INNOVATION IN RURAL BANKING

ABSTRACT

            This study is the innovation in the rural banking.  This paper present the bank sector, new mantras, new innovations, MIS promote functions, poverty alleviation of rural bank.  Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional Rural Banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country.

INTRODUCTION

            Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional rural banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country.

            In order to stimulate the development of rural banking and to give sustained support to the development of co-operative banks and other co-operative institution by providing remittances and other facilities, the all India Rural credit survey committee recommended setting up of a public sector bank which would be responsive to the needs of the Rural sector in general and co-operative institutions in particular. The overwhelming majority of poor people in India are concentrated in rural area of the estimated 260 million Indians (or 26%) of the population who live in poverty, same 193 million or 745) live in rural area.

The catalytic role played by credit for accelerating the economic development has been well recognized all over the world.  Since the inception of central economic planning in 1950, the government identified the credit needs of the rural sector and framed polices conducive for the flow of institutional credit.  Finance is one of the most fundamental inputs for economic activity.

Despite having a wide network of rural bank branches in India, Which implemented Specific poverty alleviation programmer that sought creation of self-employment opportunities through bank credit, a large number of unprivileged poor masses still continued to remain outside from the field of formal banking system.

BANKING SECTOR IN RURAL AREA:

            In June 1969, total number of banks branches in India were 89, out of which 73 were scheduled commercial banks and 16 were non-scheduled commercial banks increased to 226, out of which 148 were scheduled commercial banks, 74 Regional rural banks and 5 non-scheduled commercial banks in June 1980.  In 1998, the branches further in creased to 340, out of which state bank and its subsidiaries are 8 in number 19 nationalized banks, 196 Regional Rural Banks 86 scheduled Commercial Banks, 23 Private Banks and 1 Non-scheduled commercial banks.

            Banks have woken up to the potential in the rural sector. Specialised and innovative schemes to improve rural penetration are the new mantra. Rural credit cards and ATMs, a franchisee network, supply chain financing for agriculture; investments in rural infrastructure and cross-selling of products are only some of the schemes directed at the village folk. Building a specialised cadre for rural banking and improving awareness can help reduce default and make these schemes effective.

THE NEW MANTRA FOR BANKS

            The Union Budget for 2006-07 highlighted a number of schemes for rural India including creating opportunities for rural employment and a National Rural Health Mission. It has also asked banks to give farm credit at 7 per cent to bring more farmers under the organised credit net. The finance ministry has proposed to ask banks to increase the level of farm credit to Rs 1,75,000 crore in 2006-07, an increase of about Rs 33,500 crore. In addition, banks are being asked to bring 50 lakh more farmers into the banking fold. The potential, no doubt, is tremendous.

            However, the problem is rural penetration. A recent national sample survey has found that 41 per cent of the country’s adult population does not have access to formal banking facilities. This leaves a huge population outside the ambit of the formal financial structure. Banks are trying to remedy this problem now. Most have taken to rural expansion in a big way.  Take the country’s largest bank, State Bank of India for instance. Its rural branch network has touched a stupendous 6,600 with 972 specialised branches, which have been set up in different parts of the country exclusively for the development of agriculture through credit deployment.

            In addition, rural agricultural business units, education programmes for local farmers and kisan cards. It is no wonder that the bank is a leader in agricultural finance in the country with a portfolio of Rs. 18,000 crore in advances to around 50 lakh farmers.  The bank has brought out innovative and specialized mango and litchi credit cards for orchard owners in Uttaranchal.  Its most recent endeavor in this direction is a tie-up with National Agricultural Cooperative Marketing Federation (NAFED) for cooperation in to finance farmers for production and cultivation of various crops like soyabean, paddy, jute and potato.

            Not far behind is ICICI Bank, the country’s second largest bank. It has decided to adopt an unconventional method to beef up its presence in rural India. Instead of opening branches, the largest private bank has decided to adopt the franchisee model. Besides credit franchisees, the bank’s rural delivery channels may include branches in major agricultural markets, rural Internet kiosks and micro-finance institution partnerships, targeting specific segments of the rural population.

