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ABSTRACT
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.
This paper entitled 'RURAL BANKING' throws light on the following aspects:
* Rural Banking an introduction
* Banks: functioning for development of rural areas
* Co-operative banks and rural credit
* Commercial banks and rural credit
* Regional rural banks and rural credit
* Role of RBI in rural credit
* Marketing of mutual fund units-RRBs
* Conclusion
RURAL BANKING
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.
BANKS: FUNCTIONING FOR THE DEVELOPMENT OF RURAL AREAS
The area of operation of a majority of the RRBs is limited to a notified area comprising a few districts in a State.SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI, there are other few banks which functions for the development of the rural areas in India. 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:
Farming
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
Primary Agriculture Credit Co-operative Societies
Branches
Long Term Cooperatives
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 page 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.
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.
Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Ordinance promulgated on the 26th September 1975 and followed by Regional Rural Banks Act, 1976 with a view to develop the rural economy and to create a supplementary channel to the 'Cooperative Credit Structure' with a view to enlarge institutional credit for the rural and agriculture sector.
The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively. The area of operation of the RRBs is limited to notified few districts in a State. The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers , rural artisans and other segments of priority sector.
The RBI in 2001 constituted a Committee under the Chairmanship of Dr V S Vyas on Flow of Credit to Agriculture and Related Activities from the Banking System which examined relevance of RRBs in the rural credit system and the alternatives for making it viable. The consolidation process thus was initiated in the year 2005 as an off-shoot of Dr Vyas Committee Recommendations. First phase of amalgamation was initiated Sponsor Bank-wise within a State in 2005 and the second phase was across the Sponsor banks within a State in 2012. The process was initiated with a view to provide better customer service by having better infrastructure, computerization, experienced work force, common publicity and marketing efforts etc. The amalgamated RRBs also benefit from larger area of operation, enhanced credit exposure limits for high value and diverse banking activities. As a result of amalgamation, number of the RRBs has been reduced from 196 to 64 as on 31 March 2013. The number of branches of RRBs increased to 17856 as on 31 March 2013 covering 635 districts throughout the country.
2. Performance of RRBs during 2012-13(1 April 2012 31 March 2013) (Provisional)
2.1 Sources of Funds
The sources of funds of RRBs comprise of owned fund, deposits, borrowings from NABARD, Sponsor Banks and other sources including SIDBI and National Housing Bank.
2.1.1 Owned Funds
The owned funds of RRBs comprising of share capital, share capital deposits received from the shareholders and the reserves stood at 19304 crore as on 31 March 2013 as against 16462 crore as on 31 March 2012; registering a growth of 17.26%. The increase in owned funds to the tune of 2842 crore was mainly on account of accretion to reserves by the profit making RRBs. The share capital and share capital deposits together amounted to 6174 crore of total owned fund while the balance amount of 13130 crore represented reserves.
2.1.2.Recapitalisation of RRBs
(a) The Chakrabarty Committee reviewed the financial position of all RRBs in 2010 and recommended for recapitalisation of 40 out of 82 RRBs for strengthening their CRAR to the level of 9 per cent by 31 March 2012. According to the Committee, the remaining RRBs are in a position to achieve the desired level of CRAR on their own. Accepting the recommendations of the committee, the GOI along with other shareholders decided to recapitalise the RRBs by infusing funds to the extent of 2200 Crore. The shareholder wise proportion (GOI/Sponsor Banks/State Governments) is 50:35:15 respectively.
Six major problems faced by regional rural banks are as follows: 1. Haste and Lack of Co-ordination in Branch Expansion 2. Difficulties in Deposit Mobilisation 3. Constraints in Deposit Mobilisation 4. Slow Progress in Lending Activity 5. Urban-Orientation of Staff 6. Procedural Rigidities.
The RRBs, in most cases, seemingly have a mixed record of successes on some fronts and failures on some others in their business and attainment of goals.
Their failure in achieving their targets may be attributed to several problems they encounter in practice. Following Professor Charan Wadhva, we may pinpoint some of the major problems faced by the RRBs as under.
