rural finance study

Rural Finance Study

Project: Rural finance Mission: New business development , finance Category: Research Agency: RC&M Client: Mulitple

Index

• Introduction• Rural Finance – An Understanding• Finance Presence in Rural India• The Challenges• Enabling Measures • Banking Strategy - Long Term Impact• Case Studies• Going Forward – Next Steps• Annexure I

Introduction

• In India, over 65% of the population resides in villages. And approx, 70% of the villagers do not have bank accounts.

• But Finance is not completely absent. Just the sources of supply are informal like moneylenders

• Moneylenders are said to control one third of all rural loans, and wield considerable strength, given their personal acquaintance with the local population and omnipresent distribution network.

Rural Finance – An Understanding

Rural finance- An understanding

• A number of banks and finance companies have begun to specialize in offering credit to farmers.

• Finance in this sector has the added benefit of supporting further work in regional areas. As banks and financial services continue to extend their services into rural India they are generating employment in the vicinity.

Rural finance- An understanding

• Rural finance is a line of credit specifically intended for the requirements of the agricultural industry. Ranging from mortgage assistance to land development and farming equipment, these credit plans are a significant aspect of rural and semi-urban support.

• In a country like India, farming finance is a service of utmost importance and closely related to the continued progress of the country, as agriculture continues to play a central role.

Finance Presence in Rural India

• Financial aids for the poor clusters in rural areas today are in the following forms:

• Nationalized Banks• Private Banks• Credit Societies• Co-operative Banks• Informal loans (Money Lenders)


Nationalized Banks – Regional Rural Banks (RRB/ Gramin)

• 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.

• 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.



SBI• SBI, has a breathtaking rural branch network of 6,600 with 972

specialized branches. These branches have been set up in different parts of the country with the sole purpose of developing agriculture through credit deployment.

• SBI has developed rural agricultural business units, education programmes for local farmers and “kisan” cards. SBI has gradually evolved to become the leader in agricultural finance with a portfolio of Rs. 18,000 crore in loans to around 50 lakh farmers.



SBI• One of their recent endeavors is the tie-up with National

Agricultural Cooperative Marketing Federation (NAFED) to finance farmers for cultivation of various crops like soyabean, paddy, jute and potato.

• 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%).


Nationalized Banks – Regional Rural Banks (RRB/ Gramin)Canara

• Canara has launched aggressive grass-root level plans, in a bid to achieve 100% financial inclusion in 1,400 villages all over India, which could bring 7 lakh families into their net.

• Under this programme, every adult member of a rural household in the selected villages would be encouraged to open a 'No Frills' account with minimum entry-level formalities.

List of all RRB Banks across India – see Annexure I, at the end of the presentation


Private banks- CommercialICICI

• ICICI Bank, the country’s second largest bank, has adopted the franchise model of operation in rural markets.

• A one man office (known as “kendra”) in the village forms an interface between the villager and the Bank’s products and facilities. Crop loans, housing loans, automobile loans, farm equipment, seed financing and insurance policies are all on offer.

• The number of borrowers has risen from 130 in 2000 to over 42,000 today, and the rural loan book has crossed Rs. 16,000 crore. And the bank’s default rate in the rural retail sector is 1 – 2 % as compared to 2 – 3% in the rural wholesale sector and 5% for the banking sector as a whole.


Private banks- CommercialICICI

• ICICI is looking at tying up with micro-finance institutions and local self-help groups (or creating them if already do not exist).

• ICICI has gone further in tying up with large corporate majors having significant presence rural India and providing loans/banking services to their distributors/traders and also it is working in tandem with postal department.


Private banks- CommercialForeign Banks• Foreign Banks like Citibank, HSBC and Standard Chartered are

now looking “villageward”. Citi is reported to be in the hunt for several rural branch licenses. There is a new focus on the SME segment as well.

• More or less, all the banks are using an agent-based model , as the typical branch-based model does not work here due to cost economics.

