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

1

DECLARATION

I hereby declare that the project entitled “Rural Banking in India” which is being submitted
in partial fulfilment of the requirement for the award of the Degree of Master in Business
Administration to “SIKKIM MANIPAL UNIVERSITY, SIKKIM” is an authentic record of our
own work done under the guidance of Mr.Atul Dubey, Department of Management, SIKKIM
MANIPAL UNIVERSITY, SIKKIM.
The matter reported in this project has not been submitted earlier for the award of any other
degree.

Mr. Atul Dubey
HOD OF DEPARTMENT

Varun Trichal
STUDENT NAME

2

ACKNOWLEDGEMENT

I sincerely express indebtedness to esteemed and revered guide “Ms. Deepti Tarani”, for her
invaluable guidance, supervision and encouragement throughout the work. Without her kind
patronage and guidance, the project would not have taken shape.

I take this opportunity to express deep sense of gratitude to “Mr. Atul Dubey”, Head of
Management Studies, for his encouragement and kind approval. We would like to express
our sincere regards to him for advice and counseling from time to time.

I owe sincere thanks to all the lecturers in “Rural Banking in India” for their advice and
counseling time to time.

Varun Trichal

3

BONAFIDE CERTIFICATE Certified that this Project Report titled “Rural Banking in India” is the Bonafied work Of “Varun Trichal” who carried out the project work under my supervision. SIGNATURE: SIGNATURE: HEAD OF THE DEPARTMENT IN CHARGE FACULTY 4 .

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. investigations and improvements since 1955.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. Latest magnum opus on the subject is the National Agricultural Credit Review report 2000.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. 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.S. Financial liberalization after 1991 decimated the formal system of institutional credit in rural India. It was felt that project lending will revolutionize rural credit. Various approaches have been adopted for improving rural credit from time to time. initiatives. the “bottom of the pyramid” segments will be the growth drivers of the future – this is certainly being 5 . Rural credit has been a laboratory for various policies. To echo the thoughts of C. Prahalad.K. The Expert Committee on Rural Credit (Chairman: Professor V.Vyas) submitted its report in 2002.ABSTRACT Summary of Project Rural banking in India has been the subject of study Survey Committee Report in 1954. It represented a clear and explicit reversal of the policy of social and development banking. literally thousands of reports have examined and investigated the problems relating to the credit delivery for agriculture and rural area. such as it was.

which are collected a fresh and for the first time happen to be original in character. 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. 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. 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. The primary data are those. which are concerned with describing the character of a group. RRBs have also performed better in terms of providing loans to small and retail traders and petty non-farm rural activities. Descriptive research design studies are those studies. including to agriculture. and reaffirm the part played by the credit system in redistribution and poverty alleviation. it must reaffirm the commitment of the state to the policy of social and development banking. It has collected through the books. 6 . journals & Internet. The study was based on questionnaire method. Research in common parlance refers to a search for knowledge.borne out by the market revolution that is taking place in India’s villages. 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. RRBs' performance in respect of some important indicators was certainly better than that of commercial banks or even cooperatives. The researcher makes a plan of the study his research work. Secondary data are those which have already been collected by someone else and which have already been passed through the stratified process. The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) in meeting the needs of rural areas. RRBs should really be strengthened and provided with more resources with which they can undertake more of these important activities.

The number of rural branches should be increased rather than reduced. there should be greater coordination between district planning authorities. and most of all. 7 . 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. they should be encouraged to develop more sophisticated methods of credit delivery to meet the changing needs of farming.

 Kothari. (1997):’Marketing Management’ Kayali Publisher. Philip. New York: Free Press  Chatterjee.D. New Delhi.  Business World Newspapers  Economic Times  The Hindu  Times of India 8 . Rajan. Aaker. V. Ltd. Kaas and Satpathy no.D(2002):’Marketing Research’.N. New Delhi. pp 17  Saxena. C.. New Delhi  Sontakki. (2003):’Marketing Management’ Tata Mcgraw-Hill Publishing Company Limited. New Delhi Magazines:  Business Today  Business Week. New Delhi  Sharma. 1.. (2002): 'Revving up auto branding'. Vishwa Publication.REFERENCE Books:  Aaker (1991) Building Strong Brands. (2001) Descriptive Research: Marketing Research. Sultan Chand Sons.  David. C.  Kotler. Seventh Edition. A.. (1999):’Marketing Management’ Prentice Hall of India Pvt.Kumar & George S. Day. Jauchius. McKinsey Quarterly.R (2001):’Research Methodology’.

sector? □ strongly agree □ Agree □ Disagree □ strongly disagree □ can’t say 9 . 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.QUESTIONNAIRE NAME – SEX - AGE – DESIGNATION – Dear sir/madam.

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 NGO’s to development Knowledge marketing of the bank □ Yes □ No 10 .

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

INTRODUCTION 12 .

For achieving financial inclusion and economic growth. there is also a need to provide market information. Likewise.One more High Power Committee headed by Professor Vyas set up by the Reserve Bank of India recently to review and advice on improving credit delivery to agriculture has also given its report. The criticality of this need may be seen from the fact that even with concerted and extensive attempts to meet the credit needs of the farmers for agricultural operations etc. there is an urgent need to deliver citizen services to them in a cost effective way with assured quality. 2. 4. informal agencies including money lenders are currently providing substantial portion of the total credit to this sector. Against this background. Reducing transaction cost to make the services affordable. literally thousands of reports have examined and investigated the problems relating to the credit delivery for agriculture and rural area.INTRODUCTION Rural banking in India has been the subject of study Survey Committee Report in 1954. As the majority of the Indian population lives in rural areas.Vyas) submitted its report in 2002. Latest magnum opus on the subject is the National Agricultural Credit Review report 2000. extension services. 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. 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. 3. 13 . This involves mainly the following: 1. the ICT can play an important role by increasing effective access and improving delivery and governance in banking services. Reduction in delays. Improving the quality of services available. Enabling the ready access at the place of the villagers.. The Expert Committee on Rural Credit (Chairman: Professor V. 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. Besides. marketing support and government and other public services to the people in a cost-effective manner.S.

secondly. Financial liberalization is a crucial component of the programmes of economic reforms that are being imposed on the people of less-developed countries. housing. the exploitation of the rural masses in the credit market is one of the most pervasive and persistent features of rural life in India. particularly those vulnerable to what appear to others to be minor shocks with respect to income and expenditure. policies to dismantle the public sector and foster private banking. There are many components of the package of reforms associated with financial liberalization in India.The Rural Economy Financial liberalization after 1991 decimated the formal system of institutional credit in rural India. The demand that financial markets be liberalized quickly is high on the agenda of imperialism. These include expenditure on food. Chandrasekhar and Ghosh (2002) classify the policies of financial liberalization in India into three types: first. Rural households. compulsory and universal school education. In the Indian context. and on the rural poor in particular. It represented a clear and explicit reversal of the policy of social and development banking. policies to curtail government intervention in the allocation of credit. Agricultural and non-agricultural activities in rural areas typically are seasonal. 14 . advocates of economic “reform” see financial liberalization as being at the core of structural adjustment. polices to lower capital controls on the Indian banking system. and thirdly. need credit as an insurance against risk. a weak system for the public distribution of food and very few general social security programmes. and that despite major structural changes in credit institutions and forms of rural credit in the post-Independence period. health and education. such as it was. another important purpose of borrowing is to meet expenses on a variety of social obligations and rituals. This paper examines the impact of changes in banking policy and structure on the rural economy. In a society that has no law of free. rural households need credit for different types of consumption. It is well known that the burden of indebtedness in rural India is very great. Rural households need credit for a variety of reasons. no arrangements for free and universal preventive and curative health care. and households need credit to smoothen out seasonal fluctuations in earnings and expenditure. They need credit to meet short-term requirements of working capital and for long-term investment in agriculture and other income-bearing activities. 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. in India as well.

caste and gender in the countryside. 288). the declared objectives of public policy with regard to rural credit in the post-Independence period were.If these credit needs of the poor are to be met. is made available to as large a segment of the rural population as possible” (Rangarajan 1996. the expansion of the institutional structure of formal-sector lending institutions. First. The policy instruments to achieve these objectives were to be. in fact. people of the oppressed castes and tribes. has been the informal sector. and thirdly. directed lending. 15 . income-poor households. the terms and conditions attached to these loans have given rise to an elaborate structure of coercion – economic and extra-economic – in the countryside. provide credit at reasonable rates of interest and provide loans that are unencumbered by extra-economic provisions and obligations. “to ensure that sufficient and timely credit. first. rural credit markets in India themselves have been very imperfect and fragmented. including longterm and short-term credit and large-scale and small-scale loans to rural households. p. rural households need access to credit institutions that provide them a range of financial services. Rural credit policy in India envisaged the provision of a range of credit services. Given the issues involved. Secondly. the major source of credit to rural households. in the words of a former Governor of the Reserve Bank of India. recognized. Formal sector credit needs specially to reach backward areas.). the distribution of formal sector credit has been unequal. the supply of formal sector credit to the countryside as a whole has been inadequate. Historically. particularly with respect to region and class. Further. concessional or subsidized credit (ibid. as the foregoing suggests. Thirdly. particularly incomepoor working households. 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. there have been four major problems with respect to the supply of credit to the Indian countryside. Fourthly. Informal sector loans typically are advanced at very high rates of interest. in official evaluations and scholarship since the end of the nineteenth century. secondly. at reasonable rates of interest. and women. That these constitute what may be called the “problem of rural credit” has been well recognized.