1. Haste and Lack of Co-ordination in Branch Expansion:
Haste in branch expansion programme in many cases has resulted in lopsidedness due to lack of co-ordination. In several cases, it could not be ensured that the branches of the RRBs are opened at centres where no commercial or co-operative banking facilities were provided.
2. Difficulties in Deposit Mobilisation:
The RRBs encountered a number of practical difficulties in deposit mobilisation. On account of their restrictive lending policy which excludes richer sections of the village society, these potential depositors show least interest in depositing their money with these banks.
3. Constraints in Deposit Mobilisation:
The RRBs exclude the richer sections of the village society in providing direct financial assistance. These sections have potential savings to deposit. But, they are least interested in depositing them with the RRBs in view of the restrictive credit policy of these banks. Further, state and local governments and their agencies also have not co-operated much by maintaining their deposit accounts with the RRBs.
In short, the RRBs have failed to mobilise accounts within themselves.
4. Slow Progress in Lending Activity:
The RRBs pace of growth in loan business is slow. For this the following reasons may be given: (i) There have been limited scope for direct lending by RRBs in their fields of operations; (ii) It is always difficult to identify the potential small borrowers and the bank staff have been required to make special and sincere efforts in this regard; (ii) Most of the small borrowers do not like the bank formalities and prefer to borrow from the informal/indigenous sources of finance, such as money lenders; (iv) The anomalies in the Differential Interest Rate (DIR) Scheme also posed a special problem to the RRBs. While the RRBs charge 14 per cent interest, the commercial banks charge only 4 per cent under the DIR Scheme in rural areas.
Thus, no borrower would go to RRBs or co-operative societies in the area when a loan from the commercial bank is available under the DIR Scheme; (v) There is no effective page link between the RRBs and PACS and the farmers service societies; (vi) There is lack of co-ordination between officials of the district credit planning committees and the RRBs.
5. Urban-Orientation of Staff:
A crucial practical difficulty experienced in their working by the RRBs is the urban orientation of their staff which is rarely inclined to serve in rural areas. There is no true local involvement of the bank staff in the village where they serve.
6. Procedural Rigidities:
The RRBs follow the procedures of the scheduled commercial banks in the matter of deposits and advancing loans which are highly complicated and time-consuming from the villagers point of view. The rural borrowers always appreciate informal ways and simple procedures as have been followed by the money-lenders and the indigenous bankers.
Concluding Remarks:
Despite these problems, the RRBs have been trying their level best to achieve their social objectives. They have succeeded in projecting their image of small man s bank . They are, in fact, development banks of the rural poor. They have been trying to fill regional and functional gaps in rural finance in our country.
The issue of rural retail banking is extremely topical. Over the past few decades, while urban retail banking has seen a lot of growth, rural areas have continued to suffer from insufficient access to financial services. This is mainly due to the requirement of asset deeds, identity and income proofs among other documents by banks and FIs and absence of enough branches in these areas. The high cost of conventional banking is an additional impediment to the realisation of financial inclusion.
Our study has tried to understand how the Indian rural retail banking industry (industry) will develop over the next decade. We aimed to identify the institutional environment of this industry in the coming decade as well as the activities that banks and other financial institutions (FIs) in India will need to invest in to realize the full potential of this market.
Rural Retail Banking
The Reserve Bank of India (RBI) had a mandate to promote rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. Through the State Bank of India (SBI) Act in 1955, the SBI was made an important organisation for extending rural credit to supplement the efforts of cooperative institutions. These cooperative institutions, better known as primary agricultural credit societies (PACS)1 also provide other agricultural inputs to the farmers. The next step to supplement the efforts of cooperatives and commercial banks was the establishment of regional rural banks in 1975 in different states with equity participation from commercial banks, central and state governments. In 1982, to consolidate the various arrangements made by the RBI to promote/supervise institutions and channel credit to rural areas, the National Bank for Agricultural and Rural Development (NABARD) was established.2
Currently, according to a series of estimates and market studies the number of rural bank branches is 31,727. This is 39.7% of the total number of bank branches in the country. The number of no-frill accounts is 28.23 million. There are only 54 savings accounts for every 100 persons in rural areas and only 26% of rural citizens with an annual income of less than Rs. 50000 have a bank account. In the same income bracket, only 13% farmers have ever availed of bank loans while 54% have used non-institutional and other forms of lending3. Thus, there is sufficient need for extending financial services to the rural areas. Exhibit 1 details the supply and demand side factors that challenge the growth of rural retail banking.
