A

Seminar Report
On
A Contemporary Management Issue
Titled

RURAL BANKING IN INDIA: CURRENT

PRACTICES
Submitted for Requirements of the Paper M-207,
Seminar on a Contemporary Management Issues
of the MBA course of the Rajasthan Technical University , Kota

Submitted to: Mrs. XYZ

Submitted By: XYZ

MBA Ist Year,SEM-II

(2011-2012)

COLLEGE NAME XYZ

PREFACE
The underlying aim of the seminar on contemporary issue as an integral part of
MBA program is to provide the students with practical aspects of the
organization working environment.
The seminar project in RURAL BANKING IN INDIA: CURRENT PRACTICES
is a complete experience in itself, which provide me with the understanding. This
has become as inspirable of my knowledge of management being learned in
MBA program.
Since India is agriculture oriented country, the importance of rural banks in India
is more than any other countries. More so in India, where over 65% of the
population even today resides in villages. Hence, it has become imperative to
align the nations business agenda along with the needs of this segment.
Concurrently, the governments thrust to the development of the rural sector is
creating a more favorable landscape for business in the countrys hinterland.
XYZ

STUDENT DECLARATION

I hereby declare that this dissertation entitled RURAL BANKING IN INDIA is the
result of my own research work carried out under the guidance and supervision
ofMR.,
...
I also declare that this dissertation has not been submitted earlier to any
Institute/organization for the award of any degree or diploma.

Place:
Date:

XYZ

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.
Some is applicable to my project work. I do not claim that I have a complete
knowledge of the subject. First, I would like to thanks my friends and many
persons who directly or indirectly helped me during my project.
Doing most favorable my project part, who help me and acknowledge me, I
would
like
to
express
my
profound
gratitude
to
.. for guiding me right related to topic.

XYZ
(M.B.A II sem)

TABLE OF CONTENTS

S. No.

Particulars

Page No.

1.

Current State of Rural Banking in India

2.

Banks: Functioning for the Development of Rural Areas

3.

Key Drivers of Financial Exclusion of Rural Banking in

India

14

4.

Banking Products & Services: For services, security &

prosperity

16

5.

Reasons for Unprofitable Rural Banking in India

18

6.

Usage Issues for Rural Customers

19

7.

Market Opportunity of Rural Banking in India

22

8.

Improving Access of Rural Banking In India

24

9.

Technology and Rural Banking

27

10.

Rural Banking Initiatives: kisan credit card

28

11.

ICICI Bank: Innovation n Rural Finance

30

12.

Conclusion

36

13.

Bibliography

37

CURRENT SCENARIO OF RURAL BANKING IN INDIA

The Indian Economy:
India is the 12th largest economy in the world in terms of gross domestic product
(GDP), and fourth in terms of purchasing power parity (PPP). The growth of the
economy is equally impressive with an average of over 8.0% during the last three
years. However, in terms of GDP per capita, India ranks a lowly 160th among
other nations. Within the country, there is a stark divide in the incomes of urban
and rural areas with the average monthly per capita consumption expenditure
(MPCE) in urban India being almost double that of rural India.
India recorded the highest growth rates in the mid-2000s, and is one of the
fastest-growing economies in the world. India is the nineteenth largest
exporter and tenth largest importer in the world. Economic growth rates are
projected at around 7% for the 2011-12 fiscal year.
The Indian money market is classified into the organized sector, comprising
private, public and foreign owned commercial banks and cooperative banks,
together known as scheduled banks, and the unorganized sector, which includes
individual or family owned indigenous bankers or money lenders and nonbanking financial companies. The unorganized sector and micro credit are still
preferred over traditional banks in rural and sub-urban areas, especially for nonproductive purposes, like ceremonies and short duration loans.
Prime Minister Indira Gandhi nationalized 14 banks in 1969, followed by six
others in 1980, and made it mandatory for banks to provide 40% of their net
credit to priority sectors like agriculture, small-scale industry, retail trade, small
businesses, etc. to ensure that the banks fulfill their social and developmental
goals. Despite an increase of rural branches, from 1,860 or 22% of the total
number of branches in 1969 to 30,590 or 42% in 2007, only 32,270 out of
500,000 villages are covered by a scheduled bank.
In addition, there are significant disparities in urban and rural consumption
expenditure between different states. Jharkhand and Orissa, for example, have
an MPCE of approximately Rs. 900 in urban areas and Rs. 410 in rural areas. 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.

Current State of Indian Banking:

An important metric to determine the level of financial outreach/inclusion is the
ratio of the number of deposit accounts to population. It gives a snapshot of the
penetration of deposit accounts and credit accounts in India in comparison with a
few select countries with similar socio-cultural and economic conditions. Even in
comparison with other developing economies, India has a significant opportunity
for increasing penetration of both deposit and credit accounts.
Not only is there a large disparity between India and other countries in banking
penetration but there is also a large variation in banking penetration within urban
and rural India. While urban India seems to be over-banked with more 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 socio-cultural reasons or because opportunity costs are too
high.

BANKS: FUNCTIONING FOR THE DEVELOPMENT OF

RURAL AREAS
The area of operation of a majority of the RRBs is limited to a notified area
comprising a few districts in a State. SBI has 30 Regional Rural Banks in India
known as RRBs. The rural banks of SBI are spread in 13 states extending from
Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI,
there are other few banks which functions for the development of the rural areas
in India.

