Professional Documents
Culture Documents
Of
MBA
In
FINANCIAL MANAGEMENT
Submitted By:
VARUN TRICHAL
511227243
DEPARTMENT OF MANAGEMENT
SIKKIM
1
DECLARATION
I hereby declare that the project entitled “Rural Banking in India” which is being submitted
in partial fulfilment of the requirement for the award of the Degree of Master in Business
Administration to “SIKKIM MANIPAL UNIVERSITY, SIKKIM” is an authentic record of our own
work done under the guidance of Mr.Atul Dubey, Department of Management, SIKKIM
MANIPAL UNIVERSITY, SIKKIM.
The matter reported in this project has not been submitted earlier for the award of any other
degree.
2
ACKNOWLEDGEMENT
I sincerely express indebtedness to esteemed and revered guide “Ms. Deepti Tarani”, for her
invaluable guidance, supervision and encouragement throughout the work. Without her kind
patronage and guidance, the project would not have taken shape.
I take this opportunity to express deep sense of gratitude to “Mr. Atul Dubey”, Head of
Management Studies, for his encouragement and kind approval. We would like to express our
sincere regards to him for advice and counseling from time to time.
I owe sincere thanks to all the lecturers in “Rural Banking in India” for their advice and
counseling time to time.
Varun Trichal
3
BONAFIDE CERTIFICATE
Certified that this Project Report titled “Rural Banking in India” is the
Bonafied work Of “Varun Trichal” who carried out the project work under my
supervision.
SIGNATURE: SIGNATURE:
4
ABSTRACT
Summary of Project
Rural banking in India has been the subject of study Survey Committee Report in 1954, literally
thousands of reports have examined and investigated the problems relating to the credit delivery for
agriculture and rural area. Latest magnum opus on the subject is the National Agricultural Credit
Review report 2000. The Expert Committee on Rural Credit (Chairman: Professor V.S.Vyas) submitted
its report in 2002.One more High Power Committee headed by Professor Vyas set up by the Reserve
Bank of India recently to review and advice on improving credit delivery to agriculture has also given
its report.
Various approaches have been adopted for improving rural credit from
time to time. It was felt that project lending will revolutionize rural credit. This was followed by area
approach and extension- based schemes and then the lead bank scheme providing for forward and
backward linkages and the scheme of linking banks to Primary Agricultural Credit Societies and the
linkage of bank to microfinance institutions.
To echo the thoughts of C.K. Prahalad, the “bottom of the pyramid” segments will be the
growth drivers of the future – this is certainly being borne out by the market revolution that
is taking place in India’s villages. The Narasimham committee on rural credit recommended
the establishment of Regional Rural Banks (RRBs) in meeting the needs of rural areas.
5
The purpose of this essay is not to evaluate the rural credit policy of
the United Progressive Alliance government. Nevertheless, it is clear that if any government is
seriously to address the crisis in rural banking, it must reaffirm the commitment of the state to the
policy of social and development banking, and reaffirm the part played by the credit system in
redistribution and poverty alleviation.
The objective of the study is to study marketing of rural banking in India and to study comparative
marketing of rural and urban banking in India.
Research in common parlance refers to a search for knowledge. Descriptive research design studies
are those studies, which are concerned with describing the character of a group.
The researcher makes a plan of the study his research work. The study was based on questionnaire
method. The primary data are those, which are collected a fresh and for the first time happen to be
original in character.
Secondary data are those which have already been collected by someone else and which have already
been passed through the stratified process. It has collected through the books, journals & Internet.
RRBs' performance in respect of some important indicators was certainly better than that of
commercial banks or even cooperatives. RRBs have also performed better in terms of
providing loans to small and retail traders and petty non-farm rural activities. In recent years,
they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit
institutions and linking such groups with the formal credit sector.
RRBs should really be strengthened and provided with more resources with which they can
undertake more of these important activities. And most certainly they should be kept apart
from a profit-oriented corporate motivation that would reduce their capacity to provide much
needed financial services to the rural areas, including to agriculture.
The number of rural branches should be increased rather than reduced; they should be
encouraged to develop more sophisticated methods of credit delivery to meet the changing
needs of farming; and most of all, there should be greater coordination between district
planning authorities, Panchayati raj institutions and the banks operating in rural areas. Only
then will the RRBs fulfill the promise that is so essential for rural development.
6
REFERENCE
Books:
Magazines:
Business Today
Business Week.
Business World
Newspapers
Economic Times
The Hindu
Times of India
7
QUESTIONNAIRE
NAME – SEX -
AGE – DESIGNATION –
Dear sir/madam,
1) Central Scheme to provide Interest Subsidy for the period of moratorium on loans taken by
farmer from economically weaker sections from schedule banks under the loan scheme of the
Indian Banks Association?
□ To great extent
□ To some extent
2) To what extent is Sales Promotions have been used by banker to increase sales in the short term?
□ Completely
□ Partially
□ Nil
3) Does your marketing policy of bank have focus marketing on agro- sector?
□ strongly agree
□ Agree
□ Disagree
□ strongly disagree
□ can’t say
8
4) Multiple ‘basic’ financial services and loan gateway is product marketing of the bank?
□ Yes □ No
5) Devised to ensure usage as well as profitability Quantity discounts, and ease in payment modes is
pricing marketing of the bank?
□ Yes □ No
□ Traditional □ Modern
□ Yes □ No
9
INDEX
1. INTRODUCTION
7. RESEARCH METHODOLOGY
9. CONCLUSION
10. BIBLIOGRAPHY
11. ANNEXURE
10
INTRODUCTION
11
INTRODUCTION
Rural banking in India has been the subject of study Survey Committee Report in 1954, literally
thousands of reports have examined and investigated the problems relating to the credit
delivery for agriculture and rural area. Latest magnum opus on the subject is the National
Agricultural Credit Review report 2000. The Expert Committee on Rural Credit (Chairman:
Professor V.S.Vyas) submitted its report in 2002.One more High Power Committee headed by
Professor Vyas set up by the Reserve Bank of India recently to review and advice on improving
credit delivery to agriculture has also given its report.
The criticality of this need may be seen from the fact that even
with concerted and extensive attempts to meet the credit needs of the farmers for agricultural
operations etc., informal agencies including money lenders are currently providing substantial
portion of the total credit to this sector. Besides, the agricultural credit flows themselves are
inadequate and the gross capital formation can be improved only if substantial amount of
investment funds flow to the rural areas in the form of credit. Likewise, there is also a need to
provide market information, extension services, marketing support and government and other
public services to the people in a cost-effective manner. For achieving financial inclusion and
economic growth, the ICT can play an important role by increasing effective access and
improving delivery and governance in banking services. Against this background, the key issue
is how technology can be harnessed for improving the efficacy of the credit delivery and for
the minimization of the transaction costs involved, for ensuring that bank credit actually
increases and promotes productive
capital formation and investment in rural areas and helps address the critical problem of the
rural-urban service divide.
12
The Rural Economy
Financial liberalization after 1991 decimated the formal system of institutional credit in rural
India. It represented a clear and explicit reversal of the policy of social and development
banking, such as it was, and contributed in no small way to the extreme deprivation and distress
of which the rural poor in India have been victims over the last decade. This paper examines
the impact of changes in banking policy and structure on the rural economy, and on the rural
poor in particular.
Financial liberalization is a crucial component of the programmes of economic reforms that
are being imposed on the people of less-developed countries. The demand that financial
markets be liberalized quickly is high on the agenda of imperialism; in India as well, advocates
of economic “reform” see financial liberalization as being at the core of structural adjustment.
There are many components of the package of reforms associated with financial liberalization
in India. Chandrasekhar and Ghosh (2002) classify the policies of financial liberalization in
India into three types: first, policies to curtail government intervention in the allocation of
credit, secondly, policies to dismantle the public sector and foster private banking, and thirdly,
polices to lower capital controls on the Indian banking system.
It is well known that the burden of indebtedness in rural India
is very great, and that despite major structural changes in credit institutions and forms of rural
credit in the post-Independence period, the exploitation of the rural masses in the credit market
is one of the most pervasive and persistent features of rural life in India. Rural households need
credit for a variety of reasons. They need credit to meet short-term requirements of working
capital and for long-term investment in agriculture and other income-bearing activities.
Agricultural and non-agricultural activities in rural areas typically are seasonal, and households
need credit to smoothen out seasonal fluctuations in earnings and expenditure. Rural
households, particularly those vulnerable to what appear to others to be minor shocks with
respect to income and expenditure, need credit as an insurance against risk. In a society that
has no law of free, compulsory and universal school education, no arrangements for free and
universal preventive and curative health care, a weak system for the public distribution of food
and very few general social security programmes, rural households need credit for different
types of consumption. These include expenditure on food, housing, health and education. In
the Indian context, another important purpose of borrowing is to meet expenses on a variety of
social obligations and rituals.