A number of innovations and experiments have been initiated to bridge the gap between the rural population and the formal retail banking system.
Local area banks (LABs) an initiative that attempted to mobilize rural savings by local institutions and make them available for investment locally. As of 2005, only four LABs were functioning in the country.4 The major handicap in their business model was the lack of a re-financing facility that hindered their ability to lend at better rates.
Self-help groups (SHGs) with bank linkages was another indigenously developed banking model. Being a savings - first model, credit discipline is a norm of the group; besides joint liability and social collateral make such groups bankable in the eyes of bankers. The linkages are achieved through non-governmental organizations (NGOs) and other intermediaries, and this has formed the basis of the micro-finance movement in India. However, the absence of NGOs in states like Bihar, Uttar Pradesh and those in the north-east has been a stumbling block in spreading this model in these states.
The alternative to the above model has been the NGO/MFI bulk-lending model where funds were placed at the disposal of NGOs or MFIs for lending to SHGs or other groups and even to individuals. However, this model was not able to scale-up due to the low capitalization of the NGO/MFIs and their inability to undertake financial intermediation. Also, this meant that the formal banks had a two-level exposure and this further reduced the potential for scaling-up.
In the partnership model, the MFI evaluates, recommends, originates the loans, helps in disbursal and subsequently tracks and collects the loans. However, the loans sit on the books of the bank and not of the MFI. This model has overcome the constraints of capitalization of the MFI and the double exposure that the banks were subjected to.
Other recent innovations include the Kisan Credit Card (KCC)that enables the farmer to get loans over a three to five year period as a revolving credit entitlement, thus, providing them control over their cash flows and reduced transaction costs for both the banks and the farmers. However, the biggest roadblock has been the creation of point of sale (POS) kiosks and acceptance of the cards.
The business facilitator and the business correspondent models (Exhibit 2) have been other innovations in this field. Institutions or persons, who interface between the rural poor and banks, are leveraged to provide support services under well-defined terms and conditions by way of contractual arrangements. In the case of the business facilitator model, as per the law, these agencies provide basic support services such as customer identification, collection of information/applications, credit appraisal, marketing etc. Under the business correspondent model, specific agencies e.g. MFIs, NBFCs etc. also provide disbursal of small value credit as pass through agents for the parent bank.
Delphi Study Approach
The Delphi study approach has been used to identify and understand the different scenarios that will emerge for rural retail banking in 2020. It is a method for the systematic solicitation and collation of judgments on a particular topic through a set of carefully designed sequential questionnaires interspersed with summarized information and feedback of opinions derived from earlier responses Opinions about a certain problem or task are solicited through mail or electronic means in a geographically dispersed network.
The main features of this approach are anonymity to prevent influence of any group members, controlled feedback due to multiple rounds of survey summaries and a statistical output as a final response. It being an iterative and expert based system, the Delphi study approach is regarded as a research technique especially suitable for complex issues. For our study this was particularly relevant since we wished to understand how the rural retail banking industry will evolve over the next decade. Several experts in the field of retail banking, rural banking, rural finance and microfinance were approached through a web-tool and the final opinions of the various experts were studied and analyzed to reach our conclusion and recommendations.
Future Trends in Rural Retail Banking
Based on our secondary research and interviews with experts in the industry 20 projections were formulated for the possible scenario in the industry in the year 2020. These projections can largely be classified into outcome and enabler projections. Exhibit 3 lists out the 20 projections.