            The bank had disbursed Rs 2,500 crore towards rural sector financing was expecting good rural credit off take in the current year. It has also rolled out `Ashan’ ATMs for the urban and semi-urban markets in India. Clearly, the bank is taking the high-tech route to reach out to the rural population. Canara Bank on the other hand has launched a more grassroots-level plan. It plans on a programme for “100 per cent financial inclusion” in 1400 villages all over India, which is expected to bring 7 lakh families into the bank’s net.

            Under the programme, every adult member of a rural household in the selected villages would be encouraged to open ‘No Frills’ accounts with minimum entry-level formalities. An artisans credit card will help village artisans like blacksmiths, carpenters, leather workers, people engaged in servicing of agricultural implements and household equipment.  Meanwhile, several banks have been pursuing corporate-linked advances where finance could be provided against procurement commitments. Such supply-chain management is had now been introduced to rural lending as well. Farmer loan portfolios are increasingly getting skewed towards investment credit rather than crop loans.

            Investment credit could involve credit for the acquisition of farm equipment like tractors and other farm equipment. Banks are also involved in commodity financing where advances are provided to farmers against their final produce.

            Apart from the rising credit needs, banks can generate substantial amount of fee-based volumes from the rural segment. The agricultural sector offers cross-sell opportunities for products like micro insurance. Banks are also focusing on financing of rural infrastructure.

            An improved rural branch network, building a banking cadre specialised in rural banking, more flexible schemes and most importantly improving awareness among farmers about the advantages of bank credit are working for banks. The rural initiative, though relatively new, has tremendous potential. The coming years will show the extent of its success.

NEW INNOVATION OF RURAL BANKING

            Traditional bank architecture is based on bank branches. The branches ensure the physical security of your savings. You go there to deposit and withdraw money, negotiate loans, and engage in other financial transactions. In the past two decades, the banking architecture has changed. The automated teller machine (ATM) has been a big innovation. Credit and debit cards have created new financial spaces. Some banks have experimented with rural agents. Yet the bank branch has remained the bedrock of the banking system. You need a bank account in a branch before you can use an ATM or credit card that may be about to change. It’s early days still, but technocrats now view cellphones as the new architecture of virtual banks. This has the potential to make bank branches obsolete, or at least non-essential. Cellphone banking looks especially relevant for India, since it can penetrate the countryside cheaply and effectively.
            The world over, cellphones are spreading at a phenomenal rate. In many developing countries, more people have cellphones than bank accounts. In India, new cellphone connections are growing at the rate of six million a month, a rate of customer expansion that no bank can dream of.  Till now, rural cellphone towers did not exist to permit services in the deep countryside. But those towers are now coming up rapidly, and cellphone companies expect to get hundreds of millions of rural customers in the next five years. For the first time in history, villagers will have instant connectivity.

E-Account

            The customer can deposit cash into the e-account or withdraw it, using the retail agents of Globe Telecom, who are spread across the country. Customers can use G-cash to pay bills, repay loans, or purchase goods at shops (it’s effectively a debit card). In the Philippines, 1.3 million people now have e-accounts with Global Telecom. In Kenya, a similar service is being offered by Safaricom, a Vodafone affiliate and the leading mobile operator in the country. Safaricom has partnered the Commercial Bank of Africa and a local microfinance institution.  In South Africa, a technology firm, WIZZIT, has become a division of the South African Bank of Athens in order to meet the central bank’s regulatory concerns. WIZZIT offers the usual services — deposit, withdrawal, payments, and airtime purchases — through a variety of access points including cellphones, ATMs post offices and bank branches. So, it combines branchless and branch-based banking, and its link with the post office constitutes a public-private partnership. It has reached poor people that earlier could not dream of opening bank accounts. India needs to learn from all these models. After the NBFC scandal of the 1990s, and subsequent scandals in many cooperative banks, the RBI is ultra-cautious about new architecture that may be vulnerable to abuse. It has allowed commercial banks to use microfinance institutions (MFIs), NGOs and cooperatives as retail agents. ICICI and other banks use MFIs as retail agents for disbursing and collecting loans. However, this architecture has not so far been useful for collecting deposits, paying bills, or undertaking other financial services.  
            Hence the time is ripe for a new set of rules to facilitate cellphone banking in all rural areas. A problem in the past has been that electricity in rural areas is very intermittent and unreliable. This makes the operation of ATMs a problem. But cellphones need very little electricity, and can be charged at night in every village using batteries based on solar energy. Such solar batteries have long been used by ITC in its e-choupals, and are not a novelty.  Indeed, the e-choupal is suddenly threatened with extinction by the rural cellphone. Till now, the e-choupal has provided electronic information in rural areas having no other source of information. But once rural cellphone towers are built, 3G technology will allow every rural cellphone to connect with the internet. This will enable cell-phones to provide all the information that e–choupals do today. Indeed, to protect its future, ITC needs to immediately become provider of services through cellphones, making them the new architecture of future e-choupals. This will be a first step towards ITC becoming a rural banker too.