13
If these credit needs of the poor are to be met, rural households
need access to credit institutions that provide them a range of financial services, provide credit
at reasonable rates of interest and provide loans that are unencumbered by extra-economic
provisions and obligations.
14
BANKING POLICY IN
RURAL INDIA
15
BANKING POLICY IN RURAL INDIA
BANKING POLICY IN RURAL INDIA: 1969 TO THE
PRESENT
The period from 1969 to the present can be
characterised as representing, broadly speaking, three phases in banking policy vis-à-vis the
Indian countryside. The first was the period following the nationalization of India’s 14 major
commercial banks in 1969. This was also the early phase of the ‘green revolution’ in rural
India, and one of the objectives of the nationalization of banks was for the state to gain access
to new liquidity, particularly among rich farmers, in the countryside. The declared objectives
of the new policy with respect to rural banking - what came to be known as “social and
development banking” - were (i) to provide banking services in previously unbanked or under-
banked rural areas; (ii) to provide substantial credit to specific activities, including agriculture
and cottage industries; and (iii) to provide credit to certain disadvantaged groups such as, for
example, Dalit and Scheduled Tribe households
16
substantially, although they were, as was the green revolution itself, biased in respect of
6
regions, crops and classes. The two main crops that gained from the green revolution, as is
well recognized, were wheat and rice, and the application of the new technologies was
primarily in the irrigated areas of the north-west and south of India, with the benefits
concentrated among the richer classes of cultivators.
The second phase, which began in the late 1970s and early
1980s, was a period when the rhetoric of land reform was finally discarded by the ruling classes
themselves, and a period when the major instruments of official anti-poverty policy were
programmes for the creation of employment. Two strategies for employment generation were
envisaged, namely wage-employment through state-sponsored rural employment schemes and
self-employment generation by means of loans-cum-subsidy schemes targeted at the rural poor.
Thus began a period of directed credit, during which credit was directed towards “the weaker
sections.” The most important new scheme of this phase was, of course, the Integrated Rural
Development Programme or IRDP, a scheme for the creation of productive income-bearing
assets among the poor through the allocation of subsidized credit. The IRDP was initiated in
1978-79 as a pilot project and extended to all rural blocks of the country in 1980. There is much
writing on the failure of IRDP to create long-term income-bearing assets in the hands of asset-
8
poor rural households. Among the many reasons for this failure were the absence of agrarian
reform and decentralized institutions of democratic government, the inadequacy of public
infrastructure and public provisioning of support services and the persistence of employment-
insecurity and poverty in rural society. Nevertheless, the IRDP strategy did lead to a significant
transfer of funds to the rural poor.
17
growth strategy,” wrote a noted scholar of India’s banking system, “would admit that what the
country achieved in the area of financial sector development before the present reform process
began, particularly after bank nationalization, was unparalleled in financial history” (Shetty
1997, 253). After bank nationalization, as Shetty points out, there was “an unprecedented
growth of commercial banking in terms of both geographical spread and functional reach”
The third and current phase, which began in 1991, is that of
liberalization. The policy objectives of this phase are encapsulated in the Report of the
Committee on the Financial System, which was chaired, ironically, by the same person who
recommended the establishment of Regional Rural Banks, M. Narasimham (RBI, 1991). In its
very first paragraph, the report called for “a vibrant and competitive financial system…to
sustain the ongoing reform in the structural aspects of the real economy.” The Committee said
that redistributive objectives “should use the instrumentality of the fiscal rather than the credit
system” and, accordingly, that “directed credit programmes should be phased out.” It also
recommended that interest rates be deregulated, that capital adequacy norms be changed (to
“compete with banks globally”), that branch licensing policy be revoked, that a new
institutional structure that is “market-driven and based on profitability” be created, and that the
part played by private Indian and foreign banks be enlarged.
Let us make it clear that, before the 1990s, the banking system
was open to much criticism, particularly of its bureaucratic failures, its insensitivity to the
social and economic contexts in which it functioned, and class and regional inequalities in
lending patterns. The reforms proposed in 1991, however, were not attempts to bring rural
banking closer to the poor, but to cut it back altogether and throw the entire structure of social
and development banking overboard.
18
DISTRIBUTION
CHANNEL OF RURAL
BANKING
19
Distribution Channel of Rural Banking - Multi-agency
Approach to Rural Lending
Rural credit has been a laboratory for various policies,
initiatives, investigations and improvements since 1955.The first major strategy adopted for
improving rural credit delivery was the institutionalization of the credit delivery system with
the cooperative as the primary channels. The multi-agency approach to the rural credit delivery
emerged with the induction of the commercial banks into the scene. In 1979, specialized
institutions called Regional Rural Banks and subsequently, another breed of institutions called
Local Area Banks, came on the scene. With the operationalisation of the Lead Bank Scheme,
the area approach to rural lending was formalized and attempts were made to match
infrastructure development with bank credit flows for ensuring development of the rural areas.
The Scheme sought to give a special supply-leading role to the banking system in rural
development and also to ensure access of the rural population to bank services through rural
branch expansion. A multi-agency credit delivery system is in place for financing credit-based
development activities, under the Lead Bank Scheme. In 1988, the Service Area Approach was
also introduced as a strategy for improving the quality of rural lending. The Lead Bank Scheme
Information System and Service Area Monitoring Information System (SAMIS) have also been
operationalised using monitoring arrangements. The micro-finance and linkage of the banks to
the self- helpgroups / NGOs and the issue of Kisan Credit Cards are among the recent
developments in the area of rural lending in India. The latest policy initiatives are the enabling
of the Non-bank Financial Companies and of the “correspondent “banking for increasing
delivery of rural credit.
20
The experiment of having low cost institution for rural lending in
the form of Regional Rural Banks also has not been successful in as much as the RRB staff
expenses are required by law to be on par those of the commercial banks. Therefore, it is clear
that the rural credit delivery system is not performing efficiently and in a cost effective manner.
It is against this background that we position a technology based solution for improving the
speed efficiency and effectiveness of the credit delivery of the rural people through the
application of information technology tools and systems. We propose Model for using
Information Technology for improving rural credit delivery system by reducing the cost,
increasing the speed of delivery and also increasing the value addition in the service delivery
and improving the accountability.
The National Agricultural Credit Review Committee Report
documents the history, development and the status of the various important issues involved in
rural credit delivery in India in great detail. It is interesting to know from this voluminous report
that solutions have been advised and implemented for almost all the real as well as “perceived”
problems in rural credit. Yet, this area remains a problem defying adequate solution. For
example, some of the key concerns like the end-use of credit, infrastructure gaps, and the high
costs of lending have been repeatedly attended to. Despite that, the delivery of credit for
agriculture and rural development still remains unsatisfactory.
22
Marketing strategies of
rural banking players in
India
23
To echo the thoughts of C.K. Prahalad, the “bottom of the pyramid” segments will be the
growth drivers of the future – this is certainly being borne out by the market revolution that is
taking place in India’s villages. The Narasimham committee on rural credit recommended the
establishment of Regional Rural Banks (RRBs) in meeting the needs of rural areas.
Indian mobile banking has two major segments: the urban segment and the rural segment.
Celent estimates that urban mobile banking subscribers will reach 65 million by 2012. The
rural mobile segment represents a huge opportunity to bank the unbanked population, thereby
adding a revenue stream.
In a new report, Mobile Banking in India; Dual Strategy for Rural and Urban Segments,
Celent explains the mobile banking ecosystem in India and looks at the trends driving the
growth in its urban and rural subsegments. The report looks at the prospects of mobile banking
from both a regulatory perspective and an industry perspective.
In India’s urban segment, mobile banking is an enabling fifth channel, and in the rural segment,
mobile banking is a primary mode of financial inclusion. In both segments, the two
fundamental factors affecting the growth of mobile banking are regulations and technology.
Nontransactional users will remain the majority in India because they will continue to use
online banking and other payment mechanisms. Government-to-person (G2P) payments will
be the major growth driver for rural mobile banking. Regulatory changes are also a big driver.
Celent believes that, by 2012, over 60 million rural users will be beneficiaries of mobile
banking through business correspondence.
24
“While the urban banking market is dominated by information services, the payment
transactions segment has not picked up mainly due to regulatory limitations,” says Rajesh M
R, an analyst with Celent and coauthor of the report. “However, recent relaxation of payment
norms by RBI has presented a huge opportunity for this segment.”
“The rural mobile banking segment is a high growth area, due to the adoption of the business
correspondent model and relaxed Know Your Customer norms, but financial literacy remains
a big issue for retaining the rural adopters,” says Sreekrishna Sankar, Celent analyst and
coauthor of the report.