CO-OPERATIVE BANKS AND RURAL CREDIT:

The Co-operative bank has a history of almost 100 years. The Co-operative
banks are an important constituent of the Indian Financial System, judging by the
role assigned to them, the expectations they are supposed to fulfill, their number,
and the number of offices they operate.
Their role in rural financing continues to be important even today, and their
business in the urban areas also has increased phenomenally in recent years
mainly due to the sharp increase in the number of primary co-operative banks.
Co-operative Banks in India are registered under the Co-operative Societies Act.
The RBI also regulates the cooperative bank. They are governed by the Banking
Regulations Act 1949 and Banking Laws (Co-operative Societies) Act, 1965.
Co-operative banks in India finance rural areas under:
Farming
Cattle
Milk
Hatchery
Personal finance
Institutional Arrangements for Rural Credit (Co-operatives):
Short Term Co-operatives:
Central Co-operative Banks
State Co-operative Banks
Primary Agriculture Credit Co-operative Societies

Long Term Cooperatives:

State Agriculture & Rural Development Banks
Primary Agriculture & Rural Development Banks
Primary Agricultural Credit Societies (PACSs)
An agricultural credit society can be started with 10 or more persons normally
belonging to a village or a group of villages. The value of each share is generally
nominal so as to enable even the poorest farmer to become a member. The
members have unlimited liability, that is each member is fully responsible for the
entire loss of the society, in the event of failure. Loans are given for short periods,
normally for the harvest season, for carrying on agricultural operation, and the
rate of interest is fixed. There are now over 92,000 primary agricultural credit
societies in the country with a membership of over 100 million.
The primary agricultural credit society was expected to attract deposits from
among the well to-do members and non-members of the village and thus
promote thrift and self-help. It should give loans and advances to needy
members mainly out of these deposits.
Central Co-operative Banks (CCBs)
The central co-operative banks are located at the district headquarters or some
prominent town of the district. These banks have a few private individuals also
who provide both finance and management. The central co-operative banks have
three sources of funds
Their own share capital and reserves
Deposits from the public and
Loans from the state co-operative banks
Their main function is to lend to primary credit society apart from that, central
coopertive banks have been undertaking normal commercial banking business
also, such as attracting deposits from the general public and lending to the needy
against proper securities. There are now 367 central co-operative banks.
State Co-operative Banks (CCBs)
The state Co-operative Banks, now 29 in number, they finance, co-ordinate and
control the working of the central Co-operative Banks in each state. They serve
as the link between the Reserve bank and the general money market on the one
side and the central co-operative and primary societies on the other. They obtain
their funds mainly from the general public by way of deposits, loans and
advances from the Reserve Bank and they are own share capital and reserves.

COMMERCIAL BANK AND RURAL CREDIT:

The commercial banks at present provide short term crop loans account for
nearly 45 to 47% of the total loans given and disbursed by the commercial banks.
Term loans for varying periods are given for purchasing pump sets, tractors and
other agricultural machinery, for construction of wells and tube well, for
development of fruit and garden crops, for leveling and development of land, for
purchase of ploughs, animals, etc. commercial banks also extend loans for allied
activities viz., for dairying, poultry, piggery, bee keeping, fisheries and others.
These loans come to 15 to 16%.
Commercial Banks and Small Farmers
The commercial banks identifying the small farmers through Small Farmers
Development Agencies (SFDA) set up in various districts and group them into
various categories for credit support so as to enable them to become bible
cultivators. As regard small cultivators near urban areas and irrigation facilities,
commercial banks can help them to go in for vegetable cultivation or combine it
with small poultry farming and maintaing of one or two milch cattle.
IRDP and commercial banks
Since October 1980, the Integrated Rural Development Programme (IRDP) has
been extended to all the blocks in the country and the commercial banks have
been asked by the government of India to finance IRDP. The lead banks have to
prepare banking plans and allocate the responsibility of financing the identified
beneficiaries among the participating banks. Commercial banks have been asked
to finance all economically backward people identified by government agencies.

REGIONAL RURAL BANKS AND RURAL CREDIT:

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. Accepting the recommendations of the Narasimham committee, the
government passed the Regional Rural Banks Act, 1976. The main objective of
RRBs is to provide credit and other facilities particularly to the small and marginal
farmers, agricultural laborers, artisians and small entrepreneurs and develop
agriculture, trade, commerce, industry and other productive activities in the rural
areas.
The progress of RRBs in the initial stage was quite rapid. For instance, the Sixth
Five-year plan(1980-85) had envisaged the setting up of 170 RRBs covering 270
districts by the end of march 1985.The target was exceeded. There are now 196
RRBs in 23 states of the country with 14,200 branches.
10

 Structure of regional rural bank

The establishment of the Regional Rural Banks (RRBs) was initiated in 1975
under the provisions of the ordinance promulgated on 26.9.1975 and thereafter
Section 3(1) of the RRB Act, 1976. The issued capital of RRBs is shared by
Central Government, sponsor bank and the State Government in the proportion
of 50%, 35% and 15% respectively.
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

Role of RBI in rural credit

Since it was set up in 1934, RBI has been taking keen interest in expanding
credit to the rural sector. After NABARD was set up as the apex bank for
agriculture and rural development, RBI has been taking a series of steps for
providing timely and adequate credit through NABARD.
Scheduled commercial banks excluding foreign banks have been forced to
supplement NABARDs efforts-through the stipulation that 40 percent of net bank
credit should go to the priority sector, out of which at least 18 percent of net bank
credit should flow to agriculture. Besides, it is mandatory that any shortfall in
fulfilling the 40 percent target or the 18 percent sub-target would have to go to
the corpus Rural Infrastructure Development Fund (RIDF).RBI has also taken
steps in recent years to strengthen institutional mechanisms such as
recapitalisation of Regional Rural Banks (RRBs) and setting up of local area
banks(LABs).

