Indian Banking Sector - 'the Promising Future'

The Promising Future Indian Banking Sector

December 15, 2008

CONTRIBUTIONS:

Bhavdeep Singh Anand (accountant) Institutional Credit for India, Regional Rural Banks, Various Stats & Figures

Divya Sharma (scheduler) Analysis of Credit & Rural Economy, Banking Policy in Rural India

Gurinder Singh Cooperative Bank Survey and Interview

Harman Preet Singh (mediator) Formatting, Editorial, SHGs, The Extra-Economic Need, Presenters’ Data

Hiten Gupta Introduction, Microfinance, Inclusion, Current Stats & Figures, ICICI Case Study, Conclusion

Hema Mittal Progress of Rural Banking

INDIAN BANKING SECTOR THE PROMISING FUTURE

The Team: 50802013

Anand, Bhavdeep Singh

50802015

Sharma, Divya

50802019

Singh, Gurinder

50802024

Singh, Harman Preet

50802026

Gupta, Hiten

50702506

Mittal, Hema

LALIT MOHAN THAPAR SCHOOL OF MANAGEMENT,| THAPAR UNIVERSITY, PATIALA.

A Government of India initiative, National Bank for Agriculture and Rural Development, provides financial services to the Remote and Rural sectors of the country.

PREFACE The sustainable provision of credit and general financial services to farmers and rural inhabitants in developing countries has proved to be a difficult task. The history of such endeavours is littered with failures. This has led to a decline in agricultural credit supply for borrowers. Such a reduction contrasts with the increased demand following structural adjustment reforms. We selected this area because apart from the ample business potential available with the low income segments, it also covers the social responsibility of developing our country. Apart from providing financing facilities to the needy, this also reduces the migration rate of the unemployed to urban areas to some extent. This report explores how the new microfinance technologies in urban areas can provide useful models for similar operations in rural areas for agricultural production lending

Indian Banking Sector – The Promising Future explores the challenge of agricultural lending in India. It outlines some improved practices that emerge from recent financial market development. This report concentrates on the transferability of these practices to the agricultural sector.

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ACKNOWLEDGMENTS Our team is thankful to our professor Mrs.Debajani Ghose, guidance of whom provided us the ability of analysing a scenario from various different prospective.

We would like to thank our college senior, Mr.Gaurav Rana, for the idea for this report and enlightening us with detailed discussions. Furthermore, we are bound to the members of our group for their stimulating support.

We are deeply thankful to Mr.Hardeep Singh, Branch Manager, Co-operative Bank, Patiala; Mr.H.P.S.Chawla, Branch Manager, Punjab & Sind Bank, Goluka Morr (Punjab); Mr.L.R.Gupta, Chief Manager, S.B.I., Bhuntar (HP) for their valuable time devoted to us, providing us various details and aspects of banking, especially at the rural sector.

Last, but not the least, we are grateful to the Internet and our Laptops for easing our work load and assisting us analysing, preparing & arranging our data quickly.

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TABLE OF CONTENTS Page No. 1. Preface

2

2. Acknowledgement

3

3. Table of Contents

4

4. List of Illustrations

5

5. Introduction

6

6. Credit and Rural Economy

7

7. The ‘Extra Economic’ Need

8

8. Micro Finance Institutions

9

9. Regional Rural Banks

10

10. Self Help Groups

11

11. Banking Policies in Rural India

12

12. Financial Inclusion 12.1. Withered Financial Inclusion 12.2. Challenges Ahead 12.3. Need of the Hour

14 15 15 15

13. Case Studies

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13.1. Cooperative Bank, Patiala 13.1.1. Interaction with the Manager 13.1.2. Success story – Kapson India

16 17 17

13.2. ICICI Bank 13.2.1. Business Model 13.2.2. Development Benefits

18 18 19

14. Concluding Remarks

20

15. Appendix

21

16. Bibliography

22

17. Glossary

23

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LIST OF ILLUSTRATIONS Page No.