The Reserve Bank of India has a mandate to be closely involved in matters relating to rural
credit and banking by virtue of the provisions of Section 54 of the RBI Act. The major initiative
in pursuance of this mandate was taken with sponsoring of All-India Rural Credit Survey in
1951-52. This study made agency-wise estimates of rural indebtedness and observed that
cooperation has failed but it must succeed. The Report of the Committee on Directions is still
considered a classic on the subject, and two of the four members were, incidentally, from
Andhra Pradesh. This is the origin of the policy of extending formal credit through institutions
while viewing local, traditional and informal agencies as usurious. In the first stage, therefore,
efforts were concentrated on developing and strengthening cooperative credit structures. The
Reserve Bank of India has also been making financial contributions to the cooperative
institutions through evolving institutional arrangements, especially for refinancing of credit to
agriculture.
While enacting the State Bank of India Act in 1955, the objective was stated to be the extension
of banking facilities on a large scale, more particularly, in rural and semi-urban areas. SBI,
therefore, became an important instrument of extending rural credit to supplement the efforts
of cooperative institutions. In 1969, 14 major commercial banks were nationalised and the
objective, inter alia, was "to control the heights of economy". The nationalised banks thus
became important instruments for advancement of rural banking in addition to cooperatives
and State Bank of India. The next step to supplement the efforts of cooperatives and
commercial banks was the establishment of Regional Rural Banks in 1975 in different states
with equity participation from commercial banks, Central and State Governments.
By 1982, to consolidate the various arrangements made by the RBI to promote/ supervise
25
institutions and channel credit to rural areas, NABARD was established. Though several efforts
were made to increase the flow of institutional credit for agricultural and rural lending, there
were mismatches in credit and production. Field studies conducted to determine the reason
revealed that it was due to absence of effective local level planning. It was felt that with the
establishment of large network of branches, a system could be adopted to assign specific areas
to each bank branch in which it can concentrate on focussed lending and contribute to the
development of the area. With a view to implementing this approach, RBI introduced a scheme
of "Service Area Approach" for commercial banks. To further supplement the institutional
mechanism, the concept of Local Area Banks was taken up in 1996-97 and in-principle
approval has been given for 8 Local Area Banks.
As regards cost of credit, for most of the period, the administered interest rate regime was
applicable for bank lending and this included concessional terms for priority sector. Currently,
all interest rates on bank advances including in rural areas are deregulated and there is no link
between priority sector and interest rate, though there are some regulations on interest rates by
size of advance i.e. below Rs. 2 lakh in respect of commercial banks.
As regards policy measures to enhance flow of credit to rural areas, apart from availability of
credit lines from the Reserve Bank of India, the concept of priority sector was evolved to ensure
directed credit. Currently, the stipulation is that domestic commercial banks should extend
credit to the extent of 40 per cent of the total net bank credit to priority sector as a whole, of
which 18 per cent should be specifically for agriculture. Out of the target of 18 per cent for
agriculture, at least 13.5 per cent should be by way of direct loans to agriculture and remaining
could be in the form of indirect loans.
Where a bank fails to fulfil its commitment towards priority sector lending, it is currently
required to contribute to Rural Infrastructure Development Fund set up by NABARD.
NABARD in turn provides these funds to State Governments and state owned corporations to
enable them to complete various types of rural infrastructure projects. It is pertinent to
recognise that there are a large number of credit linked programmes sponsored by the
Government for direct assault on poverty. In programmes relating to self-employment and
women welfare, the multiplicity of programmes has been reduced by having a comprehensive
and consolidated programme named Swaranjayanti Gram Swarojgar Yojna. The financial
sector reforms, which were introduced from 1991 onwards were aimed at transforming the
credit institutions into organisationally strong, financially viable and operationally efficient
units. The measures introduced include reduction in budgetary support and concessionality of
resources, preparation of Development Action Plans and signing of Memoranda of
26
Understanding with the major controllers, and introduction of prudential norms relating to
income recognition and asset classification for RRBs and cooperative banks. The lending rates
for these institutions have also been deregulated. Other measures of liberalisation
include allowing non-target group financing for RRBs, direct financing for SCBs and CCBs,
and liberalisation in investment policies and non-fund business.
These measures have contributed to many RRBs turning around and becoming more vibrant
institutions. In the case of cooperative banks, there is greater awareness of the problems of
officialisation and politicisation and initiatives in this regard include legislative actions on
cooperative banks in Andhra Pradesh.
Recently, several policy initiatives have been taken to advance rural banking. These includ
additional capital contribution to NABARD by the RBI and the Government of India,
recapitalisation and restructuring of RRBs, simplification of lending procedures as per the
Gupta Committee recommendations, preparation of a special credit plans by public sector
banks and launching of Kisan Credit Cards. Finally, a scheme linking self-help groups with
banks has been launched under the aegis of NABARD to augment the resources of micro credit
institutions. A Committee has gone into various measures for developing micro credit, and has
submitted its report, which is under the consideration of the RBI. In respect of cooperatives, a
Task Force
under the chairmanship of my esteemed and affectionate colleague Shri Jagdish Capoor,
Deputy Governor has been constituted to review the status and make recommendations for
improvement.
Undeniably, these initiatives have enabled a very wide network of rural financial institutions,
development of banking culture, penetration of formal credit to rural areas and a counter to the
dominance of moneylenders. These initiatives have also financed modernisation of rural
economies and implementation of anti-poverty and self-employment programmes. However,
for the purpose of focussing on the future, generalisation on some concerns regarding the
current approach to rural credit and banking would be appropriate.
Firstly, the cooperative banks have different layers and many of them have significantly large
non-performing assets (NPAs). Many cooperatives are undercapitalised. The public sector
banking system also exhibits NPAs, and some of them have so far been provided with
recapitalised funds. The RRBs also exhibit NPAs and these have been recapitalised from the
Government of India so far, which would imply a total recapitalisation of double the amount
27
provided by Government of India. Secondly, according to the All-India Debt and Investment
Survey, 1991-92, the share of debt to institutional agencies in the case of rural households has
increased marginally from 61.2 per cent to 64 per cent between 1981 and 1991. However, it
must be noted that this figure relates to debt outstanding and the overall share of the institutional
credit in the total debt market is likely to be smaller than what this figure indicates. Thirdly,
the cost of financial intermediation by the various rural financial institutions is considered to
be on the high side. The difference between the cost of resources made available to NABARD
by Reserve Bank of India and the commercial rates of interest at which the cooperative banks
lend for agriculture in the deregulated interest rate regime is also considered to be on the high
side.
Fourthly, empirical studies indicate that institutional credit is more likely to be available for
well to do among the rural community.
Fifthly, empirical studies also indicate that relatively backward regions have less access to
institutional credit than others do. Sixthly, the non-availability of timely credit and the
cumbersome procedures for obtaining credit are also attributed to the functioning of the
financial institutions, though this is equally valid for rural and urban banking.
Finally in regard to Government sponsored schemes, there has been overlap in accountability
in as much as the beneficiaries are identified on a joint basis. Banks have been indicating that
NPAs are proportionately more due to this overlapping.
An important development in the formal segment of the rural financial markets is the growing
significance of non-banking financial companies, in particular, in hire purchase and leasing
operations. They also finance traders of agricultural inputs and output. The NBFCs have only
recently been brought under the regulatory regime of RBI. While their importance is recognised
in financing diversified rural agriculture, its extent and scope of operations has not been
adequately researched.
29
of informal markets would be local and hence savings would be locally deployed, within the
rural areas.
31
through the credit card route. Credit card business, so far, is an essentially urban phenomenon.
Hence, the financing of consumption by informal markets in rural areas cannot be frowned
upon when it is being done by banks through their credit card business.
Fifth, the real extent of informal markets is grossly understated in any survey that views data
on outstanding debt since the turnover of debt is admittedly much lower for public institutions
than for private lending. The turnover-differential is on account of several factors, including
preference for short term finance and better recovery-performance in informal markets. Sixth,
the social significance of informal credit is more than its proportion in financial terms since the
poorer sections draw far larger amounts from informal than formal markets. Seventh, a
significant part of informal market is through leasing, hire purchase, deferred payment, etc.
with finance often provided by NBFCs. The informal market is providing a range of financial
products, which the formal banking system is not able to.
Eighth, studies have demonstrated that expansion of literacy and education tends to increase
the access of rural folk to formal credit, reduce the informal transaction costs in dealings with
formal credit institutions and improves their resistance to malpractices attributable to landlord
or moneylender. The exploitative nature of informal markets is more pronounced in tribal or
less developed areas while productive nature of informal markets is more pronounced in
prosperous villages. Indeed, one can argue that in many areas, the formal credit structure has
provided a positive institutional alternative to the moneylenders and thus marginalising his role
in providing credit to rural masses.
