2008—Reserve Bank of India; World Bank & NCAER (2008).
Access Issues for Rural Customers Access is explained in of infrastructure, physical distance, limited delivery capabilities, regulatory constraints and the economics of rural banking. The banking infrastructure in rural India is not encouraging, with just 7% of villages housing a bank branch. What’s more, the poor physical and social infrastructure also impacts the access to financial services, with 23% of villages going without electricity, 67% without a Post Office, and an average rural literacy rate of 59% and secondary school penetration of 12%. This lack of physical and social infrastructure in rural India is a key issue impacting access to formal financial services. The average distance to a branch in India is approximately 3.8 Kms. While this compares favorably to the average distance to a branch in a developed market like the U.S. (which is 6 Kms6), there are significant additional challenges in India in the form of unpaved roads and limited access to modern transportation. Most rural customers are likely to sacrifice an entire day’s wage to travel to a bank branch which is open S.P.B.PATEL ENGINEERING COLLEGE, LINCH
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MANAGEMENT OF FINANCIAL SERVICES between 10:00am and 5:00pm. While some banking transactions could be done over phone, this is rarely an option in a country with such low rural tele-density. Limited delivery capability is a significant challenge. Much of rural India is serviced through branches because ATM penetration is low and other channels such as Phone and Internet Banking are non-existent. Intermediaries like Non-Governmental Organizations (NGOs), Self-Help Groups, and Micro Finance Institutions (MFIs) are being used by banks to improve access to credit and savings. However, these channels, in their current form, offer limited services. There are some regulatory constraints imposed by the Reserve Bank of India (RBI) which may inadvertently contribute further to the lack of formal banking services in rural areas. For example, the RBI does not allow banks to post any person other than a security guard at ATMs. Hence, banks cannot deploy many ATMs in rural areas as many rural customers require in-person . A second regulatory inhibitor is that new banks planning to establish a branch in a rural area have to receive approval from the Lead Bank and District Collector of that district. Hence, banks choose not to open new branches in certain areas even when it is profitable to do so because there is no certainty of getting approvals. Many banks view the rural market as a regulatory requirement rather than an economic opportunity. Banks have from time to time borne the social cost of lending to the rural economy at rates below their costs. They have also faced capital erosion because of the write-off of loans, particularly agriculture loans. Banks are required via regulatory requirements to open branches in rural areas to provide loans to agriculture and other priority sectors.
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Current Rural Banking Channels Description
Service Provided
Remarks
- Full fledged Branches and - Deposit s 96% of total deposit and 95% of Extension Counters of - Credit s Branch total loans are with scheduled Scheduled Commercial Banks - Remittances commercial banks with including Regional Rural Banks - Cards cooperative banks holding Cooperative Banks - Third-Party Products the difference
-
Intermediaries - Has a high cost-to-serve
- NGOs, SHGs, MFIs and
- MFIs directly lend to the poor
- This
channel delivers limited Cooperatives that act as
and also act as agents for
services in its current form
ATM
Intermediaries to take financial Services to the rural areas
- Onsite
he banks - SHGs borrow from banks and are beneficiaries of loans themselves - Cash Withdrawal
- Negligible presence of this
Others
ATM installed at a branch
- Cash Deposit
channel in rural areas - Offsite ATM installed at a remote Location
- Money Transfer - Cheque Book Request - Bill Payments
Source: Reserve Bank of India; Diamond analysis.
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REASONS FOR UNPROFITABLE OF RURAL BANKING IN INDIA High Non-performing Loans (NPL):
Banks have higher non-performing loans in rural areas because rural households have irregular income and expenditure patterns. The issue is compounded by the dependence of the rural economy on monsoons, and loan waivers driven by political agendas. NPLs from the agriculture sector are 7.7%, compared to 3.5% across non-agriculture sectors8. In order for banks to view rural India as a growth opportunity, rather than a regulatory requirement, a combination of these issues must be addressed. Increasing financial access to rural areas is contingent upon basic conditions such as proper infrastructure and an enabling regulatory framework, as well as innovative thinking on the part of commercial banks. Access issues, however, explain only one part of the problem. Usage is an equally important issue for rural customers. Low Ticket Size:
The average ticket size of both a deposit transaction and a credit transaction in rural areas is small. This means that banks need more customers per branch or channel to break even. Considering the small catchments area of a branch in rural areas, generating a customer base with critical mass is challenging. High cost to serve:
Branches are the most used channel in rural areas. This is because many rural people are not literate and are not comfortable using technology-driven channels such as ATMs, phone banking or internet banking. On the other hand, a branch is an expensive channel for banks (Following Table). In addition, rural people, whenever they have access to banks, have frequent low ticket and cash-based transactions, which increase the overall transaction cost for their bank.
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MANAGEMENT OF FINANCIAL SERVICES
Cost Per Transaction in Indian Banks 60 50
48
40 30
25
Series1 18
20
8
10
4
0 Branch
Phone (Call Centre)
ATM
Phone(IVR)
Internet
Source: Reserve Bank of India; CGAP, World Bank.
Higher risk of credit:
Rural households may have highly irregular and volatile income streams. Irregular wage labor and the sale of agricultural products are the two main sources of income for rural households. The poor rural households (landless and marginal farmers) are particularly dependent on irregular wage employment. Rural households also have irregular expenditure patterns. The typical expenditure profile of rural households is small, with daily or irregular expenses incurred through the month. Furthermore, a majority of households incur at least one unscheduled expenditure per year, with the most frequent reasons being medical or social emergency7. In short, the rural customer is generally considered to be a risky one. Information Asymmetry:
Since many rural people do not have bank s, there is a lack of information on customer behavior in rural India. Absence of a Credit Information Bureau also complicates the problem as banks have to rely on informal sources to learn the credit history of rural customers. A lack of reliable information can result in either missed opportunities in not approving otherwise eligible loan candidates, or nonperforming loans.