BANKING POLICY IN RURAL INDIA 16 .

and small-scale and cottage industries. in the countryside. with commercial banks. (ii) to provide substantial credit to specific activities.5 It was only after 1969 that a multi-institutional approach to credit provision in the countryside became policy. Advances to the countryside increased 17 . Rural credit was an important component of the ‘green revolution’ package. the countryside was not considered to be the problem of commercial banks. and one of the objectives of the nationalization of banks was for the state to gain access to new liquidity. An important feature of the policy of social and development banking was that it recast completely the role of commercial banks in rural banking. Specifically. and setting guidelines for the sectoral allocation of credit. for example. The first was the period following the nationalization of India’s 14 major commercial banks in 1969. three phases in banking policy vis-à-vis the Indian countryside.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.” namely agriculture and allied activities. including agriculture and cottage industries. 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. imposing ceilings on interest rates. a target of 40 per cent of advances for the “priority sectors. These included setting targets for the expansion of rural branches.what came to be known as “social and development banking” . the first post-nationalization phase of expansion in rural banking saw a substantial growth in credit advances for agriculture. The declared objectives of the new policy with respect to rural banking . particularly among rich farmers.were (i) to provide banking services in previously unbanked or under-banked rural areas. Regional Rural Banks and cooperative institutions establishing wide geographical and functional reach in the Indian countryside. and (iii) to provide credit to certain disadvantaged groups such as. Prior to 1969. broadly speaking. was set for commercial banks. This was also the early phase of the ‘green revolution’ in rural India. The Reserve Bank of India (RBI) issued specific directives with respect to social and development banking.

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. and covered 476 districts by 1987 The second phase. although they were. and a period when the major instruments of official anti-poverty policy were programmes for the creation of employment. In 1975. as is well recognized. Nevertheless. p 22).” The most important new scheme of this phase was. 8 Among the many reasons for this failure were the absence of agrarian reform and decentralized institutions of democratic government. Thus began a period of directed credit. as was the green revolution itself. of course. were wheat and rice. which were promoted by the Government of India. a scheme for the creation of productive income-bearing assets among the poor through the allocation of subsidized credit. and the application of the new technologies was primarily in the irrigated areas of the north-west and south of India. the Government established by ordinance and then legislation a new network of rural financial institutions called the Regional Rural Banks (RRBs). the inadequacy of public infrastructure and public provisioning of support services and the persistence of employment-insecurity and poverty in rural society. during which credit was directed towards “the weaker sections. There is much writing on the failure of IRDP to create long-term incomebearing assets in the hands of asset-poor rural households. Two strategies for employment generation were envisaged. These were created on the basis of recommendations by a working group on commercial credit. the Integrated Rural Development Programme or IRDP.substantially. the IRDP strategy did lead to a significant transfer of funds to the rural poor. also called the Narasimham Committee.7 The number of such banks expanded rapidly. 2004. 18 . biased in respect of regions. was a period when the rhetoric of land reform was finally discarded by the ruling classes themselves.6 The two main crops that gained from the green revolution. and were intended to “combine the cooperatives’ local feel and familiarity with the business acumen of commercial banks” (Jagan Mohan. State governments and commercial banks. with the benefits concentrated among the richer classes of cultivators. which began in the late 1970s and early 1980s. The IRDP was initiated in 1978-79 as a pilot project and extended to all rural blocks of the country in 1980. crops and classes.

by the same person who recommended the establishment of Regional Rural Banks. accordingly. and that the part played by private Indian and foreign banks be enlarged. before the 1990s. that “directed credit programmes should be phased out. 19 . the report called for “a vibrant and competitive financial system…to sustain the ongoing reform in the structural aspects of the real economy. there was “an unprecedented growth of commercial banking in terms of both geographical spread and functional reach” The third and current phase. particularly after bank nationalization. as Shetty points out. the banking system was open to much criticism. were not attempts to bring rural banking closer to the poor. however.” wrote a noted scholar of India’s banking system. its insensitivity to the social and economic contexts in which it functioned. that a new institutional structure that is “market-driven and based on profitability” be created.” It also recommended that interest rates be deregulated. particularly of its bureaucratic failures. was unparalleled in financial history” (Shetty 1997.” The Committee said that redistributive objectives “should use the instrumentality of the fiscal rather than the credit system” and. which was chaired. After bank nationalization. ironically. Narasimham (RBI. In its very first paragraph. 1991). Let us make it clear that. that capital adequacy norms be changed (to “compete with banks globally”). but to cut it back altogether and throw the entire structure of social and development banking overboard. M. The reforms proposed in 1991. which began in 1991. The policy objectives of this phase are encapsulated in the Report of the Committee on the Financial System. that branch licensing policy be revoked. 253). “would admit that what the country achieved in the area of financial sector development before the present reform process began. is that of liberalization.The second phase also involved an expansion and consolidation of the institutional infrastructure of rural banking. and class and regional inequalities in lending patterns. “Even ardent critics of India’s growth strategy.

DISTRIBUTION CHANNEL OF RURAL BANKING 20 .

another breed of institutions called Local Area Banks. 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 first major strategy adopted for improving rural credit delivery was the institutionalization of the credit delivery system with the cooperative as the primary channels. initiatives.helpgroups / NGOs and the issue of Kisan Credit Cards are among the recent developments in the area of rural lending in India. investigations and improvements since 1955.Multi-agency Approach to Rural Lending Rural credit has been a laboratory for various policies. The multi-agency approach to the rural credit delivery emerged with the induction of the commercial banks into the scene. 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. it has been sustained through cross subsidization.Distribution Channel of Rural Banking . The National Agricultural Credit Review Committee (NACRC) headed by Prof. under the Lead Bank Scheme. capital costs and the current expenses are of the rural branches. 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. came on the scene. The two elements of the costs namely. A multi-agency credit delivery system is in place for financing credit-based development activities. The Lead Bank Scheme Information System and Service Area Monitoring Information System (SAMIS) have also been operationalised using monitoring arrangements. Rural bank branches are such that the transaction in the rural area cannot support them. The micro-finance and linkage of the banks to the self. 21 . In 1979. In 1988. specialized institutions called Regional Rural Banks and subsequently. 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 Service Area Approach was also introduced as a strategy for improving the quality of rural lending.

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. The National Agricultural Credit Review Committee Report documents the history.6 percent in 1985 to 9. the systems repeatedly revamped several times on the basis of multiple committees are also in place. 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.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 has been a matter of concern that the multi. 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. 22 . it is clear that the rural credit delivery system is not performing efficiently and in a cost effective manner. The value addition to the GDP by the agriculture has been low as compared to the industry sector and the services sector. development and the status of the various important issues involved in rural credit delivery in India in great detail. In spite of this.8 percent in 2002. infrastructure gaps. some of the key concerns like the end-use of credit. Despite that. i The institutions are in place. Yet. the delivery of credit for agriculture and rural development still remains unsatisfactory. increasing the speed of delivery and also increasing the value addition in the service delivery and improving the accountability. i The share of bank credit for agriculture has declined from 17. For example. The income disparities as reflected in the poverty are still a matter of serious concern. this area remains a problem defying adequate solution. We propose Model for using Information Technology for improving rural credit delivery system by reducing the cost. and the high costs of lending have been repeatedly attended to. 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.

It was felt that project lending will revolutionize rural credit.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. the involvement of NGOs and voluntary agencies. Accordingly. rather the exclusive channel. 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. employment and growth. 23 . the agricultural credit delivery still remains a problem. the cooperatives were positioned as the primary. they themselves require assistance rather than being of any assistance to the farmers. With considerable enthusiasm followed by disappointment. The speed of loan processing should be faster and the cost of delivery should be reduced. 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]. the family approach and entrepreneurial development programme. by and large. Despite the large number of initiatives.Various approaches have been adopted for improving rural credit from time to time. Credit off-take and its quality have to increase to facilitate rural capital formation. This was followed by area approach and extension. the rural credit delivery system still requires improvements. Despite concerted efforts by a multitude of agencies. for rural credit delivery for about two decades and the latest reports on the cooperatives is that. the social groups and the use of self-help-groups are all being tried out for channeling adequate credit to agriculture and rural sectors. 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. the group-lending.

Marketing strategies of rural banking players in India 24 .

The Narasimham committee on rural credit recommended the establishment of Regional Rural Banks (RRBs) in meeting the needs of rural areas.To echo the thoughts of C. Celent estimates that urban mobile banking subscribers will reach 65 million by 2012. by 2012. Celent explains the mobile banking ecosystem in India and looks at the trends driving the growth in its urban and rural subsegments. thereby adding a revenue stream. mobile banking is an enabling fifth channel.K. In both segments. over 60 million rural users will be beneficiaries of mobile banking through business correspondence. Nontransactional users will remain the majority in India because they will continue to use online banking and other payment mechanisms. Regulatory changes are also a big driver. In India’s urban segment. The report looks at the prospects of mobile banking from both a regulatory perspective and an industry perspective. 25 . Indian mobile banking has two major segments: the urban segment and the rural segment. Government-to-person (G2P) payments will be the major growth driver for rural mobile banking. Celent believes that. mobile banking is a primary mode of financial inclusion. In a new report. the “bottom of the pyramid” segments will be the growth drivers of the future – this is certainly being borne out by the market revolution that is taking place in India’s villages. Dual Strategy for Rural and Urban Segments. The rural mobile segment represents a huge opportunity to bank the unbanked population. Prahalad. Mobile Banking in India. the two fundamental factors affecting the growth of mobile banking are regulations and technology. and in the rural segment.

recent relaxation of payment norms by RBI has presented a huge opportunity for this segment. and two of the four members were. the objective was stated to be the extension of banking facilities on a large scale. especially for refinancing of credit to agriculture. became an important instrument of extending rural credit to supplement the efforts of cooperative institutions. from Andhra Pradesh. In the first stage.” “The rural mobile banking segment is a high growth area. the payment transactions segment has not picked up mainly due to regulatory limitations. 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 Reserve Bank of India has also been making financial contributions to the cooperative institutions through evolving institutional arrangements. In 1969. This study made agency-wise estimates of rural indebtedness and observed that cooperation has failed but it must succeed. was "to control the heights of economy". 14 major commercial banks were nationalised and the objective. efforts were concentrated on developing and strengthening cooperative credit structures.” says Sreekrishna Sankar. to consolidate the various arrangements made by the RBI to promote/ supervise 26 . due to the adoption of the business correspondent model and relaxed Know Your Customer norms. incidentally. Central and State Governments. By 1982. The nationalised banks thus became important instruments for advancement of rural banking in addition to cooperatives and State Bank of India. This is the origin of the policy of extending formal credit through institutions while viewing local. While enacting the State Bank of India Act in 1955.“While the urban banking market is dominated by information services. 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.” says Rajesh M R. The major initiative in pursuance of this mandate was taken with sponsoring of All-India Rural Credit Survey in 1951-52. “However. in rural and semi-urban areas. inter alia. more particularly. an analyst with Celent and coauthor of the report. SBI. The Report of the Committee on Directions is still considered a classic on the subject. traditional and informal agencies as usurious. therefore. therefore. Celent analyst and coauthor of the report. but financial literacy remains a big issue for retaining the rural adopters.