Having recognised that one cannot wish away informal markets, some tentative generalisations
on the relative roles of formal and informal markets and on the linkages between them would
also be necessary to capture the emerging but complex realities. Such generalisations are
possible on the basis of empirical studies.
First, the formal credit has a tendency to flow more easily to agriculturally developed regions
and to relatively larger farmers leaving the backward regions and small farmers to be largely
served by the informal market. This phenomenon is generally explained by four factors viz.,
poor-resource endowment features of the borrower, poor personal factors (education, social
contact etc), underdevelopment of a region and higher transaction costs.
Second, as per empirical studies, transaction costs associated with formal credit include fees
for procuring necessary certificates (open), travel and related expenses including loss of wages
32
etc., and informal or unofficial commissions (hidden). The transaction costs vary with type of
credit agency involved, the type of borrower and farm-size.
Third, uncertainties and delays usually associated with formal credit can also be treated as
additions to the transaction costs.
Fourth, the true cost of borrowing from the formal credit system is thus higher than nominal
cost if the above informal transaction costs are also included. To the extent some transaction
costs are fixed, the effective cost of borrowings for smaller loans tends to be relatively higher
than for a larger loan.
Fifth, there are usually hidden costs or concealed interest rates in respect of informal credit
also, which have to be added to the nominal costs to arrive at the true cost. These hidden costs
generally relate to tied lending, tied to land, labour, input or output. The tied advance in respect
of labour is particularly relevant for migratory labour. The hidden costs are usually in the form
of undervaluation of labour and output of borrowers and overvaluation of inputs supplied by
lender.
Sixth, the choice between formal and informal credit depends on both the access and relative
true costs. Thus, recourse to informal credit, admittedly at far higher nominal costs, is to be
explained partly in terms of effective costs and the extent of supply of formal credit. Seventh,
in assessing relative roles, both supply and demand side bottlenecks of formal credit need to
be appreciated. The former relate to asset-based lending policies and complex formalities
and procedures, while the latter relate to poor endowment, lower education and social-contact,
usually caste-based in backward regions. Viewed differently, a larger role for informal credit
may arise due to low level of commercialisation and monopoly power of moneylender; and it
may also arise due to high level of commercialisation of agriculture when supply from formal
channel cannot match significant demand for credit.
Eighth, it is also necessary to recognise that, to the extent informal markets tend to lend to
borrowers who are relatively less creditworthy, risk-premium is bound to be higher. This would
also get reflected in higher nominal interest rates in informal markets and indeed higher true
cost, though it may not be so high if it is net of risk premium.
It is clear that the critical issue in respect of informal credit is the manner in which the linkages
among the participants in the market operate and result in varying degrees of hidden costs. It
is possible to make some exploratory postulates here. First, trader-lenders are likely to provide
most of production - credit, while farmer-lender or moneylender is likely to provide most of
consumption - credit. It is, of course, possible that some individuals combine the functions of
farmer, trader and moneylender. Second, informal markets are unlikely to finance credit for
33
investment purposes, given the time preference. Third, the levels of education are likely to
reduce the scope for gross overvaluation or undervaluation in linked-transactions. Fourth, the
inter-linked transactions among parties with equal bargaining power are likely to minimise the
hidden costs. Fifth, from the supply side, farmer-lenders may tend to be associated with land
and labour market linkages while trader-lender is likely to be associated with input-output
markets. On the demand side, agricultural labour may be associated with land and labour
markets while the farmer-cultivator with input-output linkages. In the process, it is likely that
a farmer would be a borrower from a trader and a lender to agricultural labour, a common
phenomenon in villages. It will, therefore, be over simplification to divide the rural population
into lenders and borrowers or exploiters and exploited. Sixth, similarly it is necessary to
appreciate the role of linkages in credit-risk-mitigation. In fact, the risk reducing element of
linkages are not built into formal credit-channels. Incidentally to the extent the transaction costs
are front loaded in respect of formal credit, there is no incentive to repay while the true costs
of informal credit are spread out. Seventh, in terms of bargaining power among the class of
borrowers, the agricultural labour and migratory labour appear to be weakest except in
agriculturally prosperous areas where labour-shortage is acute to cater to agricultural and other
operations. Similarly, the differential in bargaining power between large and small borrowers
is similar to that between large corporate and small-industrialists in urban areas.
In brief, the linkages between formal and informal markets are complex, contextual and
dynamic. The two markets appear to compete with and also supplement each other.
We should recognise that the role of banks, which is central to formal credit in rural areas, is
fast changing. Many non-banks are providing avenues for savers and funds for investment
purposes. Banks themselves are undertaking non-traditional activities. Banks are also
becoming what are called universal banks and are already providing a range of financial
services such as investments, merchant banking and even insurance products. Similarly, non
banks are also undertaking bank like activities. At present in India, these are mostly confined
to urban areas, but they will sooner than later spread to rural areas.
Another development relates to the gradual undermining of the importance of branches of
banks. The emergence of new technology allows access to banking and banking services
without physical direct recourse to the bank premise by the customer. The concept of
34
Automated Teller Machines (ATMs) is the best example. At present, ATMs are city oriented
in our country. It is inevitable that ATMs will be widely used, in semi-urban and rural areas.
The technology-led process is leading us to what has been described as virtual banking. The
benefits of such virtual banking services are manifold. Firstly, it confers the advantage of lower
cost of handling a transaction. Secondly, the increased speed of response to customer
requirements under virtual banking vis-à-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.
35
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.
Issues
It is clear that significant progress has been made, since independence, in expanding bank
branches and banking habits in the rural areas, through a variety of institutional innovations.
An impressive segment of rural economy has been brought into the ambit of formal financial
intermediation, mainly through the public sector banking system, and to some extent, through
cooperatives and RRBs. The future of banking in rural areas would, however, depend on
several factors that have been described, namely, how the current concerns are addressed taking
into account the dynamics of transformation in rural economies, the new realities in credit
markets, the linkages between formal and informal markets, and the impact of financial as well
as technological progress on the systems of financial intermediation.
Consequently, public policy will have to address several issues to ensure a sound and efficient
banking system in the service of rural areas. The more important of such issues relate to the
approach, institutions, supply, cost, and related policies
Finally, the approach may expand from delivery of credit to rural areas to making available
financial services and products to savers, investors and consumers in the rural areas. In other
words, it should be recognised that rural financial markets comprise both depositors or savers
and borrowers or investors.
37
Institutions
Among the institutions involved in rural credit, cooperatives have a special place in the RBI.
There is full appreciation of the problems and efforts are underway to workout a package for
revival and may be, rebirth of rural cooperative banks by a Committee headed by Deputy
Governor Shri Jagdish Capoor. The Committee would naturally address issues relating to legal
framework, and incurring costs of addressing problems related to overhang of the past. In
addition, the Committee, I trust, would consider desirability of cooperative banks' foray into
non-fund-based activities, such as fee-based financial services on behalf of mutual funds or
insurance-products. The cooperatives could, in fact help, retail Treasury Bills and Government
Securities in rural areas. Diversified financial products will be increasingly demanded and
supplied in the rural areas, and co-operatives should not be left out of this trend of providing
multiple-products through a single window. This would also imply, going beyond the
somewhat closed loop of preferred financial relations within cooperative system into a multiple
contacts between cooperative banks and other financial intermediaries, largely utilising
technological improvement.
Commercial banks are being reformed in accordance with recommendations of the
Narasimham Committee. The RRBs are being recapitalised. These efforts in regard to banks
would presumably recognise the trends in providing financial services to enable them to
exercise necessary flexibility and dynamism that is warranted by fast changing world.
Similarly, the future role of NABARD could be addressed because the organisational setup,
funding and activities will have to reflect the basic logic of financial sector reform viz. changing
roles of owner, regulator, refinancing, subsidised credit, government-funding and cooperatives.
Some analysts argue that supply-led strategy in regard to rural credit has not been successful,
since institutional spread and directed-lending have not had the desired impact. While
accepting that demand has to play its role, and real-demand also implies negotiating strength
of the borrower in respect of financial institutions, it will be inappropriate to conclude that
supply should necessarily follow demand. Mere presence of rural credit institutions, does not
amount to availability of supply. Similarly, mere prescriptions of priority lending would not
ensure supply.