            The RBI should probably insist that every provider of virtual banking sets up a joint venture with a commercial bank for providing such services. This will be far simpler than creating an entirely new set of rules for virtual banks. The regulations should liberally permit money transfer by cellphone. This will reduce the cost incurred by poor migrants in sending home remittances, currently done through money orders.

MIS TO PROMOTE RURAL BANKING

            To reach out to millions of unbanked rural customers, Mumbai based technology solutions provider Financial Information Network and Operations Ltd. (FINO) will work jointly with Access Development Services (ADS) to promote management information system (MIS) in the sector.  As a solution provider, FINO will implement MIS solution along with its various delivery channels, including mobiles, smart cards, micro-deposit machines (MDM’s) and credit bureaux services to aid Access Microfinance Alliance (AmFA) partners to scale up their operations.

RURAL BANKING AND POVERTY ALLEVIATION

            Inadequacy of the traditional banking system gave rise to the need of cooperative banks and regional rural banks and Regional Rural Banks combining resource and competence of the commercial banks with the rural orientation democratic approach of the cooperatives as well as low cost of establishment. After tracing the evolution of Regional Rural Banks of India the present work, based upon case studies of the RRBs, seeks to test how far the objectives RRBs had been achieved. The study involved into the working intensive field investigation into the working of regional rural banks of West Bengal.

            The progress of each of the Gramin Banks in respect of items if Capital, deposits, advances, income, expenditure, profit or loss branch expansion, loaning operations and recovery performance was reviewed. The nature of mobilization of rural savings through regional Rural Banks and the causes of their profits or losses were probed. The study in short attempts a critical evaluation to the structure and functioning of regional rural banks West Bengal

NKS: 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. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited NABARD Sindhanur Urban Souharda Co-operative Bank United Bank of India Syndicate Bank Co-operative bank

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:

Framing Cattle Milk Hatchery Personal finance 

Institutional Arrangements for Rural Credit (Co-operatives)

Short Term Co-operatives Long Term Co-operatives

Short Term Co-operatives
|
District Central Co-operative Banks
|
State Co-operative Banks
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Primary Agriculture Credit Co-operative Societies
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Branches

 

 

Long Term Cooperatives
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State Agriculture & Rural Development Banks
|
Primary Agriculture & Rural Development Banks
|
Branches

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 (SCBs)

            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 BANKS 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.

Application

Technology adds value to rural banking

            FINO is a smart card based multi-function application solutions provider that is making value-additions to rural banking In the backdrop of constant innovation in the banking sector vis-a-vis technology, Micro Finance Institutions (MFIs) are looking for enhanced services over and above the traditional services that are being offering today. Demand for value added services has propelled the necessity for MFIs to adopt advanced technology. The growing realisation among MFIs and their customers about the numerous ways in which this can be accomplished have resulted in MFIs raising the technological bar.

CORE BANKING FOR RURAL TRADERS

            Currently, many financial institutions in the rural sector are using rudimentary technology systems, which lack efficient MIS reporting, credible transaction trails or alternatively incorporate manual operations. The high cost of independent technology systems such as core banking systems have kept MFIs from investing in them. Inefficient operating modules and manual field operations act as major entry barriers to the growth of MFIs in a country like India. The upshot is that the cost of acquiring and servicing customers remains high.

            Manish Khera, CEO, FINO (Financial Information Network and Operations Ltd) says, “If the organised urban financial sector can somehow connect to its rural counterpart, it can accelerate the growth of the rural financial sector.” Thus there has been a vacuum, which can be bridged with low cost technology as offered by FINO.