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USAGE ISSUES FOR RURAL CUSTOMERS Even if access to formal banking is provided to rural customers, there is no guarantee that these services will be used. According to a study conducted by the World Bank, many households, even in developed countries, choose not to have a bank as they do not engage in many financial transactions—they collect wages in cash, spend in cash and do not wish to be burdened by a bank 9. To compound the situation many customers in rural India, who have access to and would otherwise choose to use formal financial services, do not do so because the product and service mixes do not meet their needs. The financial service needs of rural customers are not confined to just savings and credit, as is usually assumed. Their financial needs are linked to their life cycle needs, ranging from savings to credit to insurance to remittances. In fact, even the savings and credit products currently offered to rural customers do not entirely meet their needs. Access to savings and investment facilities is critical for the poor. The two critical needs for the rural poor are micro-savings and frequent withdrawals. These needs facilitate a customer in building capital over the long term, as well as coping with income shocks in the near term. However, banks do not offer adequate services to address these needs. The lack of services, therefore, leaves the rural poor with little option than to transact with the informal banking market. A study conducted by Micro Save also concludes that the poor transact with the informal sector because it will accept small amounts, provide doorstep service, and ensure ease of enrolment. Rural customers need loans not only for productive purposes but also for consumption needs (Following Table). A part from agricultural , rural customers need micro credit for consumption, education and emergencies. Though banks offer purpose free loans (personal loans and credit cards) in urban areas quite liberally, in rural areas sanction of such loans is significantly restricted. Therefore, the poor raise these loans through the informal financial system (it is worth noting that these loans taken from the informal system are almost always repaid or renewed12). In addition, larger households need occasional high value micro-enterprise loans for small capital investment. Though banks offer these loans, they require excessive
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MANAGEMENT OF FINANCIAL SERVICES documentation and time-consuming customer applications.
processes
which
discourage
Purpose of Borrowing Rural Household Borrowing Other business expenditure, 14% Agriculture expenditure, 38%
Other business expenditure Household expenditure
Household expenditure, 48%
Agriculture expenditure
Bank Lending to Rural Households
Personel Loans, 12% Personel Loans Other Business Loan, 52%
Agriculture Loan Agriculture Loan, 36%
Other Business Loan
A significant percentage of borrowing is toward consumption and other household expenditure, whereas formal financial institutions in rural India provide loans primarily for productive purposes. Source: AIDIS—2008, National Sample Survey Organization (NSSO); Diamond analysis.
Insurance reduces the vulnerability of poor households by replacing the uncertain prospect of large losses with the certainty of payout against small, regular payments. It is integral to a comprehensive risk management strategy for poor households. This includes life, health, accident and asset (dwelling, crop, and livestock) insurance. Banks and insurance firms do not offer these services in
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MANAGEMENT OF FINANCIAL SERVICES many rural areas, leading the poor to rely on the informal financial system. There are many rural households which depend on weekly or monthly remittances from their family who have moved to urban areas. At present, they depend on informal channels to remit the money and consequently either risk the loss of money or pay high transaction fees. Banks do not offer seamless remittance facilities between urban and rural branches as many of the rural branches are not computerized and connected to the main bank’s computer systems. This often results in the beneficiary receiving the amount two weeks after it has being transferred. This represents yet another key service which is not provided. The transaction cost for a rural customer to receive credit primarily constitutes four attributes: the interest rate, loan amount received as a percentage of amount applied, bribes paid, and the lead time to process the loan. Though the formal banking system offers loans at interest rates lower than informal banking systems, the time taken for a loan to be sanctioned is high which increases uncertainty and opportunity cost. In addition, the customer needs to pay almost 10% of the loan amount in bribes and eventually receives an amount that is less than what was applied for. Therefore, while the interest rates are usurious in the informal financing system, rural customers still resort to this channel because the waiting time to receive the loan is negligible and there are no indirect costs or commission. Banks also insist on collateral security which many rural poor cannot afford. As far as savings are concerned, though the formal banking system provides financial security, the cost of opening and operating an is high. The overall cost of transacting with the formal financial system increases for a rural person because of additional costs such as expenses incurred to reach a branch and the opportunity cost of lost wages. Since rural banks are generally not within an accessible area and do not operate at convenient times, the rural customer must forgo a day’s wage to reach a branch. Informal systems, on the other hand, involve a lower transaction cost, but they are risky and in some cases result in the loss of one’s entire capital. In short, this leaves the rural customer to choose between two unfavorable options. In summary, the services being offered by the formal banking system do not seem to meet the needs of the rural poor. A World Bank study suggests that the poor apply a set of criteria to judge the services being offered by any financial service provider, including: • Products—Are financial services available and tailored to my needs?
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MANAGEMENT OF FINANCIAL SERVICES • Cost—What is the total cost of the service (including opportunity cost)? • Convenience—How easy is it to access and use? • Eligibility—Am I eligible for financial services and can they be accessed repeatedly? As explained earlier, the savings products offered in the current format do not qualify as a flexible, convenient and cost-efficient service. Similarly, loan products do not meet product and eligibility criteria. In addition, insurance and remittance services are not even available. The cost of services, despite lower interest rates, is high because of other indirect costs which make the banking services cost-inefficient.
MARKET OPPORTUNITY OF RURAL BANKING At present, a rapidly growing urban India is the focus of the banking sector; however, as the deposit penetration numbers suggest (Figure 3 & 4), the market is highly competitive and over banked. Despite this, most banks are still not shifting their focus to the rural opportunity, as they are apprehensive about the total market potential of the rural market and the profitability of rural banking channels. Contrary to the widely held notion, however, the rural market is attractive from both a credit and deposit perspective. The credit demand in rural areas is approximately Rs 1,330 billion (based on an estimate by World Bank). There are other studies by the Planning Commission and ICICI Bank which put the figure even higher at Rs 1,440 billion and Rs 1,500 billion respectively. Similarly, on the deposit side, a large segment of the rural population does not save with formal banking channels because banks are not accessible and do not provide the appropriate products and service, leaving a significant opportunity to grow the deposit base. At present, the penetration of banking in rural areas is sub-optimal with a large market remaining untapped in both the liability (~ Rs 215 billion) and asset (~ Rs 1,204 billion) sides of the business. These estimates clearly suggest that there is sufficient demand in the rural market to encourage banks to think seriously about rural areas as an alternative growth opportunity. As we identified earlier, access and usage are two broad concerns which explain why the potentially bankable are unbanked. With regard to access, the challenge for banks is to identify profitable channels that meet the needs of rural customers. With regard to usage, banks need to understand the requirements of the rural customer and customize products and services
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MANAGEMENT OF FINANCIAL SERVICES Accordingly (Following Table).
