BANKING STRUCTURE

R.B
RASWALKAR
MMS-PG-FT

Banking Structure
The diversity of Indian Banking system
i)PSBs,
ii)private sector old and new,
iii)regional rural banks (RRBs),
iv)local area banks (LABs),
v)rural cooperative banks,
vi)urban cooperative banks (UCBs),
vii)Small Industries Development Bank of India (SIDBI),
viii)National Bank for Agriculture and Rural Development
(NABARD) and
ix) Micro Units Development and Refinance Agency (MUDRA),
x) the proposed Payment Banks, &the small savings banks is
a
challenge for reforms.
Besides there are outliers the microfinance institutions
(MFIs) and the NBFCs.

SCHEDULED BANKING STRUCTURE IN INDIA

Constituents of the
Indian Banking
System

Cooperative credit institutions March 2013

COMMERCIAL BANKING SYSTEM March 2013

At present, the banking structure in India
comprises 150 banks (26 public sector banks, 7
new private sector banks, 13 old private sector
banks, 43 foreign banks, 4 local area banks
(LAB) and 57 Regional Rural Banks (RRB).
Public sector banks [26]
Private sector banks [20]
Foreign banks [43]
Regional rural banks [57]
Local Area Banks
[4]
[Figures in brackets show number of
institutions]
[There are also 1606 Urban Co-operative banks
(UCBs) and 93550 Rural Co-operatives
5
operating in the country. ]

Public Sector Banks

PSBs are banks in which the Government has a major Shareholding.
PSBs (26) can be classified into two groupsi) State Bank of India & its 5 Associates-Total 6,
ii) Nationalised Banks- 20 which includes IDBI Bank
) Specifically, the following statutes regulate the PSBs-SBI regulated by State Bank of India Act 1955,
-Subsidiary Banks of SBI regulated by State Bank of India(Subsidiary
Banks) Act 1959,
-Nationalised Banks regulated by Banking Companies ( Acquisition
and Transfer of Undertakings) Act, 1970 and 1980
) The statutes stipulate that the Central Govt. is mandated to hold a
minimum of 51% in Nationalised Banks and 55% in SBI. In turn, SBI
will have to hold a minimum 51% of the Shareholding in its
subsidiaries.
) Foreign Investment in any form can not exceed 20% of total paid up
capital of the Public Sector Banks.
) Total Assets of PSBs as on 31/03/13 stood at Rs. 69619.67bn.
(64.4% of Banking sector Assets)

The State Bank of India

Initially known as Imperial Bank

Came into existence on July 1, 1955
SBI regulated by State Bank of India Act 1955,

-Subsidiary Banks of SBI regulated by State Bank of

India(Subsidiary Banks) Act 1959,
Objectives: to promote agriculture, to help RBI in
its credit policies, to help government pursue broad
economic policies
Seven subsidiaries of which 2(State Bank of
Saurashtra and State Bank of Indore) merged with
SBI in August 2010.
Dominates Indian banking structure in terms
of:
Reach, Size, Market share, Business
diversity and Position in government segment.

GOI transacts its business through SBI

At present, it has five subsidiaries.

Nationalised banks

Nationalised Banks regulated by Banking Companies

( Acquisition and Transfer of Undertakings) Act, 1970 and 1980

By the Banking Companies ( Acquisition and Transfer of

Undertakings) Act, 1970 and 1980 the Central Govt.
nationalized [took over business undertakings ] certain
banking companies and vested them in newly created statutory
bodies [corresponding new banks] constituted under section 3
of ( Acquisition and Transfer of Undertakings) Act, 1970 and
1980
-Nationalisation in two phases- in 1969 and in 1980
-To widen the branch network
-At present 20 nationalised banks
- allowed access to capital market
- Edge over private sector banks in terms of size, geographical
reach and access to low deposits
- Dominant segment is commercial banking accounting for
nearly three- fourths of assets and income.
- Responded to the new challenges of competition

Private Sector banks

- In the pre- reforms period, 24 private sector banks
- At present, 13 old private sector and 7 new private sector
banks, total 20 Private Sector Banks.
- Guidelines revised in January 2001
- Norms for issue and pricing of shares revised in 2001-02
-Level of foreign participation enhanced

Tapped new markets, offered innovative products and

servicePrivate sector banks

Asset size as on 31/03/13

Type

Asset size Rs in bn

New Private
sector Banks (7)

15450.70

14.3

Old Private
sector Banks
(13)

4447.33

4.3

18.6

Public v/s Private Ownership

-Asset size as on 31/03/13
Type
Public Sector(26)

Asset size Rs in bn
69619.67

New Private
sector Banks (7)

15450.70

Old Private
sector Banks
(13)

4447.33

%
64.4
14.3
18.6%
4.3

Public v/s Private Ownership

Both public and private banks have respective advantages

and disadvantages.

-Private ownership brings competition, professionalism and

operational efficiency.
-Public ownership makes it easier to pursue social objectives
such as mass banking, financial inclusion etc.
-Private banks have comparatively greater freedom in terms
of recruitment, salary and compensation.
-On the other hand, PSBs are perceived to offer more job
security, and consequently, employee turnover is lower.