LIST OF RURAL BANK IN INDIA:

Rural banking in India started since the establishment of banking sector in India.
Rural Banks in those days mainly focused upon the agro sector. Regional rural
banks in India penetrated every corner of the country and extended a helping
hand
in
the
growth
process
of
the
country.
SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of
SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal
Pradesh to North East. The total number of SBIs Regional Rural Banks in India
branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural
banks in the country of which 2126 (91%) are located in remote rural areas.
11

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
Durg-Rajnandgaon 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
Himachal Pradesh

Haryana

Himachal Gramin Bank

Parvatiya Gramin Bank

Harayana Gramin Bank

Gurgaon Gramin Bank

Punjab

Jammu & Kashmir

Jammu Rural Bank
Ellaquai Dehati Bank
Kamraz Rural Bank

Punjab Gramin Bank

Faridkot-Bhatinda Kshetriya Gramin Bank
Malwa Gramin Bank
Kerala

Assam

Narmada Malwa Gramin Bank

North Malabar Gramin Bank

Assam Gramin Vikash Bank

Langpi Dehangi Rural Bank

Tamil Nadu

Jharkhand

Pandyan Grama Bank

Pallavan Grama Bank

Jharkhand Gramin Bank

Vananchal Gramin Bank

Maharashtra

Madhya Pradesh
Narmada Malwa Gramin Bank
Satpura Kshetriya Gramin Bank
Madhya Bharath Gramin Bank
Chambal-Gwalior Kshetriya
Gramin Bank
Rewa-Sidhi Gramin Bank
Sharda Gramin Bank
Ratlam- Mandsaur Kshetriya

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

12

Gramin Bank
Vidisha Bhopal Kshetriya Gramin
Bank
Mahakaushal Kshetriya Gramin
Bank
Jhabua Dhar Kshetriya Gramin
Bank
Karnataka

Rajasthan

Karnataka Vikas Grameena Bank

Pragathi Gramin Bank
Cauvery Kalpatharu Grameena
Bank
Krishna Grameena Bank
Chikmagalur-Kodagu Grameena
Bank
Visveshvaraya Gramin Bank

Baroda Rajasthan Gramin Bank

Marwar Ganganagar Bikaner Gramin Bank
Rajasthan Gramin Bank
Jaipur Thar Gramin Bank
Hodoti Kshetriya Gramin Bank
Mewar Anchalik Gramin Bank

Orissa

West Bengal

Kalinga Gramya Bank

Utkal Gramya Bank
Baitarani Gramya Bank
Neelachal Gramya Bank
Rushikulya Gramya Bank

Bangiya Gramin Vikash Bank

Paschim Banga Gramin Bank
Uttar Banga Kshetriya Gramin Bank

Meghalaya

Arunachal Pradesh

Ka Bank Nogkyndong Ri KhasiJaintia

Arunachal Pradesh Rural Bank

Nagaland

Manipur Rural Bank

Nagaland Rural Bank

Mizoram

Tripura

Mizoram Rural Bank

Manipur

Tripura Gramin Bank

Uttar Pradesh

Uttaranchal

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

Uttaranchal Gramin Bank

Nainital Almora Kshetriya Gramin Bank

13

KEY DRIVERS OF FINANCIAL EXCLUSION OF RURAL

BANKING
According to Diamond estimates, approximately 245 million adults in rural India
do not have a bank account today. As depicted in Following Table, this reflects
24% of the total population. While 60 million out of 245 million may not need
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.

Source: Census India ;BSR 2008Reserve Bank of India; World Bank & NCAER
(2008).

ACCESS ISSUE FOR RURAL CUSTOMER:

Access is explained in terms of infrastructure, physical distance, limited delivery
capabilities, regulatory constraints and the economics of rural banking.
The banking infrastructure in rural India is not encouraging, with just 7% of
villages housing a bank branch. Whats more, the poor physical and social
infrastructure also impacts the access to financial services, with 23% of villages
going without electricity, 67% without a Post Office, and an average rural literacy
rate of 59% and secondary school penetration of 12%. This lack of physical and
14

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 tele-density.
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 NonGovernmental 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.
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.