Proposed Approach to Tap Potentially Bankable Population
Improve Access For Rural Customers
Convert Potentially Bankable
Encourage Usage of Services
Address Access Needs Of Rural Customers Ensure Channel Profitability
Address Usage Needs Of Rural Customers Bank Initiatives To Improve Usage
Source: Diamond analysis
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IMPROVING ACCESS FOR RURAL BANKING Today, branches are the primary delivery channel in rural areas. Though there are 32,000 commercial bank branches in India, they cover less than 7% of total villages. Opening more branches is not necessarily profitable as many pockets of rural areas do not have business enough to justify an expensive branch channel. Therefore, to improve access in rural areas, banks need to modify existing channels, introduce new channels and identify innovative ways to integrate the two. Modify Existing Channels
Fortunately there are a variety of options available for banks looking to modify their existing channels. To reduce the costs imposed by branches, banks should consider the option of sharing their branch infrastructure. This would not be too dissimilar to the example of the telecom industry sharing network infrastructure or the fast food industry sharing food courts in urban areas. Though infrastructure sharing may raise concerns over client confidentiality and data leakage, in the long run banks will only benefit from such collaboration. ATMs are an effective channel which can deliver many of the services frequently used by a branch customer. However, ATMs, in their current form, are not suitable for rural areas as the literacy level and transaction ticket amount is too low. ATMs can, however, be designed to meet the needs of rural customers. For example, ICICI Bank is working with IIT Chennai to develop an ATM that has a biometric
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MANAGEMENT OF FINANCIAL SERVICES fingerprint , accepts soiled notes, and lower value denominations. In addition to modifying the design of the machines, banks should also hold discussions with the RBI to allow an attendant to be posted at ATMs. This will enhance the usability of ATMs. Though phone banking and internet banking are cost-effective channels, given very low tele-density and low internet penetration in rural areas, the ability to use these channels to reach the rural customer is low. However, phone and internet banking should be considered once infrastructure and literacy levels improve in rural India. A business correspondent could then run an e-kiosk to assist customers to transact over these channels. For example, Centenary Bank in Uganda uses internet and phone banking to provide bill payments, money transfers and loan repayments. Business correspondents can be provided with point-of-sale (POS) functionality to allow customers to deposit and withdraw cash from their s. Combining POS with a smart card is one way to improve access. Brazil has successfully used banking correspondents who use POS and card readers to provide current s, loans, and insurance, accept bill payments, and perform other transactions. Introduce New Channels
The RBI allows banks to appoint business correspondents and facilitators to be used as intermediaries in providing banking services. NGOs, MFIs, Societies, Section 25 companies, ed NBFCs not accepting public deposits, and Post Offices can be appointed as Business Correspondents. Business Correspondents can provide several services which are not currently offered by SHGs and MFIs, including: (i) identification of borrowers and fitment of activities; (ii) collection and preliminary processing of loan applications including verification of primary information/data; (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling; (iv) processing and submission of applications to banks; (v) promotion and nurturing Self Help Groups/t Liability Groups; (vi) post-sanction monitoring; (vii) monitoring and handholding of Self Help Groups/t Liability Groups/Credit Groups/others; and (viii) follow-up for recovery; (ix) disbursal of small value credit, (x) recovery of principal/collection of interest (xi) collection of small value deposits (xii) sale of microinsurance/ mutual fund products/ pension products/ other third-party products and (xiii) receipt and delivery of small value remittances/ other payment instruments.
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MANAGEMENT OF FINANCIAL SERVICES The introduction of Business Correspondents may face some challenges from labor unions. However, Diamond believes that there may be some options to address the concerns of the current workforce while using Business Correspondents to capture more value from rural customers. Caixa Economica, a state-owned bank in Brazil, manages the country’s lottery network and distributes government benefits. To increase the access of its services, Caixa extensively utilizes the Banking Correspondent channel, with 14,000 banking correspondents covering all of Brazil’s 5,500 municipalities. In less than 2 years, Caixa opened about 2.8 million new s and estimates that 40% of its banking transactions are handled through the banking correspondent channel. Satellite offices are a cost-effective alternative to branches. These offices can be established at fixed premises in villages and are controlled and operated from a base branch located at a block headquarters. All types of banking transactions may be conducted at these offices. Banks have, however, not used this channel actively, despite the argument that this channel is relatively less expensive, as it can draw personnel from the main branch and can remain open for just two days a week. This channel, therefore, is appropriate in blocks and districts which are densely populated. In the urban areas, most Indian banks opt for an extension counter where the business does not justify a full-fl edged branch. Similarly, satellite branches can cater to rural areas which do not justify a large branch. Where banks do not find it economical to open full-fl edged branches of satellite offices, mobile offices may be more appropriate. Mobile offices extend banking facilities through a well-protected truck or van. The mobile unit visits villages on specified days/ hours. The mobile office would be d with a branch of the bank, and serve areas which have a large concentration of villages. This will not be dissimilar to the mobile ATMs implemented by some of the Indian banks in the urban areas. Determine the Combination of Channels
There is no one right channel or solution to improve access in rural areas. Banks have to evaluate the trade-offs between those channels that are most convenient to customers and those that are the most profitable. Banks are not comfortable opening new rural branches because many of those that already exist are unprofitable. Therefore, determining the right combination of channels is critical to improving access in profitable ways. An innovative approach to improving access will consider a combination of these channels. For example:
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MANAGEMENT OF FINANCIAL SERVICES • Branches and Satellite Branches— In addition to providing regular banking operations, providing backend to manage and audit the operations of business correspondents. • A low-cost, custom-made ATM— Managed by a business correspondent to bring down the operating cost and scale the channel. • An e-kiosk—Managed by a business correspondent with internet banking, ATM and POS terminal in relatively large rural areas. • A business correspondent—Using manual ledgers or POS/Palmtop to act as deposit collector and remitting agent in smaller rural areas. While this list is not exhaustive, it highlights the need for creative solutions that apply the right channel to the right market and transaction. In South Africa, Capitec has combined convenient branches along transportation routes (for example, train and bus stations, and taxi stops). In addition, it has rolled-out debit cards and automatic teller machines across 200 of these branches to stimulate savings among low-income earners. Between February and August 2007, the number of customers jumped from around 30,000 to more than 90,000.
CONCLUSION There are 185 million bankable adults in rural India who are unbanked because of access and usage issues. This presents a significant opportunity for commercial banks. However, to reach this market and subsequently build an inclusive financial system, there must be a coordinated and concerted effort by the three key stakeholders: the Government of India, the Reserve Bank of India and the commercial banks. In addition, a partnership between banks and business correspondents, and collaboration amongst banks is critical. Furthermore, banks should tailor their product and service mix to meet rural
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MANAGEMENT OF FINANCIAL SERVICES needs, and adapt their delivery models to ensure commercial viability of their rural banking operations.
BIBLIOGRAPHY 1. 2. 3. 4.
World Bank 2008 Reserve Bank of India 2008 www.cia.gov National Sample Survey Organization (NSSO), Household Consumer Expenditure in India (2006) 5. Census 2006 6. Access to and Usage of Financial Services, World Bank 2008 7. RFAS, 2008, World Bank & NCAER 8. Reserve Bank of India, www.rbi.org.in 9. Access to Financial Services by Stijin Claessens, World Bank 2005 10. Rutherford Stuart, “The Poor and their Money,” January 2000 11. www.microsave-africa.com 12. RFAS 2008, World Bank
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MANAGEMENT OF FINANCIAL SERVICES 13. Bharat Nirman is a four year business plan of the Government of India to improve rural infrastructure 14. National Sample Survey Organization (NSSO) 2007 .
