A

Seminar Report

On

A Contemporary Management Issue

Titled

“RURAL BANKING IN INDIA: CURRENT PRACTICES”

Submitted for Requirements of the Paper M-207,

“Seminar on a Contemporary Management Issues”

of the MBA course of the Rajasthan Technical University , Kota

Submitted to: - Submitted By: - Mrs. XYZ XYZ MBA Ist Year,SEM-II

(2011-2012)

COLLEGE NAME XYZ

1

PREFACE

The underlying aim of the seminar on contemporary issue as an integral part of MBA program is to provide the students with practical aspects of the organization– working environment.

The seminar project in “RURAL BANKING IN INDIA: CURRENT PRACTICES” is a complete experience in itself, which provide me with the understanding. This has become as inspirable of my knowledge of management being learned in MBA program.

Since India is agriculture oriented country, the importance of rural banks in India is more than any other countries. More so in India, where over 65% of the population even today resides in villages. Hence, it has become imperative to align the nation’s business agenda along with the needs of this segment.

Concurrently, the government’s thrust to the development of the rural sector is creating a more favorable landscape for business in the country’s hinterland.

XYZ

2

STUDENT DECLARATION

I hereby declare that this dissertation entitled “RURAL BANKING IN INDIA” is the result of my own research work carried out under the guidance and supervision ofMR………………., ……………………………………………………………………………...

I also declare that this dissertation has not been submitted earlier to any Institute/organization for the award of any degree or diploma.

Place: Date: XYZ

3

ACKNOWLEGMENT

“Chain of mistakes leads towards failures, chain of failures leads to experience and chain of experience leads to success.” That’s what a life’s path is.

Some is applicable to my project work. I do not claim that I have a complete knowledge of the subject. First, I would like to thanks my friends and many persons who directly or indirectly helped me during my project.

Doing most favorable my project part, who help me and acknowledge me, I would like to express my profound gratitude to …………………………………………….. for guiding me right related to topic.

XYZ (M.B.A II sem)

4

TABLE OF CONTENTS

S. No. Particulars Page No.

1. Current State of Rural Banking in India 6

2. Banks: Functioning for the Development of Rural Areas 8

3. Key Drivers of Financial Exclusion of Rural Banking in India

14

4. Banking Products & Services: For services, security & prosperity

16

5. Reasons for Unprofitable Rural Banking in India 18

6. Usage Issues for Rural Customers 19

7. Market Opportunity of Rural Banking in India 22

8. Improving Access of Rural Banking In India 24

9. Technology and Rural Banking 27

10. Rural Banking Initiatives: kisan credit card 28

11. ICICI Bank: Innovation n Rural Finance 30

12. Conclusion 36

13. Bibliography 37

5

CURRENT SCENARIO OF RURAL BANKING IN INDIA

The Indian Economy:

India is the 12th largest economy in the world in terms of gross domestic product (GDP), and fourth in terms of purchasing power parity (PPP). The growth of the economy is equally impressive with an average of over 8.0% during the last three years. However, in terms of GDP per capita, India ranks a lowly 160th among other nations. Within the country, there is a stark divide in the incomes of urban and rural areas with the average monthly per capita consumption expenditure (MPCE) in urban India being almost double that of rural India.

India recorded the highest growth rates in the mid-2000s, and is one of the fastest-growing economies in the world. India is the nineteenth largest exporter and tenth largest importer in the world. Economic growth rates are projected at around 7% for the 2011-12 fiscal year.

The Indian money market is classified into the organized sector, comprising private, public and foreign owned commercial banks and cooperative banks, together known as scheduled banks, and the unorganized sector, which includes individual or family owned indigenous bankers or money lenders and non-banking financial companies. The unorganized sector and micro credit are still preferred over traditional banks in rural and sub-urban areas, especially for non-productive purposes, like ceremonies and short duration loans.

Prime Minister Indira Gandhi nationalized 14 banks in 1969, followed by six others in 1980, and made it mandatory for banks to provide 40% of their net credit to priority sectors like agriculture, small-scale industry, retail trade, small businesses, etc. to ensure that the banks fulfill their social and developmental goals. Despite an increase of rural branches, from 1,860 or 22% of the total number of branches in 1969 to 30,590 or 42% in 2007, only 32,270 out of 500,000 villages are covered by a scheduled bank.In addition, there are significant disparities in urban and rural consumption expenditure between different states. Jharkhand and Orissa, for example, have an MPCE of approximately Rs. 900 in urban areas and Rs. 410 in rural areas. In other states like Punjab and Haryana, the urban rural disparity is significantly lower. A fifth of the Indian population is below the poverty line (BPL) today with a MPCE below Rs 340. In some states like Jharkhand and Orissa, the proportion of BPL is greater than 40%. Diamond believes that the segments that are not considered BPL should all be considered as “potentially bankable” with genuine financial needs that could be met by formal financial and banking systems.

6

Current State of Indian Banking:

An important metric to determine the level of financial outreach/inclusion is the ratio of the number of deposit accounts to population. It gives a snapshot of the penetration of deposit accounts and credit accounts in India in comparison with a few select countries with similar socio-cultural and economic conditions. Even in comparison with other developing economies, India has a significant opportunity for increasing penetration of both deposit and credit accounts.

Not only is there a large disparity between India and other countries in banking penetration but there is also a large variation in banking penetration within urban and rural India. While urban India seems to be over-banked with more than 100% penetration (many urban Indians have more than one bank account), rural India lags far behind with a 19% penetration. The variance in rural and urban deposit and credit account penetration is not restricted only to few states but is common across all states.

In addition, the average value of a deposit account and a credit account is also quite low in rural areas as compared to urban areas. Diamond believes that the reasons for lower penetration levels are partly economic, as explained by the low GDP per capita in the rural areas of the country, and partly a result of “controllable” factors that are inherent in formal banking systems in India today. The low deposit and credit account penetration and low average values in deposit and credit accounts demonstrate that banking outreach in rural India is sub-optimal. This low outreach can be explained by two key parameters: access and usage.

Simply defined, access is the availability of financial services, and usage is the actual use of those services. Access is influenced by issues such as the basic economic state of rural India, lack of physical infrastructure facilities, regulatory constraints, and the economics of rural banking. Usage is constrained by social issues such as illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system. Access and usage are not synonymous, as people may have access to financial services, but decide not to use them, either for socio-cultural reasons or because opportunity costs are too high.

7

BANKS: FUNCTIONING FOR THE DEVELOPMENT OF RURAL AREAS

The area of operation of a majority of the RRBs is limited to a notified area comprising a few districts in a State. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI, there are other few banks which functions for the development of the rural areas in India.

CO-OPERATIVE BANKS AND RURAL CREDIT:

The Co-operative bank has a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate.

Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary co-operative banks.