38
For example, prescription of priority-sector lending relates to percentage of credit outstanding
rather than advances. Further, there is no reward for overshooting the target and undershooting
is not really penalised since amounts of shortfall need to be placed in a fund administered by
NABARD with a totally risk-free return of 11.5 percent for a five-year advance. These funds
are actually lent to State Governments, thus to an extent replacing rural credit to agriculture
with credit to State Government for rural development. While as a transient measure during a
period conspicuous for incomplete projects, such an arrangement was justifiable, this should
not become a permanent feature as it would have obviously perverse effects. The coverage of
definition of priority sector also leads to some difference between apparent supply and effective
supply. Thus, the base for calculating priority sector excludes commercial banks' investments,
which are expanding rapidly. The procedural bottlenecks resulting in delayed supply also, in
some ways, amount to erosion of effective supply.
At the same time, there may be some effective supplies which are not reckoned for supply
under priority-sector. There may be funds channelled by banks to rural area through urban-
branches or through other intermediaries such as NBFCs.
There is perhaps a case for some research and studies on policy of directed lending so that we
could improve on the incentive and policy framework to enhance effective supply. For
example, the definition and coverage of priority sector for agriculture could be revisited and
lending to agriculture by banks through NBFC's could be considered for inclusion in priority-
sector, as has been done to ensure flow of credit to truck operators.
Yet another area in effective supply relates to lending by banks under government sponsored
programmes, which has significant non-commercial considerations. Several issues relating to
both supply and accountability arise due to involvement of both Government and banks. A
more transparent approach, for example, by separately accounting for them as policy-induced
lending would help isolate and monitor this supply, apart from isolating the non-performing
assets on this account in the balance sheets of banks.
An important bottleneck in the delivery of credit has been the negligible use of bill-discounting
for services sector. Current policies and procedures restrict this instrument to goods. It has been
decided by the RBI to constitute a Committee to explore ways by which bank finance can be
made available to service sector. The Committee, with representation from public, private
sector and foreign banks also is expected to study international experience, our policies and
procedures and make recommendations in two months. This important step recognises that
about half of our Gross Domestic Product is in services sector and would also help flow of
bank finance to the growing services sector in rural areas.
39
Reducing True Cost
The major reasons for the true cost of credit from rural financial institutions being higher than
nominal costs are mainly scarcity of supply and transaction costs. Enhancing effective supply
would be an important strategy of reducing the true cost. Encouraging competition would be
yet another strategy. A review of procedural requirements, such as eliminating mandatory
forms and replacing them with locally determined procedures, could also be considered. All
non-verified documentation could, for instance, be replaced with self-declaration by the
borrower. Repeated visits and consequent transaction costs can be avoided by several
procedural simplifications - going beyond Gupta Committee recommendation. In particular,
growth of information
technology and its application in banking would warrant a thorough review of products,
procedures and linkages among rural financial institutions.
Arbitrage in financial markets is inevitable and prevalence of such operations cannot be
ignored. Arbitrage between formal and informal markets and between production loans and
consumption needs is also common. Thus, keeping the true cost artificially low in formal
markets, the rural financial institutions would encourage arbitrage and erode the clear potential
for profit. Indeed, an appropriate strategy may be to reduce the difference between nominal
and true cost and ensure that true cost reflects market conditions, including premium for credit
risk. As already mentioned, provision of diverse financial products and services in the rural
areas would enhance income to banks and help reduce the admittedly large spreads in interest
rates. Thus, among the efforts to reduce nominal and true costs of credit in rural areas would
be provision of multiplicity of financial services by rural financial institutions, taking
advantage of developments in technology and financial markets.
Related Policies
There is increasing recognition that, the spread of literacy and generation of growth impulses
in the rural sector would be very significant factors in enhancing effective supply and reducing
true cost of rural credit. More specifically, the desired spread of technology and trickledown of
urban financial products to rural areas would require concerted action in four areas. First and
foremost, insurance, especially of crops, should penetrate the rural areas to mitigate the risks
to both farmer and lender. The lack of penetration of insurance is perhaps an important reason
40
for lenders seeking tied and other risk-mitigation arrangements through informal markets.
Second, there should be assured supply of electric power so that functioning of systems is not
disrupted. Third, telecommunication network needs to be dependable and financial sector needs
to ensure a network. We, in the RBI, have already launched INFINET. Fourth, the institutional
and regulatory framework should enable rural financial institutions to operate in diverse
financial products and services. We, in the RBI are currently engaged in a number of initiatives
and studies. We hope to continue the process, and focus on rural credit, as mandated by the
RBI Act. We would seek advice and guidance in this endeavour.
41
An ICT Structure for Rural Banking Enablement
42
Its components are Digital Rural Information Infrastructure,
Customer Data Integration and Credit rating, a shared electronic platform for various services,
Provision of technology support to banking services including ATM Services.
Benefits include financial inclusion of rural population,
providing the banking services in a pro-active manner, enabling the banks to offer highly
individualized bundle of services, and reduction of costs through shared infrastructure for data
collection and updation and shared mobile service-delivery mechanism and generally enabling
the innovation and spread of banking and other services by providing an efficient electronic
platform and promote commerce and development.
Figure 1
DIAGRAMMATIC REPRESENTATION OF THE MODEL
44
45
GANASEVA Model for Rural Banking:
Implementation Experience
The project was implemented in five villages in the Honavar
block of the Uttara Kannada district of Karnataka, India having approximately 4000 families,
involved in essentially agricultural activity. The banks which participated in this project are
State bank of India, Syndicate Bank, who had agreed to use the data / documents available
through the system. Besides the rural information service and credit rating, there is support in
the system for the crop loan and Kisan Credit Card and Savings Bank Account Operations. The
Project also wanted to link the Primary Agricultural Co-operative Societies (PACS) to the
system for providing banking services through their automation. The project was expected to
demonstrate the feasibility of the model on the ground.
Methodology
Information System
We developed a model for rural information infrastructure. A
reputed market research agency was employed for collection of
data and documents in proof thereof in respect of adults in all the households of the five selected
villages viz., Idagunji, Apsarakonda, Kelaginoor, Malkod and Manki located in the backward
Honavar block of Uttara Kannada District in Karnataka. The data collected was validated by a
control set of 500 cases collected by the project coordinator and further by the members of the
Project Monitoring Group. Pre-programmed PDAs were used for collection of
data/information, the documentary evidence and uploading of this data into Server. The
information was collected as per the requirement developed in consultation with the banks for
providing banking services and the authentication requirements.
PDA Software
ATM Feasibility
47
For testing and demonstrating the implementability of the
above solution with respect to essentials, we undertook, and completed, a pilot project during
October 2004 and January 2006 with funding from Microsoft and technology support from a
Microsoft-HP led coalition of ISVs. The Government and the local NGOs also actively
participated. Banks like State Bank of India, Honavar and Primary Agricultural Co-operative
Credit Societies have started using the systems. The project objectives were
-> Establishing ICT-based Rural Information Infrastructure for providing banking
services on a shared basis
-> Managing and processing this data and for making it available to the various
banks for acquiring customers both on the liability and assets sides.
-> Shared delivery system through mobile ATMs for increasing access to rural people.
48
pursuing cost-efficiency through extensive outsourcing and lean processes to suit the local
realities.
49
as a core function. The utility service provision which partly use banking as the payment system
infrastructure could be the second layer. The delivery of the rest of the services like governance,
information, education, health, extension and occasional requirements like investment, trade
and documentation might form the third dimension.
50
Our RII model involves the use of ICT for building and
operating this information infrastructure involving collection, storage updation, consolidation
and processing of the data and making customized offering; Entrepreneurial model with
provision for assurance review by public authorities or users or both; Pay- for- use business
model.
The technology model involves the use of personal digital
assistants (PDAs) with specially made applications for data (Voice, Picture and Data) capture,
verification and validation and updating; Data Center with storage, processing and
management; Delivery Nodes at the user-ends and Three-way connectivity between the PDA,
Data Center and Delivery Node.
51
Digital Rural Information Infrastructure Model
52
As a specific instance of the application, the RII information
services together with credit rating of the rural individuals to the banks and financing agencies
has been worked out. The RII information in digital form will be stored and processed in the
backend system at the data center for affording support to the banking functionalities of the
Rural Credit Delivery System. The banking services supported by the RII are the registration
of the customer, credit rating and the opening of the bank accounts and provision of loans for
agricultural operations. The information stored in the server is classified and grouped and
made available to the banks and the customers to perform their activities in a context - sensitive
way. The RII data will be used for deriving a credit rating and making it
available to the people and the banks. The digital RII facilitates the following in the
banks:
• Access to self- validated data / information with documentary proof in the digital
form to the service- providers at low costs.
• Providing techniques and tools for evaluation of the credit on an individual basis
rather than in a standardized manner.
• Applying of the information and communication technologies appropriately for
reducing costs, delays, increasing accuracy, objectivity and reducing governance
problems in the credit assessment.
