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A
PROJECT REPORT
ONKASHI GOMTI SAMYUT GRAMIN
SUBMITTED BY:
Dinesh Singh Ghinga
Roll no. 581113515
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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.
Same is applicable to my project work. I do not claim that I have a complete
knowledge of the subject. I would like to thanks my friends and many persons
who directly or indirectly helped me during my project.
Dinesh Singh Ghinga
5811113515 (M.B.A. 4th sem)
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PREFACE
This project report is submitted for the partial fulfillment of
Master of Business Administration degree from Sikkim
Manipal University
While developing this project, I was involved with system
analysis, design and implementation process. This is a
sample report describing in detail various aspects of the
system. I have used prototyping model for designing
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STUDENT DECLARARTION
I hereby declare that the project report entitled
“ KASHI GOMTI SAMYUT GRAMIN”
Submitted in partial fulfillment of the requirement
for the degree of Master of Business Administration
to Sikkim Manipal University, India is my
original work and not submitted for the award of any
other degree, diploma, fellowship, or any other
similar title or prizes.
Place: Haldwani DineshSingh Ghinga
Roll No.581113515
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CONTENT
No. Particulars
1. Current State of KASHI GOMTI SAMYUT
GRAMIN
2. Key Drivers of Financial Exclusion of
KASHI GOMTI SAMYUT GRAMIN
3. Reasons for Unprofitable KASHI GOMTI
SAMYUT GRAMIN
4. Usage Issues for Rural Customers
5. Market Opportunity of KASHI GOMTI
SAMYUT GRAMIN
6. Improving Access of KASHI GOMTI
SAMYUT GRAMIN
7. Conclusion
8. Bibliography
9. Annexure
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CURRENT STATE OF KASHI GOMTI
SAMYUT GRAMIN
The Indian Economy
India is the 12th largest economy in the world in terms of
gross domestic product (GDP), and fourth in terms 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 terms 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
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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
accounts to population. It gives a snapshot of thepenetration of deposit accounts and credit accounts 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 accounts.
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
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India. While urban India seems to be over-banked with more
than 100% penetration (many urban Indians have more
than one bank account), rural India lags far behind with a
19% penetration. The variance in rural and urban deposit
and credit account penetration is not restricted only to few
states but is common across all states.
In addition, the average value of a deposit account and a
credit account is also quite low in rural areas as compared
to urban areas. Diamond believes that the reasons for lowerpenetration 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 account penetration and low average values in
deposit and credit accounts demonstrate that banking
outreach in rural India is sub-optimal. 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
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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
KASHI GOMTI SAMYUT GRAMIN 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 are spread in 13 states extendingfrom 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 KASHI GOMTI SAMYUT
GRAMIN, 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:
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Andhra Pradesh Bihar
•
Andhra PradeshGrameena Vikas
Bank
• Andhra Pragathi
Grameena Bank
• Deccan Grameena
Bank
• Chaitanya Godavari
Grameena Bank
• Saptagiri Grameena
Bank
Chhattisgarh
•
Chhattisgarh GraminBank
• Surguja Kshetriya
Gramin Bank
• Durg-Rajnandgaon
Gramin Bank
Haryana
• Harayana Gramin
Bank
•
Madhya Bihar Gramin Bank• Bihar Kshetriya Gramin
Bank
• Uttar Bihar Kshetriya
Gramin Bank
• Kosi Kshetriya Gramin
Bank
• Samastipur Kshetriya
Gramin Bank
Gujarat
• Dena Gujarat Gramin Bank
• Baroda Gujarat Gramin
Bank
• Saurashtra Gramin Bank
Himachal Pradesh
• Himachal Gramin Bank
• Parvatiya Gramin Bank
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• Gurgaon Gramin
Bank
Jammu & Kashmir
• Jammu Rural Bank
• Ellaquai Dehati Bank
• Kamraz Rural Bank
Assam
• Assam Gramin
Vikash Bank
• Langpi Dehangi
Rural Bank
Jharkhand
• Jharkhand Gramin
Bank
• Vananchal Gramin
Bank
Madhya Pradesh
• Narmada Malwa
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
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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• 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
Bank
• Jhabua Dhar
Kshetriya Gramin
