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Sample Essay on Rural Banks and Their Expansion in India

by Anjana Mazumdar

While writing the essay on this topic, please keep the below given points in mind.


(1) Introduction

(2) Establishment of Rural Banks

(3) Expansion of Nationalised Banks

(4) 20-Point Economic Programme

(5) Chief Ministers Conference

(6) Aims and Objectives of Rural Banks

(7) Financial aspects

(8) Peoples Banks

(9) Future of Rural Banks

(10) Conclusion


Since ages past the average Indian farmer has been living under heavy debts. He is born under debts,
lives in debts, dies in debts and leaves debts for his heirs. The basic reason of his endless debts is the
ancestral obligations; which are regarded sacred and paid till his last breath. The heavy expenditure at
social functions, deaths and marriages force him to be down under the feet of traditional moneylender
who had been exploiting him by charging high rates of interest. The farmers who fall once into the
hands of the moneylender are never debt free.

In the whole country a network of co-operative societies was spread but the entire needs of rural people
could not be satisfied. They also adversely affected them because of corruption, favouritism and

Hence the establishment of Rural Banks was defined as To fulfill the aims of institutionalising the credit
structure and enhancing its area and coverage. Establishment of co-operative societies was no doubt a
relief to the poor. But they could not meet the entire needs of the rural people. They could provide little
service to the community because of corruption, nepotism and inefficien-cy which infected them. They
were, however, able to make a dent and money-lenders share in the total lending came down to 40% in
1960-62 from 70% in 1951-52.

14 leading banks of the country were nationalised in 1969. The object was to give banking facilities to
the neglected sections of the society specially the poor farmers, landless labourers and artisans. The
nationalised banks expanded their branches in rural areas. Despite this a large number of people were
still left uncovered and unfacilitated.

On August 18, 1975 a conference of Chief Minister and State Finance Ministers was held in Delhi to
study the credit needs of rural people. The conference decided to give these banks a different shape
other than the commercialised and co-operative banks and the staff be given facilities in regard to the
local conditions in various states and regions.

The President accepted the Chief Ministers Conference recommendations and made an ordinance on
Sept. 26, 1975 to setup the regional rural banks in the country. In reply to it fifty banks were opened on
Oct. 2, 1975 covering 9 districts of various states. The share capital of banks was made up by central
government, state government and commercialised bank in ratio of 50%, 15% and 35% respectively.
Before April 1, 1977 a target of 5&regional banks was set up.

The aims and objects of Rural Banks are as follows :

1. These banks will provide credits to rural population to make it more productive and raise the level of

2. They will identify the credit needs of each region to regulate produc-tivity and avoid wastefulness.

3. The banks will help eradication of poverty and eliminate the financial constraints that mar the
progress of poor farmers and artisans.

4. These banks will combine the better features of both the systems of commercial banks and the co-
operative societies avoiding inabilities that are present in them.

5. They will also enhance the membership of primary societies and expand it substantially.

6. They will develop the tendency to repay regularly the government loans. The proper climate for
recovery of loans will be created and non-payments will be discouraged.

7. The rural banks will also help rural industries, animal husbandries, poultries and fishery.

These banks will evolve an economic structure of rural India to make the use of the fruits of science and
technology as their motto is Banks exist for the people and not people for the banks.

The government has contributed 15% of the initial capital and 15% is proposed to be raised from the
local people. But this idea was dropped. The transactions of these banks will be made in the regional
languages so as to make them truly peoples banks.

Rural banks have been established to meet the needs of the weaker sections of society. It will eliminate
rural indebtedness. It will save the rural population from the clutches of the clever moneylenders. It will
also promote economic development by providing the much needed funds to marginal and poor
farmers. The possibilities of lack of funds to start small-scale industries will be eliminated. Easy loans will
be provided to them on low rates of interests without having substantial securities. The bank staff will
specially be made rural minded so that the villagers may not feel reluctant to partonise these banks. The
efforts will be made to form banking habits in villagers.