• Enabling more efficient capital allocation and improvements in quality of lending.
53
Figure 2.
Rural Credit Delivery Solution using Digital Rural Information Infrastructure
54
Rural Information Infrastructure-Technology Solution
The technology solution involves the use of PDA’s or
Laptops with specially made applications for capturing data [voice, picture and data] with
provision for clarification and validation and updating. It also envisages a data center wherein
all these collected data are stored, processed and managed with suitable control procedure and
provision for the audit by the users and / or public authorities. The third element is CDMA
connectivity between the users of the data and the data center. There is provision for separation
of the user’s transactional data from the general information infrastructure in order to make the
data center viable and also enable the provision of information services on an application
service provider model by keeping such operations distinctly separate from the management of
the rural information infrastructure. The fourth element of the model is hubbing all these data
centers in order to create an information grid for the country as a whole, in due course.
55
Official banking statistics do not, unfortunately, give us
information on the volume of advances in a specific year. The basic source of data on banking
is the Reserve Bank of India’s annual Banking Statistics. Data in this document are provided
on “credit outstanding,” which is the total amount advanced, including all outstanding loans
and non-performing assets, on March 31 of the reference year. Data under the head “credit
sanctioned” do not represent the volume of advanced in a single year either; in fact, at the all-
India level, the figures for “credit outstanding,” “credit sanctioned,” and “credit utilised” are
equal. The consequence of this method of collection and presentation of data is that there are
no data at all on loan advances by banks each year, that is, on the flow of credit The data on the
stock of credit show a marked deceleration in credit provision to the countryside since 1991;
had we data on the actual amount disbursed each year, we would have had a clearer picture of
the collapse in rural banking in the period of liberalization.
56
the target was over-achieved, that is, more than 40 per cent of total credit outstanding went to
priority sectors. From 1991 to 1996, the share of priority sector credit fell, in line with the
recommendations of the Narasimham Committee. At first glance, the direction in priority
sector lending appears to have been reversed over the last five years. This is, however, a
reversal by redefinition: “priority sector” lending now includes advances to newly-created
infrastructure funds, to non-banking finance companies for on-lending to very small units, and
to the food processing industry. Loans to multinationals like Pepsi, Kelloggs, Hindustan Lever
and ConAgra now count as priority sector advances. More recently, loans to cold storage units,
irrespective of location, have been included in the priority sector. Chandrasekhar and Ray
(2004) point to the growing presence of foreign banks in India, their direct presence and their
indirect presence through the purchase of shares in existing private banks. This expansion is
not good news for the priority sector. When data for scheduled commercial banks are
disaggregated by type of bank (public sector banks, regional rural banks, private banks and
foreign banks), we find that foreign banks did not lend to rural areas or agriculture.
57
agriculture. Agricultural credit outstanding to marginal cultivators accounted for 30 per cent of
total agricultural credit outstanding from commercial banks in 1990-91; its share fell to 23.8
per cent in 1999-2000 (Chavan, 2004, Table 10). At the same time, the share of credit
outstanding to “small cultivators” (with between 2.5 and 5 acres) stagnated while that to large
cultivators rose. Another indicator of the decline in credit to relatively poor rural households is
the fact that the number of ‘small borrowal accounts’ (or accounts with a credit limit of Rs
25,000) fell in the 1990s (Chandrasekhar and Ray, 2004)
VILLAGE STUDIES
Case studies based on primary data help identify the
impact of changes in financial policy and banking structure on patterns of indebtedness among
rural households. We shall attempt to review the major results from five papers, each reporting
the findings of detailed village surveys on rural credit in the contemporary period. The studies
cover Baghra and Udaipur villages of Giridih district in Jharkhand, Panahar and Muidara
villages of Bankura district in West Bengal, Morazha village of Kannur district in Kerala,
Gokilapuram of Theni district in Tamil Nadu and Dhamar of Rohtak district and Birdhana of
Fatehabad district in Haryana.
58
Gokilapuram village in south-west Tamil Nadu is a
highly-irrigated, agriculturally-advanced and commercialised village. The high development
of productive forces is combined with a very unequal distribution of resources: a large
proportion of households are landless while a small minority control the major share of land
and other assets. The availability of data from two census-type surveys of Gokilapuram, the
first in 1977 and the second in 1999, with smaller surveys in the interim, particularly in 1985,
allows for a discussion of changes over a relatively long period of time (Ramachandran and
Swaminathan, 2004b).
Resurvey data are also available for the two villages in West
Bengal. Vikas Rawal first studied the villages of Panahar and Muidara in 1995-96 and restudied
them in 2002 (Rawal, 2004). After land reform in the 1970s and 1980s, there were major
changes in these two villages. Irrigated area, agricultural output and yields surged. As in other
parts of West Bengal, agrarian structure in Panahar and Muidara is dominated by smallholders.
59
was characterised by widespread and acute indebtedness among the peasantry during the
British period. It is also a region where there were major struggles against British rule and
against landlordism, and where the cooperative movement took strong roots.
60
consumption credit and the issue of credit to landless households for productive purposes
remained neglected.
61
cooperatives and banks accounted for 44 per cent of the debt of agricultural labour households.
The share of the formal sector fell to 36 per cent in 1993 and further to 31 per cent in 1999-
2000 (GOI, 2004). Over the same period, the share of moneylenders in the total debt incurred
by agricultural labour households went up from 18.6 per cent in 1983 to 34 per cent in 1999-
2000. During the period when the share of formal credit in total debt of rural households fell,
the share of debt taken for productive purposes also fell sharply, from 41 per cent in 1983 to
21.5 per cent in 1999-2000.
62
Landowner-employers were the dominant sources of
credit for landless workers in Haryana. In Dhamar village, nearly 49 per cent of the total
principal borrowed by landless households came from their agricultural employers.
63
INSTITUTIONAL CREDIT
FOR RURAL INDIA
64
INSTITUTIONAL CREDIT FOR RURAL INDIA
In April-May 2004, the Indian electorate delivered a
dramatic judgement on economic policy. Thirteen years of neoliberal economic policy (further
intensified in the last five to six years) had taken their toll, and there is general agreement
among serious political observers that the election results represented widespread protest, rural
and urban, against the collapse of livelihoods among the mass of the people. If policy is to
repair the damage done to the rural economy, India needs large-scale public investment in the
countryside. The links between rural distress and the near-collapse of the formal sector of bank
is well recognised, and it is no surprise that one of the promises of the new Government was
that it would double the flow of rural credit in three years.
65
usury requires agrarian reform, a decisive change in banking policy is essential for the very
survival of the working people in rural India.
66
67
MAJOR RURAL BANKING
PLAYERS IN INDIA
68
MAJOR RURAL BANKING PLAYERS IN INDIA
REGIONAL RURAL BANKS
The Narasimham committee on rural credit recommended the establishment of Regional Rural
Banks (RRBs) on the ground that they would be much better suited than the commercial banks
or co-operative banks in meeting the needs of rural areas. Accepting the recommendations of
the Narasimham committee, the government passed the Regional Rural Banks Act, 1976. A
significant development in the field of banking during 1976 was the establishment of 19
Regional Rural Banks (RRBs) under the Regional Rural Banks Act‚1976.
The RRBs were established “with a view to developing the rural economy by providing, for
the purpose of development of agriculture, trade, commerce, industry and other productive
activities in the rural areas, credit and other facilities, particularly to small and marginal
farmers, agricultural labourers, artisans and small entrepreneurs, and for matters connected
therewith and incidental thereto” .
Objective
Functions
Regional Rural Banks in India
Regional Rural Banks in Tamil Nadu
The main objectives of setting up the RRB are to provide credit and other facilities‚ especially
to the small and marginal farmers‚ agricultural labourers artisans and small entrepreneurs in
rural areas.
Each RRB will operate within the local limits specified by notification.
69
If necessary‚ a RRB will also establish branches or agencies at places notified by the
Government.
Each RRB is sponsored by a public sector bank‚ which provides assistance in several ways‚
viz., subscription to its share capital‚ provision of such managerial and financial assistance as
may be mutually agreed upon and help the recruitment and training of personnel during the
initial period of its functioning.
Functions
Every RRB is authorized to carry on to transact the business of banking as defined in the
Banking Regulation Act and may also engage in other business specified in Section 6 (1) of
the said Act. In particular‚ a RRB is required to undertake the business of
(a) granting loans and advances to small and marginal farmers and agricultural laborers‚
whether individually or in groups, and to cooperative societies‚ including agricultural
marketing societies‚ agricultural processing societies‚ cooperative farming societies‚ primary
agricultural credit societies or farmers’ service societies‚ primary agricultural purposes or
agricultural operations or other related purposes, and
(b) Granting loans and advances to artisans‚ small entrepreneurs and persons of small means
engaged in trade‚ commerce‚ industry or other productive activities‚ within its area of
operation.
