Professional Documents
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ACKNOWLEGMENT
Chain of mistakes leads towards failures, chain of failures leads to experience and chain of experience leads to success. Thats what a lifes path is. Same is applicable to my project work. I do not claim that I have a complete knowledge of the subject. I would like to thanks my friends and many persons who directly or indirectly helped me during my project.
PREFACE
This project report is submitted for the partial fulfillment of Master of Business Administration degree from Sikkim
Manipal University
While developing this project, I was involved with system analysis, design and implementation process. This is a sample report describing in detail various aspects of the system. I have used prototyping model for designing
STUDENT DECLARARTION
I hereby declare that the project report entitled
areas4. In other states like Punjab and Haryana, the urban rural disparity is significantly lower. A fifth of the Indian population is below the poverty line (BPL) today with a MPCE below Rs 340. In some states like Jharkhand and Orissa, the proportion of BPL is greater than 40%. Diamond believes that the segments that are not considered BPL should all be considered as potentially bankable with genuine financial needs that could be met by formal financial and banking systems.
than 100% penetration (many urban Indians have more than one bank account), rural India lags far behind with a 19% penetration. The variance in rural and urban deposit and credit account penetration is not restricted only to few states but is common across all states. In addition, the average value of a deposit account and a credit account is also quite low in rural areas as compared to urban areas. Diamond believes that the reasons for lower penetration levels are partly economic, as explained by the low GDP per capita in the rural areas of the country, and partly a result of controllable factors that are inherent in formal banking systems in India today. The low deposit and credit account penetration and low average values in deposit and credit accounts demonstrate that banking outreach in rural India is sub-optimal. This low outreach can be explained by two key parameters: access and usage. Simply defined, access is the availability of financial services, and usage is the actual use of those services. Access is influenced by issues such as the basic economic state of rural India, lack of physical infrastructure facilities, regulatory constraints, and the economics of rural banking. Usage is constrained by social issues such as illiteracy, incomplete service offerings by banks, and high transaction costs in the formal banking system. Access and usage are
not synonymous, as people may have access to financial services, but decide not to use them, either for sociocultural reasons or because opportunity costs are too high.
Apart from SBI, there are many other banks which function for the development of the rural areas in India. These banks are listed below:
Andhra Pradesh
Bihar
Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank Chhattisgarh Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank
Madhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank Uttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank
Gujarat
Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank
Punjab
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Bank
Punjab Gramin Bank Faridkot-Bhatinda Kshetriya Gramin Bank Malwa Gramin Bank Kerala
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
Madhya Pradesh
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Gramin Bank
Madhya Bharath Gramin Bank 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
Cauvery Kalpatharu Grameena Bank Krishna Grameena Bank Chikmagalur-Kodagu Grameena Bank
Rajasthan Gramin Bank Jaipur Thar Gramin Bank Hodoti Kshetriya Gramin Bank
Visveshvaraya Gramin Bank Orissa Kalinga Gramya Bank Utkal Gramya Bank Baitarani Gramya Bank Neelachal Gramya Bank
West Bengal Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank
Uttar Banga Kshetriya Gramin Bank
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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
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banking services because they are below the poverty line, Diamond believes that approximately 185 million potentially bankable people do not use formal banking services because of reasons like poor access or usage.
120 100 80 60 40 20 0
To ta lP op ul at io
100 47 53 16
37 13
24 6
Series1 18
Source: Census India; BSR 2008Reserve Bank of India; World Bank & NCAER (2008).
n No n A
du lt P
op ul at io n
Post Office, and an average rural literacy rate of 59% and secondary school penetration of 12%. This lack of physical and social infrastructure in rural India is a key issue impacting access to formal financial services. The average distance to a branch in India is approximately 3.8 Kms. While this compares favorably to the average distance to a branch in a developed market like the U.S. (which is 6 Kms6), there are significant additional challenges in India in the form of unpaved roads and limited access to modern transportation. Most rural customers are likely to sacrifice an entire days wage to travel to a bank branch which is open between 10:00am and 5:00pm. While some banking transactions could be done over phone, this is rarely an option in a country with such low rural teledensity. Limited delivery capability is a significant challenge. Much of rural India is serviced through branches because ATM penetration is low and other channels such as Phone and Internet Banking are non-existent. Intermediaries like Non-Governmental Organizations (NGOs), Self-Help Groups, and Micro Finance Institutions (MFIs) are being used by banks to improve access to credit and savings. However, these channels, in their current form, offer limited services.