BANKING IN RURAL AREAS-CHALLENGES:

Some Banks are unwilling to operate Branches in Rural areas because

Low Profitability
Large Number of accounts
Low Value Transactions
Less Number of Transactions

15

Few activities and less opportunities for services other than deposit and
Credit
Huge Staff Cost
Difficult to implement Technology
Large area of Operation Difficult Reach

BANKING PRODUCTS & SERVICES: For Service,

Security & Prosperity

Current Account
Savings Bank Account
Recurring Deposit Scheme
Fixed Deposit Scheme
Fixed Deposits linked with Recurring Deposits Scheme
Monthly Income Deposits Scheme
Loan Linked Housing Deposits Scheme
Loan Linked Children Education Deposits Scheme

1. CROP LOANS
Short terms loans are provided for Seasonal Agricultural operation to Farmers,
(cash & kind) through Service Co-operative Societies spread all over Meghalaya
as per approved scales of finance, time schedule both under NCL, Cash Credit
Systems & Kisan Credit Cards.
2. TERM LOANS
Medium & Long Term Loans are extended to the Farmers through the affiliated
Service Co-operative Societies direct for allied agricultural activities like land
development, minor irrigation, purchase of farm machinery, poultry, goat rearing,
pisciculture, diary, horticulture, plantation & Horticulture schemes.
3. CASH CREDIT ACCOMMODATION
Cash Credit accommodations are provided to Co-operative Societies for
procurement, marketing of agriculture and minor forest produces and also for
dealing in consumer goods, etc.
4. HOUSING LOANS
Salaried persons are extended Housing Loan facilities for construction of their
residential houses in CD Block Head Quarters and other selection areas against
adequate securities.

16

5. TRANSPORT VEHICLE LOANS

The Bank provides M.T. Loans to Transport Societies and educated unemployed
youths for creation of self-employment generation & extension of easy mobility to
the people of the State.
6. CONSUMER DURABLES LOANS
Salaried persons are provided consumer durables loans for purchase of T.V. Set,
Radio, Refrigerator, Two-Wheelers, Musical Instruments, Cooking Gas, Furniture
and various other approved items.
7. CASH CREDIT FACILITIES
Govt. appointed whole sellers are extended Cash Credit/Loan facilities for
dealing in controlled commodities against adequate securities.
8. TERM LOANS FOR TOURISM DEVELOPMENT
Term Loans are provided for encouraging young & enterprising entrepreneurs
and unemployed persons for creating self-employment opportunities through
Tourism Development.
9. TERM LOANS FOR TOURISM DEVELOPMENT
The scheme is intended for regular constituents of the Bank for construction of
their residential houses with financial assistance from the Bank.
10. INTEGRATED VILLAGE DEVELOPMENT SCHEME (IVDS)
The scheme is intended to help formation of homogeneous groups with 5 to 20
members in the rural areas in the co-operative sector and extend loan assistance
to them for improving their socio-economic conditions by undertaking various
economic activities which are socially useful and economically viable.
11. PERSONAL LOAN
Salaried persons are provided Personal Loans for any bonafide need of
unspeculative nature in the shape of overdraft facilities against adequate
securities.
12. EDUCATIONAL LOAN
Educational Loans are provided to parents/deserving students for higher studies
in India/abroad adequate securities.
13. LOAN FOR PROFESSIONAL & TECHNOCRATS
Credit facilities are extended to Doctors, Lawyers, Technocrats and other
Professionals to set up Clinic, Consultancy firms etc. against adequate securities.
OTHER SCHEMES AND SERVICES

Financial Assistance to Urban Banks, Weavers Co-ops, Industrial Co-ops,

Joint Farming Societies, etc.

17

Conversion of short term (Agri) Loans affected by Natural Calamities into

Medium Term Loans.
Implementation of comprehensive Crop Insurance Scheme for the benefit
of the farmers.
Godown Loans to Service Co-operative Societies.
Overdraft facilities to regular constituents of the Bank.
Kisan Credit Card Scheme for Farmers

REASONS FOR UNPROFITABLE OF RURAL BANKING

IN INDIA
High Non-performing Loans (NPL):
Banks have higher non-performing loans in rural areas because rural households
have irregular income and expenditure patterns. The issue is compounded by the
dependence of the rural economy on monsoons, and loan waivers driven by
political agendas. NPLs from the agriculture sector are 7.7%, compared to 3.5%
across non-agriculture sectors8. In order for banks to view rural India as a growth
opportunity, rather than a regulatory requirement, a combination of these issues
must be addressed. Increasing financial access to rural areas is contingent upon
basic conditions such as proper infrastructure and an enabling regulatory
framework, as well as innovative 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.
Low Ticket Size:
The average ticket size of both a deposit transaction and a credit transaction in
rural areas is small. This means that banks need more customers per branch or
channel to break even. Considering the small catchments area of a branch in
rural areas, generating a customer base with critical mass is challenging.
High cost to serve:
Branches are the most used channel in rural areas. This is because many rural
people are not literate and are not comfortable using technology-driven channels
such as ATMs, phone banking or internet banking. On the other hand, a branch is
an expensive channel for banks (Following Table). In addition, rural people,
whenever they have access to banks, have frequent low ticket and cash-based
transactions, which increase the overall transaction cost for their bank.
Cost Per Transaction in Indian Banks

18

Source: Reserve Bank of India; CGAP, World Bank.

Higher risk of credit:
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.

USAGE ISSUES FOR RURAL CUSTOMERS

Even if access to formal banking is provided to rural customers, there is no
guarantee that these services will be used. According to a study conducted by

19

the World Bank, many households, even in developed countries, choose not to
have a bank account as they do not engage in many financial transactionsthey
collect wages in cash, spend in cash and do not wish to be burdened by a bank
account9. To compound the situation many customers in rural India, who have
access to and would otherwise choose to use 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 micro-savings 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 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 loans, they require excessive documentation and timeconsuming processes which discourage customer applications.
Purpose of Borrowing
Rural Household Borrowing

20

Bank Lending to Rural Households

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.
Insurance reduces the vulnerability of poor households by replacing the uncertain
prospect of large losses with the certainty of payout against small, regular
premium payments. It is integral to a comprehensive risk management strategy
for poor households. This includes life, health, accident and asset (dwelling, crop,

21

and 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 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 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?