The Reserve Bank of India has brought RRB’s under the ambit of priority sector lending on
par with the commercial banks. They have to ensure that forty percent of their advances are
accounted for the priority sector. Within the 40% priority target, 25% should go to weaker
section or 10% of their total advances to go to weaker section.
The State Bank of India is one of the major commercial banks having regional rural banks.
There are 30 Regional Rural Banks in India, under the State Bank of India and it is spread in
13 states across India. The number of branches the SBI Regional Rural Banks is more than
2000.
70
Several other banks, apart from the State Bank of India also functions as the promoter of rural
development in India.
There are a number of regional rural banks in India. Following are the state-wise list of
Indian regional rural banks.
Andhra Pradesh
Arunachal Pradesh
Assam
Bihar
Chhattisgarh
71
Durg-Rajnandgaon Gramin Bank
Gujarat
Haryana
Himachal Pradesh
Jharkhand
Karnataka
72
Kerala
Madhya Pradesh
Maharashtra
Manipur
Meghalaya
Mizoram
73
Mizoram Rural Bank
Nagaland
Orissa
Punjab
Rajasthan
Tamil Nadu
Tripura
74
Uttar Pradesh
Uttaranchal
West Bengal
75
The main purpose of the Haryana State Cooperative Apex Bank Limited is to financially assist
the artisans in the rural areas, farmers and agrarian unskilled labor, and the small rural
entrepreneurs of Haryana. Haryana State Cooperative Apex Bank Limited also referred as the
HARCOBANK, is one of the apex organizations in the state of Haryana. The HARCOBANK
holds a special economic position in the state of Haryana. The Haryana State Cooperative Apex
Bank Limited offers several types of financial assistances to the individuals. The financial aids
include credit for the promotion of agriculture, non-agrarian credit, and bank deposit facilities.
The HARCOBANK have been functioning as an investor for more than three decades.
The main purpose of the National Bank for Agriculture and Rural Development is to provide
credit for the development and publicity of small scaled industries, handicrafts, rural crafts,
village industries, cottage industries, agriculture, etc. The NABARD also supports all other
related economic operations in the rural sector, promotion of sustainable growth in the rural
sector. The NABARD also plays the role of a contributor to the rural development by the means
of promoting institutional development, facilitating refinance to loan providers in the rural
sector, inspection, monitoring, and evaluation of client financial corporations. National Bank
for Agriculture and Rural Development (NABARD) was established as the premiere rural
development bank.
The main purpose of the Sindhanur Urban Souharda Co-operative Bank is to provide financial
support to the rural sector. The Sindhanur Urban Souharda Co-operative Bank is more
commonly known as the SUCO Bank.
76
United Bank of India
The role played by the United Bank of India (UBI) as one of the regional rural banks is
phenomenal. The UBI has propagated the network of branches in order to actively take part in
the rural improvement and development.
Syndicate Bank
The Syndicate Bank has it grass roots in the rural sector. The development of the Syndicate
Bank was in accordance to the development of the banking sector in India and. The Syndicate
Bank has performed actively in the development of the rural sector in India.
The Regional Rural Banks in India has actively contributed to the growth of the rural sector.
The growth of the rural industries in India and the development of the rural business and
economy have been dependent largely on the investment and financial aids provided by the
Regional Rural Banks in India.
Indian Bank has sponsored two Regional Rural Banks (RRBs) viz., Saptagiri Grameena Bank
and Pallavan Grama Bank.
Pallavan Grama Bank with Head Quarters at Salem is operating in 14 districts of Tamil Nadu
viz., Salem, Namakkal, Krishnagiri, Dharmapuri, Villupuram, Cuddalore, Coimbatore, Karur,
Erode, Nilgiris, Vellore, Tiruvannamalai, Kancheepuram and Tiruvallur.
The third RRB sponsored by Indian Bank is Puduvai Bharathiar Grama Bank at Union
Territory of Puducherry with its head quarters at Puducherry.
77
Parameter 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Growth(%)
No. Of
RRBs
196 196 196 196 196 196 196 96 86 86 83
Capital 1380 1959 2049 2143 2141 2221 25354 48488 58990 67855 76392 5435.65
Deposit 27059 32226 39294 44539 49582 56295 69719 83143 99093 120184 124296 359.35
Investment
6680 7760 8800 9471 17138 21286 33486 45666 48559 62629 96699 1347.5
Advance 10559 12427 15050 17710 20934 25038 32692 40345 43456 46678 51283 385.62
Total Assets
35820 42236 49596 56802 62500 70195 436805 803416 844982 898760 984364 2648.3
Interest
Earned
3281 3938 4619 5191 5391 5535 6041 6547 7729 7586 8786 165.94
Other
Income
151 207 240 370 430 697 743 790 873 853 1023 577.4
Total
Income
3432 4145 4859 5561 5821 6231 6784 7337 7602 8421 9809 185.8
78
Interest
expanded
2131 2565 2966 3329 3340 3363 5902 8441 8860 8362 9260 334.5
Operating
Expanses
982 1056 1165 1459 1667 1825 1958 2092 22134 2345 2598 164.6
Provision
And
Contigencies
99 96 128 163 132 289 329 369 434 590 699 606.3
Total
Expenses
3113 3621 4130 4787 5107 5187 7860 10533 10994 10707 11758 277.7
Operating
Profit
319 319 729 774 714 1044 985 926 1383 1859 1987 522.8
79
RRBS – IMPORTANT BANKING INDICATORS
80
OBJECTIVE OF THE
STUDY
81
OBJECTIVE OF THE STUDY
1. To study marketing of rural banking in India.
2. To study comparative marketing of rural and urban banking in India.
3. To study about Institutional sources consist of the co-operative and commercial banks
including Regional Rural Banks (RRBS)
4. To study about Non institutional or private sources including money lender traders
commission agents and landlords
82
RESEARCH
METHODOLOGY
83
RESEARCH METHODOLOGY
Research in common parlance refers to a search for knowledge. The advanced learner’s
dictionary of current English lays down the meaning of research as “a careful investigation of
enquiry especially through search for new facts in any branch of knowledge.”
The systematic approach concerning generalization and the formulation of a theory is also
research. The purpose of research is to discover answers to questions through the application
of scientific procedures.
“A research design is the arrangement of conditions for collection and analysis of data in a
manner that aims to combine relevance to the research purpose with economy in procedure.”
- JOHN.W.BEST
Research may be defined as “any organized inquiry designed and carried out to provide
information for solving a problem”.
- EMORY
“Research is essentially an investigation, a recording and an analysis of evidence for the
purpose of gaining knowledge”.
- ROBERT ROSS
84
DATA COLLECTION
The study was based on questionnaire method. There are two types of data collection:
Primary data
Secondary data
Primary data
The primary data are those, which are collected a fresh and for the first time happen to
be original in character. It has been collected through a Questionnaire and personal interview.
Only the primary data is not the sufficient to get information about the complete topic so both
primary and secondary data is collected.
Secondary data
Secondary data are those which have already been collected by someone else and which
have already been passed through the stratified process. It has collected through the books,
journals & Internet.
RESEARCH INSTRUMENT
Questionnaire
“A questionnaire is simply a set of questions designed to generate the data necessary for
accomplishing a research project’s objectives” (Parasuraman, 1991, p.363).
SAMPLE DESIGN:
POPULATION
It covers the 100 unit of population.
SAMPLE PROCEDURES
In this study convenient sampling method was adopted. First each organization
was divided into different departments like Operations, Customer Services,
Human Resources, Internet Marketing and under writing departments. From
this department, the respondents were selected on the basis of convenience.
85
INTERVEIW SCHEDULE
The interview schedule has been used to collect the data. Information can be
gathered even when the respondents happen to be literate or illiterate.
TABULATION
Formula:
Simple percentage = No of Respondents x 100
Total No of Sample Size
86
LIMITATIONS OF THE STUDY
The study is focused only in Bajaj Allianz Life Insurance Company.
Thus the respondents are not come forward to provide their feedback regarding their
organization than the result is bias.
In this study the sample size is 70. The result might vary when the sample size values
changes it.
Researcher fined the difficulty in searching the appropriate advisor and respondent
throughout the city.
The research was limited to the Bhopal city.
87
DATA ANALYSIS
AND INTERPRETATION
88
DATA ANALYSIS AND INTERPRETATION
1) Central Scheme to provide Interest Subsidy for the period of moratorium on loans
taken by farmer from economically weaker sections from schedule banks under the
loan scheme of the Indian Banks Association?