Outcome Projections
These projections concern the actual state of affairs in the industry in 2020. They are a description of a specific situation in 2020 rather than an activity by a specific player in the society. These projections are further categorised under the following four fronts:
Political scenario A strict regulatory regime is expected for the industry in the future, accompanied with increasing changes in norms and frameworks, primarily, the removal of the cap on interest rates as imposed by the RBI at present.
Economic scenario The greater share of the market will be serviced by the MFIs and NBFCs. A collaborative alliance with internationally banks will be the primary source of funds and other resources for the MFIs and NBFCs.
Social scenario Urbanization and migration from the rural areas would substantially decrease the size of the market for the FIs. Even the consumers would become more aware and knowledgeable about the various financial services and products and hence, would expect one-stop shop solutions from the FIs.
Technological scenario Consumer databases providing information about the credit history and financial dealings of the consumers and thus enabling the FIs to design customized products and better manage their credit portfolio will be put in place. In addition, mobile phones would become the means of the primary delivery mechanism in the rural areas owing to their high penetration and reach and low costs.
Outcome Projections
The other kinds of projections for the industry in 2020 were the enabler projections. These projections pertain to the stakeholders in the industry customers, suppliers, competitors, government and society. These projections reflect the actions that are needed to be taken by these shareholders to enable the outcome projections.
Analysis of the Projections
The projections formulated for the year 2020 were analysed using the Delphi approach. The various experts who took part in the study were asked to rate the projections on the following counts:
The probability of occurrence of the respective projection in 2020.
The impact on the industry if the projection is true. The scale used was a 5-point scale from 1 to 5 where 1 signifies very low impact and 5 signifies very high impact.
The desirability of the occurrence of the projection. The scale used for was a 5-point scale from 1 to 5 where 1 signifies very low desirability and 5 signifies very high desirability.
Based on the responses of the participants in the study two metrics were calculated for each projection consensus and convergence.
Consensus
Consensus signifies the consensus among the experts as to the probability of occurrence of the projections. The variance among the responses of all the experts is taken as a measure of the consensus among the experts. A variance of up to 25 is taken as a sign of strong consensus, from 26 to 40 is taken as a sign of moderate dissent and greater than 40 is taken as sign of high dissent.
Convergence
Convergence refers to the changes in the responses of the participants over the period of the study as they studied the responses of the other participants and altered their responses accordingly. It is calculated as the change in absolute deviation of the final responses from the absolute deviation of the initial responses as a percentage of the absolute deviation of the initial responses. An absolute value of convergence up to 10% is taken as moderate convergence, from 11% to 20% is taken as strong convergence and greater than 20% is taken as very strong convergence. Exhibit 4 gives the mean value of probability, impact and desirability and the degree of consensus and convergence for each of the 20 projections.
Conclusion
Based on our study we have concluded that the following scenarios are the most probable in the year 2020 for the Indian rural retail banking industry:
Consumer awareness with increased education among the consumers and greater availability of information, the consumer awareness will increase regarding the financial services and products that are present in the market and they will demand one-stop shop solutions for all their financial needs.
Consumer databases the introduction of the UID project has led to the hope and an increasing probability of presence of extensive consumer databases in 2020. These databases will provide information about consumer credit history and financial transactions to enable the FIs to customize products suited to the consumers needs.
Capitalization of MFIs - there is a low probability that international banks would be the chosen medium of capitalization for the MFIs in 2020. They will be largely capitalized by the local Indian financial markets. This could be owing to the FDI regulations in the country as well as sufficient liquidity in the Indian financial markets.
Localized institutions the FIs would work towards designing localized financial services that would serve to provide one-stop shop solutions and remove information asymmetry because of their local presence.
Mobile-based delivery model the high penetration of mobile services in the country and advances in secure transfer mechanisms will see the rise of mobile phones as delivery platforms by 2020. This will be further augmented by the low costs associated with this delivery mechanism.
ABSTRACT
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.
