Professional Documents
Culture Documents
Seminar Report
On
A Contemporary Management Issue
Titled
(2011-2012)
PREFACE
The underlying aim of the seminar on contemporary issue as an integral part of
MBA program is to provide the students with practical aspects of the
organization working environment.
The seminar project in RURAL BANKING IN INDIA: CURRENT PRACTICES
is a complete experience in itself, which provide me with the understanding. This
has become as inspirable of my knowledge of management being learned in
MBA program.
Since India is agriculture oriented country, the importance of rural banks in India
is more than any other countries. More so in India, where over 65% of the
population even today resides in villages. Hence, it has become imperative to
align the nations business agenda along with the needs of this segment.
Concurrently, the governments thrust to the development of the rural sector is
creating a more favorable landscape for business in the countrys hinterland.
XYZ
STUDENT DECLARATION
I hereby declare that this dissertation entitled RURAL BANKING IN INDIA is the
result of my own research work carried out under the guidance and supervision
ofMR.,
...
I also declare that this dissertation has not been submitted earlier to any
Institute/organization for the award of any degree or diploma.
Place:
Date:
XYZ
ACKNOWLEGMENT
XYZ
(M.B.A II sem)
TABLE OF CONTENTS
S. No.
Particulars
Page No.
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9.
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10.
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11.
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12.
Conclusion
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13.
Bibliography
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Apart from SBI, there are many other banks which function for the development
of the rural areas in India. These banks are listed below:
Andhra Pradesh
Bihar
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
Punjab
Assam
Tamil Nadu
Jharkhand
Maharashtra
Madhya Pradesh
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
12
Gramin Bank
Vidisha Bhopal Kshetriya Gramin
Bank
Mahakaushal Kshetriya Gramin
Bank
Jhabua Dhar Kshetriya Gramin
Bank
Karnataka
Rajasthan
Orissa
West Bengal
Meghalaya
Arunachal Pradesh
Nagaland
Mizoram
Tripura
Manipur
Uttaranchal
13
Source: Census India ;BSR 2008Reserve Bank of India; World Bank & NCAER
(2008).
Low Profitability
Large Number of accounts
Low Value Transactions
Less Number of Transactions
15
Few activities and less opportunities for services other than deposit and
Credit
Huge Staff Cost
Difficult to implement Technology
Large area of Operation Difficult Reach
Current Account
Savings Bank Account
Recurring Deposit Scheme
Fixed Deposit Scheme
Fixed Deposits linked with Recurring Deposits Scheme
Monthly Income Deposits Scheme
Loan Linked Housing Deposits Scheme
Loan Linked Children Education Deposits Scheme
1. CROP LOANS
Short terms loans are provided for Seasonal Agricultural operation to Farmers,
(cash & kind) through Service Co-operative Societies spread all over Meghalaya
as per approved scales of finance, time schedule both under NCL, Cash Credit
Systems & Kisan Credit Cards.
2. TERM LOANS
Medium & Long Term Loans are extended to the Farmers through the affiliated
Service Co-operative Societies direct for allied agricultural activities like land
development, minor irrigation, purchase of farm machinery, poultry, goat rearing,
pisciculture, diary, horticulture, plantation & Horticulture schemes.
3. CASH CREDIT ACCOMMODATION
Cash Credit accommodations are provided to Co-operative Societies for
procurement, marketing of agriculture and minor forest produces and also for
dealing in consumer goods, etc.
4. HOUSING LOANS
Salaried persons are extended Housing Loan facilities for construction of their
residential houses in CD Block Head Quarters and other selection areas against
adequate securities.
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17
18
19
the World Bank, many households, even in developed countries, choose not to
have a bank account as they do not engage in many financial transactionsthey
collect wages in cash, spend in cash and do not wish to be burdened by a bank
account9. To compound the situation many customers in rural India, who have
access to and would otherwise choose to use formal financial services, do not do
so because the product and service mixes do not meet their needs.
The financial service needs of rural customers are not confined to just savings
and credit, as is usually assumed. Their financial needs are linked to their life
cycle needs, ranging from savings to credit to insurance to remittances. In fact,
even the savings and credit products currently offered to rural customers do not
entirely meet their needs.
Access to savings and investment facilities is critical for the poor. The two critical
needs for the rural poor are micro-savings and frequent withdrawals. These
needs facilitate a customer in building capital over the long term, as well as
coping with income shocks in the near term. However, banks do not offer
adequate services to address these needs. The lack of services, therefore,
leaves the rural poor with little option than to transact with the informal banking
market. A study conducted by Micro Save also concludes that the poor transact
with the informal sector because it will accept small amounts, provide doorstep
service, and ensure ease of enrolment.