PSBs dominate the banking sector in India and will

continue to be dominant in the foreseeable future.
However, these banks require substantial capital to support
growth.

-The critical question is whether the Government, given its

limited fiscal space, can meet the enhanced capital needs of

Consolidation of Banks
-Consolidation assumed significance after the
introduction of financial sector reforms starting early
nineties.
-Gained momentum after the Narasimham Committee I (1991) put forward the broad pattern of the banking
sector [3 or 4 large banks, 8 to 10 national banks, local
banks and rural banks].
-Reiterated by the S.H. Khan Committee (1997),
Narasimham Committee - II (1998), Raghuram Rajan
Committee (2009), Committee on Financial Sector
Assessment (CFSA) (2009) and Committee on Fuller
Capital Account Convertibility (2006).
- All Committees viewed that restructuring of the
banking system should be market-driven based on
viability and profitability considerations and brought

Consolidation of Banks
-Since the first round of nationalization of banks in 1969,
there have been a total of 41 mergers and amalgamations. Of
these, 17 happened before the onset of reforms in 1991 and
24 after that.
- The nature of M&As has been as follows:
Number of
cases
Public sector bank with public
sector bank

Private bank with public sector

bank

24

Private bank with private bank

14

Total

41

Consolidation of Banks
Arguments in support of consolidation
- Higher capital base after consolidation will facilitate increased
lending activity and faster GDP growth.
- Boost infrastructure financing from the perspective of enhanced
exposure limits for single and group borrowers.
- Meet the banking service demands of Indian corporates, both at
home and globally.
-Cost benefits for banks due to economies of scale and economies
of scope such as centralised back office processing, elimination of
branch overlap and duplication of administrative infrastructure,
better manpower planning, optimum funds management,
consolidation of operations, savings in IT and other purchases.
-Consolidation will afford focused supervision.
-Larger size means wider and richer experience in financial
inclusion.
-International acceptance and recognition.
- Better risk management.

Consolidation of Banks
Arguments against consolidation
- Lead to complexity and Too-Big-To-Fail (TBTF) or TooConnected-To-Fail (TCTF).
-Regulatory issues: Significant big banks could resort to
monopolistic practices that may result in unequal
competition and distortive and even predatory
behaviour in the market. Such practices could also blunt
the monetary transmission and market mechanism for
efficient allocation of resources.
-Could pose problems such as technology migration
issues, customer attrition, implementation costs, HR
issues (viz. seniority, salary, transfers, promotion, parity
in perks etc.) and litigation, will not be able to provide
personalized services provided by small banks.
-Another issue is How to ensure smooth merger of

Consolidation of Banks
Criteria for consolidation/merger
- Presently, significant skewness in the size of

banks. The second largest bank in the system is

almost one-third the size of the biggest bank.
This creates a monopolistic situation. The task is
to ensure that there are at least 4-5 banks of
comparable size at all times to ensure that
consolidated banks do not acquire monopolistic
market power, adopt predatory behaviour and
force smaller banks into unviable models.
-Organic growth or inorganic merger?

Mergers & Acquisitions & Consolidation in

Banks
Introduction

Banking is core to any economy as it drives and supports

socioeconomic development in the country. Hence it's
obvious that it's heavily guarded by the regulators and
governments. Accordingly,

Mergers & Acquisitions (M&A) in banking has been driven

not only by the commercial rationale but also due to its
social impact and national interests.

The strategic rationale for inorganic activity has evolved

and driven by various considerations like technological
advancements and regulatory consideration among others
driving M&A in India.

Mergers & Acquisitions & Consolidation in Banks

Mergers and Acquisitions- strategic options

Mergers and Acquisitions is a very broad concept

and include number of strategic options being
i) mergers,
ii)acquisitions,
iii) re-structuring,
iv)Joint ventures and alliances among others.

The industry has seen alternative structures of such

M&A, being between
i) banks,
ii) banks and NBFCs,
iii) banks and financial institutions as well as
iv) Banks with non-financial entities.

Mergers & Acquisitions & Consolidation in Banks

Mergers and AcquisitionsKey considerations in Mergers and Acquisitions in the

Indian context
1)Geographic Expansion : This has been the preferred
motivation factor for number of acquisitions in India.
Targets have been primarily regional player or present in
states / locations where the acquirer does not have any
meaningful presence. Similarly, as the rural economy
grew, banks wanted to go deeper and target entities
having rural concentration .
2) Branch Network : Acquirers looked at branch network
from the perspective of last mile connectivity to customers
/ location not present hitherto or regulatory requirements,
where branch expansion into a more lucrative urban /
metro markets was dependent on the branches in rural /
semi-urban locations. For E.g. : ICIC Bank Sangli Bank.

