Rural Banking in India
Rural
development occupies a significant place in the overall economic development of
the country and Darling’s statement (1925) that “the Indian peasant is born in
debt, lives in debt and dies in debt,” still remains true for the great
majority of working households(55-60 per cent of India’s population) in the
countryside.
Three
phases of rural banking policy since 1969
1st
phase following
the nationalization of India’s 14 major commercial banks in1969—The declared
objectives of the new policy, known as “social and development banking”, were
the following:
·
To
provide banking services in previously unbanked or under-banked rural areas;
·
To
provide substantial credit to specific activities including agriculture and
cottage industries; and
·
To
provide credit to certain disadvantaged groups such as, for example, Dalit
households.
2nd
phase
began in the late 1970s and early 1980s:
·
Two
major instruments of official anti-poverty policy were developed:
loans-cum-subsidy schemes targeted at the rural poor and state-sponsored rural
employment schemes (Integrated Rural Development Programme (IRDP))
·
An
expansion and consolidation of the institutional infrastructure for rural
banking
3rd
phase—Post
Liberalization:
·
Redistributive
objectives “should use the instrumentality of the fiscal rather than the credit
system”
·
Directed
credit programmes should be phased out
·
Interest
rates be deregulated
·
Capital
adequacy norms are changed (to “compete with banks globally”)
·
Branch
licensing policy be revoked
·
A
new institutional structure that is “market driven and based on profitability”
be created,
·
Part
played by Private Indian and foreign banks be enlarged
Challenges
facing Indian Rural Banking—
Priority
Sector Lending:
·
Priority
sectors are broadly taken as those sectors of the economy which in the absence
of inclusion in the priority sector categories would not get timely and
adequate finance.
·
Typically,
these are small loans to small and marginal farmers for agriculture and allied
activities, loans to Micro and Small Enterprises, loans for small housing
projects, education loans and other small loans to people with low income
levels
·
The
major challenge is to bring all farmers into the institutional credit
framework—
Need to
make priority sector lending competitive and commercially viable
·
By
reorienting the approach of banks to look at priority sector areas as the
challenges in priority sector can be overcome only if banks consider priority
sector lending as part of normal business operations of the banks and not as an
obligation.
·
Rural
untapped market offers a big business opportunity to the banks and banks need
to innovate new products which cater to the needs of farmers, weaker sections
and other vulnerable sections of the society, develop new delivery channels and
embrace technological developments which will reduce the delivery costs— a viable business proposition
·
Need
to lay emphasis on direct delivery of credit to the poor beneficiaries i.e.
without the involvement of intermediaries, which will ensure better management
of risks and also reduction in transaction, delivery and administrative costs
for these loans, which being essentially small ticket, low value high volume
loans, do generate profits translating to a stable low cost deposit stream for
banks and to the fortune at the bottom of the pyramid.
Regional
Rural Banks:
Regional
Rural Banks (RRBs) were established in the year 1976 as a low cost financial
intermediation structure in the rural areas to ensure sufficient flow of
institutional credit for agriculture and other rural sectors— Narasimham
committee
·
RRBs
were expected to have the local feel and familiarity of the cooperative banks
with the managerial expertise of the commercial banks.
·
RRBs
are jointly owned by GoI, the concerned State Government and Sponsor Banks, the
issued capital of a RRB is shared by the owners in the proportion of 50
percent, 15 percent and 35 percent respectively
·
RRBs
operate under the control of two institutions, the National Agricultural Bank
and Rural Development (NABARD) and Reserve Bank of India (RBI)
Financial
Inclusion:
Financial
Inclusion (FI) is the process of ensuring access to appropriate financial
products and services needed by all sections of the society in general and
vulnerable groups such as weaker sections and low income groups in particular
at an affordable cost in a fair and transparent manner by mainstream institutional
players.