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There are some regulatory constraints imposed by the Reserve Bank of India (RBI) which may inadvertently contribute further to the lack of formal banking services in rural areas. For example, the RBI does not allow banks to post any person other than a security guard at ATMs. Hence, banks cannot deploy many ATMs in rural areas as many rural customers require in-person support. A second regulatory inhibitor is that new banks planning to establish a branch in a rural area have to receive approval from the Lead Bank and District Collector of that district. Hence, banks choose not to open new branches in certain areas even when it is profitable to do so because there is no certainty of getting approvals. Many banks view the rural market as a regulatory requirement rather than an economic opportunity. Banks have from time to time borne the social cost of lending to the rural economy at rates below their costs. They have also faced capital erosion because of the write-off of loans, particularly agriculture loans. Banks are required via regulatory requirements to open branches in rural areas to provide loans to agriculture and other priority sectors.
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Service Provided
- Deposit Accounts - Credit Accounts - Remittances - Cards - Third-Party Products
Remarks
- 96% of total deposit and 95% of total loans are with scheduled commercial banks with cooperative banks holding the difference - Has a high cost-to-serve
Intermediaries
- NGOs, SHGs, MFIs and Cooperatives that act as Intermediaries to take financial Services to the rural areas
- MFIs directly lend to the poor and also act as agents for he banks - SHGs borrow from banks and are beneficiaries of loans themselves - Cash Withdrawal - Cash Deposit - Money Transfer - Cheque Book Request - Bill Payments
ATM
Others
-Phone Banking
Manual Interactive Voice Response - Internet Banking - Kisan Credit Card Provide short-term credit
- Cash Withdrawal - Cash Deposit - Money Transfer - Cheque Book Request - Bill Payments
- Almost non-existent in rural - India because of low: Tele-density Internet-penetration Credit appetite of banks
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thinking on the part of commercial banks. Access issues, however, explain only one part of the problem. Usage is an equally important issue for rural customers.
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Rural households may have highly irregular and volatile income streams. Irregular wage labor and the sale of agricultural products are the two main sources of income for rural households. The poor rural households (landless and marginal farmers) are particularly dependent on irregular wage employment. Rural households also have irregular expenditure patterns. The typical expenditure profile of rural households is small, with daily or irregular expenses incurred through the month. Furthermore, a majority of households incur at least one unscheduled expenditure per year, with the most frequent reasons being medical or social emergency7. In short, the rural customer is generally considered to be a risky one.
Information Asymmetry:
Since many rural people do not have bank accounts, there is a lack of information on customer behavior in rural India. Absence of a Credit Information Bureau also complicates the problem as banks have to rely on informal sources to learn the credit history of rural customers. A lack of reliable information can result in either missed opportunities in not approving otherwise eligible loan candidates, or nonperforming loans.
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formal financial services, do not do so because the product and service mixes do not meet their needs. The financial service needs of rural customers are not confined to just savings and credit, as is usually assumed. Their financial needs are linked to their life cycle needs, ranging from savings to credit to insurance to remittances. In fact, even the savings and credit products currently offered to rural customers do not entirely meet their needs. Access to savings and investment facilities is critical for the poor. The two critical needs for the rural poor are microsavings and frequent withdrawals. These needs facilitate a customer in building capital over the long term, as well as coping with income shocks in the near term. However, banks do not offer adequate services to address these needs. The lack of services, therefore, leaves the rural poor with little option than to transact with the informal banking market. A study conducted by Micro Save also concludes that the poor transact with the informal sector because it will accept small amounts, provide doorstep service, and ensure ease of enrolment. Rural customers need loans not only for productive purposes but also for consumption needs (Following Table). A part from agricultural support, rural customers need micro
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credit for consumption, education and emergencies. Though banks offer purpose free loans (personal loans and credit cards) in urban areas quite liberally, in rural areas sanction of such loans is significantly restricted. Therefore, the poor raise these loans through the informal financial system (it is worth noting that these loans taken from the informal system are almost always repaid or renewed12). In addition, larger households need occasional high value micro-enterprise loans for small capital investment. Though banks offer these and loans, they require excessive which documentation time-consuming processes
Purpose of Borrowing
Rural Household Borrowing
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Personel Loans, 12% Personel Loans Other Business Loan, 52% Agriculture Loan Agriculture Loan, 36% Other Business Loan
A significant percentage of borrowing is toward consumption and other household expenditure, whereas formal financial institutions in rural India provide loans primarily for productive purposes. Source: AIDIS2008, National Sample Survey Organization (NSSO);
Diamond analysis.
