by

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The growth story of India is fascinating and interesting and unfolding the economy to the world with its vast presence of Human and Natural resources. India is the second most populous country of the globe with 1.20 billion and has become destination for quality workforce and potential market place for domestic and multinational companies. Today, India is one of the fastest growing economies amidst global uncertainties.  Nonetheless, it is pertinent to note that the growth is not uniform across the sectors viz., Agriculture, Industry and Service Sector, causing aberrations to the desired economic development process. The sectoral share of GDP since last two decades is as under:

It is evident from the above that India’s growth is primarily driven by the services sector and its share has been growing year-on-year while the share of agriculture to GDP has declined from 29.34% in 1991 to 13.72% in 2012. Further, the growth rate registered in Agriculture Sector was 2.80% only while industry and service sectors growth rate stood at 3.40% and 8.90% respectively during the year 2012. The trend clearly indicates that the economic development so far been largely limited to the urban population and is yet to widely percolate to the rural population.

Economic Development - Role of Rural India

India is known as country of villages and the agriculture and allied activities are the backbone for the economic development of the country. Agriculture Sector assumes vital importance since it provides livelihood to 3/4^th of the country’s population besides becoming significant source for raw material for many industries. Thus, agriculture is an important engine for economic growth of the country.

Agriculture is a tradition which has shaped the culture and economic life of the people and therefore will continue to be central to all strategies on planned socio economic development of the country. Rapid growth of Agriculture is essential not only to achieve self-reliance but also to bring about equity in distribution of income and wealth resulting in reduction of poverty levels. In this context, it is worth to recapitulate the thoughts of first Prime Minister of India Sri.Pandit Jawaharlal Nehru “If Agriculture does not go right, nothing else will” which speaks the importance attached to the agriculture in those years.

Rural Economy - Emerging Trends

i) Income Distribution Pattern: Though, the economic development achieved so far is mostly urban biased and with uneven distribution of wealth across the segments, improvement is seen in income levels of rural India especially in post reform era, is a positive factor and a trigger for hope for the future. Hitherto, Rural and Poverty are the synonyms but it is not so now, which is evident from the Rural Income patterns of various groups furnished here below:

It is interesting to note that lower income segment has been gradually moving to Middle/Upper middle class in rural areas on account of the following factors.

Ø  Considerable improvement is seen in agricultural productivity over the years due to adoption of better farm techniques. A series of good harvests on the back of favourable monsoons coupled with improved irrigation facilities and reasonable rise in procurement prices is also one of the reasons for shoring of income levels in rural India.

Ø  Multiple occupations in rural household are a common feature on account of integration between Rural and Urban area resulting mobility of labour, capital, products and credit. As per NCAER report around 25% of rural households solely depend on non-agriculture income. 

Ø  Government schemes like National Rural Employment Guarantee Scheme, which guarantees 100 days of employment to one member of every rural household, has provided employment opportunities and enabled the rural people to improve their income level.

ii) Expenditure Pattern: As per NSSO data, the incremental consumption expenditure in urban is `2994 billion surprisingly the rural spending outpaced urban with `3750 billion in 2011-12 over 2009-10. Further noticeable shift in expenditure pattern of rural households is observed from traditional food items to non-food items i.e. Education, Housing, Cosmetics, and Entertainment etc. According to MART, rural India buys 46% of soft drinks sold, 49% of motorcycles and 59% of cigarettes. Further, Rural markets account for 56% of the total domestic Fast Moving Consumer Goods (FMCG) demand and 60% of India's annual consumption of gold/jewelry is from rural India.

iii) Literacy Rate - Till 1980s, the literacy rate in rural India was very low and it is too little among small/marginal farmers. Probably, that could be one of the principle reasons for them to have inseparable attachment to agricultural land as it is the primary source for their livelihood. However, of late, many changes have been taking place especially in the area of education in rural areas.