ANNEXURE Table – 1 : Bank Loan outstanding against SHGs – Agency-wise Position (Amount Rs. crore)
Agency
During Total Bank Loan outstanding the against year SHGs as on 31 March 2008
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Per SHGbank loan Outstanding (Rupees)
Out of Total : Bank loan outstanding against SHGs under SGSY
23
MANAGEMENT OF FINANCIAL SERVICES No. of SHGs Commercial Banks (Public & Private Sector)
200708 200809 % growth Regional 2007Rural 08 Banks 200809 % growth Cooperative 2007Banks 08 200809 % growth TOTAL 2007-08 200809 % growth
% Shar e
Amount
% Shar e
No. of SHGs
Amount
2378847 65.6
11475.47 67.5
48,240
638283 3225.92
2831374 67.1
16149.43 69.6
57,037
645145 3961.53
19.0
40.7
18.2
1.1
22.8
875716
24.2
4421.04
26.0
50,485
223191 1332.33
977834
23.1
5224.42
23.0
53,428
258890 1508.10
5.8
16.0
13.2
11.7
18.2
371378
10.2
1103.39
6.5
29,711
55504
258.62
415130
9.8
1306.00
5.8
31,460
72852
392.09
100.0
18.4 16999.90
100.0
5.9 46,884
31.3 916978
51.6 4816.87
11.8 3625941
4224338 100.0
22679.85 100.0
53,689
976887 5861.72
16.5
33.4
14.5
6.5
21.7
Table – 2 : Agency-wise NPAs of Bank loans to SHGs (Amount Rs. crore)
Agency
Commercial Banks
Total no. of Banks reported data on NPAs
26
NPAs as on 31 March 2009 Outstanding Loans against SHGs** 15086.65
Amount of NPAs 363.27
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% of NPAs to Outstanding bank loans 2.4
24
MANAGEMENT OF FINANCIAL SERVICES (Public Sector ) Commercial Banks (Private Sector) Regional Rural Banks (RRBs) Cooperative Banks
12
1376.93
23.83
1.7
72
4203.46
177.79
4.2
182
894.00
60.97
6.8
TOTAL
292
21561.04
625.86
2.9
Table – 3 : Recovery Performance – Agency-wise (All SHGs)
Agency
No. of Banks reported recovery data
No. of banks based on percentage distribution of recovery performance of bank loans to SHGs as on 31 March 2009 =/> 95% 80-94% 50-79% < 50%
Commercial Banks (Public Sector) Commercial Banks (Private Sector) Regional Rural Banks Cooperative Banks
25
6
12
7
0
7
5
1
0
1
65
12
31
15
7
170
56
58
37
19
TOTAL
267
79
102
59
27
29.6
38.2
22.1
10.1
Percentage of Banks
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A PROJECT REPORT ON RURAL BANKING IN INDIA
SUBMITTED TO: M/S. Khushbu shah (Faculty member of M.B.A department of S.P.B.Patel engineering college)
S.P.B.Patel Engineering college, Linch d to Hemchandracharya North Gujarat University
SUBMITTED BY: Kinjal Prajapati (0848) Aisha Shah (0851)
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MANAGEMENT OF FINANCIAL SERVICES
ACKNOWLEGMENT
“Chain of mistakes leads towards failures, chain of failures leads to experience and chain of experience leads to success.” That’s what a life’s path is. Some is applicable to my project work. I do not claim that I have a complete knowledge of the subject. First, I would like to thanks my friends and many persons who directly or indirectly helped me during my project. Doing most favorable my project part, who help me and acknowledge me, I would like to express my profound gratitude to M/s. Khushbu Shah, Assistance faculty, S.P.B.Patel eng. college for guiding me right related to topic.
Kinjal prajapati Aisha shah (M.B.A. 4th sem)
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MANAGEMENT OF FINANCIAL SERVICES
CONTENT No.
Particulars
1.
Current State of Rural Banking in India
2.
Key Drivers of Financial Exclusion of Rural Banking in India
8
3.
Reasons for Unprofitable Rural Banking in India Usage Issues for Rural Customers
11
4. 5. 6. 7. 8. 9.
Market Opportunity of Rural Banking in India Improving Access of rural Banking In India Conclusion Bibliography Annexure
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13 16 18 21 22 23
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CURRENT STATE OF RURAL BANKING IN INDIA The Indian Economy
India is the 12th largest economy in the world in of gross domestic product (GDP), and fourth in of purchasing power parity (PPP)1. The growth of the economy is equally impressive with an average of over 8.0% during the last three years2. However, in of GDP per capita, India ranks a lowly 160th among other nations. Within the country, there is a stark divide in the incomes of urban and rural areas with the average monthly per capita consumption expenditure (MPCE) in urban India being almost double that of rural India. In addition, there are significant disparities in urban and rural consumption expenditure between different states. Jharkhand and Orissa, for example, have an MPCE of approximately Rs. 900 in urban areas and Rs. 410 in rural areas4. In other states like Punjab and Haryana, the urban rural disparity is significantly lower. A fifth of the Indian population is below the poverty line (BPL) today with a MPCE below Rs 340. In some states like Jharkhand and Orissa, the proportion of BPL is greater than 40%. Diamond believes that the segments that are not considered BPL should all be considered as “potentially bankable” with genuine financial needs that could be met by formal financial and banking systems. Current State of Indian Banking
An important metric to determine the level of financial outreach/inclusion is the ratio of the number of deposit s to population. It gives a snapshot of the penetration of deposit s and credit s in India in comparison with a few select countries with similar socio-cultural and economic conditions. Even in comparison with other developing economies, India has a significant opportunity for increasing penetration of both deposit and credit s. Not only is there a large disparity between India and other countries in banking penetration but there is also a large variation in banking penetration within urban and rural India. While urban India seems to be over-banked with more than 100% penetration (many urban Indians have more than one bank ), rural India lags far behind with a 19% penetration. The variance in rural and urban deposit and credit penetration is not restricted only to few states but is common across all states.