• Many banks have solutions for Mobile-based services to reach rural consumers directly into their hand.


Cooperative Banks Credit Cooperatives• Rural Credit Cooperatives have existed in India for a long time. A

shortage of supply of rural credit was prevalent in India.

• To meet the demand for short and long term rural credit the Co-operative Credit Structure (CCS) was set up.

• While short term credit is supplied by the State Cooperative Banks (SCB), District Central Cooperative Banks (DCCB) and Primary Agricultural Credit Societies (PACS), long term credit is supplied by the Primary Cooperative Agriculture and Rural Development Banks (PCARDB)


Cooperative Banks Credit Cooperatives• The Co-operative Credit Structure (CCS) of India was set up to

serve the needs of both short term and long term rural credit in India. Short term credit is supplied in rural India by three institutions – • State Cooperative Banks (SCB) • District Central Cooperative Banks (DCCB) • Primary Agricultural Credit Societies (PACS)

• Long term credit is supplied by the • Primary Cooperative Agriculture and • Rural Development Banks (PCARDB).


Credit Societies - Small Scale Finance Organizations• There are two types of financial organizations that

provide small‐scale entrepreneur support.

• Microfinance institutions (MFI)• Small Organizations/NGOs/SHG


Credit Societies - Small Scale Finance OrganizationsMicrofinance institutions

• MFI Their amounts are often too small to be used for the intended (productive) purposes, such as Upgrading an existing venture, as well as for their lack of non-financial support.

• However, some MFI’s, notably BASIX, a livelihood finance provider, and SKS, are using financing models that go beyond the traditional microfinance funds to support small‐scale entrepreneurs as an alternative investment opportunity in rural areas.


Credit Societies - Small Scale Finance OrganizationsMicrofinance institutions

• These MFI’s provide larger grants coupled with non‐financial support for rural ventures that promise increased employment opportunities for the poor.

• Already established in rural areas, MFI’s have

an advantage in local networks and understanding about the risks of a potential investment


Credit Societies - Small Scale Finance OrganizationsSmall Organisations- NGOs/SHOs

• There are other organizations involved in financing rural entrepreneurs or infrastructure in villages, often with a specific remit such as environmental sustainability.

• Financial organization such as S3IDF work together with local NGOs/SHGs to provide basic infrastructure services in rural areas and train local entrepreneurs to take charge of the projects or services.

• Finance is the primary service, but these organizationsprovide additional services to link the technology with finance and suppliers

Case Study – ICommunity Banks/Societies

• Banking for specific communities : Community based banks are success stories in India.

Rickshaw Bank is started in 2004 and the central idea is the issue of an asset-based loan to the rickshaw puller for which installments are repayable on a daily repayment plan with one-year duration. Full and timely repayment leads to ownership of the rickshaw being handed over to the puller. This concept is in contradiction to the existing practice in which an equivalent amount of a daily rental fee is paid to rent the vehicle, possibly for the lifetime of activity, with no scope for ownership.

Usha Bank is started by a sex worker and it is with the purpose of providing economic security to Sex workers. Although sex workers earn in cash, they have little control over their assets. Most of their income is used to pay off power brokers within the industry, bribe local cops and provide sustenance to their families. This makes them vulnerable to extortion by moneylenders. Perpetually in debt, it is not uncommon for prostitutes to pay annual interest rates as high as 1500 percent.

Case Study – II : Example of SHG

(aiding villagers’ Finance)

Karunya, a woman’s self help group • Can be found at the vegetable market in Santhivila, a village on

the outskirts of Thiruvananthapuram. They are a group of 16 young women who have changed the local economy. They are members of Karunya, a women's self-help group registered with Kudumbasree, the state Government's Poverty Eradication Project. None of them had a job till they formed Karunya in 2007

• The local gram panchayat gave the group Rs 1 lakh and space at the local vegetable market. With the seed money, they took a bank loan to start a unit making paper boards, cloth bags, office files, pens, pencils etc. Today, Karunya is one of the most popular brands in these products.