As per census 2011, the literacy growth rate in rural area is higher (15.99%) compared to urban areas (5.73%), which clearly indicate that the rural population is keen to educate their children despite hardships. The literacy rate gap among rural-urban has been coming down over the years especially during the last two decades which is evident from the below table.

The increased literacy rate coupled with disguised unemployment in the farm sector has been forcing the rural masses to look for non-farm activities to supplement their family income.

iv) Contract farming is gaining momentum. It is an agreement between a farmer and company for production and supply of agricultural/horticultural produce at a pre-determined price. It has the potential of combining small farmer efficiency, utilizing corporate management skills, providing assured markets and reducing transaction costs in the value chain by ensuring vertical integration. Contract farming is a win-win situation for both the parties and leads to building a platform for improvement of farm incomes, development of agro-processing and expansion of rural economy.  Corporates like Hidustan Lever, Pepsi Foods, Reliance, ITC, Cadbury, Rallies India, Mahindra's Shubhlabh, Tata Kisan Kendra, Godrej Aadhar and DSCL Haryali have emerged as new agribusiness supply chain models. The recent decision of Government permitting Foreign Direct Investment in Multi Brand Retail subject to states approval will go a long way to usher contract farming and big push to agro based activities in the ensuing years. Thus, contract farming as a strategy adopted by food processors is gaining prominence in India on account of steady progress in the economy, rising food demand, organized retail boom and an increasing shift towards branded food consumption.

v) White Revolution - India is one of the world’s largest and fastest growing markets for Dairy products include milk, cheese, dahi and pro-biotic drinks etc., with annual turnover of above `20000 crore and growing at 7.5% annually. Rural India has become destination for Dairy industry and majority of farm households rely on milk production to supplement their income. In view of the growing prominence of this sector, State Governments also initiated various steps to encourage dairy development by establishing the much-needed linkages between rural producers and urban consumers.

vi) Blue revolution – Of late, Aquaculture has emerged as an important and highly productive agriculture activity in the country. Today, India is pushing ahead with rapid increase of fish production (marine, brackish, fresh and Prawn), a boon to small farmers and contributing to the gross domestic product as well as exports.

vii) Financial Inclusion - The banking industry has shown tremendous growth in volume and complexity during the last few decades. Despite making significant improvements in the areas relating to financial viability, profitability and competitiveness, there are concerns that banks have not been able to reach and bring vast segment of the population, especially the underprivileged sections of the society, into the fold of basic banking services.

Skewed distribution of bank branches is observed across population groups with 6000 per branch in urban areas and 24000 in Rural areas. Out of 6.4 lakh villages, the presence of bank branches with full-fledged services is available only in 34000 villages and recently another 73000 villages are covered under BC model. Still more than 5 lakh villages remain unbanked due to structural and operational issues such as infrastructure, distance, costs, viability etc.

Though, rural India constitutes 68% of country’s population, its share to total deposits (9%) and an advance (8%) is abysmally low compared to urban counterpart. Absence of banking services in villages is the cause to flourish informal financial markets which suffer from several imperfections such as high cost of credit at exploitative terms, loss of precious savings on account of fly-by-night operators, inordinate delays in effecting transfer of funds and settlement of accounts. Thus, the financial exclusion not only widens the ‘Rich-Poor divide’ but also leads to ‘Social Exclusion’.

As per Mckinsey Report published in Bancon 2011, only 41% of rural households have access to savings bank accounts and 79% rural households do not have access to credit facilities from formal sources. This fact reinforces the need for speedy implementation of "Financial Inclusion” initiatives with an objective to provide basic banking services at an affordable cost to the vast sections of disadvantaged and low income group. It means not only to extending banking facilities to rural people but also to provide at their convenient time and location.

The increased infrastructure development across the country is blurring the geographical barriers and making the rural populace on par with the Urban. Hence, the entire gamut of banking in rural areas needs a relook as their needs are beyond traditional products like No Frill and Crop loans. Banks may look for alternate cost effective business models with appropriate structure to tap this segment.