1. Spatial Distribution of Banking Services

6

2. Drivers for Bank Entrance into Microfinance

9

3. Performance of RRBs in India

10

4. Scheduled Commercial Banks in India 4.1. No. of Offices, Aggregate Deposits & Gross Credit Outstanding 4.2. Sharing of Priority Sector in Gross Credit Outstanding

12 13

5. Unequal Distribution 5.1. Bank Offices in India 5.2. Sources of Deposit and Credit in India

14 15

6. Benefits of SHGs

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7. Economic Statistics: Dharavi

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8. Institutional Credit to Agriculture

21

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Source: Reserve Bank of India ( RBI report on financial inclusion: http://www.indian-bank.com/Agri_FinancialInclusion.pdf )

INTRODUCTION The number of people living on less than Rs.60 per day in India is significantly greater that the entire population of the United States. From a social perspective, this is a humanitarian pandemic. From a commercial perspective, these individuals are not considered a viable market given their miniscule purchasing power. The poor of India represent an opportunity for a large, organized financial service company. Can lending to the poor be financially viable for banks? Are there alternate models of credit evaluation, contract enforcement, and building trust in large institution among the poor consumer? The Indian banking policies provides insights on how formal banking can convert the poor into customers, at the same time empowering the poor. It is verified that the current financial crisis in the US is not only due to complex financial engineering and a poor regulatory framework, but primarily because of the quality of customers the banking system had picked. Does it make sense to dole out cash to identity- less slum dwellers and villagers? A significant evolution in rural development strategies has taken place over the last decade, which represents a shift away from supply led and interventionist policies towards a more liberal, market-oriented approach. Liberalization of the financial sector includes the elimination of regulated interest rates and directed credit programmes, and the restructuring or liquidation of state-owned agricultural development banks. Indian Bank, Union Bank of India and Canara Bank have added their branches to the congested landscape in Asia’s largest slum in the past 16 months – all looking to get a slice of Dharavi’s Rs 4,400- crore leather business. Besides, of the 134 million financially excluded households in India, 76% is rural and large, uncontested market. The multilayered India banking system – comprising 82 SCBs, 92 RRBs, four LABs, 1813 UCBS and 107,497 rural co-operative credit institutions went through as introspective phase in the 1990s, when prudential norms were tightened; banks became risk averse and concentrated on strengthening their balance sheets. Today that gives them the ability to convert what was largely perceived as social responsibility into a viable growth plan: providing access to finance to all, irrespective of geography, income or education. The banking system had Rs 45,000 crore in the deposits with RRBs in 2007, and has outstanding loans worth Rs 22,227 crore as on 31 March 2008 with Self help groups (SHG) Bank linkage program, which seeks to bring low- income households into the financial access near, but that still leaves 60% of the population out of the loop. So the RBI upped the ante in its Annual policy statement, 2005-06, where it said “Banks had been bestowed with several privileges, especially of seeking public deposits on a highly leveraged basis, and therefore, should be obliged to provide banking services to all segments of the population on an equitable basis”.

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More than 60% Indian population resides in Rural Areas, where Agriculture is the main livelihood. (Source: Presenters’ Data)

CREDIT AND THE RURAL ECONOMY Financial liberalization after 1991 decimated the formal system of institutional credit in rural India. It represented a clear and explicit reversal of the policy of social and development banking, such as it was, and contributed in no small way to the extreme deprivation and distress of which the rural poor in India have been victims over the last decade. Financial liberalization is a crucial component of the programmes of economic reforms (including banking sector policies) that are being imposed on the people of less-developed countries. There are many components of the package of reforms associated with financial liberalization in India. The policies of financial liberalization in India are classified into three types: • • •

Policies to curtail government intervention in the allocation of credit Policies to dismantle the public sector and foster private banking Polices to lower capital controls on the Indian banking system

It is well known that the burden of indebtedness in rural India is very great, and that despite major structural changes in credit institutions and forms of rural credit in the postIndependence period, the exploitation of the rural masses in the credit market is one of the most pervasive and persistent features of rural life in India. Rural households need credit for a variety of reasons. They need credit to meet short-term requirements of working capital and for long-term investment in agriculture and other income-bearing activities. Agricultural and non-agricultural activities in rural areas typically are seasonal, and households need credit to smoothen out seasonal fluctuations in earnings and expenditure. Rural households, particularly those vulnerable to what appear to others ‘minor shocks’ with respect to income and expenditure, need credit as an insurance against risk. In a society that has no law of free, compulsory and universal school education, no arrangements for free and universal preventive and curative health care, a weak system for the public distribution of food 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 on a variety of social obligations and rituals. If these credit needs of the poor are to be met, rural households need access to credit institutions that provide them a range of financial services, provide credit at reasonable rates of interest and provide loans that are understood by extra-economic provisions and obligations.

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Traditional ways of farming and reluctance to adopt superior technology makes the farmer highly dependent on nature for favourable yields. The government provides insurance plans for farmers against bad yields.