22

 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.

MARKET OPPORTUNITY OF RURAL BANKING

At present, a rapidly growing urban India is the focus of the banking sector;
however, as the deposit penetration numbers suggest (Figure 3 & 4), the market
is highly competitive and over banked. Despite this, most banks are still not
shifting their focus to the rural opportunity, as they are apprehensive about the
total market potential of the rural market and the profitability of rural banking
channels. Contrary to the widely held notion, however, the rural market is
attractive from both a credit and deposit perspective. The credit demand in rural
areas is approximately Rs 1,330 billion (based on an estimate by 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 sub-optimal 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).
Proposed Approach to Tap Potentially Bankable Population

23

Improve
Access
For Rural
Customers

Address
Access Needs
Of Rural
Customers
Ensure
Channel
Profitability

Convert
Potentially
Bankable

Encourage
Usage of
Services

Address
Usage Needs
Of Rural
Customers
Bank
Initiatives
To Improve
Usage

Source: Diamond analysis

IMPROVING ACCESS FOR RURAL BANKING

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.
Modify Existing Channels:
Fortunately there are a variety of options available for banks looking to modify
their existing channels. To reduce the costs imposed by branches, banks should
consider the option of sharing their branch infrastructure. This would not be too
dissimilar to the example of the telecom industry sharing network infrastructure or
the fast food industry sharing food courts in urban areas. Though infrastructure
sharing may raise concerns over client confidentiality and data leakage, in the
long run banks will only benefit from such collaboration.

24

ATMs are an effective channel which can deliver many of the services frequently
used by a branch customer. However, ATMs, in their current form, are not
suitable for 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 cost-effective 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, money
transfers and loan repayments.
Business correspondents can be provided with point-of-sale (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 successfully
used banking correspondents who use POS and card readers to provide current
accounts, loans, and insurance, accept bill payments, and perform other
transactions.
Introduce New Channels:
The RBI allows banks to appoint business correspondents and facilitators to be
used as intermediaries in providing banking services. NGOs, MFIs, Societies,
Section 25 companies, registered NBFCs not accepting public deposits, and Post
Offices can be appointed as Business Correspondents. Business
Correspondents can provide several services which are not currently offered by
SHGs and MFIs, including: (i) 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 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.

25

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 to capture more value from rural 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.
Satellite offices are a 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.
Determine the Combination of Channels:
There is no one right channel or solution to improve access in rural areas. Banks
have to evaluate the trade-offs between those channels that are most convenient
to customers and those that are the most profitable. Banks are not comfortable
opening new rural branches because many of those that already exist are
unprofitable. Therefore, determining the right combination of channels is critical
to improving access in profitable ways. An innovative approach to improving
access will consider a combination of these channels. For example:
Branches and Satellite Branches In addition to providing regular banking
operations, providing backend support to manage and audit the operations of
business correspondents.

26

 A low-cost, custom-made ATM Managed by a business correspondent to

bring down the operating cost and scale the channel.
An e-kioskManaged by a business correspondent with internet banking, ATM
and POS terminal in relatively large rural areas.
A business correspondentUsing manual ledgers or POS/Palmtop to act as
deposit collector and remitting agent in smaller rural areas.
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.

TECHNOLOGY AND RURAL BANKING

We should recognise that the role of banks, which is central to formal credit in
rural areas, is fast changing. Many non-banks are providing avenues for savers
and funds for investment purposes. Banks themselves are undertaking nontraditional activities. Banks are also becoming what are called universal banks
and are already providing a range of financial services such as investments,
merchant banking and even insurance products. Similarly, non banks are also
undertaking bank like activities. At present in India, these are mostly confined to
urban areas, but they will sooner than later spread to rural areas.
Another development relates to the gradual undermining of the importance of
branches of banks. The emergence of new technology allows access to banking
and banking services without physical direct recourse to the bank premise by the
customer. The concept of Automated Teller Machines (ATMs) is the best
example. At present, ATMs are city oriented in our country. It is inevitable that
ATMs will be widely used, in semi-urban and rural areas.
The technology-led process is leading us to what has been described as virtual
banking. The benefits of such virtual banking services are manifold. Firstly, it
confers the advantage of lower cost of handling a transaction. Secondly, the

27

increased speed of response to customer requirements under virtual banking vis-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost
of operating branch network along with reduced staff costs leads to cost
efficiency. Fourthly, 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. It may not be possible to deny these facilities to rural areas in
our country since, if banks do not provide them, some non-banks will do it.
Another development relates to the increasing popularity of credit cards, which
are bound to reach rural areas. Many Public Sector Banks are already in credit
card business. In fact, multipurpose cards could be a facility that IT could usher
in for rural population. The potential can be illustrated with SMART cards.
SMART cards which are basically cards using computer circuits in them
thereby making them intelligent' would serve as multipurpose cards. SMART
cards are essentially a technologically improved version of credit and debit cards
and could be used also as ATM cards. They could be used for credit facilities at
different locations by the holders. SMART cards could also be used for personal
identification and incidentally for monitoring credit usage.
For the spread of virtual-banking and SMART cards to rural areas, 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. The banks could, 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.
Like banks in other parts of the world, Indian banks will have to get interested in
providing diversified range of financial products and services along with those
that they are already providing, by using technological advances. As the level of
education in rural areas rises and affluence spreads, customers will start seeking
efficient, quicker and low cost services. As the financial system diversifies and
other types of financial intermediaries become active, in rural areas, 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. The bulk of bank deposits in the rural areas are currently
longer term deposits and as these come down, there would be a distinct
shortening of the average maturity structure of bank deposits with an increase in
asset liability mismatches. The spreads that the banks now enjoy will
progressively shrink making it more difficult for them to survive. As more and
more intermediaries enter rural areas with greater level of technology, traditional
banking business will come under pressure. In order to face the competitive
pressures being exerted by the recently set up market savvy banks, 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.