Co-operative Banks in India are registered under the Co-operative Societies Act. The RBI also regulates the cooperative bank. They are governed by the Banking Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.

Co-operative banks in India finance rural areas under:

Farming Cattle Milk Hatchery Personal finance

Institutional Arrangements for Rural Credit (Co-operatives):

Short Term Co-operatives: Central Co-operative Banks State Co-operative Banks Primary Agriculture Credit Co-operative Societies

8

Long Term Cooperatives: State Agriculture & Rural Development Banks Primary Agriculture & Rural Development Banks

Primary Agricultural Credit Societies (PACSs)

An agricultural credit society can be started with 10 or more persons normally belonging to a village or a group of villages. The value of each share is generally nominal so as to enable even the poorest farmer to become a member. The members have unlimited liability, that is each member is fully responsible for the entire loss of the society, in the event of failure. Loans are given for short periods, normally for the harvest season, for carrying on agricultural operation, and the rate of interest is fixed. There are now over 92,000 primary agricultural credit societies in the country with a membership of over 100 million.

The primary agricultural credit society was expected to attract deposits from among the well –to-do members and non-members of the village and thus promote thrift and self-help. It should give loans and advances to needy members mainly out of these deposits.

Central Co-operative Banks (CCBs)

The central co-operative banks are located at the district headquarters or some prominent town of the district. These banks have a few private individuals also who provide both finance and management. The central co-operative banks have three sources of fundsTheir own share capital and reserves Deposits from the public and Loans from the state co-operative banks

Their main function is to lend to primary credit society apart from that, central coopertive banks have been undertaking normal commercial banking business also, such as attracting deposits from the general public and lending to the needy against proper securities. There are now 367 central co-operative banks.

State Co-operative Banks (CCBs)

The state Co-operative Banks, now 29 in number, they finance, co-ordinate and control the working of the central Co-operative Banks in each state. They serve as the link between the Reserve bank and the general money market on the one side and the central co-operative and primary societies on the other. They obtain their funds mainly from the general public by way of deposits, loans and advances from the Reserve Bank and they are own share capital and reserves.

9

COMMERCIAL BANK AND RURAL CREDIT:

The commercial banks at present provide short term crop loans account for nearly 45 to 47% of the total loans given and disbursed by the commercial banks. Term loans for varying periods are given for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and tube well, for development of fruit and garden crops, for leveling and development of land, for purchase of ploughs, animals, etc. commercial banks also extend loans for allied activities viz., for dairying, poultry, piggery, bee keeping, fisheries and others. These loans come to 15 to 16%.

Commercial Banks and Small Farmers

The commercial banks identifying the small farmers through Small Farmers Development Agencies (SFDA) set up in various districts and group them into various categories for credit support so as to enable them to become bible cultivators. As regard small cultivators near urban areas and irrigation facilities, commercial banks can help them to go in for vegetable cultivation or combine it with small poultry farming and maintaing of one or two milch cattle.

IRDP and commercial banks

Since October 1980, the Integrated Rural Development Programme (IRDP) has been extended to all the blocks in the country and the commercial banks have been asked by the government of India to finance IRDP. The lead banks have to prepare banking plans and allocate the responsibility of financing the identified beneficiaries among the participating banks. Commercial banks have been asked to finance all economically backward people identified by government agencies.

REGIONAL RURAL BANKS AND RURAL CREDIT:

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. The main objective of RRBs is to provide credit and other facilities particularly to the small and marginal farmers, agricultural laborers, artisians and small entrepreneurs and develop agriculture, trade, commerce, industry and other productive activities in the rural areas.

The progress of RRBs in the initial stage was quite rapid. For instance, the Sixth Five-year plan(1980-85) had envisaged the setting up of 170 RRBs covering 270 districts by the end of march 1985.The target was exceeded. There are now 196 RRBs in 23 states of the country with 14,200 branches.

10

Structure of regional rural bank

The establishment of the Regional Rural Banks (RRBs) was initiated in 1975 under the provisions of the ordinance promulgated on 26.9.1975 and thereafter Section 3(1) of the RRB Act, 1976. The issued capital of RRBs is shared by Central Government, sponsor bank and the State Government in the proportion of 50%, 35% and 15% respectively.

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

Role of RBI in rural credit

Since it was set up in 1934, RBI has been taking keen interest in expanding credit to the rural sector. After NABARD was set up as the apex bank for agriculture and rural development, RBI has been taking a series of steps for providing timely and adequate credit through NABARD.

Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40 percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture. Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percent sub-target would have to go to the corpus Rural Infrastructure Development Fund (RIDF).RBI has also taken steps in recent years to strengthen institutional mechanisms such as recapitalisation of Regional Rural Banks (RRBs) and setting up of local area banks(LABs).

LIST OF RURAL BANK IN INDIA:

Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country.

SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himacha l Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas.

11

Apart from SBI, there are many other banks which function for the development of the rural areas in India. These banks are listed below:

Andhra Pradesh

Bihar

Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank

Chhattisgarh

Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank Durg-Rajnandgaon Gramin Bank

Haryana

Harayana Gramin Bank Gurgaon Gramin Bank

Jammu & Kashmir

Jammu Rural Bank Ellaquai Dehati Bank Kamraz Rural Bank

Assam

Assam Gramin Vikash Bank Langpi Dehangi Rural Bank

Jharkhand

Jharkhand Gramin Bank Vananchal Gramin Bank

Madhya Pradesh

Narmada Malwa Gramin Bank Satpura Kshetriya Gramin Bank Madhya Bharath Gramin Bank Chambal-Gwalior Kshetriya Gramin Bank Rewa-Sidhi Gramin Bank Sharda Gramin Bank Ratlam- Mandsaur Kshetriya

Madhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank Uttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank

Gujarat

Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank

Himachal Pradesh

Himachal Gramin Bank Parvatiya Gramin Bank

Punjab

Punjab Gramin Bank Faridkot-Bhatinda Kshetriya Gramin Bank Malwa Gramin Bank

Kerala

Narmada Malwa Gramin Bank North Malabar Gramin Bank

Tamil Nadu

Pandyan Grama Bank Pallavan Grama Bank

Maharashtra

Marathwada Gramin Bank Aurangabad -Jalna Gramin Bank Wainganga Kshetriya Gramin Bank Vidharbha Kshetriya Gramin Bank Solapur Gramin Bank Thane Gramin Bank Ratnagiri-Sindhudurg Gramin Bank

12

Gramin Bank Vidisha Bhopal Kshetriya Gramin Bank Mahakaushal Kshetriya Gramin Bank Jhabua Dhar Kshetriya Gramin Bank

Karnataka

Karnataka Vikas Grameena Bank Pragathi Gramin Bank Cauvery Kalpatharu Grameena Bank Krishna Grameena Bank Chikmagalur-Kodagu Grameena Bank Visveshvaraya Gramin Bank

