RURAL BANKING: TRANSLATING VISION TO REALITY

Source: YOJANA – January 2018

Author: Manjula Wadhwa

Mahatma Gandhi said that ‘India lives in villages’ and therefore, rural development in imperative for the overall development of India. Post independence, the government has taken various steps to bring rural prosperity in India through the following measures:

1. Introducing co-operative credit structure.
2. Nationalisation of Public Sector Banks
3. Expansion of banking services in rural areas.
4. Launching of Regional Rural Banks (1976).

However, a large segment of the rural population is still ‘financially excluded’. Following data must be considered:

1. India is home to 24% of the world’s unbanked adults i.e. 2/3^rd of unbanked people in South Asia.
2. About 31 crore ‘potentially bankable’ rural Indians do not have access to formal banking services.

The lack of infrastructure (e.g. electricity) and prevalent rural illiteracy (about 71%) impact the access to financial services. Intermediaries like NGOs, Self-Help Groups, Micro Finance Institutions, and Banking Correspondents etc. are being used to provide banking services in rural areas; however, such means cannot provide services on a full scale.

 Many banks view the rural market as a regulatory requirement rather than an economic opportunity because of the following reasons:

1. Irregular income and expenditure patters of rural households lead to Non-Performing Assets. (e.g. agriculturalists are dependent on monsoons)
2. Low ticket size of deposit and credit transactions does not prove profitable for the banks.
3. Low literacy rate prevents banks from depending on technology thus leading to high cost to serve.

Thus, developing an inclusive yet sustainable rural financial system is extremely challenging and involves comprehensive understanding of the host of complementary issues, which can be placed in seven broad categories:

1. Product Strategy: Providing diversified products and services to rural customers after a comprehensive market analysis.
2. Processes: Undertaking efficient business processes to facilitate initiatives like branchless banking.
3. Partnerships: Partnering with people, Business Correspondents, Self-Help Groups etc.
4. Protection: Protecting the bank and the customers from misuse of services.
5. Profitability: Providing affordable and acceptable services to the rural clientele while ensuring profitability.
6. Productivity: Ensuring productive and optimal use of financial services.
7. People: Having a well-equipped and efficient rural staff.

In India, the first structured attempt towards financial inclusion was launched in 2005 by Mr. K.C. Chakraborthy, the Chairman of Indian Bank as a result of which, all households of Mangalam Village were provided with banking facilities.

Steps taken by the Reserve Bank of India to ensure Financial Inclusion:

1. Facilitating no-frill accounts and General Credit Cards for small deposits and credit.
2. Relaxing norms for opening accounts with annual deposits of less than 50,000.
3. Issuance of Kisan Credit Cards (KCCs).
4. Permitting commercial banks to make use of the services of Non-governmental Organizations (NGOs)/Self-Help Groups, micro-finance institutions and other civil society organizations are intermediaries for providing financial and banking services.

Measures that need to be taken:

1. Better payment, training and grievance redressal for Banking Correspondents (BCs).
2. Making banking services simple, affordable and flexible (e.g. simple and affordable credit process).
3. Leveraging technology to ensure financial inclusion. Banks need to enhance ATM network, conduct financial literacy campaigns, promote electronic benefit transfer etc.
4. Encouraging private sector banks to increase operations in rural areas.
5. Provisions of facilities such as physical and digital connectivity, uninterrupted power supply etc.
6. There is a need for vernacularisation of all banking forms.
7. Tapping the potential of large Indian Postal Network in the world (89.86% of which are in the rural areas). Launching of India Post Payment Bank is a remarkable step.
8. Introducing more innovation schemes like Self-Help Group-Bank Linkages Programme.

 Steps taken by the government to ensure financial inclusion:

1. Introducing Pradhan Mantri Jan Dhan Yojana (PMJDY).
2. Setting up Micro Unit Development Refinance Agency (MUDRA) for providing micro credits.
3. Social sector schemes like Atal Pension Yojana, Pradhan Mantri Suraksha Beema Yojana, Pradhan Mantri Jeevan Jyoti Beema Yojana.
4. Aadhaar enabled micro-ATMs and RuPay cards to replace cash transactions.
5. Introducing new payments banks and small finance banks.

However, these government initiatives face various hurdles like:

1. Multiplicity of dormant accounts in PMJDY which increases costs for banks.
2. Lower literacy rate in rural areas is an impediment for Jan Dhan, Aadhaar and Mobile (JAM).
3. Corruption among bank officials, BCs etc.
4. Increasing banking technology related frauds.
5. Lack of infrastructure like connectivity and electricity in rural hinterlands.