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Insurance reduces the vulnerability of poor households by replacing the uncertain prospect of large losses with the certainty payments. life, health, of It payout is against to small, a regular premium risk and integral comprehensive crop,
management strategy for poor households. This includes accident and asset (dwelling, livestock) insurance. Banks and insurance firms do not offer these services in many rural areas, leading the poor to rely on the informal financial system. There are many rural households which depend on weekly or monthly remittances from their family members who have moved to urban areas. At present, they depend on informal channels to remit the money and consequently either risk the loss of money or pay high transaction fees. Banks do not offer seamless remittance facilities between urban and rural branches as many of the rural branches are not computerized and connected to the main banks computer systems. This often results in the beneficiary receiving the amount two weeks after it has being transferred. This represents yet another key service which is not provided. The transaction cost for a rural customer to receive credit primarily constitutes four attributes: the interest rate, loan amount received as a percentage of amount applied, bribes
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paid, and the lead time to process the loan. Though the formal banking system offers loans at interest rates lower than informal banking systems, the time taken for a loan to be sanctioned is high which increases uncertainty and opportunity cost. In addition, the customer needs to pay almost 10% of the loan amount in bribes and eventually receives an amount that is less than what was applied for. Therefore, while the interest rates are usurious in the informal financing system, rural customers still resort to this channel because the waiting time to receive the loan is negligible and there are no indirect costs or commission. Banks also insist on collateral security which many rural poor cannot afford. As far as savings are concerned, though the formal banking system provides financial security, the cost of opening and operating an account is high. The overall cost of transacting with the formal financial system increases for a rural person because of additional costs such as expenses incurred to reach a branch and the opportunity cost of lost wages. Since rural banks are generally not within an accessible area and do not operate at convenient times, the rural customer must forgo a days wage to reach a branch. Informal systems, on the other hand, involve a lower transaction cost, but they are risky and in some cases result
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in the loss of ones entire capital. In short, this leaves the rural customer to choose between two unfavorable options. In summary, the services being offered by the formal banking system do not seem to meet the needs of the rural poor. A World Bank study suggests that the poor apply a set of criteria to judge the services being offered by any financial service provider, including: ProductsAre financial services available and tailored to my needs? CostWhat is the total cost of the service (including opportunity cost)? ConvenienceHow easy is it to access and use? EligibilityAm I eligible for financial services and can they be accessed repeatedly? As explained earlier, the savings products offered in the current format do not qualify as a flexible, convenient and cost-efficient service. Similarly, loan products do not meet product and eligibility criteria. In addition, insurance and remittance services are not even available. The cost of services, despite lower interest rates, is high because of other indirect costs which make the banking services costinefficient.
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World Bank). There are other studies by the Planning Commission and ICICI Bank which put the figure even higher at Rs 1,440 billion and Rs 1,500 billion respectively. Similarly, on the deposit side, a large segment of the rural population does not save with formal banking channels because banks are not accessible and do not provide the appropriate products and service, leaving a significant opportunity to grow the deposit base. At present, the penetration of banking in rural areas is suboptimal with a large market remaining untapped in both the liability (~ Rs 215 billion) and asset (~ Rs 1,204 billion) sides of the business. These estimates clearly suggest that there is sufficient demand in the rural market to encourage banks to think seriously about rural areas as an alternative growth opportunity. As we identified earlier, access and usage are two broad concerns which explain why the potentially bankable are unbanked. With regard to access, the challenge for banks is to identify profitable channels that meet the needs of rural customers. With regard to usage, banks need to understand the requirements of the rural customer and customize products and services Accordingly (Following Table).
