Rural Banking

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Rural Retail Banking in India: 2020
Faculty Contributor : Jayadev M., Associate Professor and Roger Moser, Visiting Faculty Student Contributors : Madhulika Kaul and Charvi Tandon
Financial inclusion is seen as one of the means for overall economic development of a country. The growth of the rural retail banking industry fosters financial inclusion by providing financial products and services to people in the farthest reaches of the country. In India, even now the rural areas lack access to basic financial services. However, the recent emergence of microfinance institutions (MFIs) and non-banking financial corporations (NBFCs) in this sector has led to a commendable growth in the industry. This study aims to identify the most probable scenarios for the industry in the year 2020 using the Delphi study approach. 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. Exhibit 1 Factors influencing demand and supply in the rural retail banking industry 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...
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