This paper entitled 'RURAL BANKING' throws light on the following aspects:
* Rural Banking an introduction
* Banks: functioning for development of rural areas
* Co-operative banks and rural credit
* Commercial banks and rural credit
* Regional rural banks and rural credit
* Role of RBI in rural credit
* Marketing of mutual fund units-RRBs
* Conclusion
RURAL BANKING
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.
BANKS: FUNCTIONING FOR THE DEVELOPMENT OF RURAL AREAS
The area of operation of a majority of the RRBs is limited to a notified area comprising a few districts in a State.SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI, there are other few banks which functions for the development of the rural areas in India. 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:
Farming
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
Primary Agriculture Credit Co-operative Societies
Branches
Long Term Cooperatives
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 page 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.
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.
Regional Rural Banks (RRBs) were established in 1975 under the provisions of the Ordinance promulgated on the 26th September 1975 and followed by Regional Rural Banks Act, 1976 with a view to develop the rural economy and to create a supplementary channel to the 'Cooperative Credit Structure' with a view to enlarge institutional credit for the rural and agriculture sector.
The Government of India, the concerned State Government and the bank, which had sponsored the RRB contributed to the share capital of RRBs in the proportion of 50%, 15% and 35%, respectively. The area of operation of the RRBs is limited to notified few districts in a State. The RRBs mobilise deposits primarily from rural/semi-urban areas and provide loans and advances mostly to small and marginal farmers, agricultural labourers , rural artisans and other segments of priority sector.
The RBI in 2001 constituted a Committee under the Chairmanship of Dr V S Vyas on Flow of Credit to Agriculture and Related Activities from the Banking System which examined relevance of RRBs in the rural credit system and the alternatives for making it viable. The consolidation process thus was initiated in the year 2005 as an off-shoot of Dr Vyas Committee Recommendations. First phase of amalgamation was initiated Sponsor Bank-wise within a State in 2005 and the second phase was across the Sponsor banks within a State in 2012. The process was initiated with a view to provide better customer service by having better infrastructure, computerization, experienced work force, common publicity and marketing efforts etc. The amalgamated RRBs also benefit from larger area of operation, enhanced credit exposure limits for high value and diverse banking activities. As a result of amalgamation, number of the RRBs has been reduced from 196 to 64 as on 31 March 2013. The number of branches of RRBs increased to 17856 as on 31 March 2013 covering 635 districts throughout the country.
2. Performance of RRBs during 2012-13(1 April 2012 31 March 2013) (Provisional)
2.1 Sources of Funds
The sources of funds of RRBs comprise of owned fund, deposits, borrowings from NABARD, Sponsor Banks and other sources including SIDBI and National Housing Bank.
2.1.1 Owned Funds
The owned funds of RRBs comprising of share capital, share capital deposits received from the shareholders and the reserves stood at 19304 crore as on 31 March 2013 as against 16462 crore as on 31 March 2012; registering a growth of 17.26%. The increase in owned funds to the tune of 2842 crore was mainly on account of accretion to reserves by the profit making RRBs. The share capital and share capital deposits together amounted to 6174 crore of total owned fund while the balance amount of 13130 crore represented reserves.
2.1.2.Recapitalisation of RRBs
(a) The Chakrabarty Committee reviewed the financial position of all RRBs in 2010 and recommended for recapitalisation of 40 out of 82 RRBs for strengthening their CRAR to the level of 9 per cent by 31 March 2012. According to the Committee, the remaining RRBs are in a position to achieve the desired level of CRAR on their own. Accepting the recommendations of the committee, the GOI along with other shareholders decided to recapitalise the RRBs by infusing funds to the extent of 2200 Crore. The shareholder wise proportion (GOI/Sponsor Banks/State Governments) is 50:35:15 respectively.
Six major problems faced by regional rural banks are as follows: 1. Haste and Lack of Co-ordination in Branch Expansion 2. Difficulties in Deposit Mobilisation 3. Constraints in Deposit Mobilisation 4. Slow Progress in Lending Activity 5. Urban-Orientation of Staff 6. Procedural Rigidities.
The RRBs, in most cases, seemingly have a mixed record of successes on some fronts and failures on some others in their business and attainment of goals.
