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RURAL BANKING IN INDIA

Submitted in partial fulfilment of the requirements for the award of degree


Of

MBA
In

FINANCIAL MANAGEMENT

Submitted By:

VARUN TRICHAL
511227243

DEPARTMENT OF MANAGEMENT

SIKKIM MANIPAL UNIVERSITY


SIKKIM

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.

Mr. Atul Dubey


HOD OF DEPARTMENT

Varun Trichal
STUDENT NAME

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

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:
HEAD OF THE DEPARTMENT
IN CHARGE

FACULTY

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.
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.
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.
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 extensionbased 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
5

borne out by the market revolution that is taking place in Indias villages.
The

Narasimham

committee

on

rural

credit

recommended

the

establishment of Regional Rural Banks (RRBs) in meeting the needs of


rural areas.
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 microcredit 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.
6

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.

REFERENCE
Books:

Aaker (1991) Building Strong Brands; New York: Free Press

Chatterjee, Jauchius, Kaas and Satpathy no. 1, (2002): 'Revving up auto


branding', McKinsey Quarterly.

David. A. Aaker, V.Kumar & George S. Day, (2001) Descriptive Research:


Marketing Research, Seventh Edition, pp 17

Saxena,

Rajan.

(2003):Marketing

Management

Tata

Mcgraw-Hill

Publishing Company Limited. New Delhi

Sontakki, C.N. (1997):Marketing Management Kayali Publisher., New


Delhi.

Kotler, Philip. (1999):Marketing Management Prentice Hall of India Pvt.


Ltd., New Delhi.

Kothari, C.R (2001):Research Methodology, Vishwa Publication., New


Delhi

Sharma,D.D(2002):Marketing Research, Sultan Chand Sons, New Delhi

Magazines:

Business Today

Business Week.

Business World

Newspapers

Economic Times

The Hindu

Times of India

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
To very little 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
cant 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?

Yes

No

6) Comprehensive offering of different services is placement marketing of the


bank?
Traditional

Modern

7) Collaborating with NGOs to development Knowledge marketing of the bank

Yes

No

10

INDEX
1. INTRODUCTION
2. BANKING POLICY IN RURAL INDIA
3. DISTRIBUTION CHANNEL OF RURAL BANKING
4. MARKETING STRATEGIES OF RURAL BANKING PLAYERS IN INDIA
5. AN ICT STRUCTURE FOR RURAL BANKING ENABLEMENT
6. OBJECTIVE OF THE STUDY
7. RESEARCH METHODOLOGY
8. DATA ANALYSIS AND INTERPRETATION
9. CONCLUSION
10. BIBLIOGRAPHY
11. ANNEXURE

11

INTRODUCTION

12

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.
As the majority of the Indian population lives in rural areas,
there is an urgent need to deliver citizen services to them in a cost effective way with assured
quality. This involves mainly the following:
1. Enabling the ready access at the place of the villagers.
2. Reducing transaction cost to make the services affordable.
3. Reduction in delays.
4. Improving the quality of services available.
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.

13

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.

14

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.
Historically, there have been four major problems with
respect to the supply of credit to the Indian countryside. First, the supply of formal sector
credit to the countryside as a whole has been inadequate. Secondly, rural credit markets in
India themselves have been very imperfect and fragmented. Thirdly, as the foregoing
suggests, the distribution of formal sector credit has been unequal, particularly with respect to
region and class, caste and gender in the countryside. Formal sector credit needs specially to
reach backward areas, income-poor households, people of the oppressed castes and tribes,
and women. Fourthly, the major source of credit to rural households, particularly incomepoor working households, has been the informal sector. Informal sector loans typically are
advanced at very high rates of interest. Further, the terms and conditions attached to these
loans have given rise to an elaborate structure of coercion economic and extra-economic
in the countryside.
That these constitute what may be called the problem of
rural credit has been well recognized; recognized, in fact, in official evaluations and
scholarship since the end of the nineteenth century. Given the issues involved, the declared
objectives of public policy with regard to rural credit in the post-Independence period were,
in the words of a former Governor of the Reserve Bank of India, to ensure that sufficient and
timely credit, at reasonable rates of interest, is made available to as large a segment of the
rural population as possible (Rangarajan 1996, p. 288). The policy instruments to achieve
these objectives were to be, first, the expansion of the institutional structure of formal-sector
lending institutions; secondly, directed lending, and thirdly, concessional or subsidized credit
(ibid.). Public policy was thus aimed not only at meeting rural credit needs but also at
pushing out the informal sector and the exploitation to which it subjected borrowers. Rural
credit policy in India envisaged the provision of a range of credit services, including longterm and short-term credit and large-scale and small-scale loans to rural households.

15

BANKING POLICY IN
RURAL INDIA

16

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--vis the
Indian countryside. The first was the period following the nationalization of Indias 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

The introduction of social and development


banking policy entailed a radical shift from prevalent practice in respect of the objective and
functioning of commercial banks. An important feature of the policy of social and
development banking was that it recast completely the role of commercial banks in rural
banking. Prior to 1969, the countryside was not considered to be the problem of commercial
banks.5 It was only after 1969 that a multi-institutional approach to credit provision in the
countryside became policy, with commercial banks, Regional Rural Banks and cooperative
institutions establishing wide geographical and functional reach in the Indian countryside.
The Reserve Bank of India (RBI) issued specific
directives with respect to social and development banking. These included setting targets for
the expansion of rural branches, imposing ceilings on interest rates, and setting guidelines for
the sectoral allocation of credit. Rural credit was an important component of the green
revolution package; the first post-nationalization phase of expansion in rural banking saw a
substantial growth in credit advances for agriculture. Specifically, a target of 40 per cent of
advances for the priority sectors, namely agriculture and allied activities, and small-scale
and cottage industries, was set for commercial banks. Advances to the countryside increased
17

substantially, although they were, as was the green revolution itself, biased in respect of
regions, crops and classes.6 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.
In 1975, the Government established by ordinance and
then legislation a new network of rural financial institutions called the Regional Rural Banks
(RRBs), which were promoted by the Government of India, State governments and
commercial banks. These were created on the basis of recommendations by a working group
on commercial credit, also called the Narasimham Committee, and were intended to
combine the cooperatives local feel and familiarity with the business acumen of commercial
banks (Jagan Mohan, 2004, p 22).7 The number of such banks expanded rapidly, and
covered 476 districts by 1987
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 incomebearing assets in the hands of asset-poor rural households. 8 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.

18

The second phase also involved an expansion and


consolidation of the institutional infrastructure of rural banking. Even ardent critics of
Indias growth strategy, wrote a noted scholar of Indias 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 systemto
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.

19

DISTRIBUTION
CHANNEL OF RURAL
BANKING

20

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.
The National Agricultural Credit Review Committee
(NACRC) headed by Prof. A S Khusru has established that the cost of rural lending by
commercial banks and cooperative banks is unsustainable and does not break even In fact, it
has been sustained through cross subsidization. The two elements of the costs namely, capital
costs and the current expenses are of the rural branches. Rural bank branches are such that the
transaction in the rural area cannot support them.