Rajasthan

Baroda Rajasthan Gramin Bank Marwar Ganganagar Bikaner Gramin Bank Rajasthan Gramin Bank Jaipur Thar Gramin Bank Hodoti Kshetriya Gramin Bank Mewar Anchalik Gramin Bank

Orissa

Kalinga Gramya Bank Utkal Gramya Bank Baitarani Gramya Bank Neelachal Gramya Bank Rushikulya Gramya Bank

West Bengal

Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank Uttar Banga Kshetriya Gramin Bank

Meghalaya

Ka Bank Nogkyndong Ri Khasi- Jaintia

Arunachal Pradesh

Arunachal Pradesh Rural Bank

Manipur

Manipur Rural Bank

Mizoram

Mizoram Rural Bank

Nagaland

Nagaland Rural 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

Uttaranchal

Uttaranchal Gramin Bank Nainital Almora Kshetriya Gramin Bank

13

KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL BANKING

According to Diamond estimates, approximately 245 million adults in rural India do not have a bank account today. As depicted in Following Table, this reflects 24% of the total population. While 60 million out of 245 million may not need banking services because they are below the poverty line, Diamond believes that approximately 185 million “potentially bankable” people do not use formal banking services because of reasons like poor access or usage.

100

47 53

1637

1324

618

020406080

100120

Total

Pop

ulat

ion

Non A

dult P

opul

ation

Adult P

opulat

ion

Urban

Adult

Pop

ulatio

n

Rural

Adult

Popul

ation

Banke

d Pop

ulat

ion

Unban

ked

Popula

tion

Financia

lly C

onst

raint

s

Ponte

ntia

lly B

anka

ble

Series1

Source: Census India ;BSR 2008—Reserve Bank of India; World Bank & NCAER (2008).

ACCESS ISSUE FOR RURAL CUSTOMER:

Access is explained in terms of infrastructure, physical distance, limited delivery capabilities, regulatory constraints and the economics of rural banking.

The banking infrastructure in rural India is not encouraging, with just 7% of villages housing a bank branch. What’s more, the poor physical and social infrastructure also impacts the access to financial services, with 23% of villages going without electricity, 67% without a Post Office, and an average rural literacy

14

rate of 59% and secondary school penetration of 12%. This lack of physical and social infrastructure in rural India is a key issue impacting access to formal financial services.

The average distance to a branch in India is approximately 3.8 Kms. While this compares favorably to the average distance to a branch in a developed market like the U.S. (which is 6 Kms6), there are significant additional challenges in India in the form of unpaved roads and limited access to modern transportation. Most rural customers are likely to sacrifice an entire day’s wage to travel to a bank branch which is open between 10:00am and 5:00pm. While some banking transactions could be done over phone, this is rarely an option in a country with such low rural tele-density.

Limited delivery capability is a significant challenge. Much of rural India is serviced through branches because ATM penetration is low and other channels such as Phone and Internet Banking are non-existent. Intermediaries like Non-Governmental Organizations (NGOs), Self-Help Groups, and Micro Finance Institutions (MFIs) are being used by banks to improve access to credit and savings. However, these channels, in their current form, offer limited services.

There are some regulatory constraints imposed by the Reserve Bank of India (RBI) which may inadvertently contribute further to the lack of formal banking services in rural areas. For example, the RBI does not allow banks to post any person other than a security guard at ATMs. Hence, banks cannot deploy many ATMs in rural areas as many rural customers require in-person support. A second regulatory inhibitor is that new banks planning to establish a branch in a rural area have to receive approval from the Lead Bank and District Collector of that district. Hence, banks choose not to open new branches in certain areas even when it is profitable to do so because there is no certainty of getting approvals.

Many banks view the rural market as a regulatory requirement rather than an economic opportunity. Banks have from time to time borne the social cost of lending to the rural economy at rates below their costs. They have also faced capital erosion because of the write-off of loans, particularly agriculture loans. Banks are required via regulatory requirements to open branches in rural areas to provide loans to agriculture and other priority sectors.

BANKING IN RURAL AREAS-CHALLENGES:

Some Banks are unwilling to operate Branches in Rural areas because

Low Profitability Large Number of accounts Low Value Transactions

15

Less Number of Transactions Few activities and less opportunities for services other than deposit and

Credit Huge Staff Cost Difficult to implement Technology Large area of Operation – Difficult Reach

BANKING PRODUCTS & SERVICES: For Service, Security & Prosperity

Current Account Savings Bank Account Recurring Deposit Scheme Fixed Deposit Scheme Fixed Deposits linked with Recurring Deposits Scheme Monthly Income Deposit’s Scheme Loan Linked Housing Deposit’s Scheme Loan Linked Children Education Deposits Scheme

1. CROP LOANS Short terms loans are provided for Seasonal Agricultural operation to Farmers, (cash & kind) through Service Co-operative Societies spread all over Meghalaya as per approved scales of finance, time schedule both under NCL, Cash Credit Systems & Kisan Credit Cards.

2. TERM LOANS Medium & Long Term Loans are extended to the Farmers through the affiliated Service Co-operative Societies direct for allied agricultural activities like land development, minor irrigation, purchase of farm machinery, poultry, goat rearing, pisciculture, diary, horticulture, plantation & Horticulture schemes.

3. CASH CREDIT ACCOMMODATION Cash Credit accommodations are provided to Co-operative Societies for procurement, marketing of agriculture and minor forest produces and also for dealing in consumer goods, etc.

4. HOUSING LOANS Salaried persons are extended Housing Loan facilities for construction of their residential houses in CD Block Head Quarters and other selection areas against adequate securities.

16

5. TRANSPORT VEHICLE LOANS The Bank provides M.T. Loans to Transport Societies and educated unemployed youths for creation of self-employment generation & extension of easy mobility to the people of the State.

6. CONSUMER DURABLES LOANS Salaried persons are provided consumer durables loans for purchase of T.V. Set, Radio, Refrigerator, Two-Wheelers, Musical Instruments, Cooking Gas, Furniture and various other approved items.

7. CASH CREDIT FACILITIES Govt. appointed whole sellers are extended Cash Credit/Loan facilities for dealing in controlled commodities against adequate securities.

8. TERM LOANS FOR TOURISM DEVELOPMENT Term Loans are provided for encouraging young & enterprising entrepreneurs and unemployed persons for creating self-employment opportunities through Tourism Development.

9. TERM LOANS FOR TOURISM DEVELOPMENT The scheme is intended for regular constituents of the Bank for construction of their residential houses with financial assistance from the Bank.

