INTRODUCTION

“The future lies with those companies who see the poor as their customers”
~C.K.Prahalad

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 and extending a helping hand in the growth
process of the rural sector in the country.
Fifty-eight per cent of the rural households do not have a bank account and only 21 per cent have
access to credit from a formal source. Over 70 per cent of marginal farmers have no deposit account
and 87 per cent have no formal credit.
Only a little over 1 per cent of rural households can rely on a loan from a financial intermediary to
finance unforeseen expenses. Approval for such loans takes between 24 and 33 weeks. Often,
consumers need to bribe officials to get loans, with the bribe varying between 10 and 20 per cent of
the loan amount. In 2002, the number of rural deposits was 30.2 per cent of the total deposits in the
banking system (Rs 13.30 crore out of Rs 43.99 crore). However, the amount of deposits mopped up
in rural India is only 14 per cent of the total deposit liability of the system (Rs 1,59,423 crore of Rs
11,23,393 crore).
Similarly, there are 2.51 crore rural advance accounts, which is 44.5 per cent of the total number of
advance accounts. However, the share of rural pockets in the total credit kitty is only 14 per cent (Rs
92,789 crore of Rs 6,55,993 crore). Overall, 18 per cent of the rural population has bank accounts.
The comparative figure in urban India is 103 per cent.
It is clear that the supply of formal finance is biased against the rural population. The per capita
deposit in rural areas stood at Rs 2,150 or around 10 per cent of the national per capita income in
2001.
In contrast, in urban India, it is Rs 33,780 or around 160 per cent of per capita GDP. Credit per
person in rural India is Rs 900 or around 4 per cent of national per capita GDP compared to Rs
20,600 for urban centres, which is 100 per cent of national per capita GDP.
The number of credit accounts in rural areas relative to the total rural population is only 3.4 per cent
against around 10 per cent in urban areas.

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 BUSINESS OF A RURAL BANK

A Rural Bank carries on the normal banking business i.e. the business as defined in Section 5 (b) of
the Banking Regulation Act, 1949 and engages in one or more forms of business specified in Section
6(1) of that Act. A rural bank may, in particular, undertake the following types of business, namely:
 The granting of loans and advances, particularly to small and marginal farmers and
agricultural laborers, whether individual or in groups and to co-operatives societies (including
agricultural marketing societies, agricultural processing societies, Co-operative farming
societies, primary agricultural credit societies or farmers’ service societies for agricultural
purposes or agricultural operations or for other connected purposes.

 The granting of loans and advances, particularly to artisans, small entrepreneurs and persons
of small means engaged in trade, commerce or industry or other productive activities within
the notified area of a Rural Bank.

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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 have 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. ICICI Bank's Internet kiosk scheme can mean financial empowerment for rural people.
In a way, it can be described as a backdoor entry into banking.
Few of them are as follows.

1. Haryana State Cooperative Apex Bank Limited

2. NABARD
3. United Bank of India
4. Syndicate Bank
5. Co-operative bank

Rural banking in India started since the establishment of banking sector in India. Rural Banks in
those days mainly focussed 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.

Haryana State Cooperative Apex Bank Limited

The Haryana State Cooperative Apex Bank Ltd. commonly called as HARCOBANK plays a vital
role in rural banking in the economy of Haryana State and has been providing aids and financing
farmers, rural artisans, agricultural labourers, entrepreneurs, etc. in the state and giving service to its
depositors.

NABARD
National Bank for Agriculture and Rural Development (NABARD) is a development bank in the
sector of Regional Rural Banks in India. It provides and regulates credit and gives service for the
promotion and development of rural sectors mainly agriculture, small scale industries, cottage and
village industries, handicrafts. It also finances rural crafts and other allied rural economic activities to
promote integrated rural development. It helps in securing rural prosperity.

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United Bank of India
United Bank of India (UBI) also plays an important role in regional rural banks. It has expanded its
branch network in a big way to actively participate in the developmental of the rural and semi-urban
areas in conformity with the objectives of nationalisation.

Syndicate Bank
Syndicate Bank was firmly rooted in rural India as rural banking and have a clear vision of future
India by understanding the grassroots realities. Its progress has been abreast of the phase of
progressive banking in India especially in rural banks.

Cooperative Banks
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 fulfil, 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:

1. Farming
2. Cattle
3. Milk
4. Hatchery
5. Personal finance
6. Institutional Arrangements for Rural Credit (Co-operatives)

Types of Co-operative Banks

There are three types of co-operative banks operating in our country. They are primary credit
societies, central co-operative banks and state co-operative banks. These banks are organized at three
levels, village or town level, district level and state level.
(i) Primary Credit Societies: These are formed at the village or town level with borrower and non-
borrower members residing in one locality. The operations of each society are restricted to a small
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area so that the members know each other and are able to watch over the activities of all members to
prevent frauds.

(ii) Central Co-operative Banks: These banks operate at the district level having some of the
primary credit societies belonging to the same district as their members. These banks provide loans to
their members (i.e., primary credit societies) and function as a link between the primary credit
societies and state co-operative banks.