which were introduced from 1991 onwards were aimed at transforming the credit institutions into organisationally strong. financially viable and operationally efficient units. It is pertinent to recognise that there are a large number of credit linked programmes sponsored by the Government for direct assault on poverty.institutions and channel credit to rural areas. It was felt that with the establishment of large network of branches. Currently. though there are some regulations on interest rates by size of advance i. for most of the period. NABARD was established. The financial sector reforms. Currently. below Rs. Out of the target of 18 per cent for agriculture. In programmes relating to self-employment and women welfare. all interest rates on bank advances including in rural areas are deregulated and there is no link between priority sector and interest rate. 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. apart from availability of credit lines from the Reserve Bank of India. Where a bank fails to fulfil its commitment towards priority sector lending. there were mismatches in credit and production. at least 13. NABARD in turn provides these funds to State Governments and state owned corporations to enable them to complete various types of rural infrastructure projects. the concept of Local Area Banks was taken up in 1996-97 and in-principle approval has been given for 8 Local Area Banks. With a view to implementing this approach. the multiplicity of programmes has been reduced by having a comprehensive and consolidated programme named Swaranjayanti Gram Swarojgar Yojna. 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. As regards policy measures to enhance flow of credit to rural areas. the concept of priority sector was evolved to ensure directed credit.e. RBI introduced a scheme of "Service Area Approach" for commercial banks. preparation of Development Action Plans and signing of Memoranda of 27 . Though several efforts were made to increase the flow of institutional credit for agricultural and rural lending. Field studies conducted to determine the reason revealed that it was due to absence of effective local level planning. 2 lakh in respect of commercial banks. The measures introduced include reduction in budgetary support and concessionality of resources. As regards cost of credit. of which 18 per cent should be specifically for agriculture. To further supplement the institutional mechanism. it is currently required to contribute to Rural Infrastructure Development Fund set up by NABARD.5 per cent should be by way of direct loans to agriculture and remaining could be in the form of indirect loans. the administered interest rate regime was applicable for bank lending and this included concessional terms for priority sector.

and liberalisation in investment policies and non-fund business. Undeniably. Finally. 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. These initiatives have also financed modernisation of rural economies and implementation of anti-poverty and self-employment programmes. a Task Force under the chairmanship of my esteemed and affectionate colleague Shri Jagdish Capoor. However. development of banking culture. Many cooperatives are undercapitalised. which is under the consideration of the RBI. and has submitted its report. These measures have contributed to many RRBs turning around and becoming more vibrant institutions. simplification of lending procedures as per the Gupta Committee recommendations. These includ additional capital contribution to NABARD by the RBI and the Government of India. and introduction of prudential norms relating to income recognition and asset classification for RRBs and cooperative banks. the cooperative banks have different layers and many of them have significantly large non-performing assets (NPAs). for the purpose of focussing on the future. The lending rates for these institutions have also been deregulated. Recently. penetration of formal credit to rural areas and a counter to the dominance of moneylenders. A Committee has gone into various measures for developing micro credit. In respect of cooperatives. In the case of cooperative banks. which would imply a total recapitalisation of double the amount 28 .Understanding with the major controllers. Other measures of liberalisation include allowing non-target group financing for RRBs. recapitalisation and restructuring of RRBs. Deputy Governor has been constituted to review the status and make recommendations for improvement. direct financing for SCBs and CCBs. The RRBs also exhibit NPAs and these have been recapitalised from the Government of India so far. a scheme linking self-help groups with banks has been launched under the aegis of NABARD to augment the resources of micro credit institutions. The public sector banking system also exhibits NPAs. several policy initiatives have been taken to advance rural banking. preparation of a special credit plans by public sector banks and launching of Kisan Credit Cards. these initiatives have enabled a very wide network of rural financial institutions. and some of them have so far been provided with recapitalised funds. generalisation on some concerns regarding the current approach to rural credit and banking would be appropriate. Firstly.

However. according to the All-India Debt and Investment Survey. The NBFCs have only recently been brought under the regulatory regime of RBI. in hire purchase and leasing operations. Assessing and meeting of credit needs of this sector is important. 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. Fourthly. 1991-92. empirical studies indicate that institutional credit is more likely to be available for well to do among the rural community. its extent and scope of operations has not been adequately researched. In this regard. 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. Second. First. An important development in the formal segment of the rural financial markets is the growing significance of non-banking financial companies. though this is equally valid for rural and urban banking. it will be useful to recognise some dynamics of rural economy. there has been overlap in accountability in as much as the beneficiaries are identified on a joint basis. empirical studies also indicate that relatively backward regions have less access to institutional credit than others do. Sixthly. While their importance is recognised in financing diversified rural agriculture. primarily with a view to strengthening. the non-availability of timely credit and the cumbersome procedures for obtaining credit are also attributed to the functioning of the financial institutions. Fifthly. in particular. prospects and solutions to many of the issues mentioned have been researched and debated. However.2 per cent to 64 per cent between 1981 and 1991. the cost of financial intermediation by the various rural financial institutions is considered to be on the high side. revamping or re-orienting rural financial institutions. services sector is getting increasing importance in the rural areas also -from coffee shops to cable television operators. there is merit in viewing the problems of rural credit and rural banking in a wider context. the integration between rural and urban areas has increased 29 . Marketing strategy and Dynamics of Rural Economy Problems. the share of debt to institutional agencies in the case of rural households has increased marginally from 61. Thirdly.provided by Government of India. Finally in regard to Government sponsored schemes. Secondly. They also finance traders of agricultural inputs and output. Banks have been indicating that NPAs are proportionately more due to this overlapping.

The present banking system does not generally encourage financing the transactions of this nature. Thus. Similarly. there is reason to seek and obtain consumption loans. Third. The end use specification and monitoring of credit is more difficult in such circumstances. given the diversified activities. there are still many areas. For example. there is increasing recourse to multiple occupations to earn a decent livelihood. other food items. However. Such assurance is possible with prosperity in rural employment. this has become quite common. a major 30 . commercialisation of agriculture. Sixth. Present arrangements in formal credit markets are inadequate to meet such requirements. the commission-agents advance money towards purchase of output from farmers. rural agriculture is getting increasingly diversified in terms of products and processes. from the data on credit deposit ratios. the traditional landlord-based tenancy is replaced with commercial-based tenancy. including poultry and fish are growing at a faster pace. the present credit and banking procedures do not cater to the working capital needs of such commercial based tenancy relationship. Norms and procedures of credit. which amounts to providing credit and includes an element of forward trading. products and even credit between the two is increasing. still persists. Where intensive cultivation of cash crops such as cotton is called for. In other words. credit terms are built into price and hence it is difficult to isolate terms. These arrangements are often entered into on a voluntary basis. in areas where commercialisation of agriculture has reached significant levels. On the other hand. Fifth. often on deferred payment basis. therefore. capital. especially for agricultural labour. a few nonbanking financial companies do provide indirect finance for such purpose.significantly. In such deferred payment arrangements. Ninth. particularly the increasing role of cash crops like cotton has resulted in substantial role for suppliers' and buyers' credit. to the extent employment and indeed incomes could be seasonal. where exploitation of tribals by money lenders or of agricultural labourers by landlord-money lenders. Seventh. progress is very uneven in different parts of the country. a small farmer is also a petty trader and may also be a satellite based cable television operator in the village. with the result. So. fertiliser and pesticide are supplied to farmers on credit. Eighth. it is clear that the banking system is a conduit for net transfer of financial savings from rural to non-rural sectors. However. while there is significant commercialisation and diversification of rural economies. need to be different to meet varying circumstances. and large work force in rural areas. Fourth. mobility of labour. compared to cereal production.

The future of rural banking cannot be appreciated without fully understanding both formal and informal rural credit markets. Often. and untied lending/borrowing activities. usually among equals. one could treat borrowing and lending among friends and relatives as occasional and not part of such an informal market. these initiatives do not constitute marketisation of activities of well-defined groups. especially their linkages. In the recent past. However. Marketing strategy and Rural Credit Markets: New Realities As mentioned earlier in the approach to rural banking. In essence. status. In brief. with little or no outside support or interference. the basic thrust of our policy has been to promote institutional credit and eliminate or ignore informal finance.. These informal debt transactions may involve tied debt transactions and untied debt transactions. Thus. there are three broad types of informal financial transactions. There are some variations under each category. neighbourhood. members have some special bonds based on religion.. In the informal financial transactions. there is no patronclient framework. in reality.e. The idea of promotion of Self-Help Groups and micro financing is an indirect admission of necessity of informal finance. etc. therefore. Accumulated Savings and Credit Associations (ASCRA) and hybrid forms of both. organisation and functioning of the formal credit system in the rural areas has been explained. caste. though important. at least at the policy level. informal finance continues to be significant. in this section nature of informal markets and the linkages will be explored. the informal financial markets are those which are outside the orbit of officially regulated institutions. has not been positive since informal debt market has been historically equated with either landlord or 31 . The informal financial market which is legal but officially unrecorded comprises unregulated financial activities i. these arrangements among well-defined groups. should not in my view be included in the concept of informal financial markets.part of informal markets would be local and hence savings would be locally deployed. The general approach. to informal market whether tied or untied. there have been efforts to provide a bridge between formal financial markets and these well-defined groups in the form of ‘micro-finance' initiatives. within the rural areas. while formal credit has expanded its share. well-defined group. outside the orbit of officially regulated financial intermediaries. viz. However. In the literature on well-defined groups. Consequently. there are three broad types namely Rotating Savings and Credit Associations (ROSCA). Since in the earlier sections. tied- lending/borrowing. Basic characteristics of these groups are that they are voluntary in nature.

