The First Steps…

India lives in its villages, and the founding fathers deemed it imperative to enable
financial inclusion for the rural population. The Regional Rural Bank (RRB) emerged
from India’s early aspirations for a stronger institutional arrangement to develop a
savings culture in the rural eco-system, provide rural credit and agriculture finance, while
enabling poverty elevation. The formation of the Narasimham Committee in 1975, and
eventually the passing of the RRB Act in 1976 were key milestones in this journey.
Legislation mandated joint ownership of RRBs by the Central Government, State
Government and a sponsor commercial bank, in the ratio of 50%: 35%: 15%,
respectively.

From a modest beginning of just 6 RRBs with 17 branches covering 12 districts in 1975,
the numbers grew to 196 RRBs with 14,446 branches working in 518 districts across the
country, in 2004. However, given the multiagency shareholding and entailed restrictions,
several RRBs failed to sustain viable operations and others merged vertically or
horizontally, resulting in the total number of RRBs stabilizing at 91, in 2007, with over
14,000 branches, spread across 585 of the 622 identified districts.

Thus, history has clearly established that the original mandate of promoting profitable
banking with a rural focus will be an enduring phenomenon, only when the RRB is able
to deliver customer-relevant products with optimal operational efficiency and ensure the
functioning of a sustainable and viable business. With 80% of RRBs in rural India, it
serves the larger cause of financial inclusion as well.

The Challenges

This, however, is easier said than done. RRBs today continue to traverse an increasingly
rocky path, facing significant economic, infrastructural and business hurdles that heighten
in complexity with every passing year.

Lack of a Robust Governance Structure

While other rural financial services providers like Scheduled Commercial Banks and
private banking entrants have robust processes for functions ranging from HR to product
development, RRBs are largely insulated in operation and lag behind their commercial
counterparts in efficiency and rationalization of process as well as governance mandates.

Manual Operations
While automation of operations at RRBs is the vision of The Reserve Bank of India
(RBI), even mechanization remains a challenge for several of these banks. Basic
automation, like the Advanced Ledger Posting Machine (ALPM), for end-of-day (EOD)
reporting, is yet to reach a significant number of RRBs. Lack of automation also hampers
reporting and MIS, which in turn results in poor visibility into business and operational
parameters, critical for management-driven business decisions.

Inadequate Infrastructure
Lack of sufficient infrastructure and consequently the inability of most RRBs to retain
qualified managers affect the growth and the discharge of their operations. Inadequate
infrastructure support also translates into high project preparation costs, and risk aversion
amongst sponsor entities.

Dynamic Market Conditions

Few RRBs are up to the rigours of channel expansion and customer segmentation
mandated to conduct business in today’s fast changing times. Even the otherwise
ubiquitous ATM, is ever so often a channel not supported by RRBs.
Most RRBs also lack a robust product innovation agenda to deliver relevant offerings,
factoring in the need for customer convenience and flexibility – increasingly critical in
today’s highly competitive and dynamic rural marketplace.

Undefined Roadmap
The RRBs’ share of woes also includes budgetary constraints, mounting over-dues, lack
of adequate infrastructure facilities, and limited channels of investment. Owing to these
problems, some RRBs are not able to achieve financial viability. In addition, they have
little visibility into operational and business imperatives. Working for growth in very
challenging conditions, sustenance is possible only when RRBs have a clear roadmap for:

• Abiding relationships with customers through customer data analysis

• Operations with clear cost-efficiency and productivity
• Unified 360-degree view of the business
• Relevant and timely product innovation

Technology can Transform

The RBI’s diktat is for RRBs to achieve automation before the dawn of 2011. In fact, for
RRBs established after September 2009, automation will be a clear mandate right from
day one of inception.

Rightly so - since, a robust technology solution can enable RRBs to confront several
current market and business challenges. As an ideal solution, it can help RRBs break
through the insular mould, share information, reuse data and business logic, deliver one
view of the customer, and sustain fruitful relationships in the long term.

Knowledge Repository
RRBs can leverage technology to build a knowledge repository by consolidating
knowledge about products, customers, systems, processes, revenue and practices. This
provides them with an integrated, 360-degree view of the entity. Such consolidated
knowledge is intellectual capital which can be realized by proactively sharing it with all
stakeholders – both within and outside the bank. Employees will thus be empowered with
the knowledge necessary to sustain and grow business. They will also have the wide-
ranging information to match customers with products and enable mapping of process to
the business challenge.

Customer-centricity
RRBs can no longer adopt the one-size-fits-all approach restricting their offerings to a
skeletal spread of microfinance for Self Help Groups (SHG), and small loans and
deposits. They must cater to the market’s need for a comprehensive range of banking and
insurance products arising from diverse customer segments ranging from the agri-based
sector, the cottage and small scale industry and artisans. A primary route through which
an RRB can address all these requirements is by having an integrated back office
environment. It provides them with a holistic and actionable view of customers, their
interactions, accounts, transactions, and products, from a single integrated hub. This can
enable the RRB to mine customer data and leverage the information to offer customers
tailored financial services that fulfill their needs. Capitalizing on already existing data
will help the RRB save money and seize cross-sell opportunities.