BankKarnataka
• Karnataka Vikas
Grameena Bank
• Pragathi Gramin
Rajasthan
• Baroda Rajasthan Gramin
Bank
• Marwar Ganganagar
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Bank
• Cauvery Kalpatharu
Grameena Bank
• Krishna Grameena
Bank
• Chikmagalur-Kodagu
Grameena Bank
• Visveshvaraya
Gramin Bank
Bikaner Gramin Bank
• Rajasthan Gramin Bank
• Jaipur Thar Gramin Bank
• Hodoti Kshetriya Gramin
Bank
• Mewar Anchalik 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
• Ka Bank Nogkyndong
Ri Khasi- Jaintia
Arunachal Pradesh
• Arunachal Pradesh Rural
Bank
Manipur
• Manipur Rural Bank
Nagaland
• Nagaland Rural Bank
Tripura
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• Tripura Gramin Bank
Mizoram
Uttar Pradesh
•
Purvanchal GraminBank
• Kashi Gomti Samyut
Gramin Bank
• Uttar Pradesh
Gramin Bank
• Shreyas Gramin
Bank
• Lucknow Kshetriya
Gramin Bank
• Ballia Kshetriya
Gramin Bank
• Triveni KshetriyaGramin Bank
Uttaranchal
•
Uttaranchal Gramin Bank
• Nainital Almora Kshetriya
Gramin Bank
KEY DRIVERS OF FINANCIAL EXCLUSION
OF RURAL BANKING
According to Diamond estimates, approximately 245 million
adults in rural India do not have a bank account today. As
depicted in Following Table, this reflects 24% of the total
population. While 60 million out of 245 million may not need
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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
16
37
1324
618
0
20
40
60
80
100
120
T o t a l P o p
u l a t i o n
N o n A d
u l t P o p
u l a t i o n
A d u l t P
o p u l a t i o
n
U r b a
n A d
u l t P o p
u l a t i o n
R u r a l A
d u l t P o p
u l a t i o n
B a n k
e d P o p
u l a t i o n
U n b a
n k e d
P o p u l a t i o
n
F i n a
n c i a l l y
C o n s
t r a i n t
s
P o n t e n t i a
l l y B a n k
a b l e
Series1
Source: Census India; BSR 2008—Reserve Bank of
India; World Bank & NCAER (2008).
Access Issues for Rural Customers
Access is explained in terms 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
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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 limitedaccess to modern transportation. Most rural customers are
likely to sacrifice an entire day’s wage to travel to a bank
branch which is open 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.
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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 support. 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
Source: Reserve Bank of India; Diamond analysis.
18
Description Service Provided Remarks
- Full fledged Branches and - Deposit Accounts - 96% of total deposit and 95% of
Extension Counters of - Credit Accounts total loans are with scheduledScheduled Commercial Banks - Remittances commercial banks withincluding Regional Rural Banks - Cards cooperative banks holdingCooperative Banks - Third-Party Products the difference
- 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 formIntermediaries to take financial he banksServices to the rural areas - SHGs borrow from banks and
are beneficiaries of loansthemselves
- Onsite - Cash Withdrawal - Negligible presence of thisATM installed at a branch - Cash Deposit channel in rural areas
- Offsite - Money TransferATM installed at a remote - Cheque Book RequestLocation - Bill Payments
-Phone Banking - Cash Withdrawal - Almost non-existent in rural
Manual - Cash Deposit - India because of low:Interactive Voice Response - Money Transfer Tele-density
- Internet Banking - Cheque Book Request Internet-penetration- Kisan Credit Card - Bill Payments Credit appetite of banks
Provide short-term credit
Branch
Intermediaries
ATM
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REASONS FOR UNPROFITABLE OF KASHI
GOMTI SAMYUT GRAMIN
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
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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-basedtransactions, which increase the overall transaction cost for
their bank.
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Cost Per Transaction in Indian Banks
48
25
18
84
0
10
20
30
40
50
60
Branch Phone (Call
Centre)
ATM Phone (IVR) Internet
Series1
Source: Reserve Bank of India; CGAP, World Bank.
Higher risk of credit:
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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 unscheduledexpenditure 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 accounts, 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 account as they do not engage in manyfinancial transactions—they 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
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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
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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 excessivedocumentation and time-consuming processes which
discourage customer applications.