This would also help a rethink on approaches to rural credit and rural banking. etc. and have to face competition or at least accept benchmarking of formal credit. Sometimes. in view of the dynamics of rural economy already described involving suppliers credit. it has been stated in the literature that financial repression like directed credit. etc. one way of reconciling the conflicting views on usefulness of informal credit is to recognise some emerging realities of both formal and informal markets. 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. Perhaps. they account for 70 to 80 per cent of debt transactions. The concept of monopoly of moneylender in rural areas is not true in many areas now. they are prima facie not desirable. since these are unregulated. First. Studies have also shown that many poor people have no access to institutional credit. and sometimes have in-built risk sharing arrangements. timeliness. interest rate ceilings. number of trips. since most of the credit-card financing by the banks is. It is considered to be financing unproductive expenditures since consumption needs are financed. it is no longer unethical for banks to finance consumption credit 32 . informal markets provide for the more risky borrowings and thus serve a purpose. it is held that. financing of consumption and at interest rates comparable to those prevailing in the rural informal debt markets. when informal financial market is linked to socially undesirable activities. it is said that there are often unequal and exploitative arrangements. The arrangements in informal debt markets are said to be flexible. in fact. Yet. it is no longer the case that the money lender and informal financing are always synonymous. are somewhat negligible although there may be hidden costs in tied lending. Finally. In other words. informal markets are less significant now than before. The transactions are considered to be expensive. the fact remains that informal debt markets do prevail. Third. and studies have shown that in some areas in our country. procedural requirements.moneylender. while formal markets tend to cater to less risky borrowings. These credit arrangements do provide for smoothening of consumption and production requirements. buyers credit and credit for services sector. Moreover. between the landlord and the tenant or the agricultural labourer. Fourth. bank credit is really not severely restricted to what can be officially determined as productive. Finally. say. branch licensing. make informal financial markets relatively attractive and popular. especially in view of what is held to be of usurious nature of interest rates. Second. Transaction costs in terms of certainty. high reserve ratios.

Such generalisations are possible on the basis of empirical studies. travel and related expenses including loss of 33 . 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. underdevelopment of a region and higher transaction costs. so far. 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. Sixth. including preference for short term finance and better recovery-performance in informal markets. Seventh. with finance often provided by NBFCs. The informal market is providing a range of financial products. 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. Hence. Second. Fifth. Marketing strategy and Linkages in Rural Debt Markets Having recognised that one cannot wish away informal markets. one can argue that in many areas. a significant part of informal market is through leasing. hire purchase. etc. Indeed. as per empirical studies. studies have demonstrated that expansion of literacy and education tends to increase the access of rural folk to formal credit. deferred payment. Credit card business.through the credit card route. 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. which the formal banking system is not able to. This phenomenon is generally explained by four factors viz. the formal credit structure has provided a positive institutional alternative to the moneylenders and thus marginalising his role in providing credit to rural masses. social contact etc). The turnover-differential is on account of several factors. 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. poor-resource endowment features of the borrower. First.. reduce the informal transaction costs in dealings with formal credit institutions and improves their resistance to malpractices attributable to landlord or moneylender. transaction costs associated with formal credit include fees for procuring necessary certificates (open). Eighth. poor personal factors (education. 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. is an essentially urban phenomenon.

is to be explained partly in terms of effective costs and the extent of supply of formal credit. uncertainties and delays usually associated with formal credit can also be treated as additions to the transaction costs. Viewed differently. admittedly at far higher nominal costs. Fourth. of course. The former relate to asset-based lending policies and complex formalities and procedures. Second. risk-premium is bound to be higher.credit. tied to land. though it may not be so high if it is net of risk premium. input or output.. To the extent some transaction costs are fixed. 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. while farmer-lender or moneylender is likely to provide most of consumption . Sixth. 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. The tied advance in respect of labour is particularly relevant for migratory labour. usually caste-based in backward regions. labour. It is possible to make some exploratory postulates here. The hidden costs are usually in the form of undervaluation of labour and output of borrowers and overvaluation of inputs supplied by lender. lower education and socialcontact. the type of borrower and farm-size. Eighth. Fifth. possible that some individuals combine the functions of farmer. and it may also arise due to high level of commercialisation of agriculture when supply from formal channel cannot match significant demand for credit. Seventh. This would also get reflected in higher nominal interest rates in informal markets and indeed higher true cost. First. both supply and demand side bottlenecks of formal credit need to be appreciated.credit. recourse to informal credit. while the latter relate to poor endowment. to the extent informal markets tend to lend to borrowers who are relatively less creditworthy. a larger role for informal credit may arise due to low level of commercialisation and monopoly power of moneylender. and informal or unofficial commissions (hidden). trader-lenders are likely to provide most of production . These hidden costs generally relate to tied lending. Third. Thus. trader and moneylender. there are usually hidden costs or concealed interest rates in respect of informal credit also. in assessing relative roles. The transaction costs vary with type of credit agency involved. the effective cost of borrowings for smaller loans tends to be relatively higher than for a larger loan. which have to be added to the nominal costs to arrive at the true cost. it is also necessary to recognise that. informal markets are unlikely to 34 .wages etc. the choice between formal and informal credit depends on both the access and relative true costs. It is.

finance credit for investment purposes. The two markets appear to compete with and also supplement each other. be over simplification to divide the rural population into lenders and borrowers or exploiters and exploited. Banks are also becoming what are called universal banks and are already providing a range of financial services such as investments. Many non-banks are providing avenues for savers and funds for investment purposes. in terms of bargaining power among the class of borrowers. the linkages between formal and informal markets are complex. Another development relates to the gradual undermining of the importance of branches of banks. contextual and dynamic. given the time preference. is fast changing. the inter-linked transactions among parties with equal bargaining power are likely to minimise the hidden costs. the levels of education are likely to reduce the scope for gross overvaluation or undervaluation in linkedtransactions. non banks are also undertaking bank like activities. Fifth. from the supply side. therefore. a common phenomenon in villages. Banks themselves are undertaking non-traditional activities. It will. At present in India. these are mostly confined to urban areas. On the demand side. Similarly. Sixth. Fourth. Third. it is likely that a farmer would be a borrower from a trader and a lender to agricultural labour. merchant banking and even insurance products. In fact. Seventh. similarly it is necessary to appreciate the role of linkages in credit-riskmitigation. Technology and marketing strategy We should recognise that the role of banks. The concept of 35 . there is no incentive to repay while the true costs of informal credit are spread out. The emergence of new technology allows access to banking and banking services without physical direct recourse to the bank premise by the customer. which is central to formal credit in rural areas. 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. 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. Incidentally to the extent the transaction costs are front loaded in respect of formal credit. 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 risk reducing element of linkages are not built into formal creditchannels. In the process. but they will sooner than later spread to rural areas. agricultural labour may be associated with land and labour markets while the farmer-cultivator with input-output linkages. Similarly.

In fact. The technology-led process is leading us to what has been described as virtual banking. multipurpose cards could be a facility that IT could usher in for rural population. It is inevitable that ATMs will be widely used. ATMs are city oriented in our country. if banks do not provide them. SMART cards are essentially a technologically improved version of credit and debit cards and could be used also as ATM cards. in semi-urban and rural areas. For the spread of virtual-banking and SMART cards to rural areas. quicker and low cost services. customers will start seeking efficient. Thirdly. 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. Secondly. Another development relates to the increasing popularity of credit cards.Automated Teller Machines (ATMs) is the best example. Firstly. the lower cost of operating branch network along with reduced staff costs leads to cost efficiency. by using technological advances. The potential can be illustrated with SMART cards. 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. 36 . Fourthly. SMART cards – which are basically cards using computer circuits in them thereby making them ‘intelligent' – would serve as multipurpose cards. Indian banks will have to get interested in providing diversified range of financial products and services along with those that they are already providing. The banks could. some non-banks will do it. the increased speed of response to customer requirements under virtual banking vis-à-vis branch banking can enhance customer satisfaction. At present. As the financial system diversifies and other types of financial intermediaries become active. 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. It may not be possible to deny these facilities to rural areas in our country since. SMART cards could also be used for personal identification and incidentally for monitoring credit usage. which are bound to reach rural areas. it confers the advantage of lower cost of handling a transaction. 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. They could be used for credit facilities at different locations by the holders. The benefits of such virtual banking services are manifold. Like banks in other parts of the world. As the level of education in rural areas rises and affluence spreads. in rural areas. Many Public Sector Banks are already in credit card business.

the major instruments of public policy were cooperatives and public-sector banking system. and related policies Marketing strategy and Approach In the past. and to some extent. This desirable approach would also need a review of institutional arrangements. a review of institutional arrangements. there are new institutions and new forms of financial intermediation that are emerging – be it mutual funds or more important for rural areas. there would be a distinct shortening of the average maturity structure of bank deposits with an increase in asset liability mismatches. a reduced role for Government including in providing refinance is being advocated. depend on several factors that have been described. 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. cost. and the impact of financial as well as technological progress on the systems of financial intermediation. An impressive segment of rural economy has been brought into the ambit of formal financial intermediation. in the area of cooperatives also. The spreads that the banks now enjoy will progressively shrink making it more difficult for them to survive. mainly through the public sector banking system. through cooperatives and RRBs. however. Similarly. institutions. As more and more intermediaries enter rural areas with greater level of technology. namely. how the current concerns are addressed taking into account the dynamics of transformation in rural economies.The bulk of bank deposits in the rural areas are currently longer term deposits and as these come down. in particular in delayering and debureaucratising the cooperatives. However. traditional banking business will come under pressure. supply. non-banking financial 37 . Issues It is clear that significant progress has been made. The more important of such issues relate to the approach. The future of banking in rural areas would. Further. the linkages between formal and informal markets. public policy will have to address several issues to ensure a sound and efficient banking system in the service of rural areas. In order to face the competitive pressures being exerted by the recently set up market savvy banks. since independence. in expanding bank branches and banking habits in the rural areas. Consequently. mainly in the incentive framework for credit-delivery appears necessary. the new realities in credit markets. through a variety of institutional innovations. with the diversification of ownership of public sector banks and the overall thrust of financial-sector reform.