Rural India – Banking opportunities:

There is a positive correlation between infrastructure development & aggregate agricultural productivity. Rural infrastructure such as irrigation water shed development, electrification, roads, markets, credit institutions, agriculture research & extension etc together plays key role in determining the improvement of productivity. In the recent years, the development of roads connecting to villages is one of the positive factors which eventually blurring the rural and urban divides to a greater extent. A quite revolution is taking place in rural India where economic growth is not just creating the rich but also providing ample opportunities to serve the financially excluded. Rural Banking is now a large opportunity and will be captured those who remove the current barriers of profitable scale.

Rural financial services are the fastest growing segment on account of large untapped potential driven by the very low penetration in rural market. Today, only around 41% of rural households have formal savings accounts and 20% alone have access to credit from banking system. Hitherto, major share of bank credit flown to farm sector that too production loans. The presence of increased middle income group in rural area demands credit facilities on par with Urban people and providing ample opportunities to the banks to extend credit to non farm sector also.

i) Farm Mechanization: Agricultural inflation has been consistently increasing due to demand supply gap and there is an imminent need to improve productivity by extensive use of farm mechanization. This invites major investments and it is an opportunity for banks to consider financing high tech agriculture production like agricultural biotechnology and farm mechanization besides continuing the traditional lending like production loans.  

ii) Agro Based Industries: The consumption boom is likely to lead to higher demand for food products viz., milk, meat, eggs, fruits, vegetables, pulses etc., which warrants supply augmentation. This can be achieved through expanding farm production activities coupled with encouraging entrepreneurs to set up agro based industries. Next Generation belongs to the millions of Young Entrepreneurs of the country from hinter land. Setting up of agro based industries in rural areas will be beneficial to the owners as well as farmers since it addresses many logistic issues. Further, these industries usher employment opportunities in rural areas and supplement the income of the rural households.

iii) Ware Housing: India is the world’s largest producer of fruit and vegetables but it has been estimated that inadequate post-harvest storage and transportation cause losses of around 30-40 per cent of the produce every year. Construction of Rural Godowns, Cold Storage and setting up of agro process units not only helps the farmers to earn income besides providing employment opportunities to many in rural areas. However, this invites huge investments and the entrepreneurs look at Banks for required financial support and guidance.

iv) Retail Banking: There is a spurt in middle class segment and it is expected to grow at accelerated pace in the ensuing years with distinct features viz., Educated, Employable and Bankable. The declining dependency ratio and increased non-farm income source are the triggers for the increased flow of savings to the banking system and a demand for retail banking services. The demand for housing in rural area is on the rise over the years. Excepting weaker section housing, majority rural housing is being self-financed. There are ample opportunities for the banks to tap this segment. However, affordable housing is need of the hour; this would require a great deal of technological and financial innovation.

Education Loans: The increased literacy rate (from 12% in 1951 to 69% in 2011) among rural masses is a positive factor. The recent Government initiative i.e. waiver of entire interest on education loan during the study period to the students whose parental income is below `4.5 lakhs per annum, has made the education loan scheme more attractive and enabled the banks to improve retail lending.  Further, it paves the way to strengthen the bondage with Gen-Y, a potential business segment for banks.   

The envisaged client expansion will lead to increased flow of savings to the banking system and a demand for retail banking services like housing loans, wealth management, insurance, asset management etc. It warrants revisiting the entire gamut of rural banking and looking for cost effective business models to reach the masses.

Rural Banking – Diverse Business Models

Today, the banking has become imperative to all the house-holds irrespective of their social and financial status and expects minimum financial services from the banking system. The recent Financial Inclusion initiatives of the Government i.e. provide access to banking services at all villages through Branch banking or Business Correspondent at affordable cost is going to transform the banking landscape to greater extent and it is an important business segment for banks. However, providing financial services to the poor, especially in rural areas, is both challenging and costly. The transaction costs have become one of the deterring factors to reach the un-banked by the banks. The stupendous task can be achieved by adopting Diverse Business Models.