28

RURAL BANKING INITIATIVES: KISAN CREDIT CARD

Banking service is an among the essential services needed by rural consumers.
Traditionally it is the village money lender who has been fulfilling this role . The
interest rate charged by the money lender would be very high leading to chronic
indebtedness of villagers. Credit at reasonable rates of interest is essential for
the village economy to grow and enable them to join the Indian growth story.
Farmers have their specific credit needs which are tied-up with their farming
cycle
and
festivals
and
functions.
Over the years many initiatives have been started by banks and other institution's
in which Micro Credit has been one which has received a lot of public
attention.This post would not focus on micro finance , but would rather focus on
the initiatives taken by public sector and private banks in mainstream banking.
One initiative which created a lot of news a few years back was the introduction
of low cost ATMs, but it's scaling-up is taking more time than anticipated. Both IIT
B and IIT M had developed their prototypes, with the idea of providing
connectivity through existing ICT initiative replacing cards by using biometric
identification. Maybe the idea needs time before it can be scaled up.
One of the initiatives is considered to be a success is the Kisan Credit
Card launched in 1998-99. In the initial five years of the programme itself the
close to 435 million cards were issued with credit disbursals of Rs 1,11,459
Crore.The main feature of KCC that it was initially meant for timely short term
credit needs of farmers and the credit delivery mechanism was simplified and
made flexible . The farmers were provided crop loan, later on the scope was
extended to term loans for agriculture and allied activities and a reasonable
component to meet the consumption needs. Though the KCC has the word card
in it, but it was essentially a passbook given to the villagers like as is the case
with normal bank accounts.
Ensuring that the poor are able to save, smooth consumption, mitigate risks,
invest, and build assets is critical to broad-based and equitable development. In
the past decade, policymakers broadened their approach to financial
inclusion from an almost exclusive reliance on expanding bank branches to
innovating and taking advantage of new technology. The business correspondent
model allows agents to operate on behalf of banks; as a result over 130,000 rural
banking points are now available, compared to 2,000 in 1970.
Over 20 million kisan credit cards have been issued and index-based crop
insurance has been scaled up in recent years. India is unique in having nearly
five million self-help groups with loans from banks. And despite having recently
run into significant problems, microfinance institutions have helped expand
29

access. The biometric-based Aadhaar initiative of the Unique Identification

Authority of India can bridge information gaps and facilitate financial inclusion.
The RBI and the government have recently committed to increasing financial
access to 350,000 villages by 2013, covering a significant part of the 100 million
households currently lacking adequate access. However, as RBI and the
government are aware, scaling up viably and with quality is not easy. We
highlight a few of the challenges.
Leveraging existing distribution networks:
For "last mile" reach, banks have embarked on an effort to increase banking
correspondents. But low transaction volumes are making viability difficult. Could
scaling up tie-ups between banks and post offices and co-operatives, and
allowing MFIs structured as non-bank finance companies to act as banking
correspondents, help optimise capacity utilisation and lower transaction costs?
Likely. However, the government's facilitation may be needed for such integration
to take place. It is also possible that covering some villages with very small
population may never be viable, and would require explicit or implicit subsidies.
Expanding market infrastructure:
Credit bureaus have recently expanded coverage of informal sector MFI clients
and generate over 500,000 monthly credit reports assessing client indebtedness
prior to new lending. Policymakers could facilitate getting rural banks and SHGs
to also share information on their borrowers with credit bureaus. Better customer
protection is also essential, particularly as delivery channels other than banks
expand coverage.
Expanding products:
Recent efforts have helped create 90 million no-frills accounts, a creditable
achievement as savings help manage risks, investments and cash flows.
However, transaction volumes have been low. The experience with South Africa's
mzansi (no-frills) accounts shows that linking up with brands that clients
recognise and allowing the use of multiple outlets helps increase transactions.
Enabling a better microfinance sector:
SHGs and MFIs account for more small-borrower accounts than the entire
banking system. Once enacted, the draft microfinance law will bring regulatory
clarity and promote customer protection. 'Patient' capital can be mobilised by
domestic development banks to help sustainable MFIs scale up.
For SHGs, ensuring quality of lending as scale grows is essential for their longterm sustainability. Also, banks typically price SHG loans at thin spreads over
cost, leading to the plateau in disbursements. Pricing that reflect margins better

30

could spur greater lending. India's progress in its financial inclusion efforts, given
the numbers and innovation involved, are of great significance. The world is
watching.