Mergers & Acquisitions & Consolidation in Banks

Mergers and Acquisitions

Key considerations in Mergers and Acquisitions in the Indian

context

3) Customers Acquisition : Target may have niche customer

segment, customer segment present in a category different from that of
the Acquirer or it could be simply an addition to the existing customers
set of the acquirer.
Intent is to avoid the acquisition cost and offer Acquirer's diversified
suite of products as a cross sell / upsell and hence have a much larger
wallet share.
For E.g. : In Feb 2013, Kotak Mahindra Bank bought Barclays India's
business loan portfolio gaining access to 6,000 business loan customers
with a total outstanding of about Rs. 7bn.
4) Product Portfolio : Banks have regularly sought to portfolio
buyouts, which either fills the portfolio gap or helps gain leadership
position in that segment.
For E.g. : In Dec 2013, RBL Bank acquired three businesses (business
banking, credit card and mortgage portfolio) from Royal Bank of
Scotland, India.

Mergers & Acquisitions & Consolidation in

Banks
Mergers and Acquisitions- Indian context :
While size and scale has been a big determinant of banking
M&A internationally, however this has not been prevalent in
India, given regulatory limitations and growth potential in India.
Separately, there were some M&As which were based on order
of moratorium issued by RBI (passed by Central Government in
public interest, in the interest of depositors and the banking
system). This was due to weak capitalization, inefficiency,
leakage and lack of professional approach etc., resulting in
asset quality issues of alarming levels, negative net worth and
hence threat to depositor base.

Mergers & Acquisitions & Consolidation in Banks

Mergers and Acquisitions- Indian context :

Name of Acquirer

Target

Year

Remarks

Centurion Bank

20 Century
Finance

1998

Under Order of Moratorium

Bank of Baroda

Bareilly
Corporation Bank

1999

Under Order of Moratorium

Union Bank of India

Sikkim Bank

1999

HDFC Bank

Times Bank

2000

Acquire a new age private sector

bank, after licenses were issued in
1993

Weak bank

ICICI Bank

Bank of Madura

2001

Geographic expansion in South

India, primarily in Tamil Nadu,
where ICICI Bank had minimal
presence

Oriental Bank of
Commerce

Global Trust Bank

2004

Under Order of Moratorium

2005

Complementary businesses CB
present primarily in South and
West vs.
BoP in north,
CB focused on retail vs. BoP in
SME and agri sector
Combined entity would have
nationwide presence with

Centurion Bank-CB

Bank of Punjab
-BoP

Mergers & Acquisitions & Consolidation in Banks

Mergers and Acquisitions- Indian context :

Name of Acquirer

Target

Year

Remarks

Federal Bank

Ganesh Bank of
Kurundwad

2006

Tap agriculture and retail portfolio

IDBI

United Western
Bank

2007

Under Order of Moratorium

Indian Overseas Bank

Bharat Overseas
Bank 2007

2007

Consolidation with the largest

shareholder
Bank

2008

Branch network and customer base

in rural and semi-urban locations;
allow ICICI to roll-out rural and SME
banking operations

ICICI Bank

Sangli Bank

Standard Chartered
Bank

American Express
Bank

2008

Outcome of global acquisition, to

enhance presence in financial
institutions
Chartered Bank and private banking
business

State Bank of India

State Bank of
Saurashtra

2009

Consolidation merger with one of

the associate banks

State Bank of Indore 2009

Consolidation merger with one of

the associate banks

State Bank of India

Mergers & Acquisitions & Consolidation in Banks

Mergers and Acquisitions- Indian context :

Name of
Acquirer
Kotak
Mahindra

Target

ING Vysya
Bank

Remarks
Yea
r
201 Complementary
4
business enhancing
south presence where
its presence
Bank was minimal,
acquire a strong SME
product where it was
not present,
get MNC clientele and
trader community
customer base and
expertise
in digital banking

Large and Small Banks

An issue related to the debate on consolidation in

banking sector is the merits and demerits of large and
small banks.

-In support of large banks

- Large banks can exploit economies of scale and scope
leading to economic efficiency.
-Large banks will have the capacity, resilience and
innovative zeal to pursue financial inclusion. They will
bring diverse experience to bear on local initiatives.
-Large banks can potentially become significant global
players and thereby give a global reach to Indian
corporates.
- Large banks with huge capital base can better meet
the huge funding requirements of the infrastructure
sectors.

Large and Small Banks

Against large banks
- Large banks can become too-big-to fail, leading to
moral hazard problems. [In economic theory, a moral hazard
is a situation where a party will have a tendency to take risks
because the costs that could result will not be felt by the party
taking the risk. In other words, it is a tendency to be more willing to
take a risk, knowing that the potential costs or burdens of taking
such risk will be borne, in whole or in part, by others.]

-Proliferation of non-core activities, either in the

books of the bank or through off-balance sheet vehicles
such as investment banking, securitisation, derivatives
trading, etc. could pose significant systemic risk because
of their complexity and opacity.
-Large banks can use power derived from their information
monopoly to suppress competing institutions and markets.
-Large banks may dilute the benefits of competition.