Farmers are encouraged to experiment with alternate farming techniques. Loans are provide at low EMIs, and waved off too, if required. (Source:

Presenters’

Data)

THE “EXTRA-ECONOMIC” NEED Historically, there have been four major problems with respect to the supply of credit to the Indian countryside: • • •

•

The supply of formal sector credit to the countryside as a whole has been inadequate. Rural credit markets in India themselves have been very imperfect and fragmented. The distribution of formal sector credit has been unequal, particularly with respect to region and class, caste and gender in the countryside. Formal sector credit needs specially to reach backward areas, income-poor households, people of the oppressed castes and tribes, and women. The major source of credit to rural households, particularly income-poor working households, has been the informal sector. Informal sector loans typically are advanced at very high rates of interest.

Further, the ‘terms and conditions’ attached to these loans have given rise to an elaborate structure of coercion – economic and extra-economic – in the countryside.

That these constitute what may be called the “problem of rural credit” has been well recognized in official evaluations and scholarship since the end of the nineteenth century. Given the issues involved, the declared objectives of public policy with regard to rural credit in the post-Independence period were, in the words of a former Governor of the Reserve Bank of India, “to ensure that sufficient and timely credit, at reasonable rates of interest, is made available to as large a segment of the rural population as possible”. The policy instruments to achieve these objectives were to be: • • •

The expansion of the institutional structure of formal-sector lending institutions Directed lending Concessional or subsidized credit

Public policy was thus aimed not only at meeting rural credit needs but also at pushing out the informal sector and the exploitation to which it subjected borrowers. Rural credit policy in India envisaged the provision of a range of credit services, including long-term and shortterm credit and large-scale and small-scale loans to rural households.

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Source: Report on Banking at the Base of the Pyramid (United States Agency for International Development)

MICRO FINANCE INSTITUTIONS MFIs could play a significant role in facilitating inclusion, as they are uniquely positioned in reaching out to the rural poor. Many of them operate in a limited geographical area, have a greater understanding of the issues specific to the rural poor, enjoy greater acceptability amongst the rural poor and have flexibility in operations providing a level of comfort to their clients. Proposed micro finance services regulation bill defines micro finance services as “providing financial assistance to an individual or an eligible client, either directly or through a group mechanism for: •

An amount, not exceeding Rs. 50,000 in aggregate per individual, for small and tiny enterprise, agriculture, allied activities (including for consumption purposes of such individual).

•

An amount no exceeding Rs 1, 50,000 in aggregate per individual for housing purposes.

•

Such other amounts, for any of the purposes mentioned at items, mentioned above or other purposes, as may be prescribed”.

Greater legitimacy, accountability and transparency will not only enable MFIs to source adequate debt and equity funds, but could eventually enable MFIs to take and use savings as a low cost source for on-lending. The lives and livelihoods of poor households are full of uncovered risk; hence insurance is essential for them. To enable MF-NBFCs to offer risk mitigation services to the poor, the IRDA micro-insurance has permitted Micro-insurance guidelines, 2005 according to which MF-NBFCs are permitted to offer micro-insurance services as agents to regulated life and non-life insurance companies.

Earlier, all regulatory aspects of microfinance were not centralized. For example, while the RPCD in RBI looked after rural lending, MF-NBFCs were under control of the DNBS and external commercial Borrowing was looked after by the Foreign Exchange Department. Later it was felt that RBI may consider bringing all regulatory aspects of microfinance under a single mechanism. Thus supervision of MF-NBFCs was delegated to NABARD by RBI.

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Source: Report on The Performance of RRBs in India (Reserve Bank of India Occasional Papers Vol. 27, No. 1 and 2, Summer and Monsoon 2006)

REGIONAL RURAL BANKS Regional Rural Banks were created in the 1970s exclusively to serve the credit needs of rural India, and specifically those individuals, social groups and regions most excluded by the formal system of credit. For all their weaknesses, these banks passed an important international test. A cross-country study of rural credit institutions threw up the important finding that, in the period 1988-1992, of all the institutions studied; Regional Rural Banks in India incurred the lowest costs of administration, 8.1 per cent of the total portfolio.

An important feature of banking reforms has been to alter the equation between different sectors of banking, in this case, to make the norms governing Regional Rural Banks indistinguishable from those governing commercial banks, thus undermining their capacity to serve the special needs of the rural economy and the rural poor.