ICICI Bank: INNOVATIONS IN RURAL FINANCE

ICICI Bank, India's second largest banking institution, has discovered a large
under-served market of potential customers-the 700 million mostly poor
inhabitants of rural India. Furthermore, ICICI considers business strategies for
accessing this market as critical to the future of the company. The bank also sees
its efforts to develop viable commercial models and distribution systems as
having an important social mission-that of enabling the poorest of the poor to
become active and informed participants in socio-economic processes. In a
relatively short period, the company has established a significant presence in
rural India as a direct provider of financial services, helping to organize village
self-help groups to whose members ICICI provides micro-loans. To extend its
reach, the company has also established indirect distribution channels, becoming
a lender to, and sometimes an investor in, some of the largest microfinance
organizations in India and partnering with several ventures to offer financial
services over their rapidly-growing networks of Internet kiosks.advantages

BUSINESS MODEL:
ICICI's direct channel is concentrated in the state of Tamil Nadu and stems from
ICICI's purchase of the Bank of Madura in 2001. The Bank of Madura had been
utilizing the self-help group (SHG) model, forming small groups of approximately
20 women from one village and providing training and a structured process that
led to savings, banking, and lending activities. ICICI expanded the process after
the merger. The women, typically with incomes below the poverty line, begin
regular monthly savings that, after a time, constitutes a fund for emergency,
short-term loans within the group. At the same time, the women are educated
about banking concepts, and encouraged to assume more responsibility for their
financial futures and take an interest in village affairs-bringing their collective
strength to bear on their family and community life. After a year, the group can
apply for loans, about $250 to each woman, for which the SHG is collectively
responsible. Loans are then typically used to help start or expand a small
business activity
The program under ICICI depends on the training and empowerment of women,
in a three-tier system. The bank recruits experienced members of SHGs to
31

become social service consultants, who form new self-help groups in neighboring
villages. The bank also hires coordinators that oversee the activities of six
consultants and 120 SHGs. A bank project manager is assigned the responsibility
of work with the coordinators, training the self-help groups, and reviewing loan
proposals. ICICI charges 18% interest on its micro-loans, higher than normal
commercial rates but much lower than rates charged by traditional village moneylenders, and even lower than many non-profit microfinance institutions. Since
2001, the program has grown to more than 8,000 self-help groups and is
continuing
to
expand
rapidly.
In addition to working with SHGs, ICICI also works through indirect channels to
catalyze microfinance institutions by providing them a line of credit to cover cash
flow needs for the first three years of activity. ICICI has also made equity
investments in some microfinance institutions. Additionally, ICICI has started to
partner with enterprises that are building networks of Internet kiosks in rural
areas. The company plans to offer savings and loan services through these
networks by training the kiosk operator as a credit agent or by placing an
inexpensive ATM at the kiosks. In some instances, ICICI is providing loans to
farmers via enterprises such as ITC's e-Choupal network or EID Parry's sugar
factories that enable the farmer to buy crop inputs and that are paid off when the
farmer sells his crop. The company is also exploring new financial products, such
as crop insurance (to protect farmers against drought), derivatives based on crop
futures that could give farmers more financial flexibility.

ICICI BANK TO INCREASE FOCUS ON RURAL AREAS:

The countrys largest private sector lender ICICI Bank plans to increase its
presence in rural and semi-urban areas.
As we focus on enhancing our capabilities to serve our corporate and retail
customers across Indias towns and cities, it is also our endeavour to proactively
reach out to rural India and to the vast numbers of our people who do not have
access to formal financial services, managing director and CEO Chanda
Kochhar said in the banks annual report.
The focus on rural areas ties in with the banks strategy to use its branch network
to source most of its loans, rather than direct sales agents. Its direct agriculture
advances amounted to Rs 17,329 crore at the end of March 2010. The gross
non-performing assets of agriculture and allied services stood at 5.62 per cent of
advances of this sector.
The bank added more than 500 branches last year to take its branch network to
about 2,000.

32

The banks proposed merger with Bank of Rajasthan will also give a fillip to its
plans to increase focus on rural and semi-urban areas. BoR has a total of 463
branches of which 40 per cent are located in rural and semi-urban areas.
In 2005-06, ICICI Bank had stepped up its focus on rural areas. However, it
suffered heavy losses on this front and had to press the pause button on its rural
foray. In 2006, the bank was cheated of Rs 200 crore at the central and state
government warehouses in Kolhapur district, where it had not engaged thirdparty collateral managers. In 2006-07, ICICI Bank made a provision of Rs 93
crore for losses from frauds pertaining to the warehouse receipt-based financing
for agricultural products.
The bank shrunk its rural loan book by 50 per cent to Rs 10,000 crore at the end
of September 2007 from Rs 20,000 crore at the end of March 2007.
The bank has undertaken several initiatives to meet the needs of the rural
market, including offering credit through micro-finance institutions, microinsurance and micro-investment products. It is extending financial support in the
rural market, including farmers, traders, commission agents, small processors
and other medium- and large agri-corporates. The bank had about four million
micro-finance borrowers with an outstanding portfolio of Rs. 3,179 crore as of
March 31, 2010.