□ To great extent
□ To some extent
To great extent 64 0
To some extent 26 72
80 72
64
70
60
50
40 28
26
30
20 10
10 0
0
To great extent To some extent To very little extent
89
Interpretation:
44% of the respondent of rural bank says that Central Scheme to provide Interest
Subsidy for the period of moratorium on loans taken by farmer from economically
weaker sections from schedule banks under the loan scheme of the Indian Banks
Association to great extend where as none of the respondent of Urban Bank says that
Central Scheme to provide Interest Subsidy for the period of moratorium on loans taken
by farmer from economically weaker sections from schedule banks under the loan
scheme of the Indian Banks Association to great extend.
26% of the respondent of rural bank says that Central Scheme to provide Interest
Subsidy for the period of moratorium on loans taken by farmer from economically
weaker sections from schedule banks under the loan scheme of the Indian Banks
Association to great extend where as 72% of the respondent of Urban Bank says that
Central Scheme to provide Interest Subsidy for the period of moratorium on loans taken
by farmer from economically weaker sections from schedule banks under the loan
scheme of the Indian Banks Association to some extend.
10% of the respondent of rural bank says that Central Scheme to provide Interest
Subsidy for the period of moratorium on loans taken by farmer from economically
weaker sections from schedule banks under the loan scheme of the Indian Banks
Association to great extend to very little great extend where as 28% of the respondent
of Urban Bank says that Central Scheme to provide Interest Subsidy for the period of
moratorium on loans taken by farmer from economically weaker sections from schedule
banks under the loan scheme of the Indian Banks Association to very little extend.
90
2) To what extent is Sales Promotions have been used by banker to increase sales in the short
term?
□ Completely
□ Partially
□ Nil
Completely 90 59
Partially 10 30
Nil 0 11
90
100
80 59
60
30
40
10 11
20 0
0
Completely Partially Nill
91
Interpretation:
90% of the respondent of Rural Bank says that Sales Promotions have been used by
banker to increase sales in the short term where as 59% of the respondent of Urban
Bank says that Sales Promotions have been used by banker to increase sales in the short
term.
10% of the respondent of rural bank says that Sales Promotions have been used by
banker to increase sales in the short term where as 30% of the respondent of Urban
Bank says that Sales Promotions have been used by banker to increase sales in the short
term.
No respondent of rural bank says that Sales Promotions have been used by banker to
increase sales in the short term is nill where as 11% of the respondent of Urban Bank
says that Sales Promotions have been used by banker to increase sales in the short term
is nill.
92
3) Does your marketing policy of bank have a focus marketing on agro- sector?
□ Strongly agree
□ Agree
□ Disagree
□ Strongly disagree
□ Can’t say
Strongly Agree 83 61
Agree 17 23
Disagree 0 16
strongly disagree 0 0
Can't say 0 0
90 83
80
70 61
60
50
40
30 23
17 16
20
10 0 0 0 0 0
0
Strongly Agree Agree Disagree strongly Can't say
disagree
93
Interpretation:
83% of the respondent of Rural Bank strongly agree that Marketing policy of bank
have a focus marketing on agro- sector where as 61% of the respondent of Urban Bank
also strongly agrees that Marketing policy of bank have a focus marketing on agro-
sector.
17% of the respondent of Rural Bank agree that Marketing policy of bank have a focus
marketing on agro- sector where as 23% of the respondent of Urban Bank also agrees
that Marketing policy of bank have a focus marketing on agro- sector.
None of the respondent of Rural Bank disagree that Marketing policy of bank have a
focus marketing on agro- sector where as 16% of the respondent of Urban Bank also
disagree that Marketing policy of bank have a focus marketing on agro- sector.
None of the respondent of Rural Bank & Urban Bank also strongly disagree that
Marketing policy of bank have a focus marketing on agro- sector.
None of the respondent of Rural Bank & Urban Bank can’t says that Marketing policy
of bank have a focus marketing on agro- sector.
94
4) Multiple ‘basic’ financial services and loan gateway is product marketing of the bank?
□ Yes □ No
Yes 87 62
No 13 38
87
100
80 62
60 38
40 13
20
0
Yes No
Interpretation:
87% of the respondent of Rural Bank says that Multiple ‘ basic’ financial services and
loan gateway is product marketing of the bank where as 62% of the respondent of
Urban Bank also says that Multiple ‘ basic’ financial services and loan gateway is
product marketing of the bank.
13% of the respondent of Rural Bank sasys that Multiple ‘ basic’ financial services and
loan gateway is product marketing of the bank where as 38% of the respondent of
Urban Bank also says that Multiple ‘ basic’ financial services and loan gateway is
product marketing of the bank.
95
5) Devised to ensure usage as well as profitability Quantity discounts, and ease in payment modes
is pricing marketing of the bank.
□ Yes □ No
Yes 11 13
No 89 87
89 87
100
80
60
40 11 13
20
0
Yes No
Interpretation:
11% of the respondent of rural bank says that Devised to ensure usage as well as
profitability Quantity discounts, and ease in payment modes is pricing marketing of the
bank. whereas 13% of the respondent of Urban Bank also says that Devised to ensure
usage as well as profitability Quantity discounts, and ease in payment modes is pricing
marketing of the bank..
89% of the respondent of rural bank says that Devised to ensure usage as well as
profitability Quantity discounts, and ease in payment modes is pricing marketing of the
bank. whereas 87% of the respondent of Urban Bank also says that Devised to ensure
usage as well as profitability Quantity discounts, and ease in payment modes is pricing
marketing of the bank..
96
6) Comprehensive offering of different services is placement marketing of the bank?
□ Traditional □ Modern
Traditional 98 91
modern 2 9
98
91
100
80
60
40
9
20 2
0
Traditional modern
Interpretation:
98% of the respondent of rural bank says that Comprehensive offering of different
services is placement marketing of the bank where as 91% of the respondent of Urban
Bank says that Comprehensive offering of different services is placement marketing of
the bank.
97
7) Collaborating with NGO’s to development Knowledge marketing of the bank
□ Yes □ No
Yes 33 81
No 67 19
81
90
80 67
70
60
50 33
40
30 19
20
10
0
Rural Bank Urban Bank
Yes No
Interpretation:
33% of the respondent of RURAL BANK says that Collaborating with NGO’s to
development Knowledge marketing of the bank where as 81% of the respondent of
Urban Bank also says that Collaborating with NGO’s to development Knowledge
marketing of the bank.
67% of the respondent of RURAL BANK says that Collaborating with NGO’s to
development Knowledge marketing of the bankwhere as 19% of the respondent of
Urban Bank says Collaborating with NGO’s to development Knowledge marketing of
the bank.
98
99
CONCLUSION
100
CONCLUSION
RRBs' performance in respect of some important indicators was certainly better than that of
commercial banks or even cooperatives. RRBs have also performed better in terms of providing
loans to small and retail traders and petty non-farm rural activities. In recent years, they have
taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit institutions
and linking such groups with the formal credit sector.
RRBs should really be strengthened and provided with more resources with which they can
undertake more of these important activities. And most certainly they should be kept apart from
a profit-oriented corporate motivation that would reduce their capacity to provide much needed
financial services to the rural areas, including to agriculture. Ideally, the best use of the
resources raised by RRBs through deposits would be through extensive cross-subsidisation.
This, in turn, really requires an apex body that would cover and oversee all the RRBs,
something like a National Rural Bank of India (NRBI).
The number of rural branches should be increased rather than reduced; they should be
encouraged to develop more sophisticated methods of credit delivery to meet the changing
needs of farming; and most of all, there should be greater coordination between district
planning authorities, Panchayati raj institutions and the banks operating in rural areas. Only
then will the RRBs fulfill the promise that is so essential for rural development.
101
BIBLIOGRAPHY
Books:
Magazines:
Business Today
Business Week.
Business World
Newspapers
Economic Times
The Hindu
Times of India
102
Annexure
QUESTIONNAIRE
1) Central Scheme to provide Interest Subsidy for the period of moratorium on loans taken by
farmer from economically weaker sections from schedule banks under the loan scheme
of the Indian Banks Association?
□ To great extent
□ To some extent
2) To what extent is Sales Promotions have been used by banker to increase sales in the short
term?
□ Completely
□ Partially
□ Nil
3) Does your marketing policy of bank have focus marketing on agro- sector?
□ Strongly agree
□ Agree
□ Disagree
□ Strongly disagree
□ Can’t say
4) Multiple ‘ basic’ financial services and loan gateway is product marketing of the bank?
□ Yes □ No
5) Devised to ensure usage as well as profitability Quantity discounts, and ease in payment
modes is pricing marketing of the bank.?
103
□ Yes □ No
□ Traditional □ Modern
□ Yes □ No
104