10. INTEGRATED VILLAGE DEVELOPMENT SCHEME (IVDS) The scheme is intended to help formation of homogeneous groups with 5 to 20 members in the rural areas in the co-operative sector and extend loan assistance to them for improving their socio-economic conditions by undertaking various economic activities which are socially useful and economically viable.

11. PERSONAL LOAN Salaried persons are provided Personal Loans for any bonafide need of unspeculative nature in the shape of overdraft facilities against adequate securities.

12. EDUCATIONAL LOAN Educational Loans are provided to parents/deserving students for higher studies in India/abroad adequate securities.

13. LOAN FOR PROFESSIONAL & TECHNOCRATS Credit facilities are extended to Doctors, Lawyers, Technocrats and other Professionals to set up Clinic, Consultancy firms etc. against adequate securities.

OTHER SCHEMES AND SERVICES

Financial Assistance to Urban Banks, Weavers Co-ops, Industrial Co-ops, Joint Farming Societies, etc.

17

Conversion of short term (Agri) Loans affected by Natural Calamities into Medium Term Loans.

Implementation of comprehensive Crop Insurance Scheme for the benefit of the farmers.

Godown Loans to Service Co-operative Societies. Overdraft facilities to regular constituents of the Bank. Kisan Credit Card Scheme for Farmers

REASONS FOR UNPROFITABLE OF RURAL BANKING IN INDIA

High Non-performing Loans (NPL):

Banks have higher non-performing loans in rural areas because rural households have irregular income and expenditure patterns. The issue is compounded by the dependence of the rural economy on monsoons, and loan waivers driven by political agendas. NPLs from the agriculture sector are 7.7%, compared to 3.5% across non-agriculture sectors8. In order for banks to view rural India as a growth opportunity, rather than a regulatory requirement, a combination of these issues must be addressed. Increasing financial access to rural areas is contingent upon basic conditions such as proper infrastructure and an enabling regulatory framework, as well as innovative thinking on the part of commercial banks. Access issues, however, explain only one part of the problem. Usage is an equally important issue for rural customers.

Low Ticket Size:

The average ticket size of both a deposit transaction and a credit transaction in rural areas is small. This means that banks need more customers per branch or channel to break even. Considering the small catchments area of a branch in rural areas, generating a customer base with critical mass is challenging.

High cost to serve:

Branches are the most used channel in rural areas. This is because many rural people are not literate and are not comfortable using technology-driven channels such as ATMs, phone banking or internet banking. On the other hand, a branch is an expensive channel for banks (Following Table). In addition, rural people, whenever they have access to banks, have frequent low ticket and cash-based transactions, which increase the overall transaction cost for their bank. Cost Per Transaction in Indian Banks

18

48

25

18

84

0

10

20

30

40

50

60

Branch Phone (CallCentre)

ATM Phone (IVR) Internet

Series1

Source: Reserve Bank of India; CGAP, World Bank.

Higher risk of credit:

Rural households may have highly irregular and volatile income streams. Irregular wage labor and the sale of agricultural products are the two main sources of income for rural households. The poor rural households (landless and marginal farmers) are particularly dependent on irregular wage employment. Rural households also have irregular expenditure patterns. The typical expenditure profile of rural households is small, with daily or irregular expenses incurred through the month. Furthermore, a majority of households incur at least one unscheduled expenditure per year, with the most frequent reasons being medical or social emergency7. In short, the rural customer is generally considered to be a risky one.

Information Asymmetry:

Since many rural people do not have bank accounts, there is a lack of information on customer behavior in rural India. Absence of a Credit Information Bureau also complicates the problem as banks have to rely on informal sources to learn the credit history of rural customers. A lack of reliable information can result in either missed opportunities in not approving otherwise eligible loan candidates, or nonperforming loans.

USAGE ISSUES FOR RURAL CUSTOMERS

Even if access to formal banking is provided to rural customers, there is no guarantee that these services will be used. According to a study conducted by

19

the World Bank, many households, even in developed countries, choose not to have a bank account as they do not engage in many financial transactions—they collect wages in cash, spend in cash and do not wish to be burdened by a bank account9. To compound the situation many customers in rural India, who have access to and would otherwise choose to use formal financial services, do not do so because the product and service mixes do not meet their needs.

The financial service needs of rural customers are not confined to just savings and credit, as is usually assumed. Their financial needs are linked to their life cycle needs, ranging from savings to credit to insurance to remittances. In fact, even the savings and credit products currently offered to rural customers do not entirely meet their needs.

Access to savings and investment facilities is critical for the poor. The two critical needs for the rural poor are micro-savings and frequent withdrawals. These needs facilitate a customer in building capital over the long term, as well as coping with income shocks in the near term. However, banks do not offer adequate services to address these needs. The lack of services, therefore, leaves the rural poor with little option than to transact with the informal banking market. A study conducted by Micro Save also concludes that the poor transact with the informal sector because it will accept small amounts, provide doorstep service, and ensure ease of enrolment.

Rural customers need loans not only for productive purposes but also for consumption needs (Following Table). A part from agricultural support, rural customers need micro credit for consumption, education and emergencies. Though banks offer purpose free loans (personal loans and credit cards) in urban areas quite liberally, in rural areas sanction of such loans is significantly restricted. Therefore, the poor raise these loans through the informal financial system (it is worth noting that these loans taken from the informal system are almost always repaid or renewed12). In addition, larger households need occasional high value micro-enterprise loans for small capital investment. Though banks offer these loans, they require excessive documentation and time-consuming processes which discourage customer applications.

Purpose of Borrowing

Rural Household Borrowing

20

Other business expenditure, 14%

Household expenditure, 48%

Agriculture expenditure, 38%

Other businessexpenditure

Householdexpenditure

Agricultureexpenditure

Bank Lending to Rural Households

Personel Loans, 12%

Agriculture Loan, 36%

Other Business Loan, 52%

Personel Loans

Agriculture Loan

Other Business Loan

A significant percentage of borrowing is toward consumption and other household expenditure, whereas formal financial institutions in rural India provide loans primarily for productive purposes.

Source: AIDIS—2008, National Sample Survey Organization (NSSO); Diamond analysis.

Insurance reduces the vulnerability of poor households by replacing the uncertain prospect of large losses with the certainty of payout against small, regular premium payments. It is integral to a comprehensive risk management strategy for poor households. This includes life, health, accident and asset (dwelling, crop,

21

and livestock) insurance. Banks and insurance firms do not offer these services in many rural areas, leading the poor to rely on the informal financial system.

There are many rural households which depend on weekly or monthly remittances from their family members who have moved to urban areas. At present, they depend on informal channels to remit the money and consequently either risk the loss of money or pay high transaction fees. Banks do not offer seamless remittance facilities between urban and rural branches as many of the rural branches are not computerized and connected to the main bank’s computer systems. This often results in the beneficiary receiving the amount two weeks after it has being transferred. This represents yet another key service which is not provided.