The Role Of Banks In Financial Inclusion Finance Essay
Financial inclusion is delivery of banking services at an affordable cost to the vast sections of
disadvantaged and low income groups. As banking services are in the nature of public good, it is
essential that availability of banking and payment services to the entire population without
discrimination is the prime objective of the public policy.
1.2 The present scene
Financial inclusion, in the sense of extending banking products at an affordable cost to the vast sections
of disadvantaged and low income groups, is not new to India. For more than three decades after
nationalization of major commercial banks in 1969, Indian banking has shown tremendous growth in
volume and outreach resulting in increase in the total number of branches of scheduled commercial
banks from 8,321 in the year 1969 to 68,681 as at the end of March 2006 and reduction of the average
population per branch office from 64,000 to 16,000 during the same period. Public sector banks were in
the forefront of reaching out to sections that were once neglected and designing new, innovative loan
products for agriculture and small-scale industries sectors is an outstanding example in this regard.
There are, however, concerns that banks have still not been able to reach a vast segment of the
population and provide them with basic banking services. Growth has also not been uniform across all
the regions/ States of the country and there still continue to be wide gaps in the availability of banking
services in the rural areas. While from the policy angle none of the earlier measures aimed at broad
basing their clientele has been withdrawn, the banks might be laying somewhat less emphasis on
inclusive practices in view of the thrust on profitability.
Indian Scenario
Bank nationalization in India marked a paradigm shift in the focus of banking as it was intended to shift
the focus from class banking to mass banking. The rationale for creating Regional Rural Banks was also
to take the banking services to poor people. The branches of commercial banks and the RRBs have
increased from 8321 in the year 1969 to 68,282 branches as at the end of March 2005. The average
population per branch office has decreased from 64,000 to 16,000 during the same period. However,
there are certain under-banked states such as Bihar, Orissa, Rajasthan, Uttar Pradesh, Chattisgarh,
Jharkhand, West Bengal and a large number of North-Eastern states, where the average population per
branch office continues to be quite high compared to the national average. As you would be aware, the
new branch authorization policy of Reserve Bank encourages banks to open branches in these under
banked states and the under banked areas in other states. The new policy also places a lot of emphasis
on the efforts made by the Bank to achieve, inter alia, financial inclusion and other policy objectives.
1.4 Financial inclusion Institutions
Financial Institutions, both large and small have an important role to play in financial inclusion. With
their organized structure and effective management larger financial institutions could act as mentors for
small financial services firm by ensuring a strong financial backing.

: Commercial banks could act as an important part of the process to achieve full financial inclusion.
Especially with simplified savings bank accounts (including no-frills account), relaxed KYC procedures,
primary sector lending and even microfinance.
Cooperative Banks: The Urban and Rural cooperative banks could cater to populations that are generally
neglected by the commercial banks. Their position allows them to reach out to the people far easier
than the more formal commercial banks. Since they are operated by the members of the banks
themselves, there would be more involvement from the people of such cooperatives.
Regional Rural Banks: Through priority sector lending, KCCs and GCCS the RRBs could ensure a steady
flow of credit to the rural poor especially the marginal farmers. The RRBs like the commercial banks can
deal with the agencies like NGOs who are interested in helping out the poor and the weaker sections.
Non-Banking Financial Companies (NBFCs): The NBFCs could include both large and small financial firms
which provide financial services. They could offer specific financial products to the poor and low income
people such as micro-insurance, micro-credit, etc. The NBFCs could create financial awareness among
the people by not only offering alternative financial services but also spreading financial literacy by
providing financial advices.
Micro Finance Institutions (MFIs): Micro Finance Institutions or MFIs are created with the specific aim of
extending financial services to the poor and the weaker sections of the populations. A MFI could be
independent or as in most cases are promoted by NGOs, government agencies, NBFCs, commercial
banks and other institutions. Micro Finance Institutions have so far been the most successful at ensuring
basic financial services to the unbanked sections of the populations. Along with the SHG movement, the
MFIs has enabled the wealth generation in many underdeveloped rural as well as neglected urban areas
in India.
Post Office Savings Bank: These along with their extensive network could offer wide variety of small and
micro financial services to the people. The Post Office Savings bank could utilise their staff to deliver
door-to-door service to the people.
Non-Governmental Organizations (NGOs): NGOs could provide financial assistance to the poor and the
weaker sections through NGO promoted MFIs or by providing financial advice. NGOs working the poor
and the economically deprived can more closely analyze their spending patterns and credit
requirements. Commercial banks and other large financial agencies can work closely with NGOs to
ensure that the dealings with the poor and the weaker sections turn out to be a fruitful activity not only
for the people but also for the lending agencies.
1.5 BC BF Model
The banking needs of the financially excluded people are restricted to limited transactions of low value
in nature. Operating a full-fledged rural branch is not a viable proposition considering the huge
operational costs and limited business volumes. The business correspondents (BCs) / business
facilitators (BFs) model is ideally the alternate viable business model in order to ensure greater
coverage of rural clients in far-flung areas at reduced costs. Under the set-up, banks are permitted by
the Reserve Bank of India (RBI) to outsource selected banking services through BCs and their authorized
agents. Customers should have the freedom to use branch banking facilities even though the business
correspondents are available in their locality or they are clients initially sponsored by BCs. Therefore, it
is considered necessary to route micro-insurance products through these no frill accounts so that the
BCs may become viable. It may be recalled that the Committee on Financial Inclusion (CFI, 2008) had
recommended that to reach the last mile client, various initiatives be taken to appoint BCs so that
financial inclusion can be achieved. Therefore, it is felt that BC / BF Model envisaged by the government
and RBI be implemented widely.