Finally. Funding by banks and regulated NBFCs of micro-finance institutions should be encouraged and guidelines provided. in respect of banks and cooperatives. thus enlarging the current attention to include both directly disbursed credit by the banking or cooperative sectors and indirect supply. In an increasingly deregulated environment. Any approach to rural-development should consider capturing. through initiatives on micro finance.companies. In fact. and in fact the policy should seek to utilise informal markets also for public interest. Hence. 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. but regulation of micro-finance institutions may not be prima facie wise. 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. Similarly. reducing the true cost of credit availability to rural areas would be yet another objective. Enhancing effective supply of credit in such rural financial markets would be a logical objective of policy. In other words. investors and consumers in the rural areas. In other words. policy analysis should perhaps consider expanding its attention from rural banking to rural financial markets. growth of literacy and diversification of the economy have brought about new characteristics and linkages between formal and informal financial markets in rural areas. Moreover. this objective would imply attention to competitive efficiency involving proceduralsimplification also. in many parts of the country. the Report of Task Force on micro-finance of NABARD (1999) has recommended extending regulatory framework for micro-finance institutions. at least the activities of non-banking financial companies as part of formal rural financial markets. the approach may expand from delivery of credit to rural areas to making available financial services and products to savers. the two markets should be treated as competing and co-existing. In any case. it should be recognised that rural financial markets comprise both depositors or savers 38 . 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. and in my view this recommendation is fraught with difficulties. I would hasten to add that a policy-focus on informal markets does not at all imply extending regulation to informal markets. A small beginning has been made in this direction. The latter does play a significant part in rural economy.

going beyond the somewhat closed loop of preferred financial relations within cooperative system into a multiple contacts between cooperative banks and other financial intermediaries. The cooperatives could. Diversified financial products will be increasingly demanded and supplied in the rural areas. rebirth of rural cooperative banks by a Committee headed by Deputy Governor Shri Jagdish Capoor. cooperatives have a special place in the RBI. I trust. This would also imply. Enhancing Effective Supply Some analysts argue that supply-led strategy in regard to rural credit has not been successful. Similarly. government-funding and cooperatives. regulator. it will be inappropriate to conclude that supply should necessarily follow demand. would consider desirability of cooperative banks' foray into non-fund-based activities.and borrowers or investors. 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. the future role of NABARD could be addressed because the organisational setup. subsidised credit. In addition. largely utilising technological improvement. The RRBs are being recapitalised. does not 39 . the Committee. While accepting that demand has to play its role. and incurring costs of addressing problems related to overhang of the past. Commercial banks are being reformed in accordance with recommendations of the Narasimham Committee. retail Treasury Bills and Government Securities in rural areas. Institutions Among the institutions involved in rural credit. The Committee would naturally address issues relating to legal framework. refinancing. changing roles of owner. such as fee-based financial services on behalf of mutual funds or insurance-products. and real-demand also implies negotiating strength of the borrower in respect of financial institutions. There is full appreciation of the problems and efforts are underway to workout a package for revival and may be. funding and activities will have to reflect the basic logic of financial sector reform viz. and co-operatives should not be left out of this trend of providing multiple-products through a single window. in fact help. since institutional spread and directed-lending have not had the desired impact. Mere presence of rural credit institutions.

While as a transient measure during a period conspicuous for incomplete projects. 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. thus to an extent replacing rural credit to agriculture with credit to State Government for rural development. Yet another area in effective supply relates to lending by banks under government sponsored programmes. apart from isolating the non-performing assets on this account in the balance sheets of banks. private sector and foreign banks also is expected to study international 40 . in some ways. For example. Current policies and procedures restrict this instrument to goods.5 percent for a five-year advance. amount to erosion of effective supply. A more transparent approach. mere prescriptions of priority lending would not ensure supply. 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 procedural bottlenecks resulting in delayed supply also. as has been done to ensure flow of credit to truck operators. for example. These funds are actually lent to State Governments. 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. Several issues relating to both supply and accountability arise due to involvement of both Government and banks. which has significant non-commercial considerations. Similarly. with representation from public. Further. For example. by separately accounting for them as policy-induced lending would help isolate and monitor this supply. there may be some effective supplies which are not reckoned for supply under priority-sector. prescription of priority-sector lending relates to percentage of credit outstanding rather than advances. which are expanding rapidly. such an arrangement was justifiable. the base for calculating priority sector excludes commercial banks' investments.amount to availability of supply. There may be funds channelled by banks to rural area through urbanbranches or through other intermediaries such as NBFCs. this should not become a permanent feature as it would have obviously perverse effects. At the same time. Thus. 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. An important bottleneck in the delivery of credit has been the negligible use of billdiscounting for services sector. The Committee. The coverage of definition of priority sector also leads to some difference between apparent supply and effective supply.

A review of procedural requirements. taking advantage of developments in technology and financial markets. our policies and procedures and make recommendations in two months. As already mentioned. Arbitrage between formal and informal markets and between production loans and consumption needs is also common. Thus. Encouraging competition would be yet another strategy. growth of information technology and its application in banking would warrant a thorough review of products. including premium for credit risk. 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. Related Policies There is increasing recognition that. Repeated visits and consequent transaction costs can be avoided by several procedural simplifications . 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. All non-verified documentation could. be replaced with self-declaration by the borrower. Indeed. procedures and linkages among rural financial institutions. such as eliminating mandatory forms and replacing them with locally determined procedures. keeping the true cost artificially low in formal markets.going beyond Gupta Committee recommendation. the rural financial institutions would encourage arbitrage and erode the clear potential for profit. the desired spread of technology and 41 . an appropriate strategy may be to reduce the difference between nominal and true cost and ensure that true cost reflects market conditions. Enhancing effective supply would be an important strategy of reducing the true cost. In particular. Arbitrage in financial markets is inevitable and prevalence of such operations cannot be ignored. 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. 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.experience. could also be considered. Thus. for instance. More specifically. 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.

AN ICT STRUCTURE FOR RURAL BANKING ENABLEMENT 42 . and focus on rural credit. have already launched INFINET. First and foremost. in the RBI are currently engaged in a number of initiatives and studies. Fourth. as mandated by the RBI Act. telecommunication network needs to be dependable and financial sector needs to ensure a network. in the RBI. We would seek advice and guidance in this endeavour. especially of crops. the institutional and regulatory framework should enable rural financial institutions to operate in diverse financial products and services. We. insurance. there should be assured supply of electric power so that functioning of systems is not disrupted.trickledown of urban financial products to rural areas would require concerted action in four areas. should penetrate the rural areas to mitigate the risks to both farmer and lender. We hope to continue the process. Third. The lack of penetration of insurance is perhaps an important reason for lenders seeking tied and other risk-mitigation arrangements through informal markets. Second. We.

g. “GANASEVA “RURAL SERVICES DELIVERY MODEL – ELECTRONIC DELIVERY VERSUS PAYMENT (DVP) PLATFORM “Ganaseva” (Gana=People. by creating rural information infrastructure and by providing an electronic platform for transmission of information from the people to the service providers like banks.. 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. the records management and follow-up and recover c) the use of entrepreneurship model for achieving effectiveness. credit rating of rural individuals and analytics for decision support. efficiency and economy in the performance of the rural information infrastructure. 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.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. b) automating the workflow. rural information services and other follow-up functions e. 43 . integrated approach to rural commerce and financial viability through entrepreneurship and choice availability both to the people and the service providers like banks. Its hall marks are empowerment of the rural individuals.

Its components are Digital Rural Information Infrastructure. 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. 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. enabling the banks to offer highly individualized bundle of services. providing the banking services in a pro-active manner. Benefits include financial inclusion of rural population. Technologically. extension and other services as well as connectivity to all the concerned banks and other service-providing agencies. Provision of technology support to banking services including ATM Services. The model envisaged provides a cost-effective but efficient technology platform for rural banking. Customer Data Integration and Credit rating. 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. a shared electronic platform for various services. 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 solution involves four main elements:   ESTABLISHMENT OF DIGITAL RURAL INFORMATION INFRASTRUCTURE   MULTI SERVICE DELIVERY SYSTEM (MSDS)   INTEGRATED MULTI-ENTITY DATABASE SYSTEM (IMDS)   SERVICE PROVIDER’S 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. Figure 1 DIAGRAMMATIC REPRESENTATION OF THE MODEL 45 ..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.

46 .

This was done by the Envision 47 . Idagunji. The information was collected as per the requirement developed in consultation with the banks for providing banking services and the authentication requirements. Apsarakonda.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. documents and voice. The banks which participated in this project are State bank of India. 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. 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. the documentary evidence and uploading of this data into Server. Kelaginoor. there was a need to develop a solution for that. Syndicate Bank. India having approximately 4000 families. who had agreed to use the data / documents available through the system. 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. involved in essentially agricultural activity. Methodology Information System We developed a model for rural information infrastructure. there is support in the system for the crop loan and Kisan Credit Card and Savings Bank Account Operations. Pre-programmed PDAs were used for collection of data/information. PDA Software Since PDAs were used for collection of data. Besides the rural information service and credit rating..