There has been a ban on recruitment to the staff of Regional Rural Banks since 1992. At every discussion or seminar on problems of rural credit that we have attended in the recent past, bank officials speak of the impact on rural credit of the graying of bank personnel and the thinning of their ranks. Field officers of Regional Rural Banks in the 1970s and 1980s were relatively young and capable of spending substantial periods of time in the villages served by their branches. Regional Rural Banks have also suffered because they are no longer permitted to recruit agricultural science and engineering graduates for specialized lending.

Liberalization has had the effect of crippling Regional Rural Banks, rendering them incapable of fulfilling their original mandate (stats on the figure). Though, the total demand for the credit has ever been on rise, but the number of players is ever increasing.

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Self Help Groups: local helping hands Primarily formed to aid each other in daily life activities, SHG came out as a great idea for economic upliftment. (Source:

Presenters’

Data)

SELF HELP GROUPS SHGs represent a unique approach to financial intermediation. The approach combines access to low-cost financial services with a process of self management and development for the women who are SHG members. SHGs are formed and supported usually by NGOs or by Government agencies. Linked not only to banks but also to wider development programmes, SHGs are seen to confer many benefits, both economic and social. SHGs enable women to grow their savings and to access the credit which banks are increasingly willing to lend. But there are also some questions. How effective are the groups in managing their financial transactions? Are the groups sustainable? How effective are such actions? Who is really benefiting? Do the poorest benefit, do they not join at all or if they do join, are they more likely to drop out? A study explored such questions, based on field research in four states of India, presenting a reality check of ‘what is really happening’. In disseminating the findings, we invite a wider discussion on the issues and the implications for ‘optimising’ the SHG movement. SHGs are formed by NGOs, Government agencies or Banks – the three types of ‘Self Help Promoting Agencies’ or SHPAs. SHPAs differ in their approaches to group promotion, with varying emphasis on microfinance (the savings and credit transactions, decisions, record-keeping and SHGs often being part of a wider village development programme, with other social development inputs). NGOs and Government SHPAs are society oriented; whereas Banks naturally are finance oriented. In case, the pattern and intensity of inputs and guidance to SHGs varies, there is variation between different types of SHPA but also within SHPAs due to differences between individual field workers who are the actual group ‘promoters’ or facilitators.

Some SHPAs are now promoting federations or ‘cluster associations’ of SHGs. For such associations have strong potential for enabling women to act collectively on different social and economic issues, and shift the capacity building requirements to a different level.

Also, other than merely business, SHGs get tax rebates, and special no-frill accounts from the government / private operators. This not only encourages their socially responsible actions, but pushes them further to expand their business for the needy.

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Number of Offices, Aggregate Deposits and Gross Credit Outstanding All scheduled Commercial Banks, India, 1969 to 2002 (Amount in Rs lakhs)

Source: Report on Financial Liberalisation and Rural Banking in India (V. K. Ramachandran and Madhura Swaminathan, Indian Statistical Institute, Kolkata)

BANKING POLICY IN RURAL INDIA 1969 TO THE PRESENT

THE FIRST PHASE The first phase was right after the nationalization of India’s 14 major commercial banks in 1969. The objective of the nationalization of banks was for the state to gain access to new liquidity, particularly among the rich farmers, in the countryside. New objectives for rural banking were declared and were termed as “social and development banking”. These objectives are listed below • • •

To provide banking services in previously unbanked or under-banked rural areas To provide substantial credit to specific activities, including agriculture and cottage industries To provide credit to certain disadvantaged groups such as, for example, Dalit and scheduled tribe households

It was only after 1969 that a multi-institutional approach to credit provision in the countryside became policy, with commercial banks, RRBs and Cooperative Institutions establishing wide geographical and functional reach in the Indian countryside RBI issued specific directives with respect to social and development banking • • •

Setting targets for the expansion of rural branches, Imposing ceilings on interest rates, Setting guidelines for the sectoral allocation of credit.

A target of 40 per cent of advances for the “priority sectors”, namely agriculture and allied activities, and small-scale and cottage industries, was set for commercial banks. Advances to the countryside increased substantially, although they were, as was the Green Revolution itself, biased in respect of regions, crops and classes. The benefits were concentrated among the richer classes of cultivators from the north-west and south of India.

THE SECOND PHASE (late 1970 and early 1980) This was a period when the rhetoric of land reform was finally discarded by the ruling classes themselves, and the major instruments of official anti-poverty policy were launched for the creation of employment.