21

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.
It has been a matter of concern that the multi- institutional rural
credit delivery system has not been very successful in delivering required amount of credit to
agriculture and small scale industries and small and medium enterprises. i The share of bank
credit for agriculture has declined from 17.6 percent in 1985 to 9.8 percent in 2002. i The
institutions are in place, the systems repeatedly revamped several times on the basis of
multiple committees are also
in place. In spite of this, the growths of the agricultural credit in the country during the last
three years have been less than the growth of credit for services and corporate sector. The
value addition to the GDP by the agriculture has been low as compared to the industry sector
and the services sector. The income disparities as reflected in the poverty are still a matter of
serious concern.

22

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. Under the
hypothesis that social factors like education, training and social pressures have critical
bearing on the credit off-take and its productive deployment in rural areas; several attempts
have been made and are being made to address them. Accordingly, the group-lending, the
family approach and entrepreneurial development programme, the involvement of NGOs and
voluntary agencies, the social groups and the use of self-help-groups are all being tried out
for channeling adequate credit to agriculture and rural sectors. With considerable enthusiasm
followed by disappointment, the cooperatives were positioned as the primary, rather the
exclusive channel, for rural credit delivery for about two decades and the latest reports on the
cooperatives is that, by and large, they themselves require assistance rather than being of any
assistance to the farmers. Despite concerted efforts by a multitude of agencies, the
agricultural credit delivery still remains a problem. The 2003 November Review of the
Monetary and Credit Policy takes up this and provides for the constitution of an Advisory
Committee to review the various exiting arrangements and to suggest appropriate changes in
the institutional and procedural arrangements for the smooth flow of credit to agriculture
The Policy also states that the Committee is expected to help in capturing technological
developments in the cause of improving credit delivery [4].
Despite the large number of initiatives, the rural credit delivery system still requires
improvements. Credit off-take and its quality have to increase to facilitate rural capital
formation, employment and growth. The speed of loan processing should be faster and the
cost of delivery should be reduced. These issues are currently relevant and important and
have been identified as such in the November 2003 credit policy statement of the Reserve
Bank of India as well.

23

Marketing strategies of
rural banking players in
India

24

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 Indias 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 Indias 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.

25

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.
Marketing strategy and
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
26

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
27

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

28

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.
Marketing strategy and Dynamics of Rural Economy
Problems, prospects and solutions to many of the issues mentioned have been researched and
debated, primarily with a view to strengthening, revamping or re-orienting rural financial
institutions. However, there is merit in viewing the problems of rural credit and rural banking
in a wider context. In this regard, it will be useful to recognise some dynamics of rural
economy. First, services sector is getting increasing importance in the rural areas also -from
coffee shops to cable television operators. Assessing and meeting of credit needs of this
sector is important. Second, the integration between rural and urban areas has increased
29

significantly, with the result, mobility of labour, capital, products and even credit between the
two is increasing. Third, commercialisation of agriculture, particularly the increasing role of
cash crops like cotton has resulted in substantial role for suppliers' and buyers' credit. Thus,
fertiliser and pesticide are supplied to farmers on credit, often on deferred payment basis. In
such deferred payment arrangements, credit terms are built into price and hence it is difficult
to isolate terms. Similarly, the commission-agents advance money towards purchase of output
from farmers, which amounts to providing credit and includes an element of forward trading.
These arrangements are often entered into on a voluntary basis. The present banking system
does not generally encourage financing the transactions of this nature. However, a few nonbanking financial companies do provide indirect finance for such purpose.
Fourth, compared to cereal production, other food items, including poultry and fish are
growing at a faster pace. In other words, rural agriculture is getting increasingly diversified in
terms of products and processes.
Fifth, in areas where commercialisation of agriculture has reached significant levels, the
traditional landlord-based tenancy is replaced with commercial-based tenancy. Where
intensive cultivation of cash crops such as cotton is called for, this has become quite
common. However, the present credit and banking procedures do not cater to the working
capital needs of such commercial based tenancy relationship.
Sixth, given the diversified activities, and large work force in rural areas, there is increasing
recourse to multiple occupations to earn a decent livelihood. For example, a small farmer is
also a petty trader and may also be a satellite based cable television operator in the village.
The end use specification and monitoring of credit is more difficult in such circumstances.
Seventh, to the extent employment and indeed incomes could be seasonal, especially for
agricultural labour, there is reason to seek and obtain consumption loans. Such assurance is
possible with prosperity in rural employment. Present arrangements in formal credit markets
are inadequate to meet such requirements.
Eighth, while there is significant commercialisation and diversification of rural economies,
progress is very uneven in different parts of the country. So, there are still many areas, where
exploitation of tribals by money lenders or of agricultural labourers by landlord-money
lenders, still persists. Norms and procedures of credit, therefore, need to be different to meet
varying circumstances.
Ninth, from the data on credit deposit ratios, it is clear that the banking system is a conduit
for net transfer of financial savings from rural to non-rural sectors. On the other hand, a major

30

part of informal markets would be local and hence savings would be locally deployed, within
the rural areas.
Marketing strategy and Rural Credit Markets: New Realities
As mentioned earlier in the approach to rural banking, the basic thrust of our policy has been
to promote institutional credit and eliminate or ignore informal finance. However, in reality,
while formal credit has expanded its share, informal finance continues to be significant. The
idea of promotion of Self-Help Groups and micro financing is an indirect admission of
necessity of informal finance. The future of rural banking cannot be appreciated without fully
understanding both formal and informal rural credit markets, especially their linkages. Since
in the earlier sections, organisation and functioning of the formal credit system in the rural
areas has been explained, in this section nature of informal markets and the linkages will be
explored.
The informal financial market which is legal but officially unrecorded comprises unregulated
financial activities i.e., outside the orbit of officially regulated financial intermediaries. In the
informal financial transactions, one could treat borrowing and lending among friends and
relatives as occasional and not part of such an informal market. Consequently, there are three
broad

types

of

informal

financial

transactions,

viz.,

well-defined

group,

tied-

lending/borrowing; and untied lending/borrowing activities. In the literature on well-defined


groups, there are three broad types namely Rotating Savings and Credit Associations
(ROSCA); Accumulated Savings and Credit Associations (ASCRA) and hybrid forms of
both. There are some variations under each category. Basic characteristics of these groups are
that they are voluntary in nature, usually among equals, with little or no outside support or
interference. Often, members have some special bonds based on religion, caste, status,
neighbourhood, etc. In brief, there is no patronclient framework. In essence, therefore, these
arrangements among well-defined groups, though important, should not in my view be
included in the concept of informal financial markets. In the recent past, there have been
efforts to provide a bridge between formal financial markets and these well-defined groups in
the form of micro-finance' initiatives. However, these initiatives do not constitute
marketisation of activities of well-defined groups. Thus, the informal financial markets are
those which are outside the orbit of officially regulated institutions. These informal debt
transactions may involve tied debt transactions and untied debt transactions. The general
approach, at least at the policy level, to informal market whether tied or untied, has not been
positive since informal debt market has been historically equated with either landlord or
31

moneylender. The transactions are considered to be expensive, especially in view of what is