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. Likewise. PACS Bank Software In order to enable the rural co-operatives to link to the RCDS system. Coverage and Implementation 48 . the PACS in the area were computerized after a thorough study of their business processes and developing separate software for the purpose. 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. Document Management Software The document management software which was integrated with the RCDS system was provided by the software company Stex. the banks and other authorities. This work was done by the Nelito in consultation with the Project Director. ATM Feasibility The technological feasibility of deploying the ATMs in the Project villages was tested and was found to be adequate. Based on these specifications. Project Location. a voice-based authentication system was also developed for testing. Credit Rating Solution A credit rating solution for the rural individuals was prepared using a separate model developed for the purpose. 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.

digital rural information infrastructure enabling the development of nationwide date grid. Syndicate Bank. authentic inputs for grassroots level planning and Government’s socioeconomic interventions. facility to do offsite identification of the prospects online. 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. Banks like State Bank of India. contiguity and proximity in the backward Honavar block in Karnataka. Benefits to Banks. The benefits to the economic system include availability electronic platform for services delivery. Participating banks and financial institutions in the project were the State Bank of India. The benefits to the rural people are banking. The Government and the local NGOs also actively participated. identifying the potential customers and providing highly individualized banking experience in proactive manner including individualized risk assessment. credit rating to enable building of quality portfolio and facility for building portfolio according to the ALM requirements of the banks. The coverage included all adult individual in the villages and was not limited to any target group like micro finance or self-help-groups. The project area comprised select interior villages chosen on the basis on connectivity. Balkoor and Manki.For testing and demonstrating the implementability of the above solution with respect to essentials. ready availability of the information for the markets and market participants to penetrate rural area and provision for enabling different methods of service 49 . and completed. availability of reliable information infrastructure in digital form with a mechanism to update on a continuous basis. 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. a pilot project during October 2004 and January 2006 with funding from Microsoft and technology support from a Microsoft-HP led coalition of ISVs. we undertook. -> Shared delivery system through mobile ATMs for increasing access to rural people. and the Primary Agricultural Co-operative Credit Societies at Kelaginoor. Honavar and Primary Agricultural Co-operative Credit Societies have started using the systems.

This focus is relevant because the existing delivery systems have been found to be wanting. for whatever systemic reasons. ATMs for pursuing cost-efficiency through extensive outsourcing and lean processes to suit the local realities. In our framework of such rural services. the banking services occupy the preeminent position. the gamut of rural activities need to have the economic transactions at the centre. c. in the rural areas. There is a need and scope for developing and making available rural credit rating. 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. The computerization of the PACS is useful to improve the quality of working of the PACS. Building rural information infrastructure is possible using technology. besides having potential for improving governance through linkage to the Credit delivery system. the Model can be expanded for providing various other services. d. 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. b. Findings from the Project Implementation Major findings from the Project implementation are the following: a. in making credit and banking services available in adequate measures in the rural areas in India Therefore. The service providers have uniformly expressed the need for such an information system. any rural services strategy will have banking 50 . Since the information and banking are direct services as well as infrastructural services.delivery like kiosks. it has to be derived from model for delivery of rural services. e. 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.

modelling it and presenting the data in a proactive manner to support the provision of various services to the rural people.services delivery as a core function. the focus of the RII in the US was on the technology. reach and affordability. 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 telecommunications and technology penetration of the rural areas is no longer the problem in the current Indian context of its exponential growth in availability. coverage of various subject areas – patient data identification for health care. and usability and cost effectiveness. the swamping of conflicting / segmented information . information. customer identification for e-commerce. 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. Digital Rural Information Infrastructure The emphasis on data quality and reconciliation processing.have all accentuated the need for establishing a robust rural information infrastructure. trade and documentation might form the third dimension. removal of the barriers for providing financial services to the poor. In our model. providing access to a broad range of information and information services. education. The rapid growth of technology and communication infrastructure with ubiquitous footprints is a great enabler of the rural information infrastructure (RII).” Despite this assertion. the need to anticipate the need of users for sentient computing. The utility service provision which partly use banking as the payment system infrastructure could be the second layer. health. beneficiary identification for the poverty alleviation programs / Employment guarantee schemes of the state. for the provision of authenticated authentic information about the rural people using the ICT tools for increasing the speed. 51 . extension and occasional requirements like investment. The delivery of the rest of the services like governance. The Rural Information Infrastructure (RII) that is the part of the NII will reach into America’s rural areas. the focus is on identifying and capturing of information content.

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 intensive…Credit 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

Rural Credit Delivery Solution using Digital Rural Information Infrastructure 55 .Figure 2.

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. 56 . In fact.Rural Information Infrastructure-Technology Solution The technology solution involves the use of PDA’s or Laptops with specially made applications for capturing data [voice. The share then rose steadily. It also envisages a data center wherein all these collected data are stored. 2002. 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. there was a gradual decline in the share of rural bank offices. Let us consider a few indicators. and attained a peak of 58.6 per cent in 1969 to 36 per cent in 1972.723 rural bank offices were closed between March 1994 and March 2000. picture and data] with provision for clarification and validation and updating. there was an absolute contraction in the number of bank offices in the 1990s: 2. in due course. Chavan 2004). From then onwards. and the share fell below 50 per cent in 1998 and thereafter. 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. Appendix Table 1 documents the growth of bank offices.2 per cent in March 1990. processed and managed with suitable control procedure and provision for the audit by the users and / or public authorities. direct. The third element is CDMA connectivity between the users of the data and the data center. 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. and dramatic effect on rural credit. Shetty 2004. Record of progress of rural banking Policies of the current phase of financial liberalization have had an immediate. There is provision for separation of the user’s transactional data from the general information infrastructure in order to make the data center viable and also enable the provision of information services on an application service provider model by keeping such operations distinctly separate from the management of the rural information infrastructure.

In the 1990s.” and “credit utilised” are equal. and continued to rise in the 1980s. 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. in fact. it is no surprise that the credit-deposit ratio in rural areas rose after 1969. when rural deposits accounted for 15. Given the pattern of growth of aggregate deposits and gross bank credit. including all outstanding loans and non-performing assets. at the allIndia level.” which is the total amount advanced. Once again.5 per cent in 1972 to 12.” “credit sanctioned. give us information on the volume of advances in a specific year. in the 1980s. the credit outstanding from rural branches as a proportion of total credit outstanding declined. although at a slower pace.6 per cent in 1980 and continued to grow. we would have had a clearer picture of the collapse in rural banking in the period of liberalization. 57 . The pace of deposit mobilization in rural areas fell in the 1990s.5 per cent of aggregate deposits. The basic source of data on banking is the Reserve Bank of India’s annual Banking Statistics. Data in this document are provided on “credit outstanding. One of the objectives of banking policy after nationalization was to expand the flow of credit to agriculture and small industries. From 1985 to 1990. from 6. 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. Data under the head “credit sanctioned” do not represent the volume of advanced in a single year either. had we data on the actual amount disbursed each year. on March 31 of the reference year. After 1988. that is.6 per cent in 1984 and remained above 60 per cent until 1991. or what were termed “priority sectors. The RBI set a target of 40 per cent for priority sector lending and by the mid-1980s this target was met.2 per cent in March 2002. Turning to deposit mobilisation. and 10. the figures for “credit outstanding. unfortunately.Official banking statistics do not.” As Appendix Table 2 shows. from around 15 per cent in 1987 and 1988 to 11 per cent in March 1999. the peak was reached in 1990-91. however. rural deposits grew rapidly after nationalization. The ratio peaked at 68. 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 credit-deposit ratio fell sharply. on the flow of credit The data on the stock of credit show a marked deceleration in credit provision to the countryside since 1991. their share of aggregate deposits doubled in the 1970s.

loans to cold storage units. have been included in the priority sector. in real terms. and to the food processing industry. the target was over-achieved. From 1991 to 1996. north-east. As already mentioned.in fact.e. Loans to multinationals like Pepsi. a reversal by redefinition: “priority sector” lending now includes advances to newly-created infrastructure funds. their direct presence and their indirect presence through the purchase of shares in existing private banks. When data for scheduled commercial banks are disaggregated by type of bank (public sector banks. Shetty’s) of the rural economy. Kelloggs. 2002. which resulted in shortages of credit for all purposes. The smallest cultivators i. then we observe that. those with land 58 . Chavan’s paper documents the gains made by the historically underprivileged regions of east. regional rural banks. the direction in priority sector lending appears to have been reversed over the last five years. that is. Chandrasekhar and Ray (2004) point to the growing presence of foreign banks in India. including for productive investment in agricultural and non-agricultural activity. to non-banking finance companies for on-lending to very small units. L. Pallavi Chavan (2004) has examined the growth and regional distribution of rural banking over the period 1975-2002. If we examine the term loans issued by scheduled commercial banks to agriculture between 1980-81 and 1997-98 (Ramachandran and Swaminathan. This is. Table 3). more than 40 per cent of total credit outstanding went to priority sectors. and central India during the period of social and development banking. 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). private banks and foreign banks). we find that foreign banks did not lend to rural areas or agriculture.. More recently. It is instructive here to look at the distribution of total agricultural advances to cultivators by size classes of land holdings. 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. At first glance. irrespective of location. This expansion is not good news for the priority sector. Policies of financial liberalization have unmistakably worsened regional inequalities in rural banking in India. Hindustan Lever and ConAgra now count as priority sector advances. however. one of our central concerns is the “credit starvation” (the term is S. the share of priority sector credit fell. in line with the recommendations of the Narasimham Committee.