Rural customers need loans not only for productive purposes but also for
consumption needs (Following Table). A part from agricultural support, rural
customers need micro credit for consumption, education and emergencies.
Though banks offer purpose free loans (personal loans and credit cards) in urban
areas quite liberally, in rural areas sanction of such loans is significantly
restricted. Therefore, the poor raise these loans through the informal financial
system (it is worth noting that these loans taken from the informal system are
almost always repaid or renewed12). In addition, larger households need
occasional high value micro-enterprise loans for small capital investment.
Though banks offer these loans, they require excessive documentation and timeconsuming processes which discourage customer applications.
Purpose of Borrowing
Rural Household Borrowing
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and livestock) insurance. Banks and insurance firms do not offer these services
in many rural areas, leading the poor to rely on the informal financial system.
There are many rural households which depend on weekly or monthly
remittances from their family members who have moved to urban areas. At
present, they depend on informal channels to remit the money and consequently
either risk the loss of money or pay high transaction fees. Banks do not offer
seamless remittance facilities between urban and rural branches as many of the
rural branches are not computerized and connected to the main banks computer
systems. This often results in the beneficiary receiving the amount two weeks
after it has being transferred. This represents yet another key service which is
not provided.
The transaction cost for a rural customer to receive credit primarily constitutes
four attributes: the interest rate, loan amount received as a percentage of amount
applied, bribes paid, and the lead time to process the loan. Though the formal
banking system offers loans at interest rates lower than informal banking
systems, the time taken for a loan to be sanctioned is high which increases
uncertainty and opportunity cost. In addition, the customer needs to pay almost
10% of the loan amount in bribes and eventually receives an amount that is less
than what was applied for. Therefore, while the interest rates are usurious in the
informal financing system, rural customers still resort to this channel because the
waiting time to receive the loan is negligible and there are no indirect costs or
commission. Banks also insist on collateral security which many rural poor
cannot afford.
As far as savings are concerned, though the formal banking system provides
financial security, the cost of opening and operating an account is high. The
overall cost of transacting with the formal financial system increases for a rural
person because of additional costs such as expenses incurred to reach a branch
and the opportunity cost of lost wages. Since rural banks are generally not within
an accessible area and do not operate at convenient times, the rural customer
must forgo a days 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 ones 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:
ProductsAre financial services available and tailored to my needs?
CostWhat is the total cost of the service (including opportunity cost)?
ConvenienceHow easy is it to access and use?
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Improve
Access
For Rural
Customers
Address
Access Needs
Of Rural
Customers
Ensure
Channel
Profitability
Convert
Potentially
Bankable
Encourage
Usage of
Services
Address
Usage Needs
Of Rural
Customers
Bank
Initiatives
To Improve
Usage
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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 fingerprint login, accepts soiled notes, and lower value denominations.
In addition to modifying the design of the machines, banks should also hold
discussions with the RBI to allow an attendant to be posted at ATMs. This will
enhance the usability of ATMs.
Though phone banking and internet banking are cost-effective channels, given
very low tele-density and low internet penetration in rural areas, the ability to use
these channels to reach the rural customer is low. However, phone and internet
banking should be considered once infrastructure and literacy levels improve in
rural India. A business correspondent could then run an e-kiosk to assist
customers to transact over these channels. For example, Centenary Bank in
Uganda uses internet and phone banking to provide bill payments, money
transfers and loan repayments.
Business correspondents can be provided with point-of-sale (POS) functionality
to allow customers to deposit and withdraw cash from their accounts. Combining
POS with a smart card is one way to improve access. Brazil has successfully
used banking correspondents who use POS and card readers to provide current
accounts, loans, and insurance, accept bill payments, and perform other
transactions.
Introduce New Channels:
The RBI allows banks to appoint business correspondents and facilitators to be
used as intermediaries in providing banking services. NGOs, MFIs, Societies,
Section 25 companies, registered NBFCs not accepting public deposits, and Post
Offices can be appointed as Business Correspondents. Business
Correspondents can provide several services which are not currently offered by
SHGs and MFIs, including: (i) identification of borrowers and fitment of activities;
(ii) collection and preliminary processing of loan applications including verification
of primary information/data; (iii) creating awareness about savings and other
products and education and advice on managing money and debt counseling;
(iv) processing and submission of applications to banks; (v) promotion and
nurturing Self Help Groups/Joint Liability Groups; (vi) post-sanction monitoring;
(vii) monitoring and handholding of Self Help Groups/Joint Liability Groups/Credit
Groups/others; and (viii) follow-up for recovery; (ix) disbursal of small value
credit, (x) recovery of principal/collection of interest (xi) collection of small value
deposits (xii) sale of micro-insurance/ mutual fund products/ pension products/
other third-party products and (xiii) receipt and delivery of small value
remittances/ other payment instruments.