I. Branch Expansion

i) Physical Branches: The penetration of banking in India is low compared to developed nations, which is evident from the presence of 5.40 lakh unbanked villages across the country. Branch banking continues to play significant role in business development despite increased adoption of Alternate Delivery Channels in the recent years. The road map of Indian Banks clearly indicates that BC model is going to be used in a big way to achieve the financial inclusion objective. However, banks need to open more number of brick and mortar branches especially in unbanked centers to cover the large population on one hand and branch network acts as service branch to route the transactions undertaken by BCs. Hence, branch network continued to grow in the ensuing years also.

ii) Ultra Small Branches (Mobile Branches): As part of liberalized Branch Authorization policy, RBI has granted general permission to domestic scheduled commercial banks to open satellite branches in unbanked areas where the population is below 50,000. It envisages the extension of banking facilities through one or two dedicated staff members who visit the identified village location on specified days. It is a cost effective model compared to physical branch model. A designated officer of the link branch shall visit the village on a prefixed date and time every week with a laptop with Virtual Private Network (VPS) connectivity to Core Banking Platform. The role of the visiting official is authorization of the accounts, balance enquiry, printing of account statements and recovery. However, the normal cash transactions will be done by the BC agent only.

iii) Branch-in-a-Box: It is primarily a cost-effective, relocatable and pre-fabricated bank branch. It uses modern, broadband satellite technology for communication. This enhances customer convenience as it provides speedy access. It can also be used to test new markets, especially in areas with limited infrastructure where banking services are not readily available. It provides full transaction facilities to customers, including cash withdrawals and deposits, sales and service.

II. Alternate Delivery Channels

The residents of far-flung areas are unable to pay visit to branches located at distant places on account of resource constraints viz., time, cost and opportunity. Thus, it has become imperative for banks to reach out customers through a variety of technology driven delivery channels such as Micro ATMs, Bio-metric ATMs, Mobile ATMs, and Smart Cards etc., which are most cost effective compared to Brick and Mortar model. ATM has brought sea change in Indian Banking space with significant qualitative improvement in delivery of banking services and within short span the presence of ATMs are outnumbered the physical branch network.

i) Micro ATMs: Though there is considerable improvement in ATM network, the presence of ATMs in rural areas is very limited. Banks are not keen to install ATMs at Rural/Semi Urban centers on account of high investment and low transaction volume. In order to make the ATMs viable at these centers, there is a need to deploy low cost ATMs with basic features such as cash withdrawal and balance enquiry etc.  It is convenient and cost effective to the customers compared to pay visit to the bank branch located at nearby center.

ii) Biometric ATMs: The penetration of ATMs into Rural areas may not serve the envisaged purpose unless it is put to use by illiterates/semi-literates whose presence is predominant in unbanked areas. The existing ATMs are not put to use optimally by rural folk on account of PIN/Password related issues. Introduction of Biometric ATMs enable them to avail hassle-free services as these devices function on thumb print and recognize voice commands in vernacular language.

iii) Mobile ATMs - In this model, ATM is installed in a vehicle, which would move to the pre-determined places at regular intervals to provide Door-step banking. These new breed of ATMs also have biometric authentication mechanisms like fingerprint verification and voice guided animated screens with touch enabled transactions. Mobile ATMs can undertake opening of accounts, which has immense benefit to the residents of unbanked centers.

v) White Label ATMs - The recent initiatives of the RBI and the Government is to allow white-label ATMs, permitting third-party service providers to set up more ATMs in off-premises areas, which include residential complexes, hospitals, tourist destinations, bus stops and railway stations. These ATMs would not belong to any bank in particular but will be owned as well as maintained by independent service providers. This initiative will enable the excluded segments to avail ATM services as at present majority ATMs are confined to Urban/Metro areas only. However, service provider levy charges which are to be either bear by the Bank or the customer.

vi) Smart Cards: State Governments are actively looking at making pension payments and disbursals under Rural Employment Generation Program using smart cards linked bank accounts. Smart card provides biometric authentication, which would help in reducing frauds and ensure identity of customers. In order to popularize smart cards, all agriculture short term loans and payment of social security schemes are to be dispensed through Smart Cards.