• There are an incredible 37 lakh poor women who are members of Kudumbasree, making it Asia's largest women's self-help and micro-credit movement.

More financial products making way

• Other financial products making their way into villages include

• IFFCO-Tokio’s weather insurance product,• Barish Bima Yojana for farmers in Rajasthan • ICICI Lombard’s medical insurance scheme ‘Sanjeevini’ for

farmers in Punjab • Commodity futures and weather derivatives.

The challenges

Challenges

• Some of the major challenges which intermediaries (Local Financial Institutions) face today in India are:

• The supply dilemma: The exclusion of large numbers of the rural population from the formal banking sector may be for several reasons from the supply side:• Persons are un-bankable in the evaluation/perception of

bankers

• The loan amount is too small to invite attention of the bankers

• The person is bankable on a credit appraisal approach but supporting the accounts and expanding branch network is not feasible and viable

Challenges

The supply dilemma:• High transaction costs particularly in dealing with a large number

of small accounts

• Lack of collateral security Inability to evaluate and monitor cash flow cycles and repayment capacities due to information asymmetry, lack of data base and absence of credit history of people with small means

• Human resources related constraints both in terms of inadequacy of manpower and lack of proper orientation/expertise

• Adverse security situation prevailing in some parts of slums and other such localities

Challenges

The deman dilemma:There are several reasons for the rural poor remaining excluded from the formal banking sector:

• High transaction costs at the client level due to expenses such as travel costs, wage losses, incidental expenses

• Lack of awareness and lack of social capital• Non-availability of ideal products• Hassles related to documentation and procedures in the formal

system• Easy availability of timely and doorstep services from money

lenders/informal sources • Prior experience of rejection by/indifference of the formal banking

system.

Enabling measures

Technology Application

There are three broad types of technologies that have been identified to drive the growth of financial services.

• Pro-poor new information and communication technology, primarily low-cost cell phones

• ATMs and other point of sales devices

• Smart plastic

Technology Application advantages

• Technology will allow branchless banking and establishment of new partnerships between financial service providers and a range of other service providers, that was not feasible before, to provide services to clients in remote areas and low-population density areas.

• Biometric methods for uniquely identifying customers are also being increasingly adopted.

Casestudy- Technology adopted

• Banks in India have initiated pilot projects utilizing smart cards/mobile technology to increase their outreach. Banks are also increasingly adopting technological solutions for delivery of credit at affordable price and to a wider section of the population.

• SBI• Corporation Bank

Casestudy III- Technology adopted

• State Bank of India initiated a project called the SBI Tiny Card Accounts [SBITCAs] recently in Aizwal. The SBITCAs are based through new generation mobile phones based on near-field communication [NFC] technology, enhanced with fingerprint recognition software and attached to receipt printer.

The Card tremendously increased the customer base for the bank. This card allows:

• Activation of transfer of funds for the purpose of micro-savings

• Cash deposits and withdrawal,

Casestudy III- Technology adopted

The card allows:• Micro-credit, money transfer [account-to-account within the

system], Micro-insurance

• Cashless payments to merchants

• SHG Savings-cum-credit accounts and attendance systems

• Disbursements of Government benefits like the national rural employment guarantee scheme, for equated monthly installments

• Utility payments, coupons, vouchers, tickets, automatic fare collection systems, etc.

Casestudy IV- Technology adopted

The corporation bank:

• The Corporation Bank adopted a branchless banking model in August 2007.

• The bank opted for a branchless banking model based on Business Correspondents [BCs] and use of a small hand held device.

• This technology enabled bank to reach out the villagers by offering them savings and loan products at their door steps there by saving of customers time and cost of travel to branch.

• The bank is able to reach out to the hitherto unreached segments and mop up rural savings at lower transaction costs.