Large and Small Banks

In support of small banks
- Small banks have a comparative advantage in the
supply of credit to small business units, small farmers
and other unorganized sector entities, thereby
furthering the cause of financial inclusion.
-Small local banks are more nimble and flexible. They
can effectively cater to unbanked areas and meet
localised needs. Can be more efficient in financial
inclusion.
- Small banks with limited area of operation would
require less infrastructure, staff and hence the
operational expenses would be low.
-Failure of a small bank will not have any systemic
impact and resolution would be easier.

Large and Small Banks

Against small banks
- Small banks are potentially vulnerable to sector
concentration risk. For instance, community banks in the
US suffered losses due to their excessive reliance on
lending to commercial real estate.
- Small banks are vulnerable to geographic
concentration risk from the local economy.
-Small banks are not big enough to finance big
investments, including infrastructure.
-Small banks are prone to local influence capture.
- A large number of small banks put pressure on the
supervisory resources of the central bank.

Large and Small Banks

Issues with encouraging large banks in India
-What is our definition of a large bank? By large bank, do we

mean a i) bank with large asset size or ii) a bank with

global foot print?
-Some of the Chinese banks fit well into the first definition.
They are large in terms of their assets, but they are not global
in the sense that they have no global presence. Some of the
American or European banks may not be large in terms of
assets, but they have presence in many jurisdictions.

What type of largeness should Indian banks attempt? Large

banks like the Chinese banks or large banks with global
presence?

it will take several years for our banks to achieve the status
of a large global bank. Our biggest bank is ranked at about
60 in the global league of large banks. It may take years for
our banks to become global players by way of organic
growth.

Large and Small Banks

Issues with encouraging large banks in India

The Industrial and CommercialBank of Chinastands

out, as it has the highest rank among the worlds
largest banks across all four metrics ($166 billion in
sales, $44 billion in profit, $3.32 trillion in asset, and
$278 billion in market value). The juggernaut also
tops the overall Global 2000 list for the third
consecutive year. This year, Bank of China moved up
5 spots to No. 4 this year, replacingJPMorgan Chase
JPM -1.75%, the largest U.S. bank.Wells Fargo
WFC -4.17%is the second-highest ranked U.S. bank
on our list, as it trails JPMorganChasein sales and
assets. HSBC remains the largest European banks,
while SpainsBanco Santanderrose to No.10 thanks
to its rising profits.

Large and Small Banks

Issues with small banks in India
- Merely encouraging small banks without addressing
the disadvantages of being small?
-Small banks are prone to fail frequently, and we have to
develop the political and financial resilience to accept
failures of small banks.
-There is a need for a faster and more effective
framework for resolution and settlement of deposit
insurance claims in the event of failure of a bank.
- When small banks become successful, they naturally
want to expand and grow. Should we allow a smooth
transition from small to big? But if we do that, arent we
defeating the very rationale for such banks viz. that
they will be nimble and flexible and meet local
demands?

Foreign Banks in India

-Operating in India since decades

- 43 foreign banks with 331 branches

- Their presence benefited the financial system:
a. Brought in new technology
b. Enabled Indian companies to access foreign
currency
c. Active players in the money market and foreign
exchange market
- Now permitted to have either branches or subsidiaries but
not both
- Road map laid out by RBI will enable entry and provide
them same treatment as PSBs.
-As on 31/03/2013, there are 43 Foreign Banks with Asset Size
of Rs. 6215.63 bn. (5.8%)
-Licensing Policy for Foreign Banks
At present, foreign banks operate in India as branches of
the parent bank. Currently, permission for opening of
branches by foreign banks in India is guided by Indias

Foreign Banks in India

Subsidiarisation of Foreign Banks

At present, foreign banks operate in India as branches of

the parent banks.
Post crisis lessons support domestic incorporation of foreign
banks i.e. subsidiarisation.
Main advantages of local incorporation are:
- Ring fenced capital within the host country
-Easier to define laws of which jurisdiction apply
-Better corporate governance, local board of directors
- Effective control in a banking crisis and enables host
country
authorities to act more independently as
against branch operations

Regulatory comfort.

Foreign Banks in India

Subsidiarisation of Foreign Banks
-Potential down side risk could be domination of the
domestic financial system by Wholly Owned Subsidiaries
(WOS) of foreign banks.

There are certain taxation and legal issues which are

being sorted out by the Regulator [RBI] and then final
guidelines are expected.