The transaction cost for a rural customer to receive credit primarily constitutes four attributes: the interest rate, loan amount received as a percentage of amount applied, bribes paid, and the lead time to process the loan. Though the formal banking system offers loans at interest rates lower than informal banking systems, the time taken for a loan to be sanctioned is high which increases uncertainty and opportunity cost. In addition, the customer needs to pay almost 10% of the loan amount in bribes and eventually receives an amount that is less than what was applied for. Therefore, while the interest rates are usurious in the informal financing system, rural customers still resort to this channel because the waiting time to receive the loan is negligible and there are no indirect costs or commission. Banks also insist on collateral security which many rural poor cannot afford.

As far as savings are concerned, though the formal banking system provides financial security, the cost of opening and operating an account is high. The overall cost of transacting with the formal financial system increases for a rural person because of additional costs such as expenses incurred to reach a branch and the opportunity cost of lost wages. Since rural banks are generally not within an accessible area and do not operate at convenient times, the rural customer must forgo a day’s wage to reach a branch. Informal systems, on the other hand, involve a lower transaction cost, but they are risky and in some cases result in the loss of one’s entire capital. In short, this leaves the rural customer to choose between two unfavorable options.

In summary, the services being offered by the formal banking system do not seem to meet the needs of the rural poor. A World Bank study suggests that the poor apply a set of criteria to judge the services being offered by any financial service provider, including:

• Products—Are financial services available and tailored to my needs?• Cost—What is the total cost of the service (including opportunity cost)?• Convenience—How easy is it to access and use?

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• Eligibility—Am I eligible for financial services and can they be accessed repeatedly?

As explained earlier, the savings products offered in the current format do not qualify as a flexible, convenient and cost-efficient service. Similarly, loan products do not meet product and eligibility criteria. In addition, insurance and remittance services are not even available. The cost of services, despite lower interest rates, is high because of other indirect costs which make the banking services cost-inefficient.

MARKET OPPORTUNITY OF RURAL BANKING

At present, a rapidly growing urban India is the focus of the banking sector; however, as the deposit penetration numbers suggest (Figure 3 & 4), the market is highly competitive and over banked. Despite this, most banks are still not shifting their focus to the rural opportunity, as they are apprehensive about the total market potential of the rural market and the profitability of rural banking channels. Contrary to the widely held notion, however, the rural market is attractive from both a credit and deposit perspective. The credit demand in rural areas is approximately Rs 1,330 billion (based on an estimate by World Bank). There are other studies by the Planning Commission and ICICI Bank which put the figure even higher at Rs 1,440 billion and Rs 1,500 billion respectively. Similarly, on the deposit side, a large segment of the rural population does not save with formal banking channels because banks are not accessible and do not provide the appropriate products and service, leaving a significant opportunity to grow the deposit base.

At present, the penetration of banking in rural areas is sub-optimal with a large market remaining untapped in both the liability (~ Rs 215 billion) and asset (~ Rs 1,204 billion) sides of the business. These estimates clearly suggest that there is sufficient demand in the rural market to encourage banks to think seriously about rural areas as an alternative growth opportunity.

As we identified earlier, access and usage are two broad concerns which explain why the potentially bankable are unbanked. With regard to access, the challenge for banks is to identify profitable channels that meet the needs of rural customers. With regard to usage, banks need to understand the requirements of the rural customer and customize products and servicesAccordingly (Following Table).

Proposed Approach to Tap Potentially Bankable Population

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Source: Diamond analysis

IMPROVING ACCESS FOR RURAL BANKING

Today, branches are the primary delivery channel in rural areas. Though there are 32,000 commercial bank branches in India, they cover less than 7% of total villages. Opening more branches is not necessarily profitable as many pockets of rural areas do not have business enough to justify an expensive branch channel. Therefore, to improve access in rural areas, banks need to modify existing channels, introduce new channels and identify innovative ways to integrate the two.

Modify Existing Channels:

Fortunately there are a variety of options available for banks looking to modify their existing channels. To reduce the costs imposed by branches, banks should consider the option of sharing their branch infrastructure. This would not be too dissimilar to the example of the telecom industry sharing network infrastructure or the fast food industry sharing food courts in urban areas. Though infrastructure sharing may raise concerns over client confidentiality and data leakage, in the long run banks will only benefit from such collaboration.

ConvertPotentiallyBankable

AddressAccess NeedsOf RuralCustomers

EnsureChannelProfitability

AddressUsage NeedsOf RuralCustomers

ImproveAccessFor RuralCustomers

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BankInitiativesTo ImproveUsage

EncourageUsage ofServices

ATMs are an effective channel which can deliver many of the services frequently used by a branch customer. However, ATMs, in their current form, are not suitable for rural areas as the literacy level and transaction ticket amount is too low. ATMs can, however, be designed to meet the needs of rural customers. For example, ICICI Bank is working with IIT Chennai to develop an ATM that has a biometric fingerprint login, accepts soiled notes, and lower value denominations. In addition to modifying the design of the machines, banks should also hold discussions with the RBI to allow an attendant to be posted at ATMs. This will enhance the usability of ATMs.

Though phone banking and internet banking are cost-effective channels, given very low tele-density and low internet penetration in rural areas, the ability to use these channels to reach the rural customer is low. However, phone and internet banking should be considered once infrastructure and literacy levels improve in rural India. A business correspondent could then run an e-kiosk to assist customers to transact over these channels. For example, Centenary Bank in Uganda uses internet and phone banking to provide bill payments, money transfers and loan repayments.

Business correspondents can be provided with point-of-sale (POS) functionality to allow customers to deposit and withdraw cash from their accounts. Combining POS with a smart card is one way to improve access. Brazil has successfully used banking correspondents who use POS and card readers to provide current accounts, loans, and insurance, accept bill payments, and perform other transactions.

Introduce New Channels:

The RBI allows banks to appoint business correspondents and facilitators to be used as intermediaries in providing banking services. NGOs, MFIs, Societies, Section 25 companies, registered NBFCs not accepting public deposits, and Post Offices can be appointed as Business Correspondents. Business Correspondents can provide several services which are not currently offered by SHGs and MFIs, including: (i) identification of borrowers and fitment of activities; (ii) collection and preliminary processing of loan applications including verification of primary information/data; (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling; (iv) processing and submission of applications to banks; (v) promotion and nurturing Self Help Groups/Joint Liability Groups; (vi) post-sanction monitoring; (vii) monitoring and handholding of Self Help Groups/Joint Liability Groups/Credit Groups/others; and (viii) follow-up for recovery; (ix) disbursal of small value credit, (x) recovery of principal/collection of interest (xi) collection of small value deposits (xii) sale of micro-insurance/ mutual fund products/ pension products/ other third-party products and (xiii) receipt and delivery of small value remittances/ other payment instruments.