Although the programme slackened after that.holdings of less than 2.5 and 5 acres) stagnated while that to large cultivators rose. 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. the number of beneficiaries in 1990-91 remained above the level of the early 1980s. each reporting the findings of detailed village surveys on rural credit in the contemporary period.000) fell in the 1990s (Chandrasekhar and Ray. were the worst affected by the post1991 decline in credit to agriculture. 59 . The studies cover Baghra and Udaipur villages of Giridih district in Jharkhand. At the same time. After 1991. Panahar and Muidara villages of Bankura district in West Bengal. its share fell to 23. the share of credit outstanding to “small cultivators” (with between 2. 2004) The IRDP was a major component of the credit-led poverty alleviation strategy of the 1980s. Agricultural credit outstanding to marginal cultivators accounted for 30 per cent of total agricultural credit outstanding from commercial banks in 1990-91.2 million in 1987 (Ramachandran and Swaminathan 2002). The number of families assisted annually with IRDP loans rose from 2. there was a steep decline in the number of IRDP beneficiaries: only 1. total term credit mobilized for IRDP peaked at 113 in 1987 and went down to 52 in 1998. Morazha village of Kannur district in Kerala. the number assisted in 1998 was a mere 37. Gokilapuram of Theni district in Tamil Nadu and Dhamar of Rohtak district and Birdhana of Fatehabad district in Haryana.5 acres or marginal cultivators. With 1982 indexed at 100.8 per cent in 1999-2000 (Chavan. 2004. We shall attempt to review the major results from five papers. Table 10). 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 25.7 million in 1980-81 to 4 million in 1984 and 4. If we index the number of families assisted in 1982 at 100. The term credit disbursed by banks under IRDP followed a similar trajectory.3 million families were assisted in 1998.

which was conducted in 2002. covered 163 landless manual labour households. agricultural output and yields surged. allows for a discussion of changes over a relatively long period of time (Ramachandran and Swaminathan. Udaipur village. a multi-caste village. a village whose population was almost entirely Adivasi (or Scheduled Tribe). 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. In neighbouring Jharkhand. Resurvey data are also available for the two villages in West Bengal. In Birdhana. 2004). Surjit and Ramachandran conducted surveys of rural credit in the villages of Baghra and Udaipur in 2003. with smaller surveys in the interim. As in other parts of West Bengal. Vikas Rawal first studied the villages of Panahar and Muidara in 1995-96 and restudied them in 2002 (Rawal. particularly in 1985. The availability of data from two census-type surveys of Gokilapuram. a larger multi-caste village. their survey. 60 . Irrigated area.Gokilapuram village in south-west Tamil Nadu is a highly-irrigated. Rawal and Mukherjee (2004) present some features of credit among landless labour households in two villages of Haryana. 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. 2004b). After land reform in the 1970s and 1980s. agrarian structure in Panahar and Muidara is dominated by smallholders. the first in 1977 and the second in 1999. In Dhamar village. there were major changes in these two villages. 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. had fewer landless households and less inequality in the distribution of land than Baghra.

Class further differentiates access to credit. Given the limited scale of borrowing. Secondly. It is also a region where there were major struggles against British rule and against landlordism. for example. First. 75 per cent in Dhamar and 83 per cent in Panahar and Muidara. 72 per cent in Baghra. R. is extremely low. 61 . the village data combined with information on the banking sector indicate that the share of formal sources of credit. regional rural banks and cooperatives. the corresponding proportions were 66 per cent in Gokilapuram. in the relatively advanced agricultural state of Haryana. landless labour households continued to depend on informal sources of credit.The last case study is from northern Kerala. These village studies present some striking observations with respect to rural credit in the liberalization phase. somewhat paradoxically. formal sources of credit accounted for 14 per cent of loans taken and 40 per cent of the principal borrowed by all village households. In Panahar and Muidara. it was observed that the formal sector accounted for 80 per cent of total principal borrowed. In Gokilapuram. all the village studies report high levels of indebtedness: 64 per cent of households in Morazha were indebted. only 28 per cent of total credit was from the formal sector. that is. with one exception. Among landless hired labour households in Gokilapuram. Morazha belongs to a region that was characterised by widespread and acute indebtedness among the peasantry during the British period. Ramakumar conducted a survey in 2001 of all landless households whose members participated in agricultural work in Morazha village (Ramakumar 2004). and where the cooperative movement took strong roots. Of total credit outstanding among landless households. commercial banks. In Baghra village. Surprisingly. 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. this observation may be explained by the poverty of the village and the absence of informal lenders. the formal sector accounted for only 22 per cent of total principal borrowed. 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.

both for direct production as well as for demands of health. 2004). where the cooperative movement is well established and where cooperative banks and societies are almost the sole source of credit for rural households. In Baghra. only one household received any formal-sector credit in the year preceding the survey (Ramachandran and Surjit. 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. In Gokilapuram. 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 Panahar and Muidara. In 2001. especially for crop cultivation and other productive activities. 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. Even here. particularly credit from scheduled commercial banks. informal lenders are thriving and in fact gained ground after 1991 as a result of the withdrawal of the banking sector from rural areas. though. The formal sector had virtually washed its hands of any responsibility to the villages. in recent years. The village studies also indicate the gross inadequacy of credit. In each of the two study villages. education. Thirdly. only seven households received any formal sector credit at all in the five years prior to the survey. The growing and unmet demand for credit. cooperatives mainly met the needs of consumption credit and the issue of credit to landless households for productive purposes remained neglected. 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. is resulting in what S. 98 per cent of the principal borrowed by landless households was from cooperatives.The exception is the village of Morazha. and other needs. Shetty terms “credit starvation” among rural households. the two studies that capture changes over time show a clear decline in access to formal sources of credit. In the study villages in West Bengal and Tamil Nadu. L. 62 . Borrowing for consumption purposes dominated the loan portfolio of almost all classes of households.

the village studies indicate that informal sources of credit – including usurious moneylenders -. per cent while moneylenders accounted for 42 per cent. Over the same period.remain important. Moneylenders accounted for 17 per cent of the total principal borrowed by households. of the total principal borrowed by surveyed households. A major finding of this study is the phenomenal rise in the number of moneylenders.4. the share of moneylenders in the total debt incurred by agricultural labour households went up from 18. Despite over three decades of systematic expansion of the banking infrastructure in the country. 2004). among informal lenders. In 1983. accounting for 64 per cent of the total principal borrowed by households. from 41 per cent in 1983 to 21. 50 per cent was advanced by agricultural traders and another 31 per cent was advanced by urban businessmen. In Panahar and Muidara. trader-moneylenders have come to dominate the informal credit market.This picture is confirmed by the latest report of the Rural Labour Enquiry. the formal sector. 32 per cent of the total principal borrowed by the surveyed households was borrowed from traders. The share of the formal sector fell to 36 per cent in 1993 and further to 31 per cent in 1999-2000 (GOI. village-based and town-based. 63 . In Baghra village too. The corresponding proportion in Udaipur was 46 per cent. By 1999. sources of credit for rural households. operating in the area. which shows both the weakening of banks in rural areas as well as the consolidation of moneylenders. In 2001-02.5 per cent in 1999-2000. In 1995-96. of the total principal borrowed by landless labour households. comprising government. moneylenders dominated. cooperatives and banks accounted for 44 per cent of the debt of agricultural labour households. During the period when the share of formal credit in total debt of rural households fell. 27 per cent was advanced by moneylenders and 23 per cent by landowners. full time and part-time. the share of landowners had fallen to 2. and often dominant and growing. In Gokilapuram in 1977.6 per cent in 1983 to 34 per cent in 1999-2000. the share of debt taken for productive purposes also fell sharply.

A distinctive feature of the Haryana villages was that the dependence of landless manual worker households on their employers for credit. the study found that the dependence of manual workers households on employers for credit was an important factor in sustaining unfree conditions of employment. They were not allowed to work for employers other than their creditors and restrictions were often imposed even on their physical mobility. In Gokilapuram. the modal interest rate range was 48-60 per cent per annum. nearly 49 per cent of the total principal borrowed by landless households came from their agricultural employers. remain very high. there were considerable variations in its specific forms. forced workers to enter into unfree labour relationships with their creditor-employers. the modal interest rate range was 60-120 per cent for landless households and 36-48 per cent for all households. where traders were the major source of credit. 64 . The nature of unfreedom was closely linked to the high degree of concentration of ownership of land holdings in these villages. particularly from moneylenders. In Dhamar village. while unfreedom was widespread. Siri workers in Dhamar village worked under conditions that were akin to bondage. In Panahar and Muidara. explicit interest rates were not easy to unearth or compute though rates between 36 and 120 per cent per annum were reported. 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. and had also to perform various kinds of labour services.Landowner-employers were the dominant sources of credit for landless workers in Haryana. It is particularly noteworthy that unfree labour relationships in these villages coexisted with significant technological advance and commercialisation in agriculture. the modal rate of interest charged by employer-lenders was 36 per cent per annum. The study found that. together with conditions of severe unemployment. In short. In Baghra. In Dhamar. Casual workers were subject to various kinds of coercion by employer-creditors. The rates of interest on loans from the informal sector.

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 .

70 .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. and for matters connected therewith and incidental thereto” . credit and other facilities. The RRBs were established “with a view to developing the rural economy by providing. the government passed the Regional Rural Banks Act. for the purpose of development of agriculture. 1976. agricultural labourers. industry and other productive activities in the rural areas. commerce. artisans and small entrepreneurs. particularly to small and marginal farmers.  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. A significant development in the field of banking during 1976 was the establishment of 19 Regional Rural Banks (RRBs) under the Regional Rural Banks Act‚1976. Accepting the recommendations of the Narasimham committee. trade.

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. Each RRB is sponsored by a public sector bank‚ which provides assistance in several ways‚ viz. 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. 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. Within the 40% priority target. If necessary‚ a RRB will also establish branches or agencies at places notified by the Government. 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.Each RRB will operate within the local limits specified by notification.. The Reserve Bank of India has brought RRB’s under the ambit of priority sector lending on par with the commercial banks. They have to ensure that forty percent of their advances are accounted for the priority sector. under the State Bank of India and it is spread in 13 states across India. 25% should go to weaker section or 10% of their total advances to go to weaker section. 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. There are 30 Regional Rural Banks in India. The number of branches the SBI Regional Rural Banks is more than 71 . Regional Rural Banks in India The State Bank of India is one of the major commercial banks having regional rural banks.

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 . List of Regional Rural Banks in India There are a number of regional rural banks in India.2000. apart from the State Bank of India also functions as the promoter of rural development in India. Several other banks.

 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 .

farmers and agrarian unskilled labor. and the small rural entrepreneurs of Haryana. and bank 78 . The Haryana State Cooperative Apex Bank Limited offers several types of financial assistances to the individuals. 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 financial aids include credit for the promotion of agriculture. non-agrarian credit. 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.

inspection. 79 . National Bank for Agriculture and Rural Development (NABARD) was established as the premiere rural development bank. handicrafts.deposit facilities. 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. monitoring. 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. The HARCOBANK have been functioning as an investor for more than three decades. and evaluation of client financial corporations. The NABARD also plays the role of a contributor to the rural development by the means of promoting institutional development. cottage industries. The NABARD also supports all other related economic operations in the rural sector. village industries. promotion of sustainable growth in the rural sector. etc. facilitating refinance to loan providers in the rural sector. rural crafts. agriculture.