(iii) State Co-operative Banks: These are the apex co-operative banks in all the states of the
country. They mobilise funds and help in its proper channelization among various sectors. The
money reaches the individual borrowers from the state co-operative banks through the central co-
operative banks and the primary credit societies.

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.

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
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for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and
tube well, for development of fruit and garden crops, for levelling 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%. ICICI
Bank's Internet kiosk scheme can mean financial empowerment for rural people. In a way, it can be
described as a backdoor entry into banking.
What makes ICICI Bank's attempt unique in introducing financial products to the rural poor is its
packaging. Small loans of Rs 20,000 for buying buffaloes or for setting up a tea shop are offered with
life, non-life and even weather insurance.

Demonstrating its seriousness about the entire exercise, ICICI Bank has initiated talks with the
Grameen Bank of Bangladesh, a pioneer in micro-financing, to float a company for giving credit
guarantee to such papers. Grameen USA, a trust of the Grameen Bank, is slated to hold a majority
stake in the proposed non-banking finance company.
Under the arrangement, ICICI Bank has replaced the MFIs' existing high cost loans (bearing an
interest rate of 14 per cent) to over-60,000 borrowers, by low cost (around 8 per cent) new loans. To
ensure repayment, ICICI Bank has opened an escrow account where all repayments by the small
borrowers will flow. So far, the bank has tied up with 10 MFIs and several more are on the cards.
It's a win-win situation for all parties involved. The MFIs are drastically bringing down the cost of
their resources that are on lent to small borrowers. The small borrowers are assured of flow of funds
and ICICI Bank is building rural assets without compromising on its quality. Even at 8 per cent, the
bank is able to make money because full repayment is assured.

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 maintain of one or two mulch 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

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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 labourers, artisans 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

STATE and SPONSER BANK-WISE DISTRIBUTION OF RRB

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PERFORMANCE OF SPONSOR BANKS ACROSS REGIONS

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ROLE OF RBI IN RURAL CREDIT

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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
throughout 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

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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.

MOBILE BANKING, BOON FOR RURAL INDIA

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Thousands of people from rural areas across 12 states are likely to get their social security pension
and wages paid under the National Rural Employment Guarantee Act (NREGA) scheme with the
help of mobiles over the coming few months.
In Andhra Pradesh alone, for instance, 250,000 people have registered for mobile banking services.
The state government is rolling out a programme to enroll three million people by the end of 2008.
Mobile banking pilots and full-scale operations are being conducted across 12 states, and the entire
ecosystem is being managed by the government with the help of the Reserve Bank of India, banks,
leading telecom operators and technology implementation partners.
The ecosystem is important since banking regulations in India currently do not allow cash for
exchange of another 'unit' such as 'airtime' in the case of mobiles. Only banks and the Indian Post
(through money orders) are currently allowed such transfers.
Mobile banking, which is catching up fast in the cities and hinterland, is not only helping the
government to take a step forward towards fulfilling its aim of having one bank account for every
household, but also saving it crores of rupees by way of reduced transaction costs.
While the government incurs a transaction cost of Rs 12-13 for every Rs 100 it shells out, mobile
banking helps it reduce the cost to a mere Rs 2. RBI estimates that around 40 per cent of Indians lack
access to formal financial services and are largely 'unbanked'.
For instance, the AP government has tied up with banks like the State Bank of India, Union Bank of
India, Axis Bank, Andhra Bank, State Bank of Hyderabad, Andhra Pradesh Grameen Vikas Bank,
and Punjab National Bank.
A Little World (ALW), a technology implementation partner, has collaborated with NXP
Semiconductors to design a mobile for the AP government that encloses an RFID card, and works
with ALW's micro-banking platform ZERO.
The mobile acts as a branch of the bank by storing a database of customers. It also has a smartcard,
which biometrically stores the identity of the customer such as name, address, photograph,
fingerprint templates and relevant details of the savings or loan accounts held by the issuing bank.
Customers get a secure electronic identity via phone or smartcard, while agents take deposits and
dispense cash. ALW works with the banks on a revenue-sharing basis.
Anurag Gupta, founder director & CEO of ALW, says: "We have carried out pilot projects with SBI
in villages located in some of the most inaccessible and difficult terrains of the country such as
Pithoragarh in Uttarakhand Mizoram, Meghalaya, and remote villages in Andhra Pradesh."
Lokanath Panda, director, ALW, also pointed out that SBI had tied up with the Indian Post to extend
banking services especially in unbanked/under-banked areas. "Select post offices will make available
to the public SBI's deposit and loan products, and ALW is the technology partner."