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MANAGEMENT OF FINANCIAL SERVICES In addition, the average value of a deposit and a credit is also quite low in rural areas as compared to urban areas. Diamond believes that the reasons for lower penetration levels are partly economic, as explained by the low GDP per capita in the rural areas of the country, and partly a result of “controllable” factors that are inherent in formal banking systems in India today. The low deposit and credit penetration and low average values in deposit and credit s demonstrate that banking outreach in rural India is suboptimal. This low outreach can be explained by two key parameters: access and usage. Simply defined, access is the availability of financial services, and usage is the actual use of those services. Access is influenced by issues such as the basic economic state of rural India, lack of physical infrastructure facilities, regulatory constraints, and the economics of rural banking. Usage is constrained by social issues such as illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system. Access and usage are not synonymous, as people may have access to financial services, but decide not to use them, either for socio-cultural reasons or because opportunity costs are too high. List of Rural Banks in India Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. Apart from SBI, there are many other banks which function for the development of the rural areas in India. These banks are listed below: Andhra Pradesh
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Bihar
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MANAGEMENT OF FINANCIAL SERVICES • • • • •
Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank Chhattisgarh
• • •
Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank Durg-Rajnandgaon Gramin Bank Haryana
• •
Jammu Rural Bank Ellaquai Dehati Bank Kamraz Rural Bank Assam
• •
• • • • •
• • •
Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank Himachal Pradesh
• •
Himachal Gramin Bank Parvatiya Gramin Bank Punjab
• • •
Punjab Gramin Bank Faridkot-Bhatinda Kshetriya Gramin Bank Malwa Gramin Bank Kerala
• •
Narmada Malwa Gramin Bank North Malabar Gramin Bank Tamil Nadu
• •
Pandyan Grama Bank Pallavan Grama Bank
Jharkhand Gramin Bank Vananchal Gramin Bank Madhya Pradesh
• • • •
Gujarat
Assam Gramin Vikash Bank Langpi Dehangi Rural Bank Jharkhand
• •
Madhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank Uttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank
Harayana Gramin Bank Gurgaon Gramin Bank Jammu & Kashmir
• • •
• • • • •
Narmada Malwa Gramin Bank Satpura Kshetriya Gramin Bank Madhya Bharath Gramin Bank Chambal-Gwalior Kshetriya Gramin Bank Rewa-Sidhi Gramin Bank Sharda Gramin Bank Ratlam- Mandsaur Kshetriya Gramin Bank Vidisha Bhopal Kshetriya Gramin Bank Mahakaushal Kshetriya Gramin
Maharashtra
• • • • • •
Marathwada Gramin Bank Aurangabad -Jalna Gramin Bank Wainganga Kshetriya Gramin Bank Vidharbha Kshetriya Gramin Bank Solapur Gramin Bank Thane Gramin Bank
•
Ratnagiri-Sindhudurg Gramin Bank
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MANAGEMENT OF FINANCIAL SERVICES Bank
•
Jhabua Dhar Kshetriya Gramin Bank Karnataka
• • • • •
•
Karnataka Vikas Grameena Bank Pragathi Gramin Bank Cauvery Kalpatharu Grameena Bank Krishna Grameena Bank Chikmagalur-Kodagu Grameena Bank
Rajasthan
• • • • •
Baroda Rajasthan Gramin Bank Marwar Ganganagar Bikaner Gramin Bank Rajasthan Gramin Bank Jaipur Thar Gramin Bank Hodoti Kshetriya Gramin Bank
•
Mewar Anchalik Gramin Bank
Visveshvaraya Gramin Bank Orissa
• • • •
Kalinga Gramya Bank Utkal Gramya Bank Baitarani Gramya Bank Neelachal Gramya Bank
•
Rushikulya Gramya Bank
West Bengal
• •
Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank
•
Uttar Banga Kshetriya Gramin Bank
Meghalaya
Arunachal Pradesh
• •
Ka Bank Nogkyndong Ri KhasiJaintia Nagaland
•
Arunachal Pradesh Rural Bank Manipur
•
Manipur Rural Bank
Nagaland Rural Bank
Mizoram
Tripura
•
•
Mizoram Rural Bank
Tripura Gramin Bank Uttar Pradesh
• • • • • •
Purvanchal Gramin Bank Kashi Gomti Samyut Gramin Bank Uttar Pradesh Gramin Bank Shreyas Gramin Bank Lucknow Kshetriya Gramin Bank Ballia Kshetriya Gramin Bank
•
Triveni Kshetriya Gramin Bank
Uttaranchal
•
Uttaranchal Gramin Bank
•
Nainital Almora Kshetriya Gramin Bank
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KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL BANKING According to Diamond estimates, approximately 245 million adults in rural India do not have a bank today. As depicted in Following Table, this reflects 24% of the total population. While 60 million out of 245 million may not need banking services because they are below the poverty line, Diamond believes that approximately 185 million “potentially bankable” people do not use formal banking services because of reasons like poor access or usage. 100 47
53
37 16
13
Series1
24 6
18
To ta lP op ul N on at io A n du lt P op ul at io Ad n ul tP op U rb ul at an io Ad n ul tP op R ul ur at al io A n du lt Po pu la Ba tio nk n ed P op U ul nb at io an n ke d P op Fi na ul at nc io ia n lly C on st Po ra nt in ts en tia lly Ba nk ab le
120 100 80 60 40 20 0
Source: Census India ;BSR 2008—Reserve Bank of India; World Bank & NCAER (2008).
Access Issues for Rural Customers Access is explained in of infrastructure, physical distance, limited delivery capabilities, regulatory constraints and the economics of rural banking. The banking infrastructure in rural India is not encouraging, with just 7% of villages housing a bank branch. What’s more, the poor physical and social infrastructure also impacts the access to financial services, with 23% of villages going without electricity, 67% without a Post Office, and an average rural literacy rate of 59% and secondary school penetration of 12%. This lack of physical and social infrastructure in rural India is a key issue impacting access to formal financial services. The average distance to a branch in India is approximately 3.8 Kms. While this compares favorably to the average distance to a branch in a developed market like the U.S. (which is 6 Kms6), there are significant additional challenges in India in the form of unpaved roads and limited access to modern transportation. Most rural customers are likely to sacrifice an entire day’s wage to travel to a bank branch which is open S.P.B.PATEL ENGINEERING COLLEGE, LINCH
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MANAGEMENT OF FINANCIAL SERVICES between 10:00am and 5:00pm. While some banking transactions could be done over phone, this is rarely an option in a country with such low rural tele-density. Limited delivery capability is a significant challenge. Much of rural India is serviced through branches because ATM penetration is low and other channels such as Phone and Internet Banking are non-existent. Intermediaries like Non-Governmental Organizations (NGOs), Self-Help Groups, and Micro Finance Institutions (MFIs) are being used by banks to improve access to credit and savings. However, these channels, in their current form, offer limited services. There are some regulatory constraints imposed by the Reserve Bank of India (RBI) which may inadvertently contribute further to the lack of formal banking services in rural areas. For example, the RBI does not allow banks to post any person other than a security guard at ATMs. Hence, banks cannot deploy many ATMs in rural areas as many rural customers require in-person . A second regulatory inhibitor is that new banks planning to establish a branch in a rural area have to receive approval from the Lead Bank and District Collector of that district. Hence, banks choose not to open new branches in certain areas even when it is profitable to do so because there is no certainty of getting approvals. Many banks view the rural market as a regulatory requirement rather than an economic opportunity. Banks have from time to time borne the social cost of lending to the rural economy at rates below their costs. They have also faced capital erosion because of the write-off of loans, particularly agriculture loans. Banks are required via regulatory requirements to open branches in rural areas to provide loans to agriculture and other priority sectors.