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The introduction of Business Correspondents may face some challenges from labor unions. However, Diamond believes that there may be some options to address the concerns of the current workforce while using Business Correspondents to capture more value from rural customers.

Caixa Economica, a state-owned bank in Brazil, manages the country’s lottery network and distributes government benefits. To increase the access of its services, Caixa extensively utilizes the Banking Correspondent channel, with 14,000 banking correspondents covering all of Brazil’s 5,500 municipalities. In less than 2 years, Caixa opened about 2.8 million new accounts and estimates that 40% of its banking transactions are handled through the banking correspondent channel.

Satellite offices are a cost-effective alternative to branches. These offices can be established at fixed premises in villages and are controlled and operated from a base branch located at a block headquarters. All types of banking transactions may be conducted at these offices. Banks have, however, not used this channel actively, despite the argument that this channel is relatively less expensive, as it can draw personnel from the main branch and can remain open for just two days a week. This channel, therefore, is appropriate in blocks and districts which are densely populated. In the urban areas, most Indian banks opt for an extension counter where the business does not justify a full-fl edged branch. Similarly, satellite branches can cater to rural areas which do not justify a large branch.

Where banks do not find it economical to open full-fl edged branches of satellite offices, mobile offices may be more appropriate. Mobile offices extend banking facilities through a well-protected truck or van. The mobile unit visits villages on specified days/ hours. The mobile office would be affiliated with a branch of the bank, and serve areas which have a large concentration of villages. This will not be dissimilar to the mobile ATMs implemented by some of the Indian banks in the urban areas.

Determine the Combination of Channels:

There is no one right channel or solution to improve access in rural areas. Banks have to evaluate the trade-offs between those channels that are most convenient to customers and those that are the most profitable. Banks are not comfortable opening new rural branches because many of those that already exist are unprofitable. Therefore, determining the right combination of channels is critical to improving access in profitable ways. An innovative approach to improving access will consider a combination of these channels. For example:

• Branches and Satellite Branches— In addition to providing regular banking operations, providing backend support to manage and audit the operations of business correspondents.

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• A low-cost, custom-made ATM— Managed by a business correspondent to bring down the operating cost and scale the channel.

• An e-kiosk—Managed by a business correspondent with internet banking, ATM and POS terminal in relatively large rural areas.

• A business correspondent—Using manual ledgers or POS/Palmtop to act as deposit collector and remitting agent in smaller rural areas.

While this list is not exhaustive, it highlights the need for creative solutions that apply the right channel to the right market and transaction. In South Africa, Capitec has combined convenient branches along transportation routes (for example, train and bus stations, and taxi stops). In addition, it has rolled-out debit cards and automatic teller machines across 200 of these branches to stimulate savings among low-income earners. Between February and August 2007, the number of customers jumped from around 30,000 to more than 90,000.

TECHNOLOGY AND RURAL BANKING

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 alsoundertaking 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 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

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increased speed of response to customer requirements under virtual banking vis-à-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost of operating branch network along with reduced staff costs leads to cost efficiency. Fourthly, it allows the possibility of improved quality and an enlarged range of services being available to the customer more rapidly and accurately at his convenience. It may not be possible to deny these facilities to rural areas in our country since, if banks do not provide them, some non-banks will do it.

Another development relates to the increasing popularity of credit cards, which are bound to reach rural areas. Many Public Sector Banks are already in credit card business. In fact, multipurpose cards could be a facility that IT could usher in for rural population. The potential can be illustrated with SMART cards. SMART cards – which are basically cards using computer circuits in them thereby making them ‘intelligent' – would serve as multipurpose cards. SMARTcards are essentially a technologically improved version of credit and debit cards and could be used also as ATM cards. They could be used for credit facilities at different locations by the holders. SMART cards could also be used for personal identification and incidentally for monitoring credit usage.

For the spread of virtual-banking and SMART cards to rural areas, it is essential that electric power and telecom connectivity are continuous and supplies do not drop especially during the hours when a bank's transactional activity is at relatively high levels. The banks could, under such assured supply conditions acquire the required banking software and also put in place the necessary networking for providing anywhere banking facilities in rural and semi-urban areas also.

Like banks in other parts of the world, Indian banks will have to get interested in providing diversified range of financial products and services along with those that they are already providing, by using technological advances. As the level of education in rural areas rises and affluence spreads, customers will start seeking efficient, quicker and low cost services. As the financial system diversifies and other types of financial intermediaries become active, in rural areas, savers would turn towards mutual funds or the savers themselves decide to deploy part of their financial surpluses into equities and debentures as also other fixed income securities. The bulk of bank deposits in the rural areas are currently longer term deposits and as these come down, there would be a distinct shortening of the average maturity structure of bank deposits with an increase in asset liability mismatches. The spreads that the banks now enjoy will progressively shrink making it more difficult for them to survive. As more and more intermediaries enter rural areas with greater level of technology, traditional banking business will come under pressure. In order to face the competitive pressures being exerted by the recently set up market savvy banks, banks which have extensive branch network in most of the existing and potential rich rural and semi-urban areas may have to provide such services.

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RURAL BANKING INITIATIVES: KISAN CREDIT CARD

Banking service is an among the essential services needed by rural consumers. Traditionally it is the village money lender who has been fulfilling this role . The interest rate charged by the money lender would be very high leading to chronic indebtedness of villagers. Credit at reasonable rates of interest is essential for the village economy to grow and enable them to join the Indian growth story. Farmers have their specific credit needs which are tied-up with their farming cycle and festivals and functions.

Over the years many initiatives have been started by banks and other institution's in which Micro Credit has been one which has received a lot of public attention.This post would not focus on micro finance , but would rather focus on the initiatives taken by public sector and private banks in mainstream banking. One initiative which created a lot of news a few years back was the introduction of low cost ATMs, but it's scaling-up is taking more time than anticipated. Both IIT B   and IIT M   had developed their prototypes, with the idea of providing connectivity through existing ICT initiative replacing cards by using biometric identification. Maybe the idea needs time before it can be scaled up.

One of the initiatives is considered to be a success is the Kisan Credit Card launched in 1998-99. In the initial five years of the programme itself the close to 435 million cards were issued with credit disbursals of Rs 1,11,459 Crore.The main feature of KCC that it was initially meant for timely short term credit needs of farmers and the credit delivery mechanism was simplified and made flexible . The farmers were provided crop loan, later on the scope was extended to term loans for agriculture and allied activities and a reasonable component to meet the consumption needs. Though the KCC has the word card in it, but it was essentially a passbook given to the villagers like as is the case with normal bank accounts.