REGIONAL RURAL BANKs

Regional Rural Banks

Came into existence in 1975 by an ordinance.The

ordinance was later replaced by Regional Rural Banks
Act 1976.
Section 3 of the Act authorizes the Central Govt. to
establish Regional Rural Banks by notification in the
official gazette at the request of a sponsor bank to
operate within specified local limits.
Each RRB sponsored by a public sector bank.
Sponsor Bank is a bank by which a Regional Rural Bank
is sponsored and it holds 35% of the issued Capital of
the RRB, while the Central Govt. holds 50% & the State
Govt. holds remaining 15% of the issued capital.
Set up to develop rural areas by providing credit and
other facilities.
Carved out a niche but characterized by low
productivity and high NPAs.
RRBs will now be merged with sponsor banks.
As on 31/03/2013 there were 57 RRBs with Asset size of
Rs. 2758.00 bn. (2.5%)

Regional Rural Banks (RRBs)

Establishment of RRBs-- Evolution and

Growth.
The Narasimham Working Group (1975)
conceptualized the creation of RRBs in 1975
as a new set of regionally oriented rural
banks, which would combine the i] local
feel and familiarity of rural problems ,
ii] characteristic of cooperatives with
the professionalism and
iii] large resource base of commercial
banks.
RRBs were established under the Regional
Rural Banks Act, 1976 to create an alternative

Regional Rural Banks (RRBs)

Establishment of RRBs-- Evolution and Growth.

RRBs are jointly owned by the Government of India,
the concerned State government and sponsor
banks, with the issued capital shared in the
proportion of 50 percent, 15 percent and 35
percent, respectively. As per the provisions of the
Regional Rural Banks Act, 1976 the authorized
capital of each RRB is Rs. 5 crore and the issued
capital is a maximum of Rs. 1 crore.
RRBs were established in the year 1976 as a low
cost financial intermediation structure in the
rural areas to ensure sufficient flow of
institutional credit for agriculture and other
rural sectors.
RRBs were expected to have the local feel

Regional Rural Banks (RRBs)

Establishment of RRBs-- Evolution and Growth.

In practice they borrowed the politicization in lending,
rampant in cooperative Banks, with the worst form of
unionism replicated from the commercial banks. The low
cost structure was also washed away after the Obul
Reddy report which brought parity of pay scales with
Commercial Banks.
From a modest beginning of 6 RRBs with 17 branches covering
12 districts in December, 1975 the number of RRBs increased
to 196 RRBs with 14,446 branches in 1991 operating in 518
districts across the country.
After a phase of consolidation starting from September, 2005,
the number of RRBs was reduced from 196 to 82.
In the current phase of consolidation which began in October,
2012 by amalgamation of RRBs across sponsor banks within a
State, the number of RRBs has further reduced to 61 RRBs as
on June 2013 with over 18000 branches in 638 districts.[latest
number is 57 RRBs]

Regional Rural Banks (RRBs)

Reforms in the RRB Sector have taken place in three
phases :
First Phase: 1993-2000
Based on the recommendations of the Narasimham
Committee Report (1992), reforms were initiated in 1993
with a view to improve the financial health and operational
viability of RRBs.
- Various measures including recapitalization,
rationalization of branch network, providing better access
to non fund business, expanding avenues of investment
and advances, upgrading the level of technology and
taking up select RRBs for comprehensive restructuring
were taken.
- Further, they were permitted to lend to non-target group
borrowers up to 60 per cent of new loans.
- From January, 1995 the investment avenues for RRBs
were broadened to improve the operational efficiency and

Regional Rural Banks (RRBs)

Reforms in the RRB Sector have taken place in three
phases :
First Phase: 1993-2000contd

Prudential accounting norms of income recognition,

asset classification, provisioning and exposure, were
implemented during this period to provide durability
to the reform process. In April, 2000, RRBs were
allowed to apply for permission to maintain nonresident accounts in rupees.

Regional Rural Banks (RRBs)

Reforms in the RRB Sector have taken place in three phases :
Second Phase: 2004-2010

-The next Phase of reforms started in 2004-05 with the structural

consolidation of RRBs by amalgamation of RRBs of the same sponsor
bank within a State.
Capital support aggregating Rs. 1796 crore was provided during the
period 2007-08 to 2009-10 as part of this process. In October, 2004,
RRBs were permitted to undertake insurance business without risk
participation and in May, 2007 they were allowed to take up corporate
agency business for distribution of all types of insurance products without
risk participation.
In December, 2005, to further extend support to RRBs for accelerating
the flow of credit to the rural areas, the resource base of RRBs was
expanded to include lines of credit from sponsor banks; they were also
permitted to access the term money markets and CBLO/Repo markets.
Issuance of credit/debit cards, setting up of ATMs, opening of currency
chests, undertaking government business, as subagents, were allowed to
enhance business opportunities.

Regional Rural Banks (RRBs)

Reforms in the RRB Sector have taken place in three
phases :
Second Phase: 2004-2010 contd.
In March, 2006, RRBs were permitted to apply for ADCategory II licence to undertake non-trade related current
account transactions for certain specified purposes to
further enhance the scope of business. In June, 2007 to
increase their exposure to foreign exchange business they
were allowed to accept FCNR deposits. RRBs were also
allowed to participate in consortium lending with sponsor
banks, DFIs and other banks within the area of operation.
The capital adequacy standards were introduced in
December, 2007 in the context of financial stability and
RRBs were required to disclose the level of CRAR in their
balance sheets.