Their failure in achieving their targets may be attributed to several problems they encounter in practice. Following Professor Charan Wadhva, we may pinpoint some of the major problems faced by the RRBs as under.
1. Haste and Lack of Co-ordination in Branch Expansion:
Haste in branch expansion programme in many cases has resulted in lopsidedness due to lack of co-ordination. In several cases, it could not be ensured that the branches of the RRBs are opened at centres where no commercial or co-operative banking facilities were provided.
2. Difficulties in Deposit Mobilisation:
The RRBs encountered a number of practical difficulties in deposit mobilisation. On account of their restrictive lending policy which excludes richer sections of the village society, these potential depositors show least interest in depositing their money with these banks.
3. Constraints in Deposit Mobilisation:
The RRBs exclude the richer sections of the village society in providing direct financial assistance. These sections have potential savings to deposit. But, they are least interested in depositing them with the RRBs in view of the restrictive credit policy of these banks. Further, state and local governments and their agencies also have not co-operated much by maintaining their deposit accounts with the RRBs.
In short, the RRBs have failed to mobilise accounts within themselves.
4. Slow Progress in Lending Activity:
The RRBs pace of growth in loan business is slow. For this the following reasons may be given: (i) There have been limited scope for direct lending by RRBs in their fields of operations; (ii) It is always difficult to identify the potential small borrowers and the bank staff have been required to make special and sincere efforts in this regard; (ii) Most of the small borrowers do not like the bank formalities and prefer to borrow from the informal/indigenous sources of finance, such as money lenders; (iv) The anomalies in the Differential Interest Rate (DIR) Scheme also posed a special problem to the RRBs. While the RRBs charge 14 per cent interest, the commercial banks charge only 4 per cent under the DIR Scheme in rural areas.
Thus, no borrower would go to RRBs or co-operative societies in the area when a loan from the commercial bank is available under the DIR Scheme; (v) There is no effective page link between the RRBs and PACS and the farmers service societies; (vi) There is lack of co-ordination between officials of the district credit planning committees and the RRBs.
5. Urban-Orientation of Staff:
A crucial practical difficulty experienced in their working by the RRBs is the urban orientation of their staff which is rarely inclined to serve in rural areas. There is no true local involvement of the bank staff in the village where they serve.
6. Procedural Rigidities:
The RRBs follow the procedures of the scheduled commercial banks in the matter of deposits and advancing loans which are highly complicated and time-consuming from the villagers point of view. The rural borrowers always appreciate informal ways and simple procedures as have been followed by the money-lenders and the indigenous bankers.
Concluding Remarks:
Despite these problems, the RRBs have been trying their level best to achieve their social objectives. They have succeeded in projecting their image of small man s bank . They are, in fact, development banks of the rural poor. They have been trying to fill regional and functional gaps in rural finance in our country.
The issue of rural retail banking is extremely topical. Over the past few decades, while urban retail banking has seen a lot of growth, rural areas have continued to suffer from insufficient access to financial services. This is mainly due to the requirement of asset deeds, identity and income proofs among other documents by banks and FIs and absence of enough branches in these areas. The high cost of conventional banking is an additional impediment to the realisation of financial inclusion.
Our study has tried to understand how the Indian rural retail banking industry (industry) will develop over the next decade. We aimed to identify the institutional environment of this industry in the coming decade as well as the activities that banks and other financial institutions (FIs) in India will need to invest in to realize the full potential of this market.