Process-centricity
RRBs must migrate to an IT environment that comprises an integrated suite of core
functionenabling systems that make it easy for the RRB to standardize processes for all
services. Such an environment introduces much needed intelligence into the RRB
organization and empowers it to chart a successful and sustainable future road-map,
which in turn can strengthen profitability.

Regulation Compliance
Like every strong player in the banking domain, mitigating compliance risk would be a
clear mandate for RRBs as well. To play a meaningful role in the financial eco-system of
the country, it will be imperative that RRBs comply with regulations like AML and KYC.

To enable regulatory compliance, RRBs can leverage technology for effective data
mining techniques to improve systems that detect violations or outlying risk factors,
consolidate processing for data-intensive jobs and factor in compliance requirements at
the product development level too. Above all, the technology platform can enable
complete visibility into customer transactions. It can also form the basis of information
sharing between RRBs for mutual risk-mitigation from poor credit and eventual gains.

It’s the Way the World Works

Worldwide, the mandate for ‘social and development banks’ like credit unions,
cooperative societies and micro-finance institutions, has been to extend financial
inclusion. This includes services to under-banked rural areas, credit for agriculture and
small scale-industry related businesses, as opposed to the traditional approach to business
from a pure-profit perspective.

The most successful among these institutions have been the ones that have adopted
appropriate technology platforms to achieve customer-centricity, break down silos, reuse
data and business logic, while accessing an enterprisewide view of operations. They have
driven their service agenda successfully, while also creating enough profits to ensure
sustenance and viability in the long term.

Problems of the Rural Poor in India - Future Perspective

By

N. Kavitha
MBA, M.Phil, (Ph.D)
(Research Scholar in Mother Teresa Women's University, Kodaikkanal)
Lecturer-MBA Department
SSM College of Engineering
Komarapalayam. Namakkal-Dist.

Dr. A.Ramachandran
M.Com, M.Phil, Grad.CWA, Ph.D
Reader in Commerce
SNR Sons College (Autonomous)
Coimbatore

Abstract

The burden of indebtedness in rural India is great, and falls mainly on the
households of rural working people. The exploitation of this group in the credit
market is one of the most pervasive and persistent features of rural life in India, and
despite major structural changes in credit institutions and forms of rural credit in the
post-Independence period, Darling's statement (1925), that "the Indian peasant is
born in debt, lives in debt and bequeaths debt," still remains true for the great
majority of working households in the countryside. Rural households need credit for
a variety of reasons. They need it to meet short-term requirements for working
capital and for long-term investment in agriculture and other income-bearing
activities. Agricultural and non-agricultural activity in rural areas are typically
seasonal, and households need credit to smooth out seasonal fluctuations in earnings
and expenditure. Rural households, particularly those vulnerable to what appear to
others to be minor shocks with respect to income and expenditure, need credit as an
insurance against risk. In a society that has no free, compulsory and universal
education or health care, and very few general social security programmes, rural
households need credit for different types of consumption. These include expenditure
on food, housing, health and education. In the Indian context, another important
purpose of borrowing is to meet expenses for a variety of social obligations and
rituals.

Introduction

About 75% of the Indian population lives in rural areas and about 80% of this
population is dependent on agriculture for its livelihood. Agriculture accounts for
about 37% of the national income. The development of the rural areas and of
agriculture and its allied activities thus becomes vital for the rapid development of
the economy as a whole.In this regard, India has succeeded in developing one of the
largest rural banking systems in the world. Various regulatory measures have been
taken enabling the banking system to play an important role in the economic
development of the rural areas. The two most prominent measures are rural
commercial bank branch expansion, thus moving from class banking to mass
banking and secondly, priority sector lending and the formulation of specific
development programmes and action plans to facilitate credit flow to the rural
sectors. Despite these measures, as per the Debt and Investment Survey, Govt. of
India (1992) about 36% of the rural households are found to be outside the fold of
institutional credit.

Agricultural Productivity

Even though India occupies the first or second position in the world in several crops
in terms of area and production, it's rank in terms of productivity per hectare in the
world is 52 for rice, 38 for wheat and much low in several other crops. The
productivity of some crops is not only low but also remained stagnant over the years.
The yield gap needs to be bridged through an integrated package of technology and
agricultural policies to reap the untapped production potential, particularly, in rain-
fed and other low productivity areas.