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ALW is also conducting a pilot programme with SKS Microfinance and the Bank of India to provide
a mobile banking service that works on BSNL SIM cards.
New Delhi-based Ekgaon Technologies too has developed a system for tracking transactions made by
self-help groups. It has partnered with the likes of CARE, WorldVision and the World Bank to
conduct a pilot, which it plans to extend to 14 Indian states.
Bharti Airtel, too, is in the process of tying up with two leading banks to extend its mobile remittance
services to rural areas, according to its president (Mobile Services), Sanjay Kapoor.
Airtel has already partnered with the Indian Farmers' Fertiliser Cooperative Limited (IFFCO) to set
up IFFCO Kisan Sanchar Limited in Rajasthan.
Under this initiative, the cooperative department will provide mobile handsets to farmers at marginal
price through its outlets in the rural areas. These handsets would be loaded with green SIM cards,
which will flash daily updates on agricultural practices and weather forecast free of cost.
While he did not provide details, Kapoor hinted that the partnership deal would be extended to
mobile banking services too. Kapoor reasons that with 55 per cent of the mobiles being internet-
enabled, mobile banking would help bridge the digital divide.
Reliance Communications, on its part, allows ICICI Bank account holders with Reliance handsets
(even the low-end Rs 1,000 ones - with or without Internet connectivity) to make intra-bank (to ICICI
account holders) money transfers. It has already tied up with HDFC offer Reliance mPay - a virtual
credit card.
The message is quite clear. An innovative approach to rural lending can do what the government's
continuous pressure on the banking system for expanding the base of kisan credit cards and good
old guidelines for agricultural lending cannot.

FUTURE OF RURAL BANKING

As per the estimate of Agricultural Credit Review Committee (Khusro Committee) the demand for
agricultural credit in 2001-2002 would be of the order of Rs. 1,10.873 Crores (Rs. 53,534 Crores for

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short terms & Rs. 57,339 Crores for term loans) & the supply of institutional credit would be Rs.
89,447 Crores implying a shortfall of Rs.21,426 crores. The demand for finance will also go up on
account of intensive use of modern technology, increase in consumption of fertilizers, insecticides &
pesticides, creation of irrigation facilities, growing use of high yielding variety crops
& diversification of agriculture to various allied activities. Despite the multi agency approach
adopted for providing rural credit, certain inbuilt formalities viz. documentation, restricted working
hours, loan amount, purpose of loan & proximity factors have been causing inconvenience to the
deserving rural poor. Yet, exploitation of the rural poor continues by the local money-lenders. Of
this, the formal sector accounts for about 20 %.
The nature of this segment demands a level of customization that the formal banking network has
failed to provide. The uniform treatment meted out and the centralized structure of the system are the
basic causes for the failure to cultivate a healthy banking habit in the rural areas.
All these causes and effects, create a situation where an innovative means of credit delivery is called
for. The process of customization that is the need of the day has been titled “micro banking”
Micro finance has been defined by the task force set up by the NABARD as "provision of thrift,
credit and other financial services and products of very small amounts to the poor in rural, semi-
urban or urban areas for enabling them to raise their income levels and improve living standards.
Micro finance institutions can include NGOs (Non-Government Organisations), co-operatives, banks
(commercial, RRBs, other nationalised and public sector banks) and NBFCs (Non-Banking Financial
Companies). The NABARD felt that banks would be unable to efficiently organize such grass-root
level groups and thus NGOs and Voluntary Agencies were introduced into the picture. New micro
credit companies such as Basix and the SEWA-aided bank represent a primarily NGO-driven effort
to charge market linked, risk adjusted rates of interest on small loans to small borrowers. At the same
time they ensure hurdle free access to borrowers and high repayment rates for themselves.
In addition to financial intermediation, many micro finance institutions provide social intermediation
such as group formation, training in financial literacy and management capabilities. Micro finance is
therefore not just a banking tool but also a development tool. Along with benefits to the rural
population, the financial institutions advancing the credit also enjoy better recovery rates.
The most prevalent method of providing micro finance in India is through Self-Help Groups (SHGs
A SHG is a group of individuals ranging from 5 to 20 members, who come together for a mutually
beneficial purpose. They are homogenous in some respect and have certain pre-defined social
binding factors.
 Members of a SHG contribute to a common fund from which collateral-free loans are given to
needy members as per the group decisions.

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 After at least 6 months if a bank is convinced, the SHG can become eligible for linkage to the
bank for availing credit and can open a savings account in its name and can receive up to 4 times
its savings balance as credit. The members of the SHG in turn receive credit as per their needs.
This linkage was introduced by the NABARD in 1991-92 through pilot project.
 . The SHG decides the rate to be charged to its members.
 Similarly, the bank negotiates about appropriate repayment period with the SHG and the SHG
decides on the repayment schedule for its members, generally in weekly installments.
 If members require larger amounts of loans they can approach the bank for individual loans, with
the SHG accepting responsibility for proper credit utilization, repayment by the member and
monitoring of the same
Micro finance is thus a potent method of rural credit delivery with tremendous potential for serving
the rural masses.

REFERENCES

BOOK:
Rural Banking In India: An Empirical Study by Garikamukkala Savaraiah

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WEBSITES:
www.google.com
www.rbi.org
www.infosys.com
www.slideshare.com
www.scribd.com
www.managementparadise.com
www.agricultureinformation.com

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