1.6 Strategy for Improving Financial Inclusion by Formal Credit Sources:-
The Committee is of the view that the overall strategy for financial inclusion,
Especially amongst the poor and disadvantaged segments of the population should
Ways and means to effect improvements within the existing formal
Credit delivery mechanism.
Suggest measures for improving the credit absorption capacity
Especially amongst the farmers and poor non-cultivator households.
Evolve new models for extending outreach.
Leverage on technology solutions to facilitate large scale inclusion.
Review Of Literature
Narayana Nagesh, 2009 focuses that RBI has forced more to IT firms to be involved in cause of financial
inclusion which is a major challenge before the nation. RBI need the involvement of big IT companies to
reduce their transaction cost. And also to make a biometric cards for unbanked people. In India about
60% of population doesnt have access to banking services. What they are looking is technology and to
increase standard of living of people by providing marketing services and many more.
Ravichandram Krishnamurthy and Alkhathlan Khalid, 2009 focuses on economy of our country which is
growing at 9% p.a. But still the condition of people in rural areas are worse. And 40% of people are also
not aware about simple banking services like savings,etc. Also for making people more aware as govt.
started opening more branches. But still there is not so much response from rural people. So the banks
decided to open their accounts with no deposits by going at their doorsteps. This project is named as
national pilot project of which the ultimate objective is to improve standard of living of poor people.
Sharma Purti, 2008 focuses on that there should be easy and affordable Credit Financial services for the
weaker Sections or we can say for rural people. For this banks should use technology in Banking system
is a best solution for achieving financial inclusion. To use all this technology first of all policies should be
made and then used.
Sharma Anamika, 2009 focuses that Financial inclusion has been a buzzword for the policymakers for a
long time. It is a path for a sustainable economic growth and development in a country like India. Acc. To
this article government bring large sections of the rural population within the banking system. Also this
article identifies the barriers in the process and suggests strategies to ensure maximum financial
inclusion for the underprivileged and unbanked areas.
Allen Franklin & Chakrabarti Rajesh, 2007 Focuses that with recent growth rates among large countries,
India has experienced nothing. The Indian financial system has been witnessing an exciting era of
transformation. The banking sector has seen major changes with deregulation of interest rates and the
emergence of strong domestic private players as well as foreign banks. Microfinance has contributed in
a big way to financial inclusion and is now attracting venture capital and for-profit companies - both
domestic and foreign.
Sinha Ram, 2009 focuses that Financial inclusion can be defined as the process of ensuring access to
financial services and timely and adequate credit for vulnerable groups such as weaker sections and low
income groups at an affordable cost. In this Article the sample includes 28 public sector and 12 private
sector commercial banks. And it results suggest that the private sector banks are lagging behind the
public sector commercial banks in this matter.