Ensuring that the poor are able to save, smooth consumption, mitigate risks, invest, and build assets is critical to broad-based and equitable development. In the past decade, policymakers broadened their approach to financial inclusion from an almost exclusive reliance on expanding bank branches to innovating and taking advantage of new technology. The business correspondent model allows agents to operate on behalf of banks; as a result over 130,000 rural banking points are now available, compared to 2,000 in 1970.

Over 20 million kisan credit cards have been issued and index-based crop insurance has been scaled up in recent years. India is unique in having nearly five million self-help groups with loans from banks. And despite having recently run into significant problems, microfinance institutions have helped expand

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access. The biometric-based Aadhaar initiative of the Unique Identification Authority of India can bridge information gaps and facilitate financial inclusion.The RBI and the government have recently committed to increasing financial access to 350,000 villages by 2013, covering a significant part of the 100 million households currently lacking adequate access. However, as RBI and the government are aware, scaling up viably and with quality is not easy. We highlight a few of the challenges.

Leveraging existing distribution networks:

For "last mile" reach, banks have embarked on an effort to increase banking correspondents. But low transaction volumes are making viability difficult. Could scaling up tie-ups between banks and post offices and co-operatives, and allowing MFIs structured as non-bank finance companies to act as banking correspondents, help optimise capacity utilisation and lower transaction costs? Likely. However, the government's facilitation may be needed for such integration to take place. It is also possible that covering some villages with very small population may never be viable, and would require explicit or implicit subsidies.

Expanding market infrastructure:

Credit bureaus have recently expanded coverage of informal sector MFI clients and generate over 500,000 monthly credit reports assessing client indebtedness prior to new lending. Policymakers could facilitate getting rural banks and SHGs to also share information on their borrowers with credit bureaus. Better customer protection is also essential, particularly as delivery channels other than banks expand coverage.

Expanding products:

Recent efforts have helped create 90 million no-frills accounts, a creditable achievement as savings help manage risks, investments and cash flows. However, transaction volumes have been low. The experience with South Africa's mzansi (no-frills) accounts shows that linking up with brands that clients recognise and allowing the use of multiple outlets helps increase transactions.

Enabling a better microfinance sector:

SHGs and MFIs account for more small-borrower accounts than the entire banking system. Once enacted, the draft microfinance law will bring regulatory clarity and promote customer protection. 'Patient' capital can be mobilised by domestic development banks to help sustainable MFIs scale up.

For SHGs, ensuring quality of lending as scale grows is essential for their long-term sustainability. Also, banks typically price SHG loans at thin spreads over cost, leading to the plateau in disbursements. Pricing that reflect margins better

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could spur greater lending. India's progress in its financial inclusion efforts, given the numbers and innovation involved, are of great significance. The world is watching.

ICICI Bank: INNOVATIONS IN RURAL FINANCE

ICICI Bank, India's second largest banking institution, has discovered a large under-served market of potential customers-the 700 million mostly poor inhabitants of rural India. Furthermore, ICICI considers business strategies for accessing this market as critical to the future of the company. The bank also sees its efforts to develop viable commercial models and distribution systems as having an important social mission-that of enabling the poorest of the poor to become active and informed participants in socio-economic processes. In a relatively short period, the company has established a significant presence in rural India as a direct provider of financial services, helping to organize village self-help groups to whose members ICICI provides micro-loans. To extend its reach, the company has also established indirect distribution channels, becoming a lender to, and sometimes an investor in, some of the largest microfinance organizations in India and partnering with several ventures to offer financial services over their rapidly-growing networks of Internet kiosks.advantages

BUSINESS MODEL:

ICICI's direct channel is concentrated in the state of Tamil Nadu and stems from ICICI's purchase of the Bank of Madura in 2001. The Bank of Madura had been utilizing the self-help group (SHG) model, forming small groups of approximately 20 women from one village and providing training and a structured process that led to savings, banking, and lending activities. ICICI expanded the process after the merger. The women, typically with incomes below the poverty line, begin regular monthly savings that, after a time, constitutes a fund for emergency, short-term loans within the group. At the same time, the women are educated about banking concepts, and encouraged to assume more responsibility for their financial futures and take an interest in village affairs-bringing their collective strength to bear on their family and community life. After a year, the group can apply for loans, about $250 to each woman, for which the SHG is collectively responsible. Loans are then typically used to help start or expand a small business activity

The program under ICICI depends on the training and empowerment of women, in a three-tier system. The bank recruits experienced members of SHGs to

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become social service consultants, who form new self-help groups in neighboring villages. The bank also hires coordinators that oversee the activities of six consultants and 120 SHGs. A bank project manager is assigned the responsibility of work with the coordinators, training the self-help groups, and reviewing loan proposals. ICICI charges 18% interest on its micro-loans, higher than normal commercial rates but much lower than rates charged by traditional village money-lenders, and even lower than many non-profit microfinance institutions. Since 2001, the program has grown to more than 8,000 self-help groups and is continuing to expand rapidly.

In addition to working with SHGs, ICICI also works through indirect channels to catalyze microfinance institutions by providing them a line of credit to cover cash flow needs for the first three years of activity. ICICI has also made equity investments in some microfinance institutions. Additionally, ICICI has started to partner with enterprises that are building networks of Internet kiosks in rural areas. The company plans to offer savings and loan services through these networks by training the kiosk operator as a credit agent or by placing an inexpensive ATM at the kiosks. In some instances, ICICI is providing loans to farmers via enterprises such as ITC's e-Choupal network or EID Parry's sugar factories that enable the farmer to buy crop inputs and that are paid off when the farmer sells his crop. The company is also exploring new financial products, such as crop insurance (to protect farmers against drought), derivatives based on crop futures that could give farmers more financial flexibility.

ICICI BANK TO INCREASE FOCUS ON RURAL AREAS:

The country’s largest private sector lender ICICI Bank plans to increase its presence in rural and semi-urban areas.

“As we focus on enhancing our capabilities to serve our corporate and retail customers across India’s towns and cities, it is also our endeavour to proactively reach out to rural India and to the vast numbers of our people who do not have access to formal financial services,” managing director and CEO Chanda Kochhar said in the bank’s annual report.

The focus on rural areas ties in with the bank’s strategy to use its branch network to source most of its loans, rather than direct sales agents. Its direct agriculture advances amounted to Rs 17,329 crore at the end of March 2010. The gross non-performing assets of agriculture and allied services stood at 5.62 per cent of advances of this sector.The bank added more than 500 branches last year to take its branch network to about 2,000.

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The bank’s proposed merger with Bank of Rajasthan will also give a fillip to its plans to increase focus on rural and semi-urban areas. BoR has a total of 463 branches of which 40 per cent are located in rural and semi-urban areas.