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MANAGEMENT OF FINANCIAL SERVICES
Current Rural Banking Channels Description
Service Provided
Remarks
- Full fledged Branches and - Deposit s 96% of total deposit and 95% of Extension Counters of - Credit s Branch total loans are with scheduled Scheduled Commercial Banks - Remittances commercial banks with including Regional Rural Banks - Cards cooperative banks holding Cooperative Banks - Third-Party Products the difference
-
Intermediaries - Has a high cost-to-serve
- NGOs, SHGs, MFIs and
- MFIs directly lend to the poor
- This
channel delivers limited Cooperatives that act as
and also act as agents for
services in its current form
ATM
Intermediaries to take financial Services to the rural areas
- Onsite
he banks - SHGs borrow from banks and are beneficiaries of loans themselves - Cash Withdrawal
- Negligible presence of this
Others
ATM installed at a branch
- Cash Deposit
channel in rural areas - Offsite ATM installed at a remote Location
- Money Transfer - Cheque Book Request - Bill Payments
Source: Reserve Bank of India; Diamond analysis.
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REASONS FOR UNPROFITABLE OF RURAL BANKING IN INDIA High Non-performing Loans (NPL):
Banks have higher non-performing loans in rural areas because rural households have irregular income and expenditure patterns. The issue is compounded by the dependence of the rural economy on monsoons, and loan waivers driven by political agendas. NPLs from the agriculture sector are 7.7%, compared to 3.5% across non-agriculture sectors8. In order for banks to view rural India as a growth opportunity, rather than a regulatory requirement, a combination of these issues must be addressed. Increasing financial access to rural areas is contingent upon basic conditions such as proper infrastructure and an enabling regulatory framework, as well as innovative thinking on the part of commercial banks. Access issues, however, explain only one part of the problem. Usage is an equally important issue for rural customers. Low Ticket Size:
The average ticket size of both a deposit transaction and a credit transaction in rural areas is small. This means that banks need more customers per branch or channel to break even. Considering the small catchments area of a branch in rural areas, generating a customer base with critical mass is challenging. High cost to serve:
Branches are the most used channel in rural areas. This is because many rural people are not literate and are not comfortable using technology-driven channels such as ATMs, phone banking or internet banking. On the other hand, a branch is an expensive channel for banks (Following Table). In addition, rural people, whenever they have access to banks, have frequent low ticket and cash-based transactions, which increase the overall transaction cost for their bank.
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Cost Per Transaction in Indian Banks 60 50
48
40 30
25
Series1 18
20
8
10
4
0 Branch
Phone (Call Centre)
ATM
Phone(IVR)
Internet
Source: Reserve Bank of India; CGAP, World Bank.
Higher risk of credit:
Rural households may have highly irregular and volatile income streams. Irregular wage labor and the sale of agricultural products are the two main sources of income for rural households. The poor rural households (landless and marginal farmers) are particularly dependent on irregular wage employment. Rural households also have irregular expenditure patterns. The typical expenditure profile of rural households is small, with daily or irregular expenses incurred through the month. Furthermore, a majority of households incur at least one unscheduled expenditure per year, with the most frequent reasons being medical or social emergency7. In short, the rural customer is generally considered to be a risky one. Information Asymmetry:
Since many rural people do not have bank s, there is a lack of information on customer behavior in rural India. Absence of a Credit Information Bureau also complicates the problem as banks have to rely on informal sources to learn the credit history of rural customers. A lack of reliable information can result in either missed opportunities in not approving otherwise eligible loan candidates, or nonperforming loans.
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USAGE ISSUES FOR RURAL CUSTOMERS Even if access to formal banking is provided to rural customers, there is no guarantee that these services will be used. According to a study conducted by the World Bank, many households, even in developed countries, choose not to have a bank as they do not engage in many financial transactions—they collect wages in cash, spend in cash and do not wish to be burdened by a bank 9. To compound the situation many customers in rural India, who have access to and would otherwise choose to use formal financial services, do not do so because the product and service mixes do not meet their needs. The financial service needs of rural customers are not confined to just savings and credit, as is usually assumed. Their financial needs are linked to their life cycle needs, ranging from savings to credit to insurance to remittances. In fact, even the savings and credit products currently offered to rural customers do not entirely meet their needs. Access to savings and investment facilities is critical for the poor. The two critical needs for the rural poor are micro-savings and frequent withdrawals. These needs facilitate a customer in building capital over the long term, as well as coping with income shocks in the near term. However, banks do not offer adequate services to address these needs. The lack of services, therefore, leaves the rural poor with little option than to transact with the informal banking market. A study conducted by Micro Save also concludes that the poor transact with the informal sector because it will accept small amounts, provide doorstep service, and ensure ease of enrolment. Rural customers need loans not only for productive purposes but also for consumption needs (Following Table). A part from agricultural , rural customers need micro credit for consumption, education and emergencies. Though banks offer purpose free loans (personal loans and credit cards) in urban areas quite liberally, in rural areas sanction of such loans is significantly restricted. Therefore, the poor raise these loans through the informal financial system (it is worth noting that these loans taken from the informal system are almost always repaid or renewed12). In addition, larger households need occasional high value micro-enterprise loans for small capital investment. Though banks offer these loans, they require excessive
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MANAGEMENT OF FINANCIAL SERVICES documentation and time-consuming customer applications.
processes
which
discourage
Purpose of Borrowing Rural Household Borrowing Other business expenditure, 14% Agriculture expenditure, 38%
Other business expenditure Household expenditure
Household expenditure, 48%
Agriculture expenditure
Bank Lending to Rural Households
Personel Loans, 12% Personel Loans Other Business Loan, 52%
Agriculture Loan Agriculture Loan, 36%
Other Business Loan
A significant percentage of borrowing is toward consumption and other household expenditure, whereas formal financial institutions in rural India provide loans primarily for productive purposes. Source: AIDIS—2008, National Sample Survey Organization (NSSO); Diamond analysis.