held to be of usurious nature of interest rates. It is considered to be financing unproductive
expenditures since consumption needs are financed. Sometimes, it is said that there are often
unequal and exploitative arrangements, say, between the landlord and the tenant or the
agricultural labourer. Finally, it is held that, since these are unregulated, they are prima facie
not desirable.
Yet, the fact remains that informal debt markets do prevail, and studies have shown that in
some areas in our country, they account for 70 to 80 per cent of debt transactions. Studies
have also shown that many poor people have no access to institutional credit. The
arrangements in informal debt markets are said to be flexible, and sometimes have in-built
risk sharing arrangements. These credit arrangements do provide for smoothening of
consumption and production requirements. Transaction costs in terms of certainty, timeliness,
procedural requirements, number of trips, etc. are somewhat negligible although there may be
hidden costs in tied lending. Moreover, while formal markets tend to cater to less risky
borrowings, informal markets provide for the more risky borrowings and thus serve a
purpose. Finally, it has been stated in the literature that financial repression like directed
credit, high reserve ratios, interest rate ceilings, branch licensing, etc. make informal financial
markets relatively attractive and popular.
Perhaps, one way of reconciling the conflicting views on usefulness of informal credit is to
recognise some emerging realities of both formal and informal markets. This would also help
a rethink on approaches to rural credit and rural banking. First, it is no longer the case that the
money lender and informal financing are always synonymous, in view of the dynamics of
rural economy already described involving suppliers credit, buyers credit and credit for
services sector. Second, informal markets are less significant now than before, and have to
face competition or at least accept benchmarking of formal credit. The concept of monopoly
of moneylender in rural areas is not true in many areas now.
Third, when informal financial market is linked to socially undesirable activities, there is
certainly a cause for concern though the available evidence shows that such a link is more a
metropolitan or urban phenomenon rather than a rural one.
Fourth, bank credit is really not severely restricted to what can be officially determined as
productive, since most of the credit-card financing by the banks is, in fact, financing of
consumption and at interest rates comparable to those prevailing in the rural informal debt
markets. In other words, it is no longer unethical for banks to finance consumption credit

32

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.
Marketing strategy and Linkages in Rural Debt Markets
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
33

wages 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 socialcontact, 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
34

finance credit for investment purposes, given the time preference. Third, the levels of
education are likely to reduce the scope for gross overvaluation or undervaluation in linkedtransactions. 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-riskmitigation. In fact, the risk reducing element of linkages are not built into formal creditchannels. 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.
Technology and marketing strategy
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
35

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--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.
36

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
Marketing strategy and Approach
In the past, the major instruments of public policy were cooperatives and public-sector
banking system. However, with the diversification of ownership of public sector banks and
the overall thrust of financial-sector reform, a review of institutional arrangements, mainly in
the incentive framework for credit-delivery appears necessary. Similarly, in the area of
cooperatives also, a reduced role for Government including in providing refinance is being
advocated. This desirable approach would also need a review of institutional arrangements, in
particular in delayering and debureaucratising the cooperatives.
Further, there are new institutions and new forms of financial intermediation that are
emerging be it mutual funds or more important for rural areas, non-banking financial
37

companies. Any approach to rural-development should consider capturing, at least the


activities of non-banking financial companies as part of formal rural financial markets.
Moreover, in many parts of the country, growth of literacy and diversification of the economy
have brought about new characteristics and linkages between formal and informal financial
markets in rural areas. The latter does play a significant part in rural economy. Hence, the two
markets should be treated as competing and co-existing, and in fact the policy should seek to
utilise informal markets also for public interest. A small beginning has been made in this
direction, through initiatives on micro finance. A policy of analysing and monitoring of rural
financial markets as a whole is critical for the future and devoting attention only to banks and
cooperatives may not suffice. I would hasten to add that a policy-focus on informal markets
does not at all imply extending regulation to informal markets. In fact, the Report of Task
Force on micro-finance of NABARD (1999) has recommended extending regulatory
framework for micro-finance institutions, and in my view this recommendation is fraught
with difficulties.
Funding by banks and regulated NBFCs of micro-finance institutions should be encouraged
and guidelines provided, but regulation of micro-finance institutions may not be prima facie
wise.
In any case, research and micro studies encompassing both formal and informal segments
would help the policy makers appreciate relative roles and linkages in rural financial markets
as a whole. In other words, policy analysis should perhaps consider expanding its attention
from rural banking to rural financial markets.
Enhancing effective supply of credit in such rural financial markets would be a logical
objective of policy, thus enlarging the current attention to include both directly disbursed
credit by the banking or cooperative sectors and indirect supply. Similarly, reducing the true
cost of credit availability to rural areas would be yet another objective, expanding the
attention of policy to include both nominal cost of credit from banking or cooperative sector
and true cost in formal and informal markets. In an increasingly deregulated environment,
this objective would imply attention to competitive efficiency involving proceduralsimplification also, in respect of banks and cooperatives.

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
38

and borrowers or investors.


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.
Enhancing Effective Supply
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
39

amount to availability of supply. Similarly, mere prescriptions of priority lending would not
ensure supply.
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 urbanbranches 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 prioritysector, 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 billdiscounting 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
40

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.
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
41

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 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.

AN ICT STRUCTURE FOR


RURAL BANKING
ENABLEMENT
42

An ICT Structure for Rural Banking Enablement


We have developed an ICT based Solution in which the
banking services delivery can be done using the electronic platform. The three key principles
used in this model are:a) unbundling and outsourcing non-statutory services needed for banking and
establishing digital rural information infrastructure.
b) automating the workflow, the records management and follow-up and recover
c) the use of entrepreneurship model for achieving effectiveness, efficiency and
economy in the performance of the rural information infrastructure, rural
information services and other follow-up functions e.g., credit rating of rural
individuals and analytics for decision support.

GANASEVA RURAL SERVICES DELIVERY MODEL


ELECTRONIC DELIVERY VERSUS PAYMENT (DVP) PLATFORM
Ganaseva (Gana=People; Seva=Service) uses technology for bridging service divide by
empowering rural individuals and by establishing digital information infrastructure and
electronic platform for rural commerce and development.

THE GANASEVA is an integrated ICT-based solution for


delivery of financial and non-financial services for improving the provision of quality
services to all the rural people by increasing the effective access, by creating rural
information infrastructure and by providing an electronic platform for transmission of
information from the people to the service providers like banks. Its hall marks are
empowerment of the rural individuals, integrated approach to rural commerce and financial
viability through entrepreneurship and choice availability both to the people and the service
providers like banks.

43

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.
The solution proposes common infrastructure for the
rural data collection and information management and processing and the sharing of the
delivery channel by the banks with a view to substantially reducing the transaction costs and
improving the speed and quality of delivery. The elements involved in the solution are the
establishment of a data center and ensuring its two way connectivity to the mobile multiservice delivery system available at the villages for providing the banking, extension and
other services as well as connectivity
to all the concerned banks and other service-providing agencies.
The solution involves the outsourcing of the data management
as well as of the delivery channel establishment and operations with required safeguards
regarding the data ownership and operations. The model envisaged provides a cost-effective
but efficient technology platform for rural banking. Technologically, the solution involves
four main elements:

ESTABLISHMENT
OF DIGITAL RURAL INFORMATION
INFRASTRUCTURE

MULTI
SERVICE DELIVERY SYSTEM (MSDS)

INTEGRATED
MULTI-ENTITY DATABASE SYSTEM (IMDS)

SERVICE
PROVIDERS WORKSTATION

The special Features of the Model are the following:


Comprehensiveness of the solutions covering both front-end and back-end
44

operations involving the delivery of credit and other services.