Rural Retail Banking
The Reserve Bank of India (RBI) had a mandate to promote rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. Through the State Bank of India (SBI) Act in 1955, the SBI was made an important organisation for extending rural credit to supplement the efforts of cooperative institutions. These cooperative institutions, better known as primary agricultural credit societies (PACS)1 also provide other agricultural inputs to the farmers. The next step to supplement the efforts of cooperatives and commercial banks was the establishment of regional rural banks in 1975 in different states with equity participation from commercial banks, central and state governments. In 1982, to consolidate the various arrangements made by the RBI to promote/supervise institutions and channel credit to rural areas, the National Bank for Agricultural and Rural Development (NABARD) was established.2
Currently, according to a series of estimates and market studies the number of rural bank branches is 31,727. This is 39.7% of the total number of bank branches in the country. The number of no-frill accounts is 28.23 million. There are only 54 savings accounts for every 100 persons in rural areas and only 26% of rural citizens with an annual income of less than Rs. 50000 have a bank account. In the same income bracket, only 13% farmers have ever availed of bank loans while 54% have used non-institutional and other forms of lending3. Thus, there is sufficient need for extending financial services to the rural areas. Exhibit 1 details the supply and demand side factors that challenge the growth of rural retail banking.
A number of innovations and experiments have been initiated to bridge the gap between the rural population and the formal retail banking system.
Local area banks (LABs) an initiative that attempted to mobilize rural savings by local institutions and make them available for investment locally. As of 2005, only four LABs were functioning in the country.4 The major handicap in their business model was the lack of a re-financing facility that hindered their ability to lend at better rates.
Self-help groups (SHGs) with bank linkages was another indigenously developed banking model. Being a savings - first model, credit discipline is a norm of the group; besides joint liability and social collateral make such groups bankable in the eyes of bankers. The linkages are achieved through non-governmental organizations (NGOs) and other intermediaries, and this has formed the basis of the micro-finance movement in India. However, the absence of NGOs in states like Bihar, Uttar Pradesh and those in the north-east has been a stumbling block in spreading this model in these states.
The alternative to the above model has been the NGO/MFI bulk-lending model where funds were placed at the disposal of NGOs or MFIs for lending to SHGs or other groups and even to individuals. However, this model was not able to scale-up due to the low capitalization of the NGO/MFIs and their inability to undertake financial intermediation. Also, this meant that the formal banks had a two-level exposure and this further reduced the potential for scaling-up.
In the partnership model, the MFI evaluates, recommends, originates the loans, helps in disbursal and subsequently tracks and collects the loans. However, the loans sit on the books of the bank and not of the MFI. This model has overcome the constraints of capitalization of the MFI and the double exposure that the banks were subjected to.
Other recent innovations include the Kisan Credit Card (KCC)that enables the farmer to get loans over a three to five year period as a revolving credit entitlement, thus, providing them control over their cash flows and reduced transaction costs for both the banks and the farmers. However, the biggest roadblock has been the creation of point of sale (POS) kiosks and acceptance of the cards.
The business facilitator and the business correspondent models (Exhibit 2) have been other innovations in this field. Institutions or persons, who interface between the rural poor and banks, are leveraged to provide support services under well-defined terms and conditions by way of contractual arrangements. In the case of the business facilitator model, as per the law, these agencies provide basic support services such as customer identification, collection of information/applications, credit appraisal, marketing etc. Under the business correspondent model, specific agencies e.g. MFIs, NBFCs etc. also provide disbursal of small value credit as pass through agents for the parent bank.
Delphi Study Approach
The Delphi study approach has been used to identify and understand the different scenarios that will emerge for rural retail banking in 2020. It is a method for the systematic solicitation and collation of judgments on a particular topic through a set of carefully designed sequential questionnaires interspersed with summarized information and feedback of opinions derived from earlier responses Opinions about a certain problem or task are solicited through mail or electronic means in a geographically dispersed network.
The main features of this approach are anonymity to prevent influence of any group members, controlled feedback due to multiple rounds of survey summaries and a statistical output as a final response. It being an iterative and expert based system, the Delphi study approach is regarded as a research technique especially suitable for complex issues. For our study this was particularly relevant since we wished to understand how the rural retail banking industry will evolve over the next decade. Several experts in the field of retail banking, rural banking, rural finance and microfinance were approached through a web-tool and the final opinions of the various experts were studied and analyzed to reach our conclusion and recommendations.
Future Trends in Rural Retail Banking
Based on our secondary research and interviews with experts in the industry 20 projections were formulated for the possible scenario in the industry in the year 2020. These projections can largely be classified into outcome and enabler projections. Exhibit 3 lists out the 20 projections.