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increased speed of response to customer requirements under virtual banking vis-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost
of operating branch network along with reduced staff costs leads to cost
efficiency. Fourthly, it allows the possibility of improved quality and an enlarged
range of services being available to the customer more rapidly and accurately at
his convenience. It may not be possible to deny these facilities to rural areas in
our country since, if banks do not provide them, some non-banks will do it.
Another development relates to the increasing popularity of credit cards, which
are bound to reach rural areas. Many Public Sector Banks are already in credit
card business. In fact, multipurpose cards could be a facility that IT could usher
in for rural population. The potential can be illustrated with SMART cards.
SMART cards which are basically cards using computer circuits in them
thereby making them intelligent' would serve as multipurpose cards. SMART
cards are essentially a technologically improved version of credit and debit cards
and could be used also as ATM cards. They could be used for credit facilities at
different locations by the holders. SMART cards could also be used for personal
identification and incidentally for monitoring credit usage.
For the spread of virtual-banking and SMART cards to rural areas, it is essential
that electric power and telecom connectivity are continuous and supplies do not
drop especially during the hours when a bank's transactional activity is at
relatively high levels. The banks could, under such assured supply conditions
acquire the required banking software and also put in place the necessary
networking for providing anywhere banking facilities in rural and semi-urban
areas also.
Like banks in other parts of the world, Indian banks will have to get interested in
providing diversified range of financial products and services along with those
that they are already providing, by using technological advances. As the level of
education in rural areas rises and affluence spreads, customers will start seeking
efficient, quicker and low cost services. As the financial system diversifies and
other types of financial intermediaries become active, in rural areas, savers
would turn towards mutual funds or the savers themselves decide to deploy part
of their financial surpluses into equities and debentures as also other fixed
income securities. The bulk of bank deposits in the rural areas are currently
longer term deposits and as these come down, there would be a distinct
shortening of the average maturity structure of bank deposits with an increase in
asset liability mismatches. The spreads that the banks now enjoy will
progressively shrink making it more difficult for them to survive. As more and
more intermediaries enter rural areas with greater level of technology, traditional
banking business will come under pressure. In order to face the competitive
pressures being exerted by the recently set up market savvy banks, banks which
have extensive branch network in most of the existing and potential rich rural and
semi-urban areas may have to provide such services.
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could spur greater lending. India's progress in its financial inclusion efforts, given
the numbers and innovation involved, are of great significance. The world is
watching.
BUSINESS MODEL:
ICICI's direct channel is concentrated in the state of Tamil Nadu and stems from
ICICI's purchase of the Bank of Madura in 2001. The Bank of Madura had been
utilizing the self-help group (SHG) model, forming small groups of approximately
20 women from one village and providing training and a structured process that
led to savings, banking, and lending activities. ICICI expanded the process after
the merger. The women, typically with incomes below the poverty line, begin
regular monthly savings that, after a time, constitutes a fund for emergency,
short-term loans within the group. At the same time, the women are educated
about banking concepts, and encouraged to assume more responsibility for their
financial futures and take an interest in village affairs-bringing their collective
strength to bear on their family and community life. After a year, the group can
apply for loans, about $250 to each woman, for which the SHG is collectively
responsible. Loans are then typically used to help start or expand a small
business activity
The program under ICICI depends on the training and empowerment of women,
in a three-tier system. The bank recruits experienced members of SHGs to
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become social service consultants, who form new self-help groups in neighboring
villages. The bank also hires coordinators that oversee the activities of six
consultants and 120 SHGs. A bank project manager is assigned the responsibility
of work with the coordinators, training the self-help groups, and reviewing loan
proposals. ICICI charges 18% interest on its micro-loans, higher than normal
commercial rates but much lower than rates charged by traditional village moneylenders, and even lower than many non-profit microfinance institutions. Since
2001, the program has grown to more than 8,000 self-help groups and is
continuing
to
expand
rapidly.