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Share of Priority Sector in Gross Credit Outstanding of all Scheduled Commercial Banks, India, 1969 to 1999 (In per cent)

Source: Report on Financial Liberalisation and Rural Banking in India (V. K. Ramachandran and Madhura Swaminathan, Indian Statistical Institute, Kolkata)

Two strategies for employment generation were as follows • •

Employment through state-sponsored rural employment schemes self-employment generation by means of loans-cum-subsidy schemes targeted at the rural poor

Thus began a period of directed credit, during which credit was directed towards the weaker sections In 1975, the Government established a new network of rural financial institutions called the Regional Rural Banks (RRBs), which were promoted by the Government of India State governments and commercial banks. The number of such banks expanded rapidly, and covered 476 districts by 1987 IRDP (1978-79) aimed the creation of productive income-bearing assets among the poor through the allocation of subsidized credit. The IRDP was extended to all rural blocks of the country in 1980. But this program failed due to the following reasons: • • •

The absence of agrarian reform and decentralized institutions of democratic government, The inadequacy of public infrastructure and public provisioning of support services The persistence of employment-insecurity and poverty in rural society

THIRD PHASE This phase, which began in 1991, is that of liberalization. It was recommended that interest rates be deregulated, and capital adequacy norms should be changed to “compete with banks globally”.

FINAL PHASE The current financing policies introduced by RBI to outreach or to penetrate through vast section of population. In November 2005, policies to include all segments of market were incubated.

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UNEQUAL DISTRIBUTION

Banks Do Not Provide Ample Credit Facilities in Rural Areas. Graph above explains the business outlets of Commercial Banks in various sectors. ( Source: Business World Magazine, Archives-2007 )

FINANCIAL INCLUSION In November 2005, banks were advised to make available a basic banking ‘no-frills’ account with low or nil minimum balances which has pre-fixed by banks only, to outreach or to penetrate through vast section of population. According to the information available with Reserve bank, about five lakh no-frill accounts have been opened until March 31, 2006, of which about two third are with the public sector and one third with the private sector banks. Reserve Bank also wants every bank to follow KYC procedure in` which procedural Hassles for opening an account has been simplified. The Reserve Bank has directed Banks to make available all the printed material used by retail customer in English, Hindi and the concerned regional language.

In January 2006, public sector banks were permitted to utilize the services of NGOs/ SHGs, micro finance institution and other civil society organization as intermediate in providing financial and banking services through the use of business facilitator and business correspondent models. Private sector banks like ICICI BANK earlier utilized these services. Its merger with the Bank of Madura Bank, in 2001, proved to be profitable deal. To extend hassle free-free credit to bank customer in rural areas, the guidelines on GCC schemes were simplified to enable customer’s access credit on simplified terms and conditions, without insistence on security, purpose or end use of credit. Banks were allowed to issue general credit cards similar to kisan credit cards. A simplified mechanism for one time settlement of loans with principal amount up to Rs.25, 000 which have become doubtful was suggested for adoption. Banks have been specifically advised that borrowers with loans settled under the one time settlement scheme will be eligible to re-access the formal financial system for fresh credit. Banks were advised to give effect to these measures at all branches for achieving greater financial inclusion Under this new guideline, banks initiated and are conducting several pilot, to test the functionality of new schemes such as no-frills accounts, models like that of BCs, ad information communication technologies.

The costs banks have to bear while providing such services cannot be ignored. For instance, in the case of Canara bank, the cost of opening a no frills account was Rs 48, and each transaction Rs 1,012. So, the break even average deposit level required was Rs 1,911 (for 12 transactions a year). The average balance at Canara bank was estimated at Rs 528 – less than half of break-even.

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UNEQUAL DISTRIBUTION

Banks Do Not Provide Ample Credit Facilities in Rural Areas. Above stated bar graphs show the deposits and credit made by various sector for the mentioned years. ( Source: Business World Magazine, Archives-2007 )

WITHERED FINANCIAL INCLUSION? The two funds of Rs 500 crore are issued for financial inclusion: one for development of inclusion mechanisms and the other to meet the costs for technology adoption. These funds are set aside by the Union Budget should provide the right catalytic effect. But for now the situation seems to be different and surveys are telling a whole different story. It is placed even below than some of the less developed African countries such as Kenya and Morocco.

CHALLENGES AHEAD The current ‘TSUNAMI’ IN THE FINANCIAL SECTOR triggered by the subprime crises has had a telling impact on the Global economy from which it will take some time for the economy to recover. If India wants to stay as world’s second fastest growing economy Role of banking sector will be vital for India. Study of Business World, ‘Banking in 2050’, shows that the structure of global banking will undergo a complete realignment with the E7 driving growth. The E7 group: Brazil, Russia, India, China, Indonesia, Mexico and Turkey.