All the above initiatives warrant the banks to invest substantial amounts in infrastructure besides recurring expenditure which adds cost to the customer where as the distribution of financial products and services at the lowest rung of the pyramid requires a low-cost model. High Operating Costs and Low Business Volume are the major constraints of the banks in extending banking services especially in remote rural and inaccessible areas through Branch Banking Model. To address this issue, RBI permitted the banks to make use the services of Business Correspondents to take banking to un-banked areas in a most cost effective manner.

III. Business Correspondent (BC) Model

Business Correspondent model using smart card and mobile technology is also an effective tool to reach the remote rural areas where alternate delivery channel mechanism is not feasible. This model enables greater rural outreach to improve the business volumes. RBI permitted the BCs to undertake basic banking services viz., Collection/payment of small value deposits, disbursal of small value loan amounts, collection of loan installments, receipt and delivery of small value remittances and Sale of micro insurance/mutual fund products/pension products/other third party products. Though, BC model has been gaining momentum since last two years, still desired results are not coming as the model is confronting the following issues and challenges, which need to be addressed on priority.

i) Operational issues: Cash management is the biggest challenge as the major operations of BCs pertains to cash transactions. It entails interest costs as well as operational risks. Further, the beneficiaries of BC services are mostly illiterate and are susceptible to misguidance. At times, customers tend to perceive the BCs as banks. The success of the model crucially depend on the trust levels among customers, banks and BCs, which is possible through spread of financial awareness by conducting financial literacy programs on an ongoing basis.   

ii) Viability: The viability of the BC model is the most critical issue which probably is one of the main reasons for not taking-off the model as envisaged. The transaction volume is not encouraging since many of the accounts opened are in dormant stage. Absence of sufficient business is causing concern to both BCs as well as banks; and in turn it is becoming difficult for BCs to continue operations on account of mismatch of revenues earned and costs incurred. Banks need to tweak the products and work with the BCs to design products that are suitable to the target market to make the model profitable. Further, to make the BC model viable, the funds pertaining to various government schemes are to be routed directly through the beneficiaries’ bank accounts only.

Mobile Banking

Till recent years, Mobile/Cell phone used to be a status symbol or lifestyle product, and now it has become a necessity and inseparable with day-to-day life of the individuals irrespective of age, education and financial background. India accounts for about 1/4^th of world’s mobile market with 965 million and making inroads in to remote rural areas. The share of rural subscribers is around 35% speaks growing potential of this segment. The reach of mobile to the remote areas and its usage by the common man has become order of the day. The swift growth in number of Mobile users and wider coverage of mobile phone networks has made this channel an important platform for extending banking services to customers. Mobile banking runs on Interbank Mobile Payment Service (IMPS) mode which enables the bank customers to have access to their bank accounts and carryout banking transactions including funds transfers across the banks using mobile phones independent of Branch/Business Correspondents.

M-wallet is the further extension of Mobile Banking and it acts like a pre-paid account operated through a mobile phone which can be used for small purchases, remittances, bill payments and cash withdrawals. Telecom players are playing significant role in taking this concept forward with strategic tie-ups with banks as service provider as well as business correspondents. As per the recent study, the cost effectiveness is one of the major advantages of the Mobile Banking, as the mobile based transaction cost is about 2% of branch banking, 10% of ATM and 50% of the Internet banking.

T-Banking: Today, we rarely come across a house without Television. It has become one of the cost effective modes to disseminate information and to provide entertainment to the public. Banks may make use of the existing cable network to extend banking services to vast segment using this mode as non-branch service delivery channel. However, this model yet to take a shape for pilot implementation.