Proactive provision of services to the people
Provision for exploiting the existing sources and interfacing with available data
services and other e-governance solution- providers.
Expert systems for processing of credit and other services
Easy and secure interface for the rural people with biometric security measures
Assisted credit delivery with provision for clarification from the banks etc.,
through the voice & video
Provision of the information required for credit approvals

Provision of a data base tool for capturing of the rural data and the technical
specifications of such rural data base and its architecture

Figure 1 below gives a diagrammatic representation of the Model.

Figure 1
DIAGRAMMATIC REPRESENTATION OF THE MODEL

45

46

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

Since PDAs were used for collection of data, documents and


voice, there was a need to develop a solution for that. This was done by the Envision
47

Company and the software was integrated with the RCDS System at the backend to facilitate
seamless data transmission from the PDAs to the RCDS Server using web services.

Rural Credit Delivery System


The functional specifications for the banking services to be
provided were worked out in consultation with the bankers at the project area as well as their
controlling authorities. Based on these specifications, the System Requirement Specification
was worked out to develop the software. The delivered system has been installed in various
user locations for testing like the SBI, Honavar and PACS Kelaginoor.

Credit Rating Solution


A credit rating solution for the rural individuals was prepared
using a separate model developed for the purpose. Likewise, a voice-based authentication
system was also developed for testing.

PACS Bank Software


In order to enable the rural co-operatives to link to the RCDS
system, the PACS in the area were computerized after a thorough study of their business
processes and developing separate software for the purpose. This work was done by the
Nelito in consultation with the Project Director, the banks and other authorities.

Document Management Software


The document management software which was
integrated with the RCDS system was provided by the software company Stex.

ATM Feasibility
The technological feasibility of deploying the ATMs
in the Project villages was tested and was found to be adequate.

Project Location, Coverage and Implementation


48

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.
The project area comprised select interior villages chosen on
the basis on connectivity, contiguity and proximity in the backward Honavar block in
Karnataka. Participating banks and financial institutions in the project were the State Bank of
India, Syndicate Bank, and the Primary Agricultural Co-operative Credit Societies at
Kelaginoor, Balkoor and Manki. The coverage included all adult individual in the villages
and was not limited to any target group like micro finance or self-help-groups.

Benefits to Banks, People and to the System


The benefits to the banks from the model are the
availability of mechanism for achieving and expanding effective access to the rural areas in a
non-traditional economical way, identifying the potential customers and providing highly
individualized banking experience in proactive manner including individualized risk
assessment; availability of reliable information infrastructure in digital form with a
mechanism to update on a continuous basis; facility to do offsite identification of the
prospects online; credit rating to enable building of quality portfolio and facility for building
portfolio according to the ALM requirements of the banks. The benefits to the rural people
are banking. The benefits to the economic system include availability electronic platform for
services delivery, digital rural information infrastructure enabling the development of nationwide date grid; authentic inputs for grassroots level planning and Governments socioeconomic interventions; ready availability of the information for the markets and market
participants to penetrate rural area and provision for enabling different methods of service
49

delivery like kiosks. ATMs for pursuing cost-efficiency through extensive outsourcing and
lean processes to suit the local realities.

Findings from the Project Implementation


Major findings from the Project implementation are the following:
a. Building rural information infrastructure is possible using technology, in the rural
areas.
b. The service providers have uniformly expressed the need for such an information
system.
c. There is a need and scope for developing and making available rural credit rating.
d. The computerization of the PACS is useful to improve the quality of working of the
PACS, besides having potential for improving governance through linkage to the
Credit delivery system.
e. ATM-based mobile service delivery systems are deployable in rural areas using
the CDMA technology

ICT Framework for delivery of rural services


The need and potential for the application of Ganaseva Model
Framework with regional and functional variations of processes and the delivery channels in
India and even beyond appear to be substantial. Since the information and banking are direct
services as well as infrastructural services, the Model can be expanded for providing various
other services.

Rural Services Delivery Framework


As the raison d etre of the Indian Rural Information
Infrastructure (RII) is to enable the provision of rural services of high quality at low costs in a
sustainable manner in a self financing framework, it has to be derived from model for
delivery of rural services. In our framework of such rural services, the banking services
occupy the preeminent position. Given the scenario of poverty and economic deprivation and
the need for accelerating capital formation in rural areas for promoting growth and income in
villages, the gamut of rural activities need to have the economic transactions at the centre.
This focus is relevant because the existing delivery systems have been found to be wanting,
for whatever systemic reasons, in making credit and banking services available in adequate
measures in the rural areas in India Therefore, any rural services strategy will have banking
50

services delivery 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.

Digital Rural Information Infrastructure


The emphasis on data quality and reconciliation processing,
coverage of various subject areas patient data identification for health care, customer
identification for e-commerce, beneficiary identification for the poverty alleviation
programs / Employment guarantee schemes of the state, removal of the barriers for providing
financial services to the poor, the swamping of conflicting / segmented information , the need
to anticipate the need of users for sentient computing- have all accentuated the need for
establishing a robust rural information infrastructure, for the provision of authenticated
authentic information about the rural people using the ICT tools for increasing the speed, and
usability and cost effectiveness.
The rapid growth of technology and communication
infrastructure with ubiquitous footprints is a great enabler of the rural information
infrastructure (RII).The telecommunications and technology penetration of the rural areas is
no longer the problem in the current Indian context of its exponential growth in availability,
reach and affordability. The Rural Information Infrastructure in this context ought to put
emphasis on enabling of the reaching of services to the rural people rather than taking
technology to their doorsteps. The objectives of this effort could be identical with the mission
of the National Information Infrastructure (NII) in the United States which is to deliver to all
Americans the information they need when they want it and where they want it at an
affordable price. The Rural Information Infrastructure (RII) that is the part of the NII will
reach into Americas rural areas, providing access to a broad range of information and
information services. Despite this assertion, the focus of the RII in the US was on the
technology. In our model, the focus is on identifying and capturing of information
content, modelling it and presenting the data in a proactive manner to support the
provision of various services to the rural people.

51

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.
We have developed customized information offerings to
banks and financing agencies for exemplifying our model and exploring the usefulness and
implement ability of our RII model for enabling the customer acquisitions and follow-up by
the banks, both on the liability and asset sides. It may be pointed out that the need for
automated digitized rural information infrastructural support is needed for rural financing, not
only in India but in other parts of the world as well. According to The Economist
Microfinance Survey The cost of micro-finance will have to come down. At present, it is far
too manpower intensiveCredit evaluation relies on character or cash flow valuation rather
than the statistical techniques it will not be sustainable. More competition will help
reduce costs, but the biggest hope comes from new technology and further, In the past,
the two main obstacles to providing Financial services to poor people have been lack of
information and costs. Ultimately lower costs and better information are good not just for
the poor, but for everyone.