2006:
Reserve
Bank permitted banks to utilise the services of non-governmental organizations
(NGOs), micro-finance institutions (other than Non-Banking Financial Companies)
and other civil society organisations as intermediaries in providing financial
and banking services through the use of business facilitator and business
correspondent (BC) models. The BC model allows banks to do “cash in-cash out”
transactions at a location much closer to the rural population, thus addressing
the last mile problem.
Combination
of strategies— ranging
from relaxation of regulatory guidelines, provision of new products and other
supportive measures to achieve sustainable and scalable Financial Inclusion; as
well as close monitoring
Issues
being faced—
Not
treated as an Efficient Business Model:
·
Banks
are pursuing FI as a regulatory requirement rather than treating it as a
business model.
·
Banks
have to realize that the bankability of the poor holds a major opportunity for
the banking sector in developing a stable retail deposit base and in curbing
volatility in earnings with the help of a diversified asset portfolio and
therefore, Financial Inclusion programmes should be implemented on commercial
lines as a sustainable and viable business model
·
Ensure
that poor people who deserve credit are provided access to timely and adequate
credit in a non-exploitative manner
·
Reasons—
- Higher
non-performing loans in rural areas because rural households
have irregular income and expenditure patterns—compounded by the
dependence of the rural economy on monsoons, and loan waivers driven by
political agendas
- 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
Transaction Cost: due to small loan sizes, the high frequency of
transactions, the large geographical spread, the heterogeneity of
borrowers, and widespread illiteracy
- Higher
risk of credit: Rural households may have highly irregular and
volatile income streams. Irregular wage labour and the sale of
agricultural products are the two main sources of income for rural
households.
- Information
Asymmetry:
Since many rural people do not have bank accounts, there is a lack of
information on customer behaviour in rural India
Government’s
policies:
·
High
fiscal deficits and statutory pre-emptions imposed on banks
·
Persisting
interest rate restrictions—“floors” on short-term deposit rates and lending
rates, “caps” on small loans
·
Government’s
domination of and interference in rural banks, particularly RRBs and
cooperative banks, further distort bankers’ incentives;
·
Inefficiencies
arising from weak governance & poor management,
·
Weak
regulatory standards & Lack of supervision
BC
Model – Viability issues:
·
Scarcity
of staff
·
Inadequate
commissions
·
Accounts
opened have remained non-operational
Infrastructure:
·
Technology
issues: Non-availability of physical and digital connectivity as well as low
rural television-density
·
Lack
of Bank branches—Limited delivery capability as ATM penetration is low and
other channels such as Phone and Internet Banking are non-existent
·
Poor
physical and social infrastructure—unpaved roads and limited access to modern
transportation
Small
Rural Borrowers Find Rural Banks Unattractive:
·
Rural
banks do not provide flexible products and services to meet the income and
expenditure patterns of small rural borrowers
·
The
transaction costs of dealing with formal banks are high—Procedures for opening
an account or seeking a loan are cumbersome and costly (with high rejection
rates), and, clients often have to pay hefty bribes (ranging from 10 to 20
percent of the loan amount) to access loans. This makes the ultimate cost to
borrowers very high (despite interest “caps”).
·
Banks
demand collateral, which poor rural borrowers lack — Land, remains the
predominant form of collateral. But, poor households very often do not have
clear titles to their land, and in any case, this collateral is seldom
executed, so it is just another cost with little benefit in practice
Financial
Literacy:
Financial
Inclusion and Financial Literacy are two sides of the equation. Financial Inclusion
acts from supply side by providing financial market/services that people demand
whereas Financial Literacy stimulates the demand side by making people aware of
what they can demand. Therefore, access to financial services and Financial
Education must happen simultaneously and must be a continuous, an ongoing
process and must target all sections of the population.