•

Over the next 25 years, banking sectors will grow, much faster than these countries’ GDP.

•

Total domestic credit in the E7 is likely to exceed those of G7 countries in next 40 years,

•

India likely to emerge as the third largest domestic banking market by 2040, and could even grow faster that china.

THE NEED OF THE HOUR Banking Liberalisation For the Indian banking industry, 2009 may be a defining phase as it is likely to be opened up further. In India, government – owned banks channel about 70 % of the net saving of the economy into government and state owned enterprises, and finance a huge budget deficit of about 9 % of GDP. Reducing the government’s dependence on these funds would require a change in the way banking sector thinking and looks as itself, moving towards more formally in financial inclusion.

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A Govt. Initiative, Cooperative Banks aim to facilitate poor, mostly waged labourers to secure their daily savings in banks. This not only gives them a sense of security, but also gives them return on investment.

(Source: Presenters’ Data)

CASE STUDY Punjab State Cooperative Bank (The Mall, Patiala)

The Punjab state cooperative bank has given loan to rural people for doing his business. This bank gives loan under his various schemes i.e. for any kind of small scale business. With the help of bank rural people has raise their standard of living and do their business in urban area also. The bank provides financial help to farmers and workers at low rates of interests. Many people start business with the help of this bank, by the financial help from the bank rural people will have secure future. Earlier rural people are gone to the contractor for the financial help; the contractor’s are miss use the farmer’s. With the new policies from bank it can get easy for people to start their business. The Punjab state co operative bank has played a valuable role in advancing loans to the farmers, industrialists, traders and youth under various schemes thereby raising their standard of living. By developing profitable approaches to serving poor rural communities, 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.

MISSION Enable the Poor to Create a World without Poverty Initially, the Bank was established with the objective of saving the farmers from the exploitation of money vendors by extending Long-Term Credit help to redeem their debts on agricultural lands and to acquire more lands for the formation of their economic holdings etc. However, with the passage of time, the Bank had also diversified its lending portfolios to meet the changing long-term credit needs of the farmers in the State for the development of Agriculture etc. The Bank subsequently started advancing loans for improvement of Banjar Lands, Alkaline and Saline Lands and also for the installation of Tube wells, purchase of Tractors and Agricultural Implements, Levelling of Lands etc. etc. and as such played a major role in bringing Green Revolution in the State. Every third tube well installed in the State is financed by this Bank. Similarly every fourth Tractor running in the fields of the State is financed by the Bank.

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PROVIDING OPPORTUNITIES

Various schemes offered by rural banks encourage farmer to think out of box and setup alternative income endeavours like Poultry farms, Dairy farms, Biogas units, Cable TV services, Sericulture, Computer centres etc. ( Source: Presenters’ Data)

Not only this, keeping in view the saturation point in respect of the traditional purposes, the Bank also diversified its loaning activities to provide subsidiary occupations and improve the economic conditions of the farmers in the State and advanced loans for Dairy Development, Poultry Development, Animal Driven Carts, Farm Forestry, Fish Farming, Sheep Rearing, Sand Scrapping, Installation of Bio-Gas Plants etc. After the Green Revolution, the Bank in particular accepted the challenge to bring White Revolution in the State by advancing Dairy Loans. The Dairy Farming has been accepted by the farmers as an honourable profession for improving their economic position. Starting with the advancement of loans for development of two, three and five animal units, the Bank is now advancing loans for setting up of Commercial Dairy units consisting of 10, 20, 30 and 50 milch cattle. It is worth mentioning here that the per capita milk availability in the Punjab State has reached the level of 845 grams against per capita availability of 201 grams in the country. For this, the credit should go to this Bank, because major financing amongst financial institutions has been made by this Bank for Dairy Farming in the State which consequently, increased the milk production of the State.

INTERACTION WITH THE MANAGER Our visit to the bank gives the valuable thoughts from the manger. The branch manager Mr. Hardeep Singh gives the useful knowledge about the rural banking system. He apprised about the various schemes under which the bank is giving loan to rural people. The bank is getting money from the RBI. This step had been taken by the Centre Government to raise the standard of the rural sectors. This bank has provided loans to people at low rates of interest.

OBJECTIVE The aim or motive of the bank is to boost the Indian rural sectors so that poverty ratio is decreased. The bank didn’t get much profit by rural banking but earning its normal profits by various loan schemes. As the aim of government is to boost rural sector, these bank provides services. The money is funded by government. The bank obeys rules & guidelines of RBI for lending money to various sectors. Mission is to enable the poor, especially the poorest, to create a world without poverty.