52

Digital Rural Information Infrastructure Model


Collection of data about people, including rural people, for
governance and commercial purposes is a well-established activity the world over, including
in India. However, in the Indian context, the collection and validation of the data about the
Indian people on a comprehensive basis; the processing, analysis and presentation of this data
in a user friendly manner in electronic form are yet to be done. Currently, this has assumed
urgency for the following reasons: (i) Achieving greater comprehensiveness about the data to
meet the increasing variety of requirements at a single point (ii) Formulating delivery goals
for various functionalities (iii) Need for a different implementation framework rather than the
application of standard data warehousing methodology (iv) The complexity of the need.
The proposed RII solution involves the use of information and
Communication Technology for building and operating robust reliable authentic
comprehensive digital information infrastructure involving the sourcing of the data to the
maximum extent possible, together with supporting documentary and non-documentary
evidence, the images of the assets and the personal identification features like pictures and
voice clips ; the online storage of such information in a data center directly and the
classification and consolidation and processing of the data and making customized offerings
to various users after appropriate value addition through analytics. We also propose an
entrepreneur-based model for implementing the solution in a large country like India with a
view to creating the economic incentive for the completion of this large scale
multidimensional rural census with provision for the assurance review of this information
infrastructure by public authorities or users or both, depending upon the purposes for which
such information has to be used and also for preventing any abuse of this data for anti-social
purposes. Another key feature of the model is that the users will have to pay for accessing the
information needed according to the specific offerings required in order to make this model
self-financing and financially viable.

53

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.

54

Figure 2.
Rural Credit Delivery Solution using Digital Rural Information Infrastructure

55

Rural Information Infrastructure-Technology Solution


The technology solution involves the use of PDAs 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 users 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.

Record of progress of rural banking


Policies of the current phase of financial liberalization have had
an immediate, direct, and dramatic effect on rural credit. There has been a contraction in rural
banking in general and in priority sector lending and preferential lending to the poor in
particular (Ramachandran and Swaminathan, 2002, Shetty 2004, Chavan 2004).
Let us consider a few indicators. Appendix Table 1
documents the growth of bank offices, deposits and gross bank credit in rural areas as well as
the share of rural areas in the all India total from December 1969 to March 2002, for all
scheduled commercial banks. The impact of bank nationalization on the growth of scheduled
commercial banks in rural areas is clear: the share of rural bank offices in total bank offices
jumped from 17.6 per cent in 1969 to 36 per cent in 1972. The share then rose steadily, and
attained a peak of 58.2 per cent in March 1990. From then onwards, there was a gradual
decline in the share of rural bank offices, and the share fell below 50 per cent in 1998 and
thereafter. In fact, there was an absolute contraction in the number of bank offices in the
1990s: 2,723 rural bank offices were closed between March 1994 and March 2000.

56

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 Indias 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 allIndia 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.
The period after nationalization was characterized by an
expansion of bank credit to rural areas: the credit outstanding from rural branches tripled in
the 1970s, and continued to rise in the 1980s. After 1988, however, the credit outstanding
from rural branches as a proportion of total credit outstanding declined, from around 15 per
cent in 1987 and 1988 to 11 per cent in March 1999, and 10.2 per cent in March 2002.
Turning to deposit mobilisation, rural deposits grew rapidly after nationalization; their share
of aggregate deposits doubled in the 1970s, from 6.5 per cent in 1972 to 12.6 per cent in 1980
and continued to grow, although at a slower pace, in the 1980s. Once again, the peak was
reached in 1990-91, when rural deposits accounted for 15.5 per cent of aggregate deposits.
The pace of deposit mobilization in rural areas fell in the 1990s.
Given the pattern of growth of aggregate deposits and gross bank
credit, it is no surprise that the credit-deposit ratio in rural areas rose after 1969. The ratio
peaked at 68.6 per cent in 1984 and remained above 60 per cent until 1991. In the 1990s, the
credit-deposit ratio fell sharply.
One of the objectives of banking policy after
nationalization was to expand the flow of credit to agriculture and small industries, or what
were termed priority sectors. As Appendix Table 2 shows, the share of priority sectors in
the total credit outstanding of scheduled commercial banks rose from 14 per cent in 1969 to
21 per cent in 1972 and then went up to 33 per cent in 1980. The RBI set a target of 40 per
cent for priority sector lending and by the mid-1980s this target was met. From 1985 to 1990,
57

in fact, 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.

Pallavi Chavan (2004) has examined the growth and regional


distribution of rural banking over the period 1975-2002. Chavans paper documents the gains
made by the historically underprivileged regions of east, north-east, and central India during
the period of social and development banking. These gains were reversed in the 1990s:
cutbacks in rural bank branches and in rural credit-deposit ratios were steepest in the eastern
and north-eastern states of India. Policies of financial liberalization have unmistakably
worsened regional inequalities in rural banking in India.
As already mentioned, one of our central concerns is
the credit starvation (the term is S. L. Shettys) of the rural economy, which resulted in
shortages of credit for all purposes, including for productive investment in agricultural and
non-agricultural activity. If we examine the term loans issued by scheduled commercial banks
to agriculture between 1980-81 and 1997-98 (Ramachandran and Swaminathan, 2002, Table
3), then we observe that, in real terms, credit outstanding rose from 1983-84 to 1990-91, but
fell in the first four years after 1991 (although there was some recovery from 1995-96
onwards). It is instructive here to look at the distribution of total agricultural advances to
cultivators by size classes of land holdings. The smallest cultivators i.e., those with land
58

holdings of less than 2.5 acres or marginal cultivators, were the worst affected by the post1991 decline in credit to 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)
The IRDP was a major component of the credit-led poverty
alleviation strategy of the 1980s. The number of families assisted annually with IRDP loans
rose from 2.7 million in 1980-81 to 4 million in 1984 and 4.2 million in 1987 (Ramachandran
and Swaminathan 2002). Although the programme slackened after that, the number of
beneficiaries in 1990-91 remained above the level of the early 1980s. After 1991, there was a
steep decline in the number of IRDP beneficiaries: only 1.3 million families were assisted in
1998. If we index the number of families assisted in 1982 at 100, the number assisted in 1998
was a mere 37. The term credit disbursed by banks under IRDP followed a similar trajectory.
With 1982 indexed at 100, total term credit mobilized for IRDP peaked at 113 in 1987 and
went down to 52 in 1998.

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.

59

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.
In neighbouring Jharkhand, Surjit and Ramachandran
conducted surveys of rural credit in the villages of Baghra and Udaipur in 2003. These
villages are not only less developed in terms of agricultural production than Panahar and
Muidara but also poorer in terms of general infrastructure and resources. Udaipur village, a
village whose population was almost entirely Adivasi (or Scheduled Tribe), had fewer
landless households and less inequality in the distribution of land than Baghra, a multi-caste
village.
Rawal and Mukherjee (2004) present some features of
credit among landless labour households in two villages of Haryana. In Dhamar village, their
survey, which was conducted in 2002, covered 163 landless manual labour households. In
Birdhana, a larger multi-caste village, their survey covered 282 households (this included
households living in the village settlements and those that lived on the fields) and was
conducted in June 2003.