Insurance reduces the vulnerability of poor households by replacing the uncertain prospect of large losses with the certainty of payout against small, regular payments. It is integral to a comprehensive risk management strategy for poor households. This includes life, health, accident and asset (dwelling, crop, and livestock) insurance. Banks and insurance firms do not offer these services in
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MANAGEMENT OF FINANCIAL SERVICES many rural areas, leading the poor to rely on the informal financial system. There are many rural households which depend on weekly or monthly remittances from their family who have moved to urban areas. At present, they depend on informal channels to remit the money and consequently either risk the loss of money or pay high transaction fees. Banks do not offer seamless remittance facilities between urban and rural branches as many of the rural branches are not computerized and connected to the main bank’s computer systems. This often results in the beneficiary receiving the amount two weeks after it has being transferred. This represents yet another key service which is not provided. The transaction cost for a rural customer to receive credit primarily constitutes four attributes: the interest rate, loan amount received as a percentage of amount applied, bribes paid, and the lead time to process the loan. Though the formal banking system offers loans at interest rates lower than informal banking systems, the time taken for a loan to be sanctioned is high which increases uncertainty and opportunity cost. In addition, the customer needs to pay almost 10% of the loan amount in bribes and eventually receives an amount that is less than what was applied for. Therefore, while the interest rates are usurious in the informal financing system, rural customers still resort to this channel because the waiting time to receive the loan is negligible and there are no indirect costs or commission. Banks also insist on collateral security which many rural poor cannot afford. As far as savings are concerned, though the formal banking system provides financial security, the cost of opening and operating an is high. The overall cost of transacting with the formal financial system increases for a rural person because of additional costs such as expenses incurred to reach a branch and the opportunity cost of lost wages. Since rural banks are generally not within an accessible area and do not operate at convenient times, the rural customer must forgo a day’s wage to reach a branch. Informal systems, on the other hand, involve a lower transaction cost, but they are risky and in some cases result in the loss of one’s entire capital. In short, this leaves the rural customer to choose between two unfavorable options. In summary, the services being offered by the formal banking system do not seem to meet the needs of the rural poor. A World Bank study suggests that the poor apply a set of criteria to judge the services being offered by any financial service provider, including: • Products—Are financial services available and tailored to my needs?
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MANAGEMENT OF FINANCIAL SERVICES • Cost—What is the total cost of the service (including opportunity cost)? • Convenience—How easy is it to access and use? • Eligibility—Am I eligible for financial services and can they be accessed repeatedly? As explained earlier, the savings products offered in the current format do not qualify as a flexible, convenient and cost-efficient service. Similarly, loan products do not meet product and eligibility criteria. In addition, insurance and remittance services are not even available. The cost of services, despite lower interest rates, is high because of other indirect costs which make the banking services cost-inefficient.
MARKET OPPORTUNITY OF RURAL BANKING At present, a rapidly growing urban India is the focus of the banking sector; however, as the deposit penetration numbers suggest (Figure 3 & 4), the market is highly competitive and over banked. Despite this, most banks are still not shifting their focus to the rural opportunity, as they are apprehensive about the total market potential of the rural market and the profitability of rural banking channels. Contrary to the widely held notion, however, the rural market is attractive from both a credit and deposit perspective. The credit demand in rural areas is approximately Rs 1,330 billion (based on an estimate by World Bank). There are other studies by the Planning Commission and ICICI Bank which put the figure even higher at Rs 1,440 billion and Rs 1,500 billion respectively. Similarly, on the deposit side, a large segment of the rural population does not save with formal banking channels because banks are not accessible and do not provide the appropriate products and service, leaving a significant opportunity to grow the deposit base. At present, the penetration of banking in rural areas is sub-optimal with a large market remaining untapped in both the liability (~ Rs 215 billion) and asset (~ Rs 1,204 billion) sides of the business. These estimates clearly suggest that there is sufficient demand in the rural market to encourage banks to think seriously about rural areas as an alternative growth opportunity. As we identified earlier, access and usage are two broad concerns which explain why the potentially bankable are unbanked. With regard to access, the challenge for banks is to identify profitable channels that meet the needs of rural customers. With regard to usage, banks need to understand the requirements of the rural customer and customize products and services
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MANAGEMENT OF FINANCIAL SERVICES Accordingly (Following Table).
Proposed Approach to Tap Potentially Bankable Population
Improve Access For Rural Customers
Convert Potentially Bankable
Encourage Usage of Services
Address Access Needs Of Rural Customers Ensure Channel Profitability
Address Usage Needs Of Rural Customers Bank Initiatives To Improve Usage
Source: Diamond analysis
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MANAGEMENT OF FINANCIAL SERVICES
IMPROVING ACCESS FOR RURAL BANKING Today, branches are the primary delivery channel in rural areas. Though there are 32,000 commercial bank branches in India, they cover less than 7% of total villages. Opening more branches is not necessarily profitable as many pockets of rural areas do not have business enough to justify an expensive branch channel. Therefore, to improve access in rural areas, banks need to modify existing channels, introduce new channels and identify innovative ways to integrate the two. Modify Existing Channels
Fortunately there are a variety of options available for banks looking to modify their existing channels. To reduce the costs imposed by branches, banks should consider the option of sharing their branch infrastructure. This would not be too dissimilar to the example of the telecom industry sharing network infrastructure or the fast food industry sharing food courts in urban areas. Though infrastructure sharing may raise concerns over client confidentiality and data leakage, in the long run banks will only benefit from such collaboration. ATMs are an effective channel which can deliver many of the services frequently used by a branch customer. However, ATMs, in their current form, are not suitable for rural areas as the literacy level and transaction ticket amount is too low. ATMs can, however, be designed to meet the needs of rural customers. For example, ICICI Bank is working with IIT Chennai to develop an ATM that has a biometric
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MANAGEMENT OF FINANCIAL SERVICES fingerprint , accepts soiled notes, and lower value denominations. In addition to modifying the design of the machines, banks should also hold discussions with the RBI to allow an attendant to be posted at ATMs. This will enhance the usability of ATMs. Though phone banking and internet banking are cost-effective channels, given very low tele-density and low internet penetration in rural areas, the ability to use these channels to reach the rural customer is low. However, phone and internet banking should be considered once infrastructure and literacy levels improve in rural India. A business correspondent could then run an e-kiosk to assist customers to transact over these channels. For example, Centenary Bank in Uganda uses internet and phone banking to provide bill payments, money transfers and loan repayments. Business correspondents can be provided with point-of-sale (POS) functionality to allow customers to deposit and withdraw cash from their s. Combining POS with a smart card is one way to improve access. Brazil has successfully used banking correspondents who use POS and card readers to provide current s, loans, and insurance, accept bill payments, and perform other transactions. Introduce New Channels
The RBI allows banks to appoint business correspondents and facilitators to be used as intermediaries in providing banking services. NGOs, MFIs, Societies, Section 25 companies, ed NBFCs not accepting public deposits, and Post Offices can be appointed as Business Correspondents. Business Correspondents can provide several services which are not currently offered by SHGs and MFIs, including: (i) identification of borrowers and fitment of activities; (ii) collection and preliminary processing of loan applications including verification of primary information/data; (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling; (iv) processing and submission of applications to banks; (v) promotion and nurturing Self Help Groups/t Liability Groups; (vi) post-sanction monitoring; (vii) monitoring and handholding of Self Help Groups/t Liability Groups/Credit Groups/others; and (viii) follow-up for recovery; (ix) disbursal of small value credit, (x) recovery of principal/collection of interest (xi) collection of small value deposits (xii) sale of microinsurance/ mutual fund products/ pension products/ other third-party products and (xiii) receipt and delivery of small value remittances/ other payment instruments.