Causes for Backwardness in Villages

1. Zamindari System, the legacy of the British Rule

India was under British rule for 200 years. British policies were aimed in revenue
collection and not rural development. They introduced the zamindari system. The
zamindars were deemed the owners of all land and they collected as much revenue
as they could from the peasants. The system left the peasants very poor and the
zamindars did very little to improve the conditions of the villages. After the country
attained independence this system was abolished, but the conditions of the peasants
is yet to transform completely.
2. The Bonded Labour System
It is equivalent to near slavery. Bonded labour is an indebted agricultural worker,
who had borrowed from the money lender at usurious rate of interest and had to
work in his farm for low wages. The system was used to permanently enslave the
worker, as the worker was only able to repay a part of interest and the loan with
compounded residual interest went on swelling. The agricultural labour can free
himself eventually only by giving his son in bondage as a substitute. Under the 20-
point economic programme, the Government India under Prime Minister Mrs.Indira
Gandhi abolished bonded labour system and brought legislation to this effect in
1975. Despite the legislation the system is known to persist here and there in select
areas.

3. Other contributory reasons are the total lack of agricultural development under
foreign rule, poor communication, roads and other infrastructure development in
villages, lack of education and health facilities, and the destruction of the thriving
Indian cottage industries on account of competition from the cheap machine made
goods imported under British rule

Progress made after the Country attained Independence

1. After Independence the Country adopted planned development. The very first five
year plan laid stress on agricultural development. It took a number of measures to
bring more land under irrigation. Major irrigation Dams like Bakra Nangal, Hirakud,
Nagarjunasagar, Tungabhadra were constructed which generated power for
industrialisation of the country and water for irrigation. A number canals were build
to distribute stored water over an extensive area. The Indian farmer, as a result, is
now not exclusive depending on the monsoon.

2. Intensive cultivation of land is made possible through farm mechanisation.

Tractors are being produced in the country and these are available to the farmers
everywhere. Farmers are also using threshing machines, deep boring and irrigation
pumps. They get supplies of high yielding improved seeds, fertilisers and other
inputs. To enable them to purchase such inputs the rural credit system has been
invigorated with Cooperatives, Regional Rural Banks, and Rural Branches of
Commercial Banks. The recent boon to the poor Indian peasant is the micro finance
system and Self Help Groups that have rendered financial support within the easy
reach of all.

3. Land Reform legislation introduced in the country after independence include the
abolition of the zamindari system, the abolition of bonded labour system, land ceiling
legislation etc.. Legislation was also introduced to relieve rural indebtedness and the
money lender could no longer legally collect more than reasonable interest.
Untouchability was abolished and special legislation for the upliftment of scheduled
cases and scheduled tribes were enacted.

4. Community Development Programmes, Integrated Rural Development

Programme, bringing local self-government to the roots of the village through
introduction of panchayat raj system ushered a new era of rural development.
Development of public health care system, schemes undertaken for promoting
literacy and adult education in the country, programmes for development of rural
industries are other development programmes that have received the thrust of the
Government's development approach.
Future Perspectives

Agriculture, with its large dependent population has to thrive and flourish, in order to
secure rural prosperity. To ensure orderly and vigorous growth of agriculture policy
and structural issues need to be addressed quickly. Some of the important issues
that need to be addressed are -

1. Improving profitability of agriculture, through yield improvements, diversification

and reform of agricultural marketing.

2. Strengthening backward linkages and expanding irrigation coverage.

3. Providing forward linkages especially for post harvest management, processing,

transport, storage and market infrastructure.

4. Securing a stable long term policy on agricultural commodities trade, including the
role of private sector.

5. Encouraging emergence of a market mechanism for agricultural commodities such

as a commodities exchange.

6. Streamlining the cooperative credit structure for facilitating hassle free flow of
credit.

7. Implementing watershed development projects in the rain-fed and dry-land areas.

Rural banking faces twin challenges

Banking in rural India is faced with the twin challenges of regulation and distribution.
Regulation with respect to banking has been designed for delivery in urban India and
distribution required more manpower to be deployed in rural areas. Initiatives like
cheque transaction — where the electronic image and not the actual cheque is sent
— have in mind the urban customer, he said. "About 500-600 million people in India
still do not have bank accounts. For the rural segment, one needs to design no-frills
products and deliver hard core value".The other handicap was that while Rs 1-crore
business in microfinance required 30 people in terms of manpower, the same volume
of business in other portfolios required only one person. Also, contract farming and
supply chain integration has not gone the way they should have. Power,
telecommunications, banking and transportation had reduced the urban-rural divide,
he said. Besides traditional banking services, people in the rural and semi-urban
areas are expressing interest in liability and investment products. He said, "Rural
India is fast transforming a nation of savers into a nation of investors".

Conclusion

No doubt, villages are in a state of neglect and under-development, with

impoverished people, as result of past legacies and defects in our planning process
and investment pattern. But the potential in rural India is immense. What if every
village in the country is provided with basic amenities, like drinking water, electricity,
health care, educational transport, communication and other facilities, with only a
smaller population of the village engaged in agriculture and the remaining in other
gainful occupations? When this happens India will turn into mighty country. The
purchasing power of the rural population throwing enormous demand for goods and
services will boost the national economy tremendously. The day will see the reverse
migration of people from the urban slums back to the villages. Rural Development is
the subject to come to the forefront after the economic reforms and rural banking
will serve the backbone of this development.