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The last case study is from northern Kerala. R. Ramakumar


conducted a survey in 2001 of all landless households whose members participated in
agricultural work in Morazha village (Ramakumar 2004). Morazha belongs to a region that
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.
These village studies present some striking
observations with respect to rural credit in the liberalization phase. First, all the village
studies report high levels of indebtedness: 64 per cent of households in Morazha were
indebted, the corresponding proportions were 66 per cent in Gokilapuram, 72 per cent in
Baghra, 75 per cent in Dhamar and 83 per cent in Panahar and Muidara.
Secondly, with one exception, the village data combined
with information on the banking sector indicate that the share of formal sources of credit, that
is, commercial banks, regional rural banks and cooperatives, is extremely low. In Baghra
village, for example, only 28 per cent of total credit was from the formal sector. In Panahar
and Muidara, the formal sector accounted for 24 per cent of credit among all village
households in 1995-96 but its share was nil among landless households. In Gokilapuram,
formal sources of credit accounted for 14 per cent of loans taken and 40 per cent of the
principal borrowed by all village households. Class further differentiates access to credit.
Among landless hired labour households in Gokilapuram, the formal sector accounted for
only 22 per cent of total principal borrowed. Surprisingly, in the relatively advanced
agricultural state of Haryana, landless labour households continued to depend on informal
sources of credit. Of total credit outstanding among landless households, formal sources
accounted for 12 per cent in Dhamar and 8 per cent among manual labour households living
in fields in Birdhana. In Udaipur village, somewhat paradoxically, it was observed that the
formal sector accounted for 80 per cent of total principal borrowed. Given the limited scale of
borrowing, this observation may be explained by the poverty of the village and the absence of
informal lenders.

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The exception is the village of Morazha, where the cooperative


movement is well established and where cooperative banks and societies are almost the sole
source of credit for rural households. In 2001, 98 per cent of the principal borrowed by
landless households was from cooperatives. Even here, though, cooperatives mainly met the
needs of consumption credit and the issue of credit to landless households for productive
purposes remained neglected.
A most striking feature of the village data from Jharkhand
was that the people at large had no access to the formal sector of credit. In Baghra, only seven
households received any formal sector credit at all in the five years prior to the survey. In
each of the two study villages, only one household received any formal-sector credit in the
year preceding the survey (Ramachandran and Surjit, 2004). The formal sector had virtually
washed its hands of any responsibility to the villages.
Thirdly, the two studies that capture changes over time
show a clear decline in access to formal sources of credit, particularly credit from scheduled
commercial banks, in recent years. In Panahar and Muidara, the share of the formal sector in
total debt fell from 24 per cent in 1995-96 to 7 per cent in 2001-02. In Gokilapuram, the share
of the formal sector in the total principal borrowed by landless households fell from 80 per
cent to 17 per cent between 1985 and 1999. It is worth noting that among landless labour
households in Gokilapuram the share of principal borrowed for productive purposes fell from
44 per cent in 1985 to 14 per cent in 1999. Borrowing for consumption purposes dominated
the loan portfolio of almost all classes of households.
In the study villages in West Bengal and Tamil
Nadu, informal lenders are thriving and in fact gained ground after 1991 as a result of the
withdrawal of the banking sector from rural areas. The village studies also indicate the gross
inadequacy of credit, especially for crop cultivation and other productive activities. The
growing and unmet demand for credit, both for direct production as well as for demands of
health, education, and other needs, is resulting in what S. L. Shetty terms credit starvation
among rural households.

62

This picture is confirmed by the latest report of the Rural


Labour Enquiry, which shows both the weakening of banks in rural areas as well as the
consolidation of moneylenders. In 1983, the formal sector, comprising government,
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.
Despite over three decades of systematic expansion
of the banking infrastructure in the country, the village studies indicate that informal sources
of credit including usurious moneylenders -- remain important, and often dominant and
growing, sources of credit for rural households.
In Panahar and Muidara, trader-moneylenders have
come to dominate the informal credit market. In 1995-96, 32 per cent of the total principal
borrowed by the surveyed households was borrowed from traders. Moneylenders accounted
for 17 per cent of the total principal borrowed by households. In 2001-02, of the total
principal borrowed by surveyed households, 50 per cent was advanced by agricultural traders
and another 31 per cent was advanced by urban businessmen.

In Gokilapuram in 1977, of the total principal


borrowed by landless labour households, 27 per cent was advanced by moneylenders and 23
per cent by landowners. By 1999, the share of landowners had fallen to 2.4, per cent while
moneylenders accounted for 42 per cent. A major finding of this study is the phenomenal rise
in the number of moneylenders, full time and part-time, village-based and town-based,
operating in the area. In Baghra village too, among informal lenders, moneylenders
dominated, accounting for 64 per cent of the total principal borrowed by households. The
corresponding proportion in Udaipur was 46 per cent.

63

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.
The rates of interest on loans from the informal sector,
particularly from moneylenders, remain very high. In Panahar and Muidara, where traders
were the major source of credit, explicit interest rates were not easy to unearth or compute
though rates between 36 and 120 per cent per annum were reported. In Baghra, the modal
interest rate range was 48-60 per cent per annum. In Gokilapuram, the modal interest rate
range was 60-120 per cent for landless households and 36-48 per cent for all households.
Among landless labour households in Gokilapuram, the share of principal borrowed at rates
higher than 36 per cent per annum doubled between 1977 and 1999. In Dhamar, the modal
rate of interest charged by employer-lenders was 36 per cent per annum.
A distinctive feature of the Haryana villages was that
the dependence of landless manual worker households on their employers for credit, together
with conditions of severe unemployment, forced workers to enter into unfree labour
relationships with their creditor-employers. It is particularly noteworthy that unfree labour
relationships in these villages coexisted with significant technological advance and
commercialisation in agriculture. The study found that, while unfreedom was widespread,
there were considerable variations in its specific forms. The nature of unfreedom was closely
linked to the high degree of concentration of ownership of land holdings in these villages.
Casual workers were subject to various kinds of coercion by employer-creditors, and had also
to perform various kinds of labour services. Siri workers in Dhamar village worked under
conditions that were akin to bondage. They were not allowed to work for employers other
than their creditors and restrictions were often imposed even on their physical mobility. In
short, the study found that the dependence of manual workers households on employers for
credit was an important factor in sustaining unfree conditions of employment.

64

INSTITUTIONAL CREDIT
FOR RURAL INDIA

65

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.
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. Commercial banks,
Regional Rural Banks and cooperatives must lead rural credit revival, which is too serious
and large-scale a task to be left merely to self help groups or NGO-controlled private-sector
micro-credit organisations. The geographical and functional reach of public sector banking
must be restored and extended, differential interest policies reinstated, and special loans-cumsubsidy schemes reintroduced on a large scale for all landless and poor and middle peasant
households, scheduled caste and tribe households and other vulnerable sections of the rural
population. Priority sector norms must be enforced, and, instead of an alternative such as
investment in RIDF bonds, penalties must be imposed on any failure of banks to meet these
public-interest targets.