In 2005-06, ICICI Bank had stepped up its focus on rural areas. However, it suffered heavy losses on this front and had to press the pause button on its rural foray. In 2006, the bank was cheated of Rs 200 crore at the central and state government warehouses in Kolhapur district, where it had not engaged third-party collateral managers. In 2006-07, ICICI Bank made a provision of Rs 93 crore for losses from frauds pertaining to the warehouse receipt-based financing for agricultural products.

The bank shrunk its rural loan book by 50 per cent to Rs 10,000 crore at the end of September 2007 from Rs 20,000 crore at the end of March 2007.

The bank has undertaken several initiatives to meet the needs of the rural market, including offering credit through micro-finance institutions, micro-insurance and micro-investment products. It is extending financial support in the rural market, including farmers, traders, commission agents, small processors and other medium- and large agri-corporates. The bank had about four million micro-finance borrowers with an outstanding portfolio of Rs. 3,179 crore as of March 31, 2010.

RURAL INSURANCE: product offer by ICICI bank

At ICICI Lombard, investing in rural markets is seen as a keen social responsibility. The protection provided to the rural class is specified and customized according to their needs. Through a multiple channel system we not only provide agricultural protection but also health, motor and other covers.

Health InsuranceWe provide protection to the health of the rural folk through our comprehensive Family Health Insurance plan, which covers the entire family in one policy.

Home InsuranceOur comprehensive policy protects much more than just the home. Through our network channels, we ensure that the houses in the rural sector are insured against natural and other perils.

Tractor Insurance

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Tractors are one of the most precious assets to the rural folks. Our comprehensive package policy covers not just own damage but also third party liability and personal accident.

Weather InsuranceWeather Insurance is an insurance cover against losses incurred due to uncertainties in climatic conditions. It can be used to hedge any vulnerability of assets or any other damage incurred due to erratic and irregular weather.

Shop InsuranceShop Insurance is a comprehensive policy that covers both the structure and the contents of a shop and protects it against any financial loss in case of an unfortunate incident. 

ICICI STORMING THE MARKET:

Liabilities:

Current a/c for agriculture traders Farmers savings a/c Rural savings a/c Gold coins High value insurance policy for rural sector

Assets:

PRODUCTS OBJECTIVE

Short term loansTo take care of short –term needs of farmerloan amount: up to rs. 1 lakh depending on the crop Tenure:1 year.

Livelihood-linked loans

To finance the purchase of buffaloes,three wheelers, small kirana shops etc. Loan amount: Rs. 1 lakhTenure : 1 year

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Micro enterprise loans

To finance small business start ups,small highway hotels, etc,Loan amount: upto rs. 25 lakhTenure :2-3 years.

Crop loansTo finance sowing operations,purchase of pesticides,fertilizers,etc.Loan amount: upto rs. 10 lakhTenure : 1 year

Farm equipmentTo finance the purchase of tractors,tillers,etc,Loan amount:upto rs. 5 lakhTenure:5-9 year

ICICI PLANS NEW PRODUCTS FOR COUNTRYSIDE:

ICICI Bank Ltd., India’s largest private sector by assets, is getting ready to roll out a variety of financial products for villagers and farmers in rural India. From basic bank accounts to subsidy transfers to basic insurance for farm produce, the bank expects to offer these products in the next six months.

The bank currently offers a basic bank account—known as a no-frills account—in 18 states and has three million such account holders. These provide it with a ready market in which to sell some of these new products.

The concept of a no-frills account was first suggested by the Reserve Bank of India in 2005, when it directed all banks to offer this option of a basic account to villagers. Most banks did the bare minimum on that—even today less than half of all Indians have a bank account.

Last year, the RBI asked all banks to submit a plan for the inclusion of more Indians into the formal financial system that was approved by their boards. This, said RBI governor D. Subbarao, in a speech at the spring meeting of the International Institute of Finance in New Delhi earlier this week, would create a sense of ownership of the problem among banks.

ICICI, which is listed in New York, says it is readying this rural push ahead of others.“Over a period of time all banks will have to look at rural business,” said Mrs. Kochhar. “We are looking at a mix of channels to reach out to farmers including basic accounts, transfer of subsidies, some lending.”

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Early this year the bank announced a tie-up with Vodafone Essar to eventually offer financial products in villages by mobile phone.

ICICI, which had aggressively targeted retail customers during most of the past decade, cut that business back during the recession after it saw a huge number of bad loans in its portfolio of unsecured, personal and credit card loans. For the past two years, its retail loan portfolio has been rising more slowly than at other banks, but in an earnings call last month, Mrs. Kochhar, said the bank would keep pace with the industry in the fiscal year starting in April.

DEVELOPMENT BENEFIT:

The self-help groups in ICICI's direct service model build self-confidence, group solidarity, and governance skills while also instilling the habit of regular saving. Some SHGs have become active in village politics, in some cases even overturning a ban on widows being able to remarry, debating with local politicians on the digging of a well, or getting a woman elected as village president. Some self-help groups have developed their own welfare funds that act as a kind of life insurance for group members. A study of some 220 SHGs by the National Bank for Agriculture and Rural Development found that micro-lending had positive impact on income levels, self confidence, communications skills, and enhanced participation in household decision-making, and were correlated with a decline such social problems as drinking and domestic violence.

KEY LESSONS:

By developing profitable approaches to serving poor rural communities, ICICI is expanding its potential market and developing what it sees as its engine of growth for the future. But to do it successfully, it is also catalyzing self-help groups that create powerful social advantages and partnering with both microfinance institutions and business enterprises that are providing financial and other services to rural communities. By combining an explicit social commitment, a focus on innovation, and an insistence on profitable business practices, ICICI is well positioned for a leadership role in India's financial market.

CONCLUSION

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There are 185 million bankable adults in rural India who are unbanked because of access and usage issues. This presents a significant opportunity for commercial banks.

However, to reach this market and subsequently build an inclusive financial system, there must be a coordinated and concerted effort by the three key stakeholders: the Government of India, the Reserve Bank of India and the commercial banks.

In addition, a partnership between banks and business correspondents, and collaboration amongst banks is critical.

Furthermore, banks should tailor their product and service mix to meet ruralneeds, and adapt their delivery models to ensure commercial viability of their rural banking operations.

BIBLIOGRAPHY

1. www.cia.gov2. National Sample Survey Organization (NSSO), Household Consumer Expenditure in India (2006)3. Census 20064. Access to and Usage of Financial Services, World Bank 20085. RFAS, 2008, World Bank & NCAER6. Reserve Bank of India, www.rbi.org.in7. Access to Financial Services by Stijin Claessens, World Bank 20058. Rutherford Stuart, “The Poor and their Money,” January 20009. www.microsave-africa.com

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10. RFAS 2008, World Bank11. Bharat Nirman is a four year business plan of the Government of India to improve rural infrastructure12. National Sample Survey Organization (NSSO) 2007

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