Challenges

i) Technology – Though, Mobile Banking is most cost effective compared to other channels to reach unbanked areas, all three stakeholders viz. the Telecom Operators, Banks and Merchants should work in tandem with suitable business model on robust technology platform to achieve the desired results. 

ii) Human Resources - The presence of full-fledged Brick and Mortar branches, newly introduced Ultra Small branches and Business Correspondents (BCs) are going to stay in rural India. However, the said delivery channels need to be handled by staff with positive attitude. The present recruitment policies of the banks signify the fact that majority of staff absorbed are from urban background and they are not keen to serve in rural areas, causing a hindrance for smooth banking operations in rural areas. At the same time the banking industry is in need of another 1.50 lakh additional manpower to serve the unbanked areas which is a major challenge. Ironically, there are large numbers of rural young population with average academic background is eagerly waiting for employment opportunities.

Similarly, Personnel handling BCs need to be trained further to enable them to help the customers in understanding the financial products and to take informed decisions. Achieving full scale financial inclusion, BCs also need to be adequately trained both on technology platform and banking domain knowledge. This issue needs to be addressed on priority by adopting suitable recruitment models to attract local talent.  It is the time for the Banks, Government and Regulators to pay focused attention on the above issues and initiate necessary steps to bridge the gap through adopting appropriate recruitment policies for sustained growth of the banking industry.

iii) Financial Literacy - In the above backdrop, major chunk of prospective customers are likely from unbanked/under banked population whose awareness towards banking services is limited. It warrants strategic initiatives from banks inviting investment in customer education through financial literacy and awareness programs.

Way forward

Every household is bankable. Today around 100 million rural households are away from the banking system and their estimated average banking requirement is about 2 lakhs per household, which translates huge business (around `20 lakh crore) to the banking industry, almost two times of the existing business of rural bank branches of the country. Nonetheless, understanding the nuances of rural consumer behavior, offering customized products, forging the right partnerships/collaborations and developing the appropriate business models and organization structure is the prerequisite for the banks to tap the vast potential of rural India.

Mobile Banking has great potential to provide the banking facilities to people truly “anywhere” on account of easy adoptability, affordability and cost effectiveness compared to other delivery channels. Nevertheless, banks need to adopt multi-pronged approach viz., Brick & Mortar Branches, Ultra Small Branches, ATMs and Business Correspondents, to reach the large number of unbanked population with diverse literacy, economic and social backgrounds across the geographies. In the present scenario, no single channel is to be treated as substitute to other channel; rather they are to be viewed as complement to each other.

The expected burgeoning client base is really a daunting task for the banking industry to handle their diversified needs. However, it is an opportunity to enhance the value of all stakeholders with improved business volumes. Banks need to adopt “High Volume – Low Margin” business model leveraging Technology and Human Capital to remain competitive in the present fierce dynamic environment.                   

The initiatives of the policy makers, regulator and banks in this direction are going to transform the rural India in a big way. This decade definitely be an icon for Rural Banking and paves the way to achieve the long cherished dream of Inclusive Growth.

“The future lies with those companies who see the poor as their customers”

Prof. C K Prahalad

***

References:

1. Article of Dr. C Rangarajan, Chairman, Prime Minister’s Economic Advisory Council titled “Financial Inclusion – Not an Option but a Compulsion” published in September 2010 issue of “The Banking & Financial World”

2. Paper presented by Dr. K G Karmakar, Managing Director, NABARD on “Financial Inclusion – Branchless Banking and Beyond”

3. Article of Sri B B Barik, Principal, B V Rural Institute, Bichpuri, Agra on “Financial Inclusion and Empowerment of Indian Rural Households

4. Report on “Low Cost Banking on Mobile” published in Business Standard dated 20^th June 2011

5. Endowment lecture by Dr. Y.V.Reddy, Deputy, Former Governor, RBI, on “Future of Rural Banking” on 4.12.1999 at Hyderabad

6. “Mobile Banking – Issues & Challenges” presented by Shri. H R Khan, Deputy Governor, RBI at FIBAC 2012