If financial liberalization had the effect of damaging


the system of formal credit severely, our case studies show that changes in national banking
policy have had a rapid, drastic and potentially disastrous effect on the debt portfolios of the
income-poor. In general, as formal sector credit withdrew, the informal sector rushed in to
occupy the space that it had vacated. Although it is clear that chronic indebtedness among the
rural poor is a problem that cannot be solved by banking policy alone, and that the abolition
66

of usury requires agrarian reform, a decisive change in banking policy is essential for the very
survival of the working people in rural India.

Regional Rural Banks


Regional Rural Banks, as we have noted, were created in the
1970s exclusively to serve the credit needs of rural India, and specifically those individuals,
social groups and regions most excluded by the formal system of credit. For all their
weaknesses, these banks passed an important international test. A cross-country study of rural
credit institutions threw up the important finding that, in the period 1988-1992, of all the
institutions studied, Regional Rural Banks in India incurred the lowest costs of
administration, 8.1 per cent of the total portfolio.
An important feature of banking reforms has
been to alter the equation between different sectors of banking, in this case, to make the
norms governing Regional Rural Banks indistinguishable from those governing commercial
banks, thus undermining their capacity to serve the special needs of the rural economy and
the rural poor
There has been a ban on recruitment to the staff of
Regional Rural Banks since 1992 (Jagan Mohan, 2004). At every discussion or seminar on
problems of rural credit that we have attended in the recent past, bank officials speak of the
impact on rural credit of the greying of bank personnel and the thinning of their ranks. Field
officers of Regional Rural Banks in the 1970s and 1980s were relatively young and capable
of spending substantial periods of time in the villages served by their branches. Regional
Rural Banks have also suffered because they are no longer permitted to recruit agricultural
science and engineering graduates for specialised lending (see Shetty, 2004 and Jagan
Mohan, 2004). Liberalization has had the effect of crippling Regional Rural Banks, rendering
them incapable of fulfilling their original mandate.

Marketing of Rural banking in India

67

68

MAJOR RURAL BANKING


PLAYERS IN INDIA

69

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 Act1976.
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

RRBs established with the explicit objective of

Bridging the credit gap in rural areas

Check the outflow of rural deposits to urban areas

Reduce regional imbalances and increase rural employment generation

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.

70

Each RRB will operate within the local limits specified by notification.
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 RRBs 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.
Regional Rural Banks in India
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
71

2000.
Several other banks, apart from the State Bank of India also functions as the promoter of rural
development in India.
List of Regional Rural Banks 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

Andhra Pradesh Grameena Vikas Bank

Andhra Pragathi Grameena Bank

Deccan Grameena Bank

Chaitanya Godavari Grameena Bank

Saptagiri Grameena Bank

Arunachal Pradesh

Arunachal Pradesh Rural Bank

Assam

Assam Gramin Vikash Bank

Langpi Dehangi Rural Bank

Bihar

Madhya Bihar Gramin Bank

Bihar Kshetriya Gramin Bank


72

Uttar Bihar Kshetriya Gramin Bank

Kosi Kshetriya Gramin Bank

Samastipur Kshetriya Gramin Bank

Chhattisgarh

Chhattisgarh Gramin Bank

Surguja Kshetriya Gramin Bank

Durg-Rajnandgaon Gramin Bank

Gujarat

Dena Gujarat Gramin Bank

Baroda Gujarat Gramin Bank

Saurashtra Gramin Bank

Haryana

Harayana Gramin Bank

Gurgaon Gramin Bank

Himachal Pradesh

Himachal Gramin Bank

Parvatiya Gramin Bank

Jammu & Kashmir

Jammu Rural Bank

73

Ellaquai Dehati Bank

Kamraz Rural Bank

Jharkhand

Jharkhand Gramin Bank

Vananchal Gramin Bank

Karnataka

Karnataka Vikas Grameena Bank

Pragathi Gramin Bank

Cauvery Kalpatharu Grameena Bank

Krishna Grameena Bank

Chimagalur-Kodagu Grameena Bank

Visveshvaraya Gramin Bank

Kerala

Narmada Malwa Gramin Bank

North Malabar Gramin Bank

Madhya Pradesh

Narmada Malwa Gramin Bank

Satpura Kshetriya Gramin Bank

Madhya Bharath Gramin Bank


74

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 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

Manipur

Manipur Rural Bank

Meghalaya

Ka Bank Nogkyndong Ri Khasi-Jaintia


75

Mizoram

Mizoram Rural Bank

Nagaland

Nagaland Rural Bank

Orissa

Kalinga Gramya Bank

Utkal Gramya Bank

Baitarani Gramya Bank

Neelachal Gramya Bank

Rushikulya Gramya Bank

Punjab

Punjab Gramin Bank

Faridkot-Bhatinda Kshetriya Gramin Bank

Malwa Gramin Bank

Rajasthan

Baroda Rajasthan Gramin Bank

Marwar Ganganagar Bikaner Gramin Bank

Rajasthan Gramin Bank

Jaipur Thar Gramin Bank

76

Hodoti Kshetriya Gramin Bank

Mewar Anchalik Gramin Bank

Tamil Nadu

Pandyan Grama Bank

Pallavan Grama Bank

Tripura

Tripura Gramin Bank

Uttar Pradesh

Purvanchal Gramin Bank

Kashi Gomti Samyut Gramin Bank

Uttar Pradesh Gramin Bank

Shreyas Gramin Bank

Lucknow Kshetriya Gramin Bank

Ballia Kshetriya Gramin Bank

Triveni Kshetriya Gramin Bank

Aryavart Gramin Bank

Kisan Gramin Bank

Kshetriya Kisan Gramin Bank

Etawah Kshetriya Gramin Bank


77

Rani Laxmi Bai Kshetriya Gramin Bank

Baroda Western Uttar Pradesh Gramin Bank

Devipatan Kshetriya Gramin Bank

Prathama Bank

Baroda Eastern Uttar Pradesh Gramin Bank

Uttaranchal

Uttaranchal Gramin Bank

Nainital Almora Kshetriya Gramin Bank

West Bengal

Bangiya Gramin Vikash Bank

Paschim Banga Gramin Bank

Uttar Banga Kshetriya Gramin Bank

The other Regional Rural Banks in India are -

Haryana State Cooperative Apex Bank Limited


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
78

deposit facilities. The HARCOBANK have been functioning as an investor for more than
three decades.

National Bank for Agriculture and Rural Development


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.

Sindhanur Urban Souharda Co-operative 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.

79

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.
Regional Rural Banks in Tamil Nadu
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.