Bankar Nitin, 2005 concluded that as rural area are having major demerit regarding the finance. Many
projects are being formulated for the rural peoples for the advantage. The major problem in unbanked
areas is Access to cash, limited financial services as there are many indigenous bankers who lend money
and charge high interest and exploited the rural people. To keep a check on all these type of exploitation
various schemes are being carried out, but for this first we should understand the problem faced by the
village or the rural people. Firstly, their needs are very limited so they are unrecognised and the next
problem which occur is the smaller number of people scattered at longer distance, even if this involves
huge cost it also provides huge opportunity for the banks to take the advantage. To help these rural area
corrective actions must be taken like we have to provide proper advice to the villagers and face to face
contact can create a good trust in the minds of people and thus they could be made aware about the
positive traits of banking.
Benison Marc, 2008 focused on the rural areas are being provided with some benefits like No-Frill
account, in which they could have zero balance in their account and there is no such obligation to have
minimum amount of balance, also they provided overdraft facility in no-frill accounts. This encouraged
the people and had a very good response and further they were provided with the service called KYC i.e.
Know Your Customer, so that they may not have any problem in opening an account. They even changed
their printed material into Hindi and other regional languages. Banks have been advised by RBI to
provide a General purpose Credit Card (GCC) facility at their rural banks; this card holder is entitled to
withdraw cash from specific branch. These all projects have been initiated in North India and carried out
good results.
Shukla Rajiv, 2009 concluded that nearly 80% of the population is with life, health, non-life insurance
cover. About 40% of people have bank account and 51 out of every 100 Indians had bank account in
1993 which marginally gone up to 54 in 2007. People spend life and non life insurance just about 2,000
and Rs 300 resp. compared with global average of at least 18,ooo and 13,000.So after read the article I
think in rural area people have no knowledge about the banking services so thats why people not takes
the advantages of the banking services. And the main motive of Indian banks is not only opening
accounts they also help to lowering transaction costs for small loans and deposits, using technologies.
Shrivastava Ashish, 2009 focused on developing countries like India, the access to banking services
especially to the poor, underprivileged and low income groups, for inclusive growth. Today the banks
redesign their business strategies to in corporate specific plans to promote low income group so it is
both as well as business and corporate social responsibility. Today banks also help people who Below
Poverty Line (BPL). The govt. opens their accounts and deposits 1500 in the a/c of 50 lakh rural families.
The banks also come together with some NGO organization and establish some branches. Todays banks
focus very poor and disadvantage groups such as non cultivator house holds share croppers etc. So
financial inclusion objective is help to providing access to affordable banking services.

Gupta Indranil, 2010 focused on financial inclusion which is simple words to be that all financial bodies
coming together and spreading access to each and every corner in India. It does not mean opening bank
account it is the process of reaching financial services or weapons to all India across the country.
Financial inclusive also main motive to use the potentiality of Indias huge untapped population. In rural
people not aware about the banks product which are beneficial for them. In rural area more people get
daily wages so the banks cannot give loan to the people. So then for getting a loan they will go to lender
because they feel that lender is easier than getting a loan from bank. Today RBI open no frills accounts
and banks also now using phones to reach low income consumer. So with all these they will create the
financial inclusiveness over the country.
K C Chakrabarty, 2009 focused on financial inclusion which played important role in improving quality
and reducing cost. 'Anytime Banking' through new, 24/7/365 delivery channels helps to increase
banking services. But it not helps properly to rural people to know about the services. Today, only 5.2
per cent of the country's villages have a bank branch. So achieving for this banks have redesign their
strategies which helps to promote financial inclusion. So for this experts recommended BC(Business
correspondent) BF(Business facilitator) which helps to the banks to promote finiancial inclusion with in
the people. Financial inclusion along with the Governmental developmental programmes will lead to an
overall financial and economic development in our country.

Shetty Naveen and Dr. Veerashekharappa, 2009 added that developing the economy finance is one of
the effective tools. The main cause of exclusion of large number of rural population from financial
institutions is the gap between demand and supply of financial services and due to this microfinance
was introduced. Micro finance has many areas to improve as there was a problem in non-availability and
poor recovery performance of existing rural credit institutions. The linkage between SHG-banks and MFI
have helped microfinance sector in its growth and various NGOs are transforming themselves into
microfinance institutions to help the excluded people of rural area.
Jayasheela Nil, Hans Basil, 2008 concluded that micro finance plays a vital role as a part of financial
inclusion. MFIs work towards handling the public money, their growth demands attention and
appreciation. As demand is increasing for rural finance the micro financing institutions want power of
mobilising saving from the government and taking into consideration the present scenario MFIs should
be better in their finance and technology and fulfil their social responsibility. MFIs have to upgrade their
credit institutions for sustaining livelihoods of the associated people
Need And Scope Of a Study
The scope of financial inclusion can be expanded in two ways.
through state-driven intervention by way of statutory enactments ( for instance the US example, the
Community Reinvestment Act and making it a statutory right to have bank account in France).
Through voluntary effort by the banking community it for evolving various strategies to bring within the
ambit of the banking sector the large strata of society.