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32
Convert Potentially Bankable Address Usage Needs Of Rural Customers Bank Initiatives To Improve Usage
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Today, branches are the primary delivery channel in rural areas. Though there are 32,000 commercial bank branches in India, they cover less than 7% of total villages. Opening more branches is not necessarily profitable as many pockets of rural areas do not have business enough to justify an expensive branch channel. Therefore, to improve access in rural areas, banks need to modify existing channels, introduce new channels and identify innovative ways to integrate the two.
rural areas as the literacy level and transaction ticket amount is too low. ATMs can, however, be designed to meet the needs of rural customers. For example, ICICI Bank is working with IIT Chennai to develop an ATM that has a biometric fingerprint login, accepts soiled notes, and lower value denominations. In addition to modifying the design of the machines, banks should also hold discussions with the RBI to allow an attendant to be posted at ATMs. This will enhance the usability of ATMs. Though phone banking and internet banking are costeffective channels, given very low tele-density and low internet penetration in rural areas, the ability to use these channels to reach the rural customer is low. However, phone and internet banking should be considered once infrastructure and literacy levels improve in rural India. A business correspondent could then run an e-kiosk to assist customers to transact over these channels. For example, Centenary Bank in Uganda uses internet and phone banking to provide bill payments, repayments. Business correspondents can be provided with point-ofsale (POS) functionality to allow customers to deposit and withdraw cash from their accounts. Combining POS with a smart card is one way to improve access. Brazil has money transfers and loan
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successfully used banking correspondents who use POS and card readers to provide current accounts, loans, and insurance, accept bill payments, and perform other transactions.
correspondents
and
facilitators
intermediaries in providing banking services. NGOs, MFIs, Societies, Section 25 companies, registered NBFCs not accepting appointed currently public as offered deposits, Business by SHGs and Post Offices can be Correspondents. and MFIs, Business (i)
Correspondents can provide several services which are not including: identification of borrowers and fitment of activities; (ii) collection and preliminary processing of loan applications including verification of primary information/data; (iii) creating awareness about savings and other products and education and advice on managing money and debt counseling; (iv) processing and submission of applications to banks; (v) promotion and nurturing Self Help Groups/Joint Liability Groups; (vi) post-sanction monitoring; (vii) monitoring and handholding of Self Help Groups/Joint
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Liability Groups/Credit Groups/others; and (viii) follow-up for recovery; (ix) disbursal of small value credit, (x) recovery of principal/collection of interest (xi) collection of small value deposits (xii) sale of micro-insurance/ mutual fund products/ pension products/ other third-party products and (xiii) receipt and delivery of small value remittances/ other payment instruments. The introduction of Business Correspondents may face some challenges from labor unions. However, Diamond believes that there may be some options to address the concerns of the current workforce while using Business Correspondents customers. Caixa Economica, a state-owned bank in Brazil, manages the countrys lottery network and distributes government benefits. To increase the access of its services, Caixa extensively utilizes the Banking Correspondent channel, with 14,000 banking correspondents covering all of Brazils 5,500 municipalities. In less than 2 years, Caixa opened about 2.8 million new accounts and estimates that 40% of its banking transactions are handled through the banking correspondent channel. to capture more value from rural
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Satellite
offices
are
cost-effective
alternative
to
branches. These offices can be established at fixed premises in villages and are controlled and operated from a base branch located at a block headquarters. All types of banking transactions may be conducted at these offices. Banks have, however, not used this channel actively, despite the argument that this channel is relatively less expensive, as it can draw personnel from the main branch and can remain open for just two days a week. This channel, therefore, is appropriate in blocks and districts which are densely populated. In the urban areas, most Indian banks opt for an extension counter where the business does not justify a full-fl edged branch. Similarly, satellite branches can cater to rural areas which do not justify a large branch. Where banks do not find it economical to open full-fl edged branches of satellite offices, mobile offices may be more appropriate. Mobile offices extend banking facilities through a well-protected truck or van. The mobile unit visits villages on specified days/ hours. The mobile office would be affiliated with a branch of the bank, and serve areas which have a large concentration of villages. This will not be dissimilar to the mobile ATMs implemented by some of the Indian banks in the urban areas.