Banking Strategy - long term target

• To tap huge rural finance potential, the RBI is considering other innovative measures like (which are being adopted by private banks for developing strong foundation in rural finance market) :

• Allowing banks to use village moneylenders to reach the rural populace, given their personal acquaintance with the local population and ubiquitous distribution network.

• Banks hope to leverage their low cost funds to lend to moneylenders, who can in turn give loans to the rural folk at far lower rates that the usual monstrous 60-70%!

Case Study V-Strategy Adopted by a Microfinance Institution

• This Institution , has a base in smaller villages and districts across India

• Deeper regions like Bhor, Saswad, Talegoan, Saidpur, Goasigang, Gouribazar, Deoria, Tadipatri, Nizamabad, Gadag, Davangere and Perundurai are among the more than 5,000 tehsils (also called talukas and mandals in various regions) where they are present today.

• In this case study, this institution promoted Reliance Money’s schemes in the villages


• Local Partners - They realized that employing city-based managers in these areas would not be a viable option as local people would never trust and feel comfortable with a non-native person who did not speak their language. So they devised a strategy which relied heavily on local partners.

• Franchisee route - It was extremely important for them to work with the existing eco-system prevailing in the hinterland as opposed to trying to create a new or parallel structure. They decided to take the franchisee route and appoint at least three or four local youths as their franchisees in each tehsil. Typically, all their franchisees were people whose families have resided in the area for several generations and who know most of the people residing in the village and are also known to people in the surrounding areas.


How it helped:• This strategy helped them to achieve financial inclusion of the

rural masses while creating a new breed of local entrepreneurs who could bring financial products and services closer to the villagers.

• With continuous training, they converted their local partners into brand ambassadors, advising locals on financial investments and selling them appropriate financial products in an extremely beneficial manner.

• An interesting aspect that they noticed during this exercise was the fact that not all their franchisees were illiterates. A sizeable chunk of them were graduates and some were even MBAs


• Like all initiatives, their rural foray also has had its share of highs and lows. However, there have been amazing lessons and insights, too. When they started their rural initiative, they had designed bright neon lit signs to be hung outside the kiosks. They thought the signs would attract attention and bring in a crowd. However, their thought process was off track. The glossy signs intimidated villagers and made them wary.

• They redesigned these signs to make them blend with the background of the region. Also started using traditional painting techniques used in village homes.

• To promote our money transfer facility, we conducted road shows in regional languages.


Challenges encountered and resolved in this journey:• Logistics Issue - Even after two years, logistics still pose a major

challenge. They had to pre-plan each and every step and schedule timelines. The first step was to ensure that the forms and the marketing material reached the villages on time. They then had to get the forms filled in and delivered to the bidding centers on time. On certain occasions the deadlines were missed because they underestimated the travel time and costs.

• Solution - Learning from this experience, they fine-tuned the entire operation to close two days prior to the actual closing date.


Challenges encountered and resolved in this journey:• Success - Overall, experience in this initiative has been mixed. It

was pre-recognized that the exercise will pay dividends only in the long-run. Just because 70% of the country’s population is dependent on agriculture and lives in the villages, they knew that they will not get 70% of their income in financial services from villages in two years’ time.However the 80-20 principle (that 80% of the locations give you 20% of your income) works in rural India as well and they had already seen this in operation, allowing them to sharpen their marketing and distribution strategies.

Going forward- Next Steps


• Agricultural assistance must concentrate more on future earning power than the borrower's current position. As with any loan, the lender should reasonably demonstrate a capacity to repay the amount borrowed, but in the case of credit for farmers, providers are often dealing with lower income groups. Understanding this customer is essential.

• As banks and financial services continue to extend their services into rural India they are generating employment in the vicinity. This employment ensures that customers can relate to the local face of the institution. It also represents a significant basis for skill development.


• Appreciated as a key impetus in poverty reduction, this type of support can greatly assist regional development and growth. The creation of a business model that takes the unique needs of non-urban India into account, along with the unique challenges, is the key to success for companies working within this field.