RURAL INSURANCE: product offer by ICICI bank

At ICICI Lombard, investing in rural markets is seen as a keen social
responsibility. The protection provided to the rural class is specified and
customized according to their needs. Through a multiple channel system we not
only provide agricultural protection but also health, motor and other covers.
Health Insurance
We provide protection to the health of the rural folk through our comprehensive
Family Health Insurance plan, which covers the entire family in one policy.
Home Insurance
Our comprehensive policy protects much more than just the home. Through our
network channels, we ensure that the houses in the rural sector are insured
against
natural
and
other
perils.
Tractor Insurance

33

Tractors are one of the most precious assets to the rural folks. Our
comprehensive package policy covers not just own damage but also third party
liability and personal accident.
Weather Insurance
Weather Insurance is an insurance cover against losses incurred due to
uncertainties in climatic conditions. It can be used to hedge any vulnerability of
assets or any other damage incurred due to erratic and irregular weather.
Shop Insurance
Shop Insurance is a comprehensive policy that covers both the structure and the
contents of a shop and protects it against any financial loss in case of an
unfortunate
incident.

ICICI STORMING THE MARKET:

Liabilities:

Current a/c for agriculture traders

Farmers savings a/c
Rural savings a/c
Gold coins
High value insurance policy for rural sector

Assets:
PRODUCTS

OBJECTIVE

Short term loans

To take care of short term needs of farmer

loan amount: up to rs. 1 lakh depending on the
crop
Tenure:1 year.

Livelihood-linked
loans

To finance the purchase of buffaloes,three

wheelers, small kirana shops etc.
Loan amount: Rs. 1 lakh
Tenure : 1 year

34

Micro enterprise
loans

To finance small business start ups,small

highway hotels, etc,
Loan amount: upto rs. 25 lakh
Tenure :2-3 years.

Crop loans

To finance sowing operations,purchase of

pesticides,fertilizers,etc.
Loan amount: upto rs. 10 lakh
Tenure : 1 year

Farm equipment

To finance the purchase of tractors,tillers,etc,

Loan amount:upto rs. 5 lakh
Tenure:5-9 year

ICICI PLANS NEW PRODUCTS FOR COUNTRYSIDE:

ICICI Bank Ltd., Indias largest private sector by assets, is getting ready to roll
out a variety of financial products for villagers and farmers in rural India. From
basic bank accounts to subsidy transfers to basic insurance for farm produce, the
bank expects to offer these products in the next six months.
The bank currently offers a basic bank accountknown as a no-frills accountin
18 states and has three million such account holders. These provide it with a
ready market in which to sell some of these new products.
The concept of a no-frills account was first suggested by the Reserve Bank of
India in 2005, when it directed all banks to offer this option of a basic account to
villagers. Most banks did the bare minimum on thateven today less than half of
all Indians have a bank account.
Last year, the RBI asked all banks to submit a plan for the inclusion of more
Indians into the formal financial system that was approved by their boards. This,
said RBI governor D. Subbarao, in a speech at the spring meeting of the
International Institute of Finance in New Delhi earlier this week, would create a
sense of ownership of the problem among banks.
ICICI, which is listed in New York, says it is readying this rural push ahead of
others.

35

Over a period of time all banks will have to look at rural business, said Mrs.
Kochhar. We are looking at a mix of channels to reach out to farmers including
basic accounts, transfer of subsidies, some lending.
Early this year the bank announced a tie-up with Vodafone Essar to eventually
offer financial products in villages by mobile phone.
ICICI, which had aggressively targeted retail customers during most of the past
decade, cut that business back during the recession after it saw a huge number
of bad loans in its portfolio of unsecured, personal and credit card loans. For the
past two years, its retail loan portfolio has been rising more slowly than at other
banks, but in an earnings call last month, Mrs. Kochhar, said the bank would
keep pace with the industry in the fiscal year starting in April.

DEVELOPMENT BENEFIT:
The self-help groups in ICICI's direct service model build self-confidence, group
solidarity, and governance skills while also instilling the habit of regular saving.
Some SHGs have become active in village politics, in some cases even
overturning a ban on widows being able to remarry, debating with local politicians
on the digging of a well, or getting a woman elected as village president. Some
self-help groups have developed their own welfare funds that act as a kind of life
insurance for group members. A study of some 220 SHGs by the National Bank
for Agriculture and Rural Development found that micro-lending had positive
impact on income levels, self confidence, communications skills, and enhanced
participation in household decision-making, and were correlated with a decline
such social problems as drinking and domestic violence.

KEY LESSONS:
By developing profitable approaches to serving poor rural communities, ICICI is
expanding its potential market and developing what it sees as its engine of
growth for the future. But to do it successfully, it is also catalyzing self-help
groups that create powerful social advantages and partnering with both
microfinance institutions and business enterprises that are providing financial and
other services to rural communities. By combining an explicit social commitment,
a focus on innovation, and an insistence on profitable business practices, ICICI is
well positioned for a leadership role in India's financial market.

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CONCLUSION
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

1. www.cia.gov
2. National Sample Survey Organization (NSSO), Household Consumer
Expenditure in India (2006)
3. Census 2006
4. Access to and Usage of Financial Services, World Bank 2008
5. RFAS, 2008, World Bank & NCAER
6. Reserve Bank of India, www.rbi.org.in
7. Access to Financial Services by Stijin Claessens, World Bank 2005

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8. Rutherford Stuart, The Poor and their Money, January 2000

9. www.microsave-africa.com
10. RFAS 2008, World Bank
11. Bharat Nirman is a four year business plan of the Government of India to
improve rural infrastructure
12. National Sample Survey Organization (NSSO) 2007

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