When bankers do not give the desired attention to certain areas, the regulators have to step in to
remedy the situation. This is the reason why the Reserve Bank of India is placing a lot of emphasis on
financial inclusion.
In India the focus of the financial inclusion at present is confined to ensuring a bare minimum access to a
savings bank account without frills, to all. Internationally, the financial exclusion has been viewed in a
much wider perspective. Having a current account / savings account on its own, is not regarded as an
accurate indicator of financial inclusion. There could be multiple levels of financial inclusion and
exclusion. At one extreme, it is possible to identify the super-included, i.e., those customers who are
actively and persistently courted by the financial services industry, and who have at their disposal a wide
range of financial services and products. At the other extreme, we may have the financially excluded,
who are denied access to even the most basic of financial products. In between are those who use the
banking services only for deposits and withdrawals of money. But these persons may have only
restricted access to the financial system, and may not enjoy the flexibility of access offered to more
affluent customers.
To know the role of public sector banks and private sector banks towards financial inclusion.
To make comparison between public sector banks and private sector banks in financial inclusion.
To know the technique used by banks for financial inclusion.
To identify procedural problems from both public and private sector banks.
Research Define
The definition of problem includes the study of Role of bank in financial inclusion with special reference
to Kapurthala district.
Research Design
A research design is the arrangement of conditions for the collection and analysis of data in a manner
that aims to combine relevance to research purpose with economy in procedure. My research design is
a descriptive. This step of the study consists of developing the most efficient plan for gathering the
relevant data. The following factors were under focus in the research plan:
Data Design: It involves different aspects like the nature of data, the data sources, the data frequency
and the data tools.
Nature of Data: The nature of data that has been used under project is both primary and secondary in
nature. The first hand information bearing on any research, which has been collected by the researcher,
or his agent or assistant, is called primary data.
Primary Data: Structured Questionnaires
Secondary Data: Secondary data was obtained through banks and informations available in textbooks,
magazines and internet related to the topic.
Types of Research
Survey is best suited for descriptive research. Survey are undertaken to know about the financial
inclusion from the banks in Kapurthala District. And we analyzed through structured questionnaires
filled by bank managers.
Sample Place: Sample will be taken from the Phagwara (Kapurthala District) only.
Sample Size: 10
5 Private Banks
5 Public Banks
Structured Questionnaires: The questionnaires were administered to respondents in Phagwara under
District Kapurthala in India.
Do you provide adequate knowledge about financial inclusion to your customers?
Yes No
Are you aware of Business CorrespondentBusiness Facilitator (BC-BF) models?
Yes No
Public sector banks provide adequate knowledge to their customers about financial inclusion but
through our research we get to know that most of the banks in Phagwara were not aware about
Business correspondent- Business facilitator model. About 80% of banks are not aware about BC-BF

Whereas Private sector banks also provide knowledge about financial inclusion but level of awareness
about BC-BF model is same as compared to public sector banks.
Is your bank taking help of any of these groups?
Self Help Group Village panchayats Retired persons
Farmer club Village Meetings Advertisement
Students Post offices
To increase the financial inclusion in rural area banks can take helps like some banks take helps of more
than one group like CANARA BANK take the help of SHGs, farmer clubs, village panchayats. After fill the
questionnaire from the respondents we clearly know that PUBLIC BANKS more participate to increase
the financial inclusion.
As we can see that the from the questionnaires we can see that public banks take help from various
group like UNITED BANK OF INDIA take help of SHG, Village panchayats, Farmer clubs, NGO.
What are the techniques used by banks to provide financial inclusion?
No-frills Account General credit card (GCC)
Mobile banking 10 inch Box
Kisan credit card Bank linkage programme
Micro financing Post offices
All the banks both private and public use No-frills account by which they provide financial inclusion. Four
banks can use of General credit cards, six banks can use of mobile banking, seven banks use Kisan credit
cards (KCC), and six banks use micro financing. So with this we can know about that banks use some
techniques and provide financial resources to the rural people.