In addition to working with SHGs, ICICI also works through indirect channels to
catalyze microfinance institutions by providing them a line of credit to cover cash
flow needs for the first three years of activity. ICICI has also made equity
investments in some microfinance institutions. Additionally, ICICI has started to
partner with enterprises that are building networks of Internet kiosks in rural
areas. The company plans to offer savings and loan services through these
networks by training the kiosk operator as a credit agent or by placing an
inexpensive ATM at the kiosks. In some instances, ICICI is providing loans to
farmers via enterprises such as ITC's e-Choupal network or EID Parry's sugar
factories that enable the farmer to buy crop inputs and that are paid off when the
farmer sells his crop. The company is also exploring new financial products, such
as crop insurance (to protect farmers against drought), derivatives based on crop
futures that could give farmers more financial flexibility.
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The banks proposed merger with Bank of Rajasthan will also give a fillip to its
plans to increase focus on rural and semi-urban areas. BoR has a total of 463
branches of which 40 per cent are located in rural and semi-urban areas.
In 2005-06, ICICI Bank had stepped up its focus on rural areas. However, it
suffered heavy losses on this front and had to press the pause button on its rural
foray. In 2006, the bank was cheated of Rs 200 crore at the central and state
government warehouses in Kolhapur district, where it had not engaged thirdparty collateral managers. In 2006-07, ICICI Bank made a provision of Rs 93
crore for losses from frauds pertaining to the warehouse receipt-based financing
for agricultural products.
The bank shrunk its rural loan book by 50 per cent to Rs 10,000 crore at the end
of September 2007 from Rs 20,000 crore at the end of March 2007.
The bank has undertaken several initiatives to meet the needs of the rural
market, including offering credit through micro-finance institutions, microinsurance and micro-investment products. It is extending financial support in the
rural market, including farmers, traders, commission agents, small processors
and other medium- and large agri-corporates. The bank had about four million
micro-finance borrowers with an outstanding portfolio of Rs. 3,179 crore as of
March 31, 2010.
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Tractors are one of the most precious assets to the rural folks. Our
comprehensive package policy covers not just own damage but also third party
liability and personal accident.
Weather Insurance
Weather Insurance is an insurance cover against losses incurred due to
uncertainties in climatic conditions. It can be used to hedge any vulnerability of
assets or any other damage incurred due to erratic and irregular weather.
Shop Insurance
Shop Insurance is a comprehensive policy that covers both the structure and the
contents of a shop and protects it against any financial loss in case of an
unfortunate
incident.
Assets:
PRODUCTS
OBJECTIVE
Livelihood-linked
loans
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Micro enterprise
loans
Crop loans
Farm equipment
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Over a period of time all banks will have to look at rural business, said Mrs.
Kochhar. We are looking at a mix of channels to reach out to farmers including
basic accounts, transfer of subsidies, some lending.
Early this year the bank announced a tie-up with Vodafone Essar to eventually
offer financial products in villages by mobile phone.
ICICI, which had aggressively targeted retail customers during most of the past
decade, cut that business back during the recession after it saw a huge number
of bad loans in its portfolio of unsecured, personal and credit card loans. For the
past two years, its retail loan portfolio has been rising more slowly than at other
banks, but in an earnings call last month, Mrs. Kochhar, said the bank would
keep pace with the industry in the fiscal year starting in April.
DEVELOPMENT BENEFIT:
The self-help groups in ICICI's direct service model build self-confidence, group
solidarity, and governance skills while also instilling the habit of regular saving.
Some SHGs have become active in village politics, in some cases even
overturning a ban on widows being able to remarry, debating with local politicians
on the digging of a well, or getting a woman elected as village president. Some
self-help groups have developed their own welfare funds that act as a kind of life
insurance for group members. A study of some 220 SHGs by the National Bank
for Agriculture and Rural Development found that micro-lending had positive
impact on income levels, self confidence, communications skills, and enhanced
participation in household decision-making, and were correlated with a decline
such social problems as drinking and domestic violence.
KEY LESSONS:
By developing profitable approaches to serving poor rural communities, ICICI is
expanding its potential market and developing what it sees as its engine of
growth for the future. But to do it successfully, it is also catalyzing self-help
groups that create powerful social advantages and partnering with both
microfinance institutions and business enterprises that are providing financial and
other services to rural communities. By combining an explicit social commitment,
a focus on innovation, and an insistence on profitable business practices, ICICI is
well positioned for a leadership role in India's financial market.
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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
needs, and adapt their delivery models to ensure commercial viability of their
rural banking operations.
BIBLIOGRAPHY
1. www.cia.gov
2. National Sample Survey Organization (NSSO), Household Consumer
Expenditure in India (2006)
3. Census 2006
4. Access to and Usage of Financial Services, World Bank 2008
5. RFAS, 2008, World Bank & NCAER
6. Reserve Bank of India, www.rbi.org.in
7. Access to Financial Services by Stijin Claessens, World Bank 2005
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