KAPSON INDIA, PATIALA Kapson India is a joint venture firm, located at D-99, Focal Point, Patiala. The owner of the firm is Mr. Sanjay Kapoor, Mrs. Sunita Kapoor, and Mrs. Jyoti Kapoor. The firm has taken a loan for its business from the bank in year 1999. The firm credited 5 lakh for its machinery and 3.50 lakh for its cash credit limit from the bank. The total cost of the project is 15 lakh. This firm is making Iron tools for the various purposes. These tools are exported all over the country. The major dealers of the firm are located at Delhi, Punjab, Mumbai and Kolkata. By the initiative steps taken by Mr. Sanjay Kapoor and with the financial help from the bank, this firm is making good profit, and is having a good credit rating.

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BENEFITS OF SELF-HELP GROUPS

SHG-Bank linkage programme for rural India: An Impact Assessment, NABARD 27, 33, and 39 ( Source: Business World Magazine, Archives-2007 )

CASE STUDY ICICI Bank (INDIA) EXECUTIVE SUMMARY 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 (SHG) 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.

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 was established in 1943. Under the leadership of if Dr. K.M. Thiagrahan, who assumed the position of chairman in 1993, the Bank of Madura reoriented its focus towards increasing deposits. Thiagrajan became familiar with the Grameen Bank model started in Bangladesh, providing small loans to clients below poverty line. Executive at the Bank of Madura felt the efforts in Bangladesh could be replicated in India. In 1995, they developed a model focused on economic empowerment of the poor in rural areas. Under this conception of bank model small groups of approximately 20 women was formed from one village and training was provided. Ultimately a structured process was made 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 10,000 rupees to each woman, for which the SHG is collectively responsible. Loans are then typically used to help start or expand a small business activity.

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Economic Statistics: Dharavi DHARAVI

WARDEN ROAD

POVERTY PREMIUM (ratio)

Credit (annual interest)

600 - 1000%

12-18%

53

Municipal Grade Water (per cubic meter)

44.80

1.20

37

Phone Call (per minute)

1.6 – 2.5

1

1.8

Rice(per Kg)

11.20

9.60

1.2

Source: “The Poor and High cost Economics Ecosystems”. from “Serving the World’s Poor Profitably” ( Authored by C.K. Prahalad and Allen Hammond, September 2002)

A graphical comparison of the above mentioned stats. Worth mentioning, the Rate of Interest mentioned above could not be fit in this graph.

The program under ICICI depends on the training and empowerment of women, in a threetier system. The bank recruits experienced members of SHGs to become social service consultants, who form new self-help groups in neighbouring 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 money - lenders (e.g. Dharavi, figure on left side), 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.

DEVELOPMENT BENEFIT The SHGs 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 NABARD 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 expanded its potential market and developed 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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A Woman Farmer in rural Andhra Pradesh. At the end of the day, Financial Security matters! ( Source: Gdstone, Flickr March 6, 2008 )

CONCLUDING REMARKS The economy is presently in a phase of rapidly rising incomes, rural and urban, arising from an expansion of extant economic activities as well as the creation of new activities. Corporate profitability has exhibited sustainable trends and consumer incomes are increasing rapidly, riding on the growth momentum. All these developments suggest that the demand for financial services, both for saving as well as production purposes, will be greater than has been the case in past, and there will be many new entrants in need of financial services who have so far not been served, at present our financial depth is much lower that other Asian countries, though it has picked up in the recent past. While there is evidence o fan increase in financial deepening, particularly during the present decade, the increase in the breadth and coverage of formal finance has been less than adequate. Deepening the financial system and widening the reach is crucial for both accelerating growth and for equitable distribution, given the present stage of development of our country. As the poverty levels decline and households have greater levels of discretionary incomes, they will be first time financial savers. They will, therefore, need to have an easy access to formal financial systems to get into the banking habit. Banks will need to innovate and devise newer methods of including such customers into their fold. The importance of ‘no-frills’ account and expanding the range of identity documents that is acceptable to open an account without sacrificing objectivity of the process in this milieu can never be over- emphasized. Banks will need to go to their customers, rather than the other way around, The micro credit and SHG movements are in their infancy but are gathering force. More innovation in the form of business facilitators and correspondents will be needed for banks to increase their outreach for banks to ensure financial inclusion. New entrants to the banking system need households at their doorstep. To conclude, we wish to stress that with increasing liberalization and higher economic growth, the role of banking sector is poised to increase the financing pattern of economic activities within the country, to meet, the growing credit demand, the banks need to mobilize resource from a wider deposit base and extend credit to activities which are so far not financed by banks. The trend of increasing commercialization of agriculture and rural activities should generate greener pastures, and banks should examine the benefits of increasing penetration therein. Financial Inclusion will strengthen financial deepening an provide resources to the banks to expand credit delivery, thus, financial inclusion, driven by SHGs & RRBs, will lead to financial development in our country which will help to accelerate economic growth.