A social bank is the one concerned mainly with the social and environmental impacts of its investments
and loans. In Social Banking, the focus is on satisfying the needs in the real economy and the society
whilst .simultaneously taking into accounts their social, cultural, ecological and economic sustainability.
The banking system touches the lives of millions and has to be inspired by larger social purpose
and has to subserve national priorities and objectives such as rapid growth of agriculture, small
industries and exports, raising the employment levels, encouragement of new entrepreneurs and
development of backward areas. For this purpose it is necessary for the Government to take direct
responsibility for the extension and diversification of banking services. Thus an essential feature of the
Indian banking programme has been to lay adequate emphasis on bank lending towards sectors deemed
as priority sectors, which include agriculture and small scale industries, and within these sectors to
individuals belonging to weaker sections of the society. The opening up of Indian market to greater
international competition, has thrown both challenges and opportunities for the SSI sector. Low capital
base can make these Units vulnerable to external shocks more easily.
The genesis of the importance of social banking is enshrined in the central objective of planning
in India as designated in the First Five Year Plan - "to initiate a process of development which would
raise standards and open out to the people new opportunities for a richer and more varied life"
necessitating the banking institutions to contribute to the process of ensuring growth with equity. The
need to reconcile economic efficiency with social equality and distributive justice to achieve growth will
have a tangible impact on poverty alleviation, became apparent. Development as a process must lead to
the augmentation of the value of human versus social capital, physical vis-a-vis financial capital and
environmental capital.
Why Social Banking?
It is increasingly accepted that business should not operate on the expense of but contribute to
the wellbeing of the community at large. With the Society being even more conscious and informed
about the behaviour of business organizations, to stay successful, business organizations will have to
take into account not only the needs and objectives of their stockholders but also of all their other
In this context, social banking can be considered a successful example of an organizational model that
not only creates economic t also social and environmental value. Social banks enable their depositors
and investors to achieve a financial return whilst simultaneously channeling funds to borrowers or
investees who are assumed to have a positive impact on the society. These banks usually disclose their
loan and investment portfolio, to the wider community in a very transparent and detailed way. This
provides a sound basis for the bank's stakeholders to assess whether or not the bank's core activities still
meet their expectations. Thus social banking can be seen as contributing to more transparency and a
democratization of financial and economic processes.

India's Social Banking Experiment
The period till 1969 can be termed as a transitory period when India moved towards social
banking and nationalization. On 19th July, 1969, fourteen largest commercial banks were nationalised.
The nationalization of the banks is considered at as a historic step taken to ensure adequate credit flow
into genuine productive areas in conformity with Plan priorities. During the period till 1969, the Indian
banking system made considerable progress but there remained a large number of unbanked areas
especially rural and semi-urban areas. A large portion of the credit facilities were still the prerogative of
large industries. The sectors now well known as Priority Sector such as agriculture, small-scale industries
and exports remained the last priority of the banking sector.
In 1977 the Indian central bank mandated that for every bank opened in an already banked
location a commercial bank must open four in unbanked locations. This rule was removed in 1990.
Between 1971 and 1990 this rule caused banks .to open more rural branches. The rural bank expansion
programme had a significant impact on savings mobilization and credit disbursement in rural India. This
branch expansion was an integral part of India's social banking experiment which sought to improve the
access of the rural poor to cheap formal credit. The rapid increase in the Indian rural branch network
and rural credit and savings share after bank nationalization in 1969, and the subsequent slowdown post
1990 has been widely documented. However, evidence on the economic impact of social banking
programme remains mixed. One school of thought that holds pessimistic view of social banking believes
that state control of the banking sector implies political, not economic, consideration to determine the
flow of credit across and individuals.
In short social banking provides the basic financial support required by the economically weak sections
of the society and thereby enables them to participate and benefit from the developmental
programmes. Once this is achieved, social banking leads to desired goal of sustainable development.
Social banking plays pivotal role for poverty alleviation through the network of commercial banks,
cooperative banks, Regional Rural Banks (RRBs), microfinance institutions, primary agriculture credit
societies and Self Help Groups (SHGs). However, availability of credit alone cannot alleviate poverty.
Several other reforms are too needed like land reform which would better enable absorption of
microfinance. But in any case, banks and financial institutions do ensure flow of credit to the poor to
strengthen their economy.
How Technology can help banking sector