• The conditions surrounding rural business are never constant. Ruined crops, bad monsoon seasons and natural disasters are just some of the ever present, largely uncontrollable factors. Those offering services in this area must commit to supporting their customers through both turbulent and growth patch of time. If this can be achieved, rural finance has a huge market to work in.

Annexure-I List of Rural Banks /Co-operative Banks across India

Andhra Pradesh

* Andhra Pradesh Grameena Vikas Bank * Andhra Pragathi Grameena Bank * Deccan Grameena Bank * Chaitanya Godavari Grameena Bank * Saptagiri Grameena Bank

Bihar

Madhya Bihar Gramin BankBihar Kshetriya Gramin BankUttar Bihar Kshetriya Gramin BankKosi Kshetriya Gramin BankSamastipur Kshetriya Gramin Bank

Chhattisgarh

* Chhattisgarh Gramin Bank * Surguja Kshetriya Gramin Bank * Durg-Rajnandgaon Gramin Bank

Haryana

* Harayana Gramin Bank * Gurgaon Gramin Bank

Jammu & Kashmir

* Jammu Rural Bank * Ellaquai Dehati Bank * Kamraz Rural Bank


Assam

* Assam Gramin Vikash Bank * Langpi Dehangi Rural Bank

Jharkhand

* Jharkhand Gramin Bank * Vananchal Gramin Bank

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


Gujarat

* Dena Gujarat Gramin Bank * Baroda Gujarat Gramin Bank * Saurashtra Gramin Bank

Himachal Pradesh

* Himachal Gramin Bank * Parvatiya Gramin Bank

Bihar

* Madhya Bihar Gramin Bank * Bihar Kshetriya Gramin Bank * Uttar Bihar Kshetriya Gramin Bank * Kosi Kshetriya Gramin Bank * Samastipur Kshetriya Gramin Bank

Punjab

* Punjab Gramin Bank * Faridkot-Bhatinda Kshetriya Gramin Bank * Malwa Gramin Bank


Kerala

* Narmada Malwa Gramin Bank * North Malabar Gramin Bank

Tamil Nadu

* Pandyan Grama Bank * Pallavan Grama Bank

Maharashtra

* 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

Karnataka

* Karnataka Vikas Grameena Bank * Pragathi Gramin Bank * Cauvery Kalpatharu Grameena Bank * Krishna Grameena Bank * Chikmagalur-Kodagu Grameena Bank * Visveshvaraya Gramin Bank


Rajasthan

* 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

* Kalinga Gramya Bank * Utkal Gramya Bank * Baitarani Gramya Bank * Neelachal Gramya Bank * Rushikulya Gramya Bank

West Bengal

* Bangiya Gramin Vikash Bank * Paschim Banga Gramin Bank * Uttar Banga Kshetriya Gramin Bank

Meghalaya

* Ka Bank Nogkyndong Ri Khasi- Jaintia

Arunachal Pradesh

* Arunachal Pradesh Rural Bank

Manipur

* Manipur Rural Bank


Uttar Pradesh

* 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 * Aryavart Gramin Bank * Kisan Gramin Bank * Kshetriya Kisan Gramin Bank * Etawah Kshetriya Gramin Bank * Rani Laxmi Bai Kshetriya Gramin Bank * Baroda Western Uttar Pradesh Gramin Bank * Devipatan Kshetriya Gramin Bank * Prathama Bank * Baroda Eastern Uttar Pradesh Gramin Bank

Uttaranchal

* Uttaranchal Gramin Bank * Nainital Almora Kshetriya Gramin Bank


Arunachal Pradesh

* Arunachal Pradesh Rural Bank

Manipur

* Manipur Rural Bank

Mizoram

* Mizoram Rural Bank

Nagaland

* Nagaland Rural Bank

Tripura

* Tripura Gramin Bank

Thank you

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