Pallavan Grama Bank with Head Quarters at Salem is operating in 14 districts of Tamil Nadu viz. Syndicate Bank The Syndicate Bank has it grass roots in the rural sector. Salem. The Syndicate Bank has performed actively in the development of the rural sector in India. Erode.United Bank of India The role played by the United Bank of India (UBI) as one of the regional rural banks is phenomenal. The third RRB sponsored by Indian Bank is Puduvai Bharathiar Grama Bank at Union Territory of Puducherry with its head quarters at Puducherry. Tiruvannamalai. Saptagiri Grameena Bank and Pallavan Grama Bank. Nilgiris... Karur. The development of the Syndicate Bank was in accordance to the development of the banking sector in India and. Cuddalore. The UBI has propagated the network of branches in order to actively take part in the rural improvement and development. Vellore. 80 . Dharmapuri. Villupuram. Regional Rural Banks in Tamil Nadu Indian Bank has sponsored two Regional Rural Banks (RRBs) viz. The Regional Rural Banks in India has actively contributed to the growth of the rural sector. Kancheepuram and Tiruvallur. 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. Namakkal. Krishnagiri. Coimbatore.

4 3432 4145 4859 5561 5821 6231 6784 7337 7602 8421 9809 185.5 10559 12427 15050 17710 20934 25038 32692 40345 43456 46678 51283 385.8 Investment Advance Total Assets Interest Earned Other Income Total Income 81 .65 Deposit 27059 32226 39294 44539 49582 56295 69719 83143 99093 120184 124296 359. 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 5435.62 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.Parameter 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 Growth(%) No.35 6680 7760 8800 9471 17138 21286 33486 45666 48559 62629 96699 1347.

Interest expanded 2131 2565 2966 3329 3340 3363 5902 8441 8860 8362 9260 334.3 3113 3621 4130 4787 5107 5187 7860 10533 10994 10707 11758 277.5 982 1056 1165 1459 1667 1825 1958 2092 22134 2345 2598 164.7 319 319 729 774 714 1044 985 926 1383 1859 1987 522.6 99 96 128 163 132 289 329 369 434 590 699 606.8 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 comparative marketing of rural and urban banking in India. To study about Institutional sources consist of the co-operative and commercial banks including Regional Rural Banks (RRBS) 4. 2. To study marketing of rural banking in India. To study about Non institutional or private sources including money lender traders commission agents and landlords 85 . 3.

RESEARCH METHODOLOGY 86 .

EMORY “Research is essentially an investigation.W. The advanced learner’s dictionary of current English lays down the meaning of research as “a careful investigation of enquiry especially through search for new facts in any branch of knowledge. It is more focused than an exploratory study.JOHN. a recording and an analysis of evidence for the purpose of gaining knowledge”. Three main purposes of research are to describe. and validate findings. Description emerges following creative exploration. It provides basic information for formulating more sophisticated study. and data analysis that will be applied to a given topic. That will enable the researcher to save and resources such a plan of study or blue print or study is called a research design. design. “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.” The systematic approach concerning generalization and the formulation of a theory is also research. Descriptive statistics tell what is. The researcher makes a plan of the study his research work. while inferential statistics try to determine cause and effect. . and serves to organize the findings in order to fit them with explanations.RESEARCH METHODOLOGY Research in common parlance refers to a search for knowledge. Descriptive research aims at fact finding & more often is based on surveys .” . explain.ROBERT ROSS DESCRIPTIVE RESEARCH DESIGN Descriptive research design studies are those studies. and then test or validate those explanations The reason to adopt the descriptive research is due to the type of research question.It’s purpose to describe the present state of affairs of the topic of study. 87 . . The purpose of research is to discover answers to questions through the application of scientific procedures. which are concerned with describing the character of a group.BEST Research may be defined as “any organized inquiry designed and carried out to provide information for solving a problem”.

363). journals & Internet.DATA COLLECTION The study was based on questionnaire method. Customer Services. p. Internet Marketing and under writing 88 . Secondary data Secondary data are those which have already been collected by someone else and which have already been passed through the stratified process. 1991. First each organization was divided into different departments like Operations. RESEARCH INSTRUMENT Questionnaire “A questionnaire is simply a set of questions designed to generate the data necessary for accomplishing a research project’s objectives” (Parasuraman. It has collected through the books. Only the primary data is not the sufficient to get information about the complete topic so both primary and secondary data is collected. which are collected a fresh and for the first time happen to be original in character. SAMPLE DESIGN: POPULATION  It covers the 100 unit of population. Human Resources. SAMPLE PROCEDURES In this study convenient sampling method was adopted. There are two types of data collection:  Primary data  Secondary data Primary data The primary data are those. It has been collected through a Questionnaire and personal interview.

the respondents were selected on the basis of convenience. This involves creating table for recording the filled in interview schedule.departments. These tables are of immense help to analysis by using the statistics tools help to analysis by using the statistical tools. 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. based on the opinions of the respondents. TOOLS USED FOR ANALYSIS Simple percentage analysis  It is simple analysis tool. Formula: Simple percentage = No of Respondents x 100 Total No of Sample Size 89 . From this department. percentage and bar chart is calculated for the respective scales of each factor. TABULATION  It is the arrangement of classified data in an orderly manner. In this method.

 In this study the sample size is 70.  The research was limited to the Bhopal city. 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. 90 .  Thus the respondents are not come forward to provide their feedback regarding their organization than the result is bias.LIMITATIONS OF THE STUDY  The study is focused only in Bajaj Allianz Life Insurance Company.

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 0 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. 93 .  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.

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 0 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.  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 .  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.  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.

sector? □ Strongly agree □ Agree □ Disagree □ Strongly disagree □ Can’t say Table: 3% of the respondent Rural Bank Urban Bank Strongly Agree 83 61 Agree 17 23 Disagree 0 16 strongly disagree 0 0 Can't say 0 0 100 100% total 90 80 70 60 50 40 30 20 10 0 83 61 17 23 16 0 Rural Bank 0 0 0 0 Urban Bank 96 .3) Does your marketing policy of bank have a focus marketing on agro.

 83% of the respondent of Rural Bank strongly 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.sector where as 16% of the respondent of Urban Bank also disagree that Marketing policy of bank have a focus marketing on agro.sector. 97 .  None of the respondent of Rural Bank & Urban Bank also strongly disagree that Marketing policy of bank have a focus marketing on agro.  None of the respondent of Rural Bank & Urban Bank can’t says that Marketing policy of bank have a focus marketing on agro.  17% of the respondent of Rural Bank agree that Marketing policy of bank have a focus marketing on agro.  None of the respondent of Rural Bank disagree that Marketing policy of bank have a focus marketing on agro.sector.sector.Interpretation: From the above data it is evident that among the respondent.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.

 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.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. 98 .

. 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 .  11% of the respondent of rural bank says that Devised to ensure usage as well as profitability Quantity discounts.. 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. 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.5) Devised to ensure usage as well as profitability Quantity discounts. and ease in payment modes is pricing marketing of the bank. 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.

 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. 100 .  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.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 2 9 100 100% total 98 91 100 80 60 40 2 20 0 Traditional Rural Bank 9 modern Urban Bank Interpretation: From the above data it is evident that among the respondent.

 67% of the respondent of RURAL BANK says that Collaborating with NGO’s to development Knowledge marketing of the bankwhere as 19% of the respondent of 101 .7) Collaborating with NGO’s 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 NGO’s to development Knowledge marketing of the bank where as 81% of the respondent of Urban Bank also says that Collaborating with NGO’s to development Knowledge marketing of the bank.

102 .Urban Bank says Collaborating with NGO’s to development Knowledge marketing of the bank.

CONCLUSION 103 .

Panchayati raj institutions and the banks operating in rural areas. including to agriculture. something like a National Rural Bank of India (NRBI). The number of rural branches should be increased rather than reduced. This. Ideally. 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. the best use of the resources raised by RRBs through deposits would be through extensive crosssubsidisation. there should be greater coordination between district planning authorities.CONCLUSION RRBs' performance in respect of some important indicators was certainly better than that of commercial banks or even cooperatives. 104 . 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. In recent years. RRBs have also performed better in terms of providing loans to small and retail traders and petty non-farm rural activities. RRBs should really be strengthened and provided with more resources with which they can undertake more of these important activities. really requires an apex body that would cover and oversee all the RRBs. Only then will the RRBs fulfill the promise that is so essential for rural development. in turn. they should be encouraged to develop more sophisticated methods of credit delivery to meet the changing needs of farming. and most of all.

(1999):’Marketing Management’ Prentice Hall Of India Pvt.D(2002):’Marketing Research’. New Delhi Magazines:  Business Today  Business Week. (2002): 'Revving up auto branding'.N.D. C. (1997):’Marketing Management’ Kayali Publisher. Day. New Delhi. C..  Kotler. New Delhi.  David. McKinsey Quarterly. Seventh Edition.. 1. V. New Delhi  Sontakki.Sultan Chand Sons. pp 17  Saxena.  Kothari. New Delhi  Sharma. Vishwa Publication..R (2001):’Research Methodology’. (2003):’Marketing Management’ Tata Mcgraw-Hill Publishing Company Limited.  Business World Newspapers  Economic Times  The Hindu  Times of India 105 . A. New York: Free Press  Chatterjee. Ltd. (2001) Descriptive Research: Marketing Research. Philip. Rajan. Aaker.BIBLIOGRAPHY Books:  Aaker (1991) Building Strong Brands. Jauchius.Kumar & George S. Kaas and Satpathy no.

? 106 . and ease in payment modes is pricing marketing of the bank.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 □ Can’t say 4) Multiple ‘ basic’ financial services and loan gateway is product marketing of the bank? □ Yes □ No 5) Devised to ensure usage as well as profitability Quantity discounts.

□ Yes □ No 6) Comprehensive offering of different services is placement marketing of the bank? □ Traditional □ Modern 7) Collaborating with NGO’s to development Knowledge marketing of the bank □ Yes □ No 107 .