The Indian banking sector has been evolving since the year 1770 when the Bank of Hindustan was
established in Calcutta and subsequently in its various avatars-when the General Bank of India, which
came into existence in 1886 again in Calcutta; and then Bank of Calcutta (later Bank of Bengal - 1806 ),
Bank of Bombay and Bank of Madras merging in 1921 to become the Imperial Bank of India which
became the State Bank of India (SBI) in 1955.

The Indian banking system saw another phase of metamorphosis in 1969 when all the leading
commercial banks were nationalised by the then prime minister and finance minister, Indira Gandhi. The
third phase which actually started changing the face of the Indian banking was the post-1991 economic
liberalisation which opened up the banking sector to increased competition and transformation offering
better fare to customers.

Technology to the fore
Banks have changed in their operations and moved towards universal banking along with the increased
usage of technology and technology-based services offering alternate channels such as smart cards,
ATMs, usage of the internet, mobile and social banking. Banks have started deploying core banking,
human resource management (HRM) and enterprise risk (ERP) management and process re-engineering
etc to improve on their performance and productivity. Majority of banks are insisting on cashless and
paperless payment modes.
According to a KPMG study, a research analysts says, as of FY2012, non-cash payments constituted 91
per cent in value terms as compared to 88 per cent in FY in 2010 and 48 per cent in terms of value from
35 per cent in FY 2010. A bank analyst says the payments made through cheques in total non-cash
transaction too has come down to 52 per cent from 83 per cent in volume terms, and to nine per cent
from 85 per cent in value terms during between FY 2006 and FY 2012.
Indian banks get top billing globally
This has resulted in putting 20 Indian banks in their standing globally. In 2010, the UK-based Brand
Finance's annual ranking put these banks in the top 500 banks by their brand value. In 2007, only six
Indian banks had the top standing globally.
To see further growth in the banking sector regulators and policy makers have been emphasising on
financial inclusion to cover all sections of the society. Half of India's population does not bank. The
regulators and policy makers have started taking a serious view of this. As a result, the top regulator the
Reserve Bank of India (RBI) is now encouraging various entities including non-banking finance companies
(NBFCs), co-operative banks, regional rural banks (RRBs), self-help entities, business correspondents in
rural areas and microfinance companies which have now given exposure to non-banked rural areas. This
shows that at some point of time banking services would reach rural areas as much as they do in urban
and semi-urban areas.
The government and the regulator have taken several measures including mandatory opening of at least
25 per cent of new bank branches in unbanked rural areas, giving impetus to opening of new branches
in tier III-VI cities. The mandatory and simplified Know Your Customer (KYC) detailing for opening small
accounts have made things easier for banks to extend their reach.
Banks have also become finance providers for community services development. Post-liberalisation
India has also been attracting banks from various foreign lands. These now number 40 - from 28 in FY in
2008 and have a 7 per cent share of the total assets management. Over 20 Indian banks have now
opened over 240 offices overseas.
Future outlook
The banking system has to implement Basel III guidelines as per the directive of the RBI to make it a
stronger sector. Some of the key measures of this include creating firm measures to make it foolproof of
systemic risks, stringent timelines, ongoing improvement of quality and quantity of capital, liquidity risk
management, value-based practices, solid mechanism, disclosures for total transparency and reduction
of systemic risk in derivative and other money-related markets.
The RBI has stipulated a time frame of five years to implement Basel III norms. But there are economy
related hurdles as the government which holds majority stake in the public sector banks (PSBs) copes
with the high fiscal deficit. Once the government decides to dilute its shares in the PSBs and brings it
down to around 51 per cent, the Indian banking sector would see a sea change. Also, a large number of
foreign players and big Indian corporates are awaiting government clearances for setting up new
generation banks. Once there is clarity on this issue things would change drastically.