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MANAGEMENT OF FINANCIAL SERVICES The introduction of Business Correspondents may face some challenges from labor unions. However, Diamond believes that there may be some options to address the concerns of the current workforce while using Business Correspondents to capture more value from rural customers. Caixa Economica, a state-owned bank in Brazil, manages the country’s lottery network and distributes government benefits. To increase the access of its services, Caixa extensively utilizes the Banking Correspondent channel, with 14,000 banking correspondents covering all of Brazil’s 5,500 municipalities. In less than 2 years, Caixa opened about 2.8 million new s and estimates that 40% of its banking transactions are handled through the banking correspondent channel. Satellite offices are a cost-effective alternative to branches. These offices can be established at fixed premises in villages and are controlled and operated from a base branch located at a block headquarters. All types of banking transactions may be conducted at these offices. Banks have, however, not used this channel actively, despite the argument that this channel is relatively less expensive, as it can draw personnel from the main branch and can remain open for just two days a week. This channel, therefore, is appropriate in blocks and districts which are densely populated. In the urban areas, most Indian banks opt for an extension counter where the business does not justify a full-fl edged branch. Similarly, satellite branches can cater to rural areas which do not justify a large branch. Where banks do not find it economical to open full-fl edged branches of satellite offices, mobile offices may be more appropriate. Mobile offices extend banking facilities through a well-protected truck or van. The mobile unit visits villages on specified days/ hours. The mobile office would be d with a branch of the bank, and serve areas which have a large concentration of villages. This will not be dissimilar to the mobile ATMs implemented by some of the Indian banks in the urban areas. Determine the Combination of Channels
There is no one right channel or solution to improve access in rural areas. Banks have to evaluate the trade-offs between those channels that are most convenient to customers and those that are the most profitable. Banks are not comfortable opening new rural branches because many of those that already exist are unprofitable. Therefore, determining the right combination of channels is critical to improving access in profitable ways. An innovative approach to improving access will consider a combination of these channels. For example:
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MANAGEMENT OF FINANCIAL SERVICES • Branches and Satellite Branches— In addition to providing regular banking operations, providing backend to manage and audit the operations of business correspondents. • A low-cost, custom-made ATM— Managed by a business correspondent to bring down the operating cost and scale the channel. • An e-kiosk—Managed by a business correspondent with internet banking, ATM and POS terminal in relatively large rural areas. • A business correspondent—Using manual ledgers or POS/Palmtop to act as deposit collector and remitting agent in smaller rural areas. While this list is not exhaustive, it highlights the need for creative solutions that apply the right channel to the right market and transaction. In South Africa, Capitec has combined convenient branches along transportation routes (for example, train and bus stations, and taxi stops). In addition, it has rolled-out debit cards and automatic teller machines across 200 of these branches to stimulate savings among low-income earners. Between February and August 2007, the number of customers jumped from around 30,000 to more than 90,000.
CONCLUSION There are 185 million bankable adults in rural India who are unbanked because of access and usage issues. This presents a significant opportunity for commercial banks. However, to reach this market and subsequently build an inclusive financial system, there must be a coordinated and concerted effort by the three key stakeholders: the Government of India, the Reserve Bank of India and the commercial banks. In addition, a partnership between banks and business correspondents, and collaboration amongst banks is critical. Furthermore, banks should tailor their product and service mix to meet rural
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MANAGEMENT OF FINANCIAL SERVICES needs, and adapt their delivery models to ensure commercial viability of their rural banking operations.
BIBLIOGRAPHY 1. 2. 3. 4.
World Bank 2008 Reserve Bank of India 2008 www.cia.gov National Sample Survey Organization (NSSO), Household Consumer Expenditure in India (2006) 5. Census 2006 6. Access to and Usage of Financial Services, World Bank 2008 7. RFAS, 2008, World Bank & NCAER 8. Reserve Bank of India, www.rbi.org.in 9. Access to Financial Services by Stijin Claessens, World Bank 2005 10. Rutherford Stuart, “The Poor and their Money,” January 2000 11. www.microsave-africa.com 12. RFAS 2008, World Bank
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MANAGEMENT OF FINANCIAL SERVICES 13. Bharat Nirman is a four year business plan of the Government of India to improve rural infrastructure 14. National Sample Survey Organization (NSSO) 2007 .
ANNEXURE Table – 1 : Bank Loan outstanding against SHGs – Agency-wise Position (Amount Rs. crore)
Agency
During Total Bank Loan outstanding the against year SHGs as on 31 March 2008
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Per SHGbank loan Outstanding (Rupees)
Out of Total : Bank loan outstanding against SHGs under SGSY
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MANAGEMENT OF FINANCIAL SERVICES No. of SHGs Commercial Banks (Public & Private Sector)
200708 200809 % growth Regional 2007Rural 08 Banks 200809 % growth Cooperative 2007Banks 08 200809 % growth TOTAL 2007-08 200809 % growth
% Shar e
Amount
% Shar e
No. of SHGs
Amount
2378847 65.6
11475.47 67.5
48,240
638283 3225.92
2831374 67.1
16149.43 69.6
57,037
645145 3961.53
19.0
40.7
18.2
1.1
22.8
875716
24.2
4421.04
26.0
50,485
223191 1332.33
977834
23.1
5224.42
23.0
53,428
258890 1508.10
5.8
16.0
13.2
11.7
18.2
371378
10.2
1103.39
6.5
29,711
55504
258.62
415130
9.8
1306.00
5.8
31,460
72852
392.09
100.0
18.4 16999.90
100.0
5.9 46,884
31.3 916978
51.6 4816.87
11.8 3625941
4224338 100.0
22679.85 100.0
53,689
976887 5861.72
16.5
33.4
14.5
6.5
21.7
Table – 2 : Agency-wise NPAs of Bank loans to SHGs (Amount Rs. crore)
Agency
Commercial Banks
Total no. of Banks reported data on NPAs
26
NPAs as on 31 March 2009 Outstanding Loans against SHGs** 15086.65
Amount of NPAs 363.27
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% of NPAs to Outstanding bank loans 2.4
24
MANAGEMENT OF FINANCIAL SERVICES (Public Sector ) Commercial Banks (Private Sector) Regional Rural Banks (RRBs) Cooperative Banks
12
1376.93
23.83
1.7
72
4203.46
177.79
4.2
182
894.00
60.97
6.8
TOTAL
292
21561.04
625.86
2.9
Table – 3 : Recovery Performance – Agency-wise (All SHGs)
Agency
No. of Banks reported recovery data
No. of banks based on percentage distribution of recovery performance of bank loans to SHGs as on 31 March 2009 =/> 95% 80-94% 50-79% < 50%
Commercial Banks (Public Sector) Commercial Banks (Private Sector) Regional Rural Banks Cooperative Banks
25
6
12
7
0
7
5
1
0
1
65
12
31
15
7
170
56
58
37
19
TOTAL
267
79
102
59
27
29.6
38.2
22.1
10.1
Percentage of Banks
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