Regional Rural Banks (RRBs)

Third Phase: 2010 onwards
Based on the recommendations of Dr. K. Chakrabarty
Committee (2010), 40 RRBs have been taken up for
recapitalization to enable them to achieve and sustain a
CRAR of 9%.
In November, 2010 the branch licensing policy was
liberalized which allowed RRBs to open branches in Tier 3
to Tier 6 centres (with population of up to 49,999 as per
2001 Census) without prior approval from the Reserve
Bank, subject to certain conditions. This policy was further
liberalized in August, 2013 to also include Tier 2 centres.
The next phase of consolidation commenced from
October, 2012 with amalgamation of RRBs across sponsor
banks within a State.

Regional Rural Banks (RRBs)

Performance of RRBs Post Amalgamation:

2005-06

2012-13

No of RRBs

133

64
[57]

No of branches

14489

17867

Net profit (cr)

617

2384

Profit/loss making RRBs 111/22

63/1

Deposits (cr)

71329

211457

Loans & Advances (cr)

38520

133098

CD ratio (%)

55.7

66.13

Share of CASA in
deposits %

59.14

57

Share of PSA in total

%

81

86

Share of agri adv to

54.2

63

Regional Rural Banks (RRBs)

Performance of RRBs Post Amalgamationcontd.

Post amalgamation, in terms of total business 2 RRBs are larger
than some private sector commercial banks as can be seen
from the graph below

Cooperative Banks

Cooperative Banks

Cooperatives are based on the principles

of community camaraderie, - mutual help,
democratic decision making and open
membership.
Cooperatives represent a new and
alternative approach to organization as
against proprietary firms, partnership firms
and joint stock companies, which represent
the dominant form of commercial
organization.
The principles cover various aspects of
cooperatives beginning from its
membership to concern on community.

Cooperative Banks
Introduction
Co-operative banks play an important role in meeting
the credit requirements of both the urban and rural
India. Though in the bank dominated financial system,
these institutions account for a small share in the total
credit they hold a significant position in credit delivery
as they cater to different geographic locations and
demographic categories.
The wide network of co-operative banks, both rural and
urban, supplements the commercial banking network for
deepening financial intermediation by bringing a large
number of depositors/borrowers under the formal
banking network.
Demographically, these institutions have enabled
access to financial services to low and middleincome groups in both rural and urban areas.

Cooperative credit institutions March 2013

50

Rural Cooperative
Banks

Co op Banks
Cooperative Banks came into existence with the
enactment of the Cooperative Credit Societies Act of
1904 which provided for the formation of cooperative
credit societies.
Subsequently, in 1912, a new act was passed which
provided for the establishment of cooperative central
Banks.
Cooperative Banking comprises
i) Urban cooperative Banks
ii) Rural Cooperative Banks
) Cooperative Banks fill in the gaps of Banking needs of
small and medium income groups not adequately met
through by the Public sector and Private sector Banks.
) A Cooperative Bank is a member promoted and
has to be registered with the state based
Registrar of Cooperative Societies.

Rural Cooperative Banks

Rural Cooperative Banks play an important role in

the rural credit delivery system as they account for
around 30% of Rural Deposits and 44% of the credit
of the banking system for Agri. and Rural
development.
Short- term structure of Rural Cooperative Banks
comprisesi) State Cooperative banks(StCBs)- the upper tier.[31]
ii) District Central Cooperative banks(DCCBs)-the
middle tier.[370]
iii) Primary Agril. Credit Societies(92432)-the lower
tier.[92,432]
) Long- term structure of Rural Cooperative Banks
comprisesi) State Cooperative Agriculture and Rural
Development banks {SCARDB}- the upper tier.[20]
II) Primary Cooperative Agriculture and Rural
Development banks(PCARDBs)- the lower tier.[697]

Rural Cooperative Banks

Profile of Rural Cooperative Banks- as on 31/03/12
{ Amnt. in Rs.
bn.}
Short
Term
Long -Term
StCBs

DCCB
s

PACs

SCAR
DB

PCAR
DB

No of
Cooperatives

31

370

92432

20

697

Owned Funds

145

359

160

64

48

Deposits

867

1768

503

11

05

Advances

756

1448

912

194

120

Institutions in
profit

28

318

45433

10

358

Amnt. Of Profit

07

17

14

01

02

NPA-%

6.8

9.7

26.8

33.1

38.6

Recovery of
Loans to
Demand ratio-%

96

78

73

41.3

47.3

Rural Cooperative Banks

Problems of cooperatives
Despite the phenomenal outreach and volume of
operations, the health of a very large proportion of rural
credit cooperatives has deteriorated significantly.
The institutions are beset with problems like
i] poor governance,
Ii] infrastructural weaknesses,
Iii] operational inefficiencies and
Iv]the consequent impairment of their financial health.
Several factors as given below have led to the
deterioration in the financial soundness of cooperativesi]low resource base,
ii]lack of democratization and professionalism,
iii]high incidence of overdue and almost stagnant recovery
performance

Rural Cooperative Banks

Problems of cooperatives
There is an urgent need to find ways for
strengthening the cooperative movement to
meet the credit needs of rural India, especially
the resource-poor and resource-less poor
farmers. The revitalization and strengthening of
cooperative institutions at all levels should
therefore be considered not only desirable but
expedient.
The thrust has to be four-fold, financial,
operational, organizational and systemic.