Purpose of Borrowing
Rural Household Borrowing
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Other business
expenditure, 14%
Household
expenditure, 48%
Agriculture
expenditure, 38%
Other business
expenditure
Household
expenditure
Agriculture
expenditure
Bank Lending to Rural Households
Personel Loans, 12%
Agriculture Loan, 36%
Other Business Loan,
52%
Personel Loans
Agriculture Loan
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.
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Insurance reduces the vulnerability of poor households by
replacing the uncertain prospect of large losses with the
certainty of payout against small, regular premium
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 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 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
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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 isnegligible 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 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
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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 tomy needs?
• 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.
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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
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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
Accordingly (Following Table).
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Proposed Approach to Tap Potentially
Bankable Population
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Source: Diamond analysis
IMPROVING ACCESS FOR RURAL BANKING
Convert
Potentially
Bankable
Address
Access Needs
Of Rural
Customers
Ensure
Channel
Profitability
Address
Usage Needs
Of RuralCustomers
Improve
AccessFor Rural
Customers
33
Bank
Initiatives
To Improve
Usage
Encourage
Usage of
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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. Thiswould 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
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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
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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 notcurrently 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
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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.
The introduction of Business Correspondents may face
some challenges from labor unions. However, Diamondbelieves 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 accounts and estimates that 40% of
its banking transactions are handled through the banking
correspondent channel.
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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 districtswhich 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 affiliated 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.
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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:
• Branches and Satellite Branches— In addition to providing
regular banking operations, providing backend support to
manage and audit the operations of businesscorrespondents.
• 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.
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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 30,000to more than 90,000.
CONCLUSION
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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
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1. World Bank 2008
2. Reserve Bank of India 2008
3. www.cia.gov
4. 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 & NCAER8. 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
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.
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ANNEXURE
Table – 1 : Bank Loan outstanding against SHGs –
Agency-wise Position
(Amount Rs. crore)
Agen
cy
Durin
g theyear
Total Bank Loan
outstandingagainst
SHGs as on 31
March 2008
Per SHGbank
loanOutstanding
(Rupees)
Out of Total :
Bank loan
outstanding
against SHGs
under
SGSY No.
of
SHG
s
%
Shar
e
Amo
unt
%
Shar
e
No. of
SHGs
Amoun
t
Com
merci
al
Banks(Publi
c &
Privat
e
2007-
08
2008-
09%
grow
th
2378
847
2831
374
19.0
65.6
67.1
1147
5.47
1614
9.43
40.7
67.5
69.6
48,240
57,037
18.2
63828
3
64514
5
1.1
3225.92
3961.53
22.8
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Secto
r)Regio
nalRural
Banks
2007-
082008-
09
%
grow
th
875716
9778
34
11.7
24.2
23.1
4421.04
5224
.42
18.2
26.0
23.0
50,485
53,428
5.8
223191
25889
0
16.0
1332.33
1508.10
13.2
Coop
erativ
e
Banks
2007-
08
2008-
09
%
grow
th
3713
78
4151
30
11.8
10.2
9.8
1103
.39
1306
.00
18.4
6.5
5.8
29,711
31,460
5.9
55504
72852
31.3
258.62
392.09
51.6
TOTA
L
2007-
08
362
594
1
100.
0
169
99.9
0
100.
0
46,884 91697
8
4816.8
7
2008-
09
%
grow
th
4224
338
16.5
100.
0
2267
9.85
33.4
100.0 53,689
14.5
97688
7
6.5
5861.72
21.7
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Table – 2 : Agency-wise NPAs of Bank loans to SHGs
(
Amount Rs. crore)
Agency Total no.
of Banks
reported
data
on NPAs
NPAs as on 31 March 2009
Outstandi
ng Loans
against
SHGs**
Amount
of NPAs
% of
NPAs to
Outstandi
ng bank
loansCommerci
al Banks(Public
Sector )
26 15086.65 363.27 2.4
Commerci
al Banks
(Private
Sector)
12 1376.93 23.83 1.7
RegionalRural
Banks
(RRBs)
72 4203.46 177.79 4.2
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Cooperativ
e Banks
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
report
ed
recove
ry
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%
Commerci
al Banks
(Public
Sector)
25 6 12 7 0
Commerci
al Banks
(Private
Sector)
7 5 1 0 1
Regional
Rural
Banks
65 12 31 15 7
46
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