80

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

6680

7760

8800

9471

17138

21286

33486

45666

48559

62629

96699

1347.5

10559

12427

15050

17710

20934

25038

32692

40345

43456

46678

51283

385.62

35820

42236

49596

56802

62500

70195

436805

803416

844982

898760

984364

2648.3

3281

3938

4619

5191

5391

5535

6041

6547

7729

7586

8786

165.94

151

207

240

370

430

697

743

790

873

853

1023

577.4

3432

4145

4859

5561

5821

6231

6784

7337

7602

8421

9809

185.8

Investment
Advance
Total Assets
Interest
Earned
Other
Income
Total
Income

81

Interest
expanded
2131

2565

2966

3329

3340

3363

5902

8441

8860

8362

9260

334.5

982

1056

1165

1459

1667

1825

1958

2092

22134

2345

2598

164.6

99

96

128

163

132

289

329

369

434

590

699

606.3

3113

3621

4130

4787

5107

5187

7860

10533

10994

10707

11758

277.7

319

319

729

774

714

1044

985

926

1383

1859

1987

522.8

Operating
Expanses

Provision
And
Contigencies

Total
Expenses
Operating
Profit

82

RRBS IMPORTANT BANKING INDICATORS

83

OBJECTIVE OF THE
STUDY
84

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

85

RESEARCH
METHODOLOGY

86

RESEARCH METHODOLOGY
Research in common parlance refers to a search for knowledge. The advanced learners
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

DESCRIPTIVE RESEARCH DESIGN


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. That will enable the researcher to
save and resources such a plan of study or blue print or study is called a research design.
Three main purposes of research are to describe, explain, and validate findings. Description
emerges following creative exploration, and serves to organize the findings in order to fit
them with explanations, and then test or validate those explanations
The reason to adopt the descriptive research is due to the type of research question, design,
and data analysis that will be applied to a given topic. Descriptive statistics tell what is, while
inferential statistics try to determine cause and effect. Descriptive research aims at fact
finding & more often is based on surveys .Its purpose to describe the present state of affairs
of the topic of study. It is more focused than an exploratory study. It provides basic
information for formulating more sophisticated study.

87

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 projects 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
88

departments. From this department, the respondents were selected on the basis
of convenience.

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

It is the arrangement of classified data in an orderly manner. This involves


creating table for recording the filled in interview schedule. These tables are of
immense help to analysis by using the statistics tools help to analysis by using
the statistical tools.

TOOLS USED FOR ANALYSIS

Simple percentage analysis


It is simple analysis tool. In this method, based on the opinions of the
respondents, percentage and bar chart is calculated for the respective scales of
each factor.

Formula:
Simple percentage =

No of Respondents

x 100

Total No of Sample Size

89

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.

90

DATA ANALYSIS
AND INTERPRETATION

91

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 very little extent
Table: 1:- % of the respondent
Rural Bank

Urban Bank

To great extent

64

To some extent

26

72

To very little extent

10

28

total

100

100%

72

80
70

64

60
50
40

28

26

30
20

10

10
0

To great extent
0

To some extent
Rural Bank

To very little extent

Urban Bank

92

Interpretation:
From the above data it is evident that among the respondent,
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.

93

2) To what extent is Sales Promotions have been used by banker to increase sales in the short
term?
Completely
Partially
Nil
Table: 02% of the respondent
Rural Bank

Urban Bank

Completely

90

59

Partially

10

30

Nil

11

total

100

100%

90
90
80
70
60
50
40
30
20
10
0

59

30
11

10

Completely

Partially
Rural Bank

0 Nill

Urban Bank

94

Interpretation:
From the above data it is evident that among the respondent,
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.

95

3) Does your marketing policy of bank have a focus marketing on agro- sector?
Strongly agree
Agree
Disagree
Strongly disagree
Cant say
Table: 3% of the respondent

Rural Bank

Urban Bank

Strongly Agree

83

61

Agree

17

23

Disagree

16

strongly disagree

Can't say

100

100%

total

90
80
70
60
50
40
30
20
10
0

83
61

17

23

16
0

Rural Bank

Urban Bank

96

Interpretation:
From the above data it is evident that among the respondent,
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 cant says that Marketing
policy of bank have a focus marketing on agro- sector.

97

4) Multiple basic financial services and loan gateway is product marketing of the bank?
Yes

No

Table: 4:-% of the respondent


Rural Bank

Urban Bank

Yes

87

62

No

13

38

total

100

100%

100

87
62

80
60

38

40

13

20
0

Yes

No
Rural Bank

Urban Bank

Interpretation:
From the above data it is evident that among the respondent,
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.

98

5) Devised to ensure usage as well as profitability Quantity discounts, and ease in payment
modes is pricing marketing of the bank.
Yes

No

Table: 5:-% of the respondent


Rural Bank

Urban Bank

Yes

11

13

No

89

87

total

100

100%

89

100

87

80
60
40

13

11

20
0

Yes

No
Rural Bank

Urban Bank

Interpretation:
From the above data it is evident that among the respondent,
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..
99

6) Comprehensive offering of different services is placement marketing of the bank?


Traditional

Modern

Table: 6:-% of the respondent

Rural Bank

Urban Bank

Traditional

98

91

modern

100

100%

total
98

91

100
80
60
40
2

20
0

Traditional
Rural Bank

modern
Urban Bank

Interpretation:
From the above data it is evident that among the respondent,
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.
2 % of the respondent of rural bank says that Comprehensive offering of different
services is placement marketing of the bank where as 9% of the respondent of Urban
Bank says that Comprehensive offering of different services is placement marketing
of the bank.

100

7) Collaborating with NGOs to development Knowledge marketing of the bank


Yes

No

Table: 7:-% of the respondent

Rural Bank

Urban Bank

Yes

33

81

No

67

19

total

100

100%

81

90
80

67

70
60
50

33

40

19

30
20
10
0

Rural Bank

Urban Bank
Yes

No

Interpretation:
From the above data it is evident that among the respondent,
33% of the respondent of RURAL BANK

says that Collaborating with NGOs to

development Knowledge marketing of the bank where as 81% of the respondent of


Urban Bank also says that Collaborating with NGOs to development Knowledge
marketing of the bank.
67% of the respondent of RURAL BANK

says that Collaborating with NGOs to

development Knowledge marketing of the bankwhere as 19% of the respondent of

101

Urban Bank says Collaborating with NGOs to development Knowledge marketing of


the bank.

102

CONCLUSION

103

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 crosssubsidisation. 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.

104

BIBLIOGRAPHY
Books:

Aaker (1991) Building Strong Brands; New York: Free Press

Chatterjee, Jauchius, Kaas and Satpathy no. 1, (2002): 'Revving up auto branding',
McKinsey Quarterly.

David. A. Aaker, V.Kumar & George S. Day, (2001) Descriptive Research: Marketing
Research, Seventh Edition, pp 17

Saxena, Rajan. (2003):Marketing Management Tata Mcgraw-Hill Publishing


Company Limited. New Delhi
Sontakki, C.N. (1997):Marketing Management Kayali Publisher., New Delhi.
Kotler, Philip. (1999):Marketing Management Prentice Hall Of India Pvt. Ltd., New Delhi.
Kothari, C.R (2001):Research Methodology, Vishwa Publication., New Delhi
Sharma,D.D(2002):Marketing Research,Sultan Chand Sons, New Delhi

Magazines:

Business Today

Business Week.

Business World

Newspapers

Economic Times

The Hindu

Times of India

105

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
To very little 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
Cant 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.?
106

Yes

No

6) Comprehensive offering of different services is placement marketing of the bank?


Traditional

Modern

7) Collaborating with NGOs to development Knowledge marketing of the bank

Yes

No

107