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Green Revolution: Improved seeds, fertilizers, and pesticides dramatically increased crop yields. The total food available per person worldwide has increased exponentially. (Source: Presenters’ Data)

APPENDIX Green Revolution The introduction of high-yielding varieties of seeds after 1965 and the increased use of fertilizers and irrigation are known collectively as the Green Revolution, which provided the increase in production needed to make India self-sufficient in food grains, thus improving agriculture in India. Famine in India, once accepted as inevitable, has not returned since the introduction of Green Revolution crops. The two main crops that gained from the green revolution, as is well recognized, were wheat and rice, and the application of the new technologies was primarily in the irrigated areas of the north-west and south of India, with the benefits concentrated among the richer classes of cultivators.

Filling the Gaps Lack of access to formal credit and to full financial intermediation services impedes agricultural development and hampers the efforts to alleviate rural poverty. However, new initiatives are being undertaken to meet the demand for rural credit. They include the reform of agricultural development banks, enabling them to pursue a market approach in the delivery of credit services to small and medium-sized rural clients. At the same time, some microfinance institutions (MFIs) are attempting to transfer their urban microcredit technologies to rural areas. Two recent developments have influenced these initiatives. The first one has been the adoption of a “financial systems” development approach. This emphasizes the need for an integrated approach to financial market development and the provision of competitive and durable financial services in local financial markets. A clear understanding of both client demand and existing informal financial services providers is required. In fact, over the last decades, development agencies, NGOs, practitioners and researchers have accumulated substantial experience in operating financial services for rural clients. Microenterprise credit programmes were initiated to address the unemployment problems that are associated with the vast rural-urban migration in developing countries. Initially, they targeted the promotion of self-employment and income-generating activities for the urban poor. The evolution in microfinance, like the earlier one in rural finance, has been affected by the principles of financial systems development. Attention is on developing financial institutions that target low-income clients while pursuing commercial viability.

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BIBLIOGRAPHY Various Reports and Documents by: Dr. Chakravarthi Rangarajan (Indian Economist) Financial Inclusion: Lecture addressed by Dr. Rakesh Mohan at the Annual Bankers' Conference 2006 http://www.rbi.org.in/scripts/BS_SpeechesView.aspx?Id=310 Article: Withered Financial Inclusion? Global Financial Inclusion Index released this July by Delhi based research forum http://www.icrier.org/ Report: Banking At the Base of the Pyramid: A Microfinance Primer for Commercial Banks by Robin Young and Deborah Drake USAID (United States Agency for International Development) Indian Agricultural Problems: University of Michigan http://www.umich.edu/ Occasional Papers: Reserve Bank of India http://www.rbi.org.in/ Economic Survey 2004-2005: Budget Commission http:/indiabudget.nic.in Economic Survey 2006-07: Press Information Bureau http://pib.nic.in Indian Statistical Institute, Kolkata http://www.isical.ac.in/ National Bank for Agriculture and Rural Development http://www.nabard.org Search Engines:

http://www.altavista.com/ http://www.google.com/ http://www.flickr.com/

Encyclopaedia: http://www.wikipedia.org/

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GLOSSARY SHG: Self Help Groups ICRIER: Indian council for Research on International Economic Relations NABARD: National Bank for Agriculture and Rural Development SCB: Scheduled Commercial Banks RRB: Regional Rural Banks LAB: Local Area Banks UCB: Urban co-operative banks KYC: Know Your Customer GCC: General Credit Card BC: Business Correspondents RPCD: Rural Planning and Credit Department MF-NBFC: Microfinance - Non Banking finance Companies DNBS: Department of Non-Banking Supervision IRDA: Insurance Regulatory and Development Authority IRDP: Integrated Rural Development Program DHARAVI: The Largest & Highly Populated Slum Pocket in Asia KIOSKS: A small open fronted office/ hut/cubicle.

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