Rural Cooperative Banks

Problems of cooperatives
Poor governance

Cooperatives operate within the legal framework formulated by

state governments. However, compliance with the legal
provisions of the State Cooperative Societies Acts has not been
ensured. Governance, connected lending, transparency in grant
of loans, audit, internal checks and control, recovery of dues,
recruitment of qualified persons are issues affecting the
efficient functioning of cooperatives.
As dominant share holders, state governments interfere in the
management of cooperatives. Supervision and guidance by the
elected Boards is lax. Delay in conduct of elections, frequent
supersession of the Boards, lack of participation by members in
the management and decision-making process have impaired
functioning of cooperatives on sound business lines. In the
absence of professional management, accountability and
uncertain tenures, the Board members are not able to provide
dynamic leadership to the organization. Restoring and
strengthening autonomy, mutual help and self governance are
the cornerstone of the cooperatives.

Rural Cooperative Banks

Problems of cooperatives
Lack of member participation
The cooperative structure should be member-driven. However, members
having a voting right do not take active part or show interest in the affairs
of the cooperatives since the control and management is vested in a few
members .Besides, depositors, whose money is intermediated by the
cooperatives, have no voting right or any say in the management.
Duality of control
Under the Constitution, Cooperation is a state subject governed by the
respective State Cooperative Societies Acts. Registration, incorporation,
management, election, and audit are governed by the State Acts. Some
aspects relating to banking activities are regulated and supervised by the
Reserve Bank of India / NABARD under the Banking Regulation Act, 1949
(As Applicable to Cooperative Societies). There is an urgent need to remove
the overlapping controls and endowing functional autonomy and
operational freedom to cooperatives. Banking functions should be brought
completely under the Banking Regulation Act. The provisions of the Banking
Regulation Act should override the provisions of the State Acts/byelaws/rules which run counter to it. This will lead to clear demarcation of the
areas of activities of cooperative banks.

RURAL BANKING

Rural Area-India lives in its villages"

-Mahatma Gandhi

Rural Banking
CONTENT.
Particulars
1 Current State of Rural Banking in India
2 Key Drivers of Financial Exclusion of Rural
Banking in India
3 Reasons for Unprofitable Rural Banking in India
4 Market Opportunity of Rural Banking in India
5 Usage issues for Rural Customers
6 Improving Access of Rural Banking in India
7 Conclusion

Rural Banking
Rural Area-India lives in its villages" -Mahatma
Gandhi
What is rural sector or which place can be
defined as rural area?
The "rural sector" means any place as per the "latest
census" which meets the following criteria,
1)A population of less than 5,000
2)Density of population less than 400 per sq km and
3)more than "25 per cent of the male working
population" is engaged in agricultural pursuits.

Rural Banking

Rural India
Rural India constitutes 69% of Indias population.
86% of Rural population earns less than $2 per
day (most of Indian BoP [The Base of Pyramid]
households earn $67 per month).
Only 0.29 per cent of the male population has
reached the graduation level (0.04% for women)
and 6.% of the rural males are educated up to
the middle level.
Connectivity In 2006: 13% in rural India had to
travel 30 minutes 2011: just 2%. When it comes
to connectivity, Rural Indian BOP segment [The
Base of Pyramid] has grown more than urban in
last year.
The rural economy contributes nearly half of the

Rural Banking

Rural India
More than 50 percent of the sales FMCG and
Durable companies come from the rural areas.
According to estimates,
- approximately 245 million adults (24%) in rural
India do not have a bank account,
- 60 million out of 245 million may not need
banking services because they are below the
poverty line approximately
- 185 million potentially bankable people do not
use formal banking services because of reasons
like poor access or usage

Rural Banking

Dynamics of Rural Economy1)The integration between rural and urban areas has
increased significantly, with the result, mobility of
labour, capital, products and even credit between the
two is increasing.
2) Commercialization of agriculture, particularly the
increasing role of cash crops like cotton has resulted in
substantial role for suppliers & and buyers credit. Thus,
fertilizer and pesticide are supplied to farmers on credit,
often on deferred payment basis. In such deferred
payment arrangements, credit terms are built into price
and hence it is difficult to isolate terms.
Similarly, the commission agents advance money
towards purchase of output from farmers, which
amounts to providing credit and includes an element of
forward trading. These arrangements are often entered
into on a voluntary basis.

Rural Banking
Dynamics of Rural Economy3) Compared to cereal production, other food items, including
poultry and fish are growing at a faster pace. In other words,
rural agriculture is getting increasingly diversified in
terms of products and processes.
4) In areas where commercialization of agriculture has
reached significant levels, the traditional landlord based
tenancy is replaced with commercial based tenancy.
Where intensive cultivation of cash crops such as cotton is
called for, this has become quite common. However, the
present credit and banking procedures do not cater to the
working capital needs of such commercial based tenancy
relationship.
5) Given the diversified activities, and large work force in
rural areas, there is increasing recourse to multiple
occupations to earn a decent livelihood. For example, a
small farmer is also a petty trader and may also be a satellite
based cable television operator in the village.