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While this list is not exhaustive, it highlights the need for creative solutions that apply the right channel to the right market and transaction. In South Africa, Capitec has combined convenient branches along transportation routes (for example, train and bus stations, and taxi stops). In addition, it has rolled-out debit cards and automatic teller machines across 200 of these branches to stimulate savings among low-income earners. Between February and August 2007, the number of customers jumped from around 30,000 to more than 90,000.
CONCLUSION
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There are 185 million bankable adults in rural India who are unbanked because of access and usage issues. This presents a significant opportunity for commercial banks. However, to reach this market and subsequently build an inclusive financial system, there must be a coordinated and concerted effort by the three key stakeholders: the Government of India, the Reserve Bank of India and the commercial banks. In addition, a partnership between banks and business correspondents, and collaboration amongst banks is critical. Furthermore, banks should tailor their product and service mix to meet rural needs, and adapt their delivery models to ensure commercial viability of their rural banking operations.
BIBLIOGRAPHY
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1. World Bank 2008 2. Reserve Bank of India 2008 3. www.cia.gov 4. National Sample Survey Organization (NSSO), Household Consumer Expenditure in India (2006) 5. Census 2006 6. Access to and Usage of Financial Services, World Bank 2008 7. RFAS, 2008, World Bank & NCAER 8. Reserve Bank of India, www.rbi.org.in 9. Access to Financial Services by Stijin Claessens, World Bank 2005 10. Rutherford Stuart, The Poor and their Money, January 2000 11. www.microsave-africa.com 12. RFAS 2008, World Bank 13. Bharat Nirman is a four year business plan of the Government of India to improve rural infrastructure 14. National Sample Survey Organization (NSSO) 2007.
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ANNEXURE
Table 1 : Bank Loan outstanding against SHGs Agency-wise Position (Amount Rs. crore) Agen cy Durin Total Bank Loan g the year outstanding against March 2008 Per SHGbank loan Outstanding Out of Total : Bank loan outstanding against SHGs under No. of SHG s Com merci al (Publi c& Privat e 200708 2008% grow th 19.0 40.7 1.1
43
SHGs as on 31 (Rupees)
% e
Amo
% Shar e
Amoun t
Shar unt
48,240 57,037
63828 3
3225.92 3961.53
Banks 09
Secto r) Regio nal Rural 200708 2008% grow th 11.7 Coop erativ e 200708 2008% grow th 11.8 TOTA 2007- 362 L 08 200809 % grow th 16.5 33.4 4224 100. 338 0 2267 100.0 53,689 9.85 14.5 6.5 97688 7 21.7 5861.72 594 1 100. 0 18.4 169 99.9 0 100. 0 46,884 91697 8 4816.8 7 3713 10.2 78 9.8 4151 30 1306 .00 5.9 31.3 51.6 1103 6.5 .39 5.8 31,460 72852 392.09 29,711 55504 258.62 18.2 16.0 8757 24.2 16 23.1 9778 34 5224 .42 5.8 4421 26.0 .04 23.0 53,428 25889 0 13.2 50,485 22319 1 1508.10 1332.33
Banks 09
Banks 09
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Table 2 : Agency-wise NPAs of Bank loans to SHGs ( Amount Rs. crore) Agency Total no. of Banks reported data on NPAs Commerci al Banks (Public Sector ) Commerci al Banks (Private Sector) Regional Rural Banks (RRBs) 72 4203.46 177.79 4.2 12 1376.93 23.83 1.7 26 NPAs as on 31 March 2009 Outstandi ng Loans against SHGs** 15086.65 363.27 Amount of NPAs % of NPAs to Outstandi ng bank loans 2.4
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894.00 21561.04
60.97 625.86
6.8 2.9
Table 3 : Recovery Performance Agency-wise (All SHGs) Agency No. of Banks report ed recove ry Commerci al Banks (Public Sector) Commerci al Banks (Private Sector) Regional Rural Banks
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No. of banks based on percentage distribution of recovery performance of bank loans to SHGs as on 31 March 2009 =/> 80-94% 50-79% < 50% 95% 6 12 7 0
data 25
65
12
31
15
Cooperati
170
56
58 102 38.2
37 59 22.1
19 27 10.1
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