Importance: the low levels of
literacy and the large section of the population still out of the formal
financial system
Need
to-
·
Evolve
an appropriate Business Model & an Efficient Delivery Mechanism
·
Create
awareness of basic financial products through dissemination of simple messages
of financial prudence in vernacular language—activities included publication of
comic books on banking and RBI; games on Financial Education; arranging
school/college visits for creating financial awareness; participation in
exhibitions/fairs/melas at the State & District levels; conducting essay
competitions and quizzes in schools to create awareness about banking and RBI;
outreach programmes undertaken by theTop Management and Regional Offices; RBI’s
Young Scholars Scheme, etc.
Education:
Why—For economic
development and raising overall living standards
·
Facilitate
economically weaker sections of the society to avail educational loans from
scheduled banks with modified easier norms
·
Loans
for education should be seen as an investment for economic development and
prosperity, since knowledge and information would be the principal driving
force for economic growth in the coming years
New
Approaches and Products to Improve Rural Access to Finance in India:
SHG-Bank
Linkage Program—championed by the National Bank for Agriculture and
Rural Development (NABARD).
Have
targeted poorer segments of the rural population in an effective manner,
reducing the vulnerability of clients. But outreach, volume of lending, and
average loan size remain limited.
Key
challenges facing the initiative are:
(a)
Inadequate attention to group quality could jeopardize longer-term credibility and
sustainability.
(b)
Capacity constraints and the cost of group formation
(c)
State-owned banks have been lending to SHGs at higher interest rates
Microfinance
Institutions—
Like SIDBI
·
Limited
outreach and scale of Indian MFIs reflects the absence of an enabling policy
alongside a legal and regulatory framework, hindering the ability of MFIs to
mobilize member deposits, equity, and raise debt from external sources.
·
MFIs
are also constrained by the lack of adequate capacity and skills in financial
control and management, management information systems (MIS), new product
design, etc.
Partnerships
between Private Banks, Micro-financiers, and Service Providers—
·
Pursuing
innovative approaches to microfinance—as a potential business and not merely as
a social or priority sector lending obligation.
·
Key
innovations include a pilot scheme by ICICI Bank that uses NGOs or MFIs,
traders, or local brokers (who are close to the farmer by the nature of their
business) as intermediaries/“service providers” for originating, managing, and
collecting loans to groups of small and marginal farmers.
·
Banks
are also experimenting with an approach now termed the “Integrated Agricultural
Service Provider” (IASP) approach, whereby the bank identifiesan IASP—one that
has a good relationship with farmers and which provides genuine and timely
information through extension services— and enters into a tripartite agreement
with the IASP and the output buyer. This reduces transaction costs and the risk
exposure of all parties, and, therefore, presents a potentially low-cost way of
serving the rural poor engaged in marginal or small farming.
The
Kissan Credit Card—
Reducing
both borrowers’ transaction costs as well as delays in accessing and renewing
crop loans; but the success of the KCC scheme has been uneven
Key
to success
·
Develop
appropriate products for this segment of customers—Appropriate products and
fair lending rates would automatically eliminate the moneylender
·
Shortening
of turn-around time—Interventions in some sectors:
Wheat—
·
Issuance
of a smart card to procurement agents
·
Installation
of an electronic data machine (EDM) at the mandi backed by the e-payment system
RuPay
·
Quick
generation of MIS and reports
·
E-approvals
by the procurement agency
Milk—
Leveraging
the technology of Point of Sale (PoS) terminals for small operations and
full-scale ATMs for larger dairy societies— the process enables the
instantaneous capture of milk quantity and quality data, converting them into
an accounting entry that credits the farmer’s account, and a micro-ATM or cash
dispenser is made available for farmers to draw money from
·
Digitisation of banking: will help access a
wider range of customers in rural India
-Digital
applications (wallets, mobile-to-mobile payments) are adding to transaction
traffic
·
Inculcate saving & banking habit: Critical to conduct
financial literacy and credit counselling programmes, offer skills training to
enhance income generation, form self-help groups and fund these groups for
income-generating activities thereby enabling the delivery of viable credit to
the rural poor in a sustainable manner