Outcome Projections
These projections concern the actual state of affairs in the industry in 2020. They are a description of a specific situation in 2020 rather than an activity by a specific player in the society. These projections are further categorised under the following four fronts:
Political scenario A strict regulatory regime is expected for the industry in the future, accompanied with increasing changes in norms and frameworks, primarily, the removal of the cap on interest rates as imposed by the RBI at present.
Economic scenario The greater share of the market will be serviced by the MFIs and NBFCs. A collaborative alliance with internationally banks will be the primary source of funds and other resources for the MFIs and NBFCs.
Social scenario Urbanization and migration from the rural areas would substantially decrease the size of the market for the FIs. Even the consumers would become more aware and knowledgeable about the various financial services and products and hence, would expect one-stop shop solutions from the FIs.
Technological scenario Consumer databases providing information about the credit history and financial dealings of the consumers and thus enabling the FIs to design customized products and better manage their credit portfolio will be put in place. In addition, mobile phones would become the means of the primary delivery mechanism in the rural areas owing to their high penetration and reach and low costs.
Outcome Projections
The other kinds of projections for the industry in 2020 were the enabler projections. These projections pertain to the stakeholders in the industry customers, suppliers, competitors, government and society. These projections reflect the actions that are needed to be taken by these shareholders to enable the outcome projections.
Analysis of the Projections
The projections formulated for the year 2020 were analysed using the Delphi approach. The various experts who took part in the study were asked to rate the projections on the following counts:
The probability of occurrence of the respective projection in 2020.
The impact on the industry if the projection is true. The scale used was a 5-point scale from 1 to 5 where 1 signifies very low impact and 5 signifies very high impact.
The desirability of the occurrence of the projection. The scale used for was a 5-point scale from 1 to 5 where 1 signifies very low desirability and 5 signifies very high desirability.
Based on the responses of the participants in the study two metrics were calculated for each projection consensus and convergence.
Consensus
Consensus signifies the consensus among the experts as to the probability of occurrence of the projections. The variance among the responses of all the experts is taken as a measure of the consensus among the experts. A variance of up to 25 is taken as a sign of strong consensus, from 26 to 40 is taken as a sign of moderate dissent and greater than 40 is taken as sign of high dissent.
Convergence
Convergence refers to the changes in the responses of the participants over the period of the study as they studied the responses of the other participants and altered their responses accordingly. It is calculated as the change in absolute deviation of the final responses from the absolute deviation of the initial responses as a percentage of the absolute deviation of the initial responses. An absolute value of convergence up to 10% is taken as moderate convergence, from 11% to 20% is taken as strong convergence and greater than 20% is taken as very strong convergence. Exhibit 4 gives the mean value of probability, impact and desirability and the degree of consensus and convergence for each of the 20 projections.
Conclusion
Based on our study we have concluded that the following scenarios are the most probable in the year 2020 for the Indian rural retail banking industry:
Consumer awareness with increased education among the consumers and greater availability of information, the consumer awareness will increase regarding the financial services and products that are present in the market and they will demand one-stop shop solutions for all their financial needs.
Consumer databases the introduction of the UID project has led to the hope and an increasing probability of presence of extensive consumer databases in 2020. These databases will provide information about consumer credit history and financial transactions to enable the FIs to customize products suited to the consumers needs.
Capitalization of MFIs - there is a low probability that international banks would be the chosen medium of capitalization for the MFIs in 2020. They will be largely capitalized by the local Indian financial markets. This could be owing to the FDI regulations in the country as well as sufficient liquidity in the Indian financial markets.
Localized institutions the FIs would work towards designing localized financial services that would serve to provide one-stop shop solutions and remove information asymmetry because of their local presence.
Mobile-based delivery model the high penetration of mobile services in the country and advances in secure transfer mechanisms will see the rise of mobile phones as delivery platforms by 2020. This will be further augmented by the low costs associated with this delivery mechanism.