            Ramesh Ramanathan, Chairman Janalakshmi Social Service says, “In order to attract the huge portion of the populace that is not served by the banking sector, this technology was needed. Our need for industrial strength technology is as important as that of formal financial institutions, possibly more; we have a large number of customers with large transaction volumes, and small ticket sizes. Our audit and control systems need to match these volumes, and our transaction costs need to be low enough to enable low cost delivery. None of this will be possible without technology.”

            Khera adds, “The idea of biometric smart cards was floated after an in-depth study by our team about MFIs in India. The majority of MFI customers are illiterate and it would be unfair to give them a password to use, so we have introduced a system where we take the customer’s fingerprints and whenever he wants to transact, he need not remember a number, his fingers will suffice at the FINO POT (Point of Transaction).”

            FINO and IBM are set to reach out to unbanked micro-entrepreneurs at the grassroots level. The solution for banking will enable customers of MFIs to participate in the market; smart cards will be provided to enable customers to access the trading floor without carrying cash.

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.

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 40percent 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).

Micro-Finance

Micro-finance is a novel approach to “banking with poor”as they attempt to combine lower transaction costs and high degree of repayments.The major thrust of these micro-finance initiatives is through the setting up of  Self Help Groups (SHGs),Non-Governmental organizations(NGOs),Credit Unions etc.

Kisan (Farmers’) Credit Card

Another notable development in recent years is the introduction of Kisan Credit Cards(KCC) in 1998-99.The purpose of the Kisan Credit Cards(KCC) scheme is to facilities short term credit to farmers.The scheme has gained popularity and its implementation has been taken up by 27 commercial banks, 187 RRBs and 334 Central cooperative banks.

Agricultural Insurance

As Agricultural is highly susceptible to risks such as drought, flood, pests etc.It is necessary to protect the farmers from natural calamities and ensure their credit eligibility from the next season. Towards this purpose, the Government of India introduced a comprehensive crop insurance scheme throught the country in 1985 covering major cereal crops, oilseeds and pulses. Among commercial crops, seven crops viz., sugarcane potato, cotton, ginger, onion, turmeric and chillies are presently covered.

MARKETING OF MUTUAL FUND UNITS – RRBS

            With a view to expanding the scope of business of RRBs and considering that marketing of Mutual Fund (MF) units provides a profitable avenue for banks, it has been decided by RBI on 17th May 2006 to allow Regional Rural Banks (RRBs) to undertake marketing of units of Mutual Funds, as agents.

Accordingly, RRBs may, with approval of their Board of Directors, enter into agreements with Mutual Funds for marketing their units subject to the following terms and conditions: The bank should only act as an agent of the customers, forwarding applications of the investors for purchase / sale of MF units to the Mutual Fund / Registrar Transfer Agents. The purchase of MF units should be at the risk of customers and without the bank guaranteeing any assured return. The bank should not acquire such units of Mutual Fund from the secondary market. The bank should not buy back units of Mutual Funds from their customers. The bank holding custody of MF units on behalf of their customers should ensure that its own investment and investments belonging to their customers are kept distinct from each other. Retailing of units of Mutual Funds may be confined to some select branches of the bank to ensure better control. The bank should comply with the extant KYC/ AML guidelines in respect of the applicants. The RRBs should put in place adequate and effective control mechanisms in consultation with their sponsor banks.

CONCLUSION

            RRBs’ performance in respect of some important indicators was certainly better than that of commercial banks or even cooperatives. RRBs have also performed better in terms of providing loans to small and retail traders and petty non-farm rural activities. In recent years, they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit institutions and linking such groups with the formal credit sector.  RRBs should really be strengthened and provided with more resources with which they can undertake more of these important activities. And most certainly they should be kept apart from a profit-oriented corporate motivation that would reduce their capacity to provide much needed financial services to the rural areas, including to agriculture. Ideally, the best use of the resources raised by RRBs through deposits would be through extensive cross-subsidisation. This, in turn, really requires an apex body that would cover and oversee all the RRBs, something like a National Rural Bank of India (NRBI).

            The number of rural branches should be increased rather than reduced; they should be encouraged to develop more sophisticated methods of credit delivery to meet the changing needs of farming; and most of all, there should be greater coordination between district planning authorities, panchayati raj institutions and the banks operating in rural areas. Only then will the RRBs fulfill the promise that is so essential for rural development.

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Article By

P. Devika

Mphil Scholar

Karpagam university.

E-mail : sabaridevika@gmail.com