Rural Banking

Dynamics of Rural Economy6)To the extent employment and indeed incomes could
be seasonal, especially for agricultural labour, there is
reason to seek and obtain consumption loans. Present
arrangements in formal credit markets are inadequate to
meet such requirements.
7) While there is significant commercialization and
diversification of rural economies, progress is very
uneven in different parts of the country. So, there
are still many areas, where exploitation of tribal by
money lenders or of agricultural labourers by landlord
money lenders, still persists. Norms and procedures of
credit, therefore, need to be different to meet varying
circumstances.
8) Credit Deposit ratio of Rural, Semi Urban, Urban &
Metro sector indicate Net transfer of Savings from Rural
to Non-Rural sectors.

Rural Banking
What Is Rural Banking?
It is a form of services that provide solution to the
financial needs of the consumers in Rural areas.
Financial Services required for Rural sector1)Savings,
2)Loans,
3)Remittances,
4)Insurance,
5)Credit Cards,
6)Pension,
7)Pension/Social security.

Rural Banking

Institutional structure of Rural

BankingCommercia Three Tier Primary
Regional
l Banks

Co-op
Banks

1)Public
Sector
2)Private
sector
3)Foreign
Banks

1)State Coop Banks

2)Dist
Central
Co-op
Banks
3)Primary

Co-op Agril Rural

& Rural
Banks
Developme
nt Banks

Rural Banking

Depending upon the requirement and purpose, the

funds needed by Indian farmers can be
categorized into three types1)Short term loan - 12 to15 months SHORT TERM LOAN
are issued to the farmer for the purpose of cultivation or
domestics expenses such buying seeds, manure and
fodder for cattle, etc.
2) Medium term loan -3 to 5 years MEDIUM TERM LOAN
are given to farmer to purchase cattle, agriculture
implement and to make improvement on land.
3) Long term loan -5 to 20 years LONG TERM LOAN are
given to the farmer to purchase land, pay of old debt and
purchase useful machinery for long term usage. These
loans are for comparative long period since the farmers
can repay them gradually over a number of years.

Rural Banking

Sources of Rural FinanceInstitutional CreditFinancial Institutions

1)
2)
3) Co-op
Commer Regional Banks
cial
Rural
Banks
Banks

Private Credit
1)
2)
3)Trader
Money Landlor s &
Lenders ds
Commis
sion
Agents

Types of Financial Institutions

A)Formal-Banks
B)Informal-Non-Banks
1)Nation 2)Private 3)RRBs Micro Finance Institutions - Micro
alized
Banks
Credit to Micro Entrepreneur
Banks
Non-profit Mutual
For Profit
org,
Benefit org orgPublic Trust like Self
NonHelp
Banking

Rural Banking

Objectives Of Banking Services In Rural Area

1)Poverty Alleviation Objectives: The
objectives is to uplift the mass of population
residing in the rural areas who are currently below
the poverty line by extending credit to the
smallest-scale economic activity.
2)Financial Intermediation Objectives: The
approach involves increasing the accessibility of
banking services to the poor in a commercially
sustainable manner.

Rural Banking

Financial Needs & Service

Financial
Critical
Description
Current
requirements-

Rationale

Needs &
Service

Needs

Saving

Micro Saving

Daily/Frequent Low
surplus Saving

Banks do not offer

daily small saving
deposit scheme

Frequent
Withdrawals

To meet
Low
contingencies,
Social
functions,
Working
Capital

Bank Branch channel

is cost ineffective in
Rural areas.

Micro Credit

For
Consumption,
Education, or
emergency
purposes

Low

Rural Banks generally

do not give Loans for
Consumption,
Education, or
emergency purposes

Micro
Enterprise
Credit

Working Capital
or Small Capital
Investment

Medium

Though Banks give

micro credit for

Credit

Availability
via Formal
Banking

Rural Banking

Financial Needs & Service

requirementsFinancial Critical
Needs & Needs
Service

Descripti
on

Current
Rationale
Availability
via Formal
Banking
Insurance Micro
Asset
Low
Insurances
&
Insurance protection,
services for
Remittanc
Health,
Rural poor are
e
Life &
extremely Low
Saving
Protection
Remittanc To access High
With core
es &
funds
Banking to &
Transfers remitted
from Rural
by
area
relatives
remittances
have become

Rural Banking

Issues & Challenges in Rural

Banking Augmenting credit flow to various
sectors of economy
Priority sector lending
Credit Deposit Ratio
Financial Inclusion
Financial literacy

Rural Banking
Issues & Challenges in Rural Banking Priority sector lendingPriority sector refers to those sectors of the
economy which may not get timely and adequate
credit in the absence of this special
dispensation.
Typically, these are small value loans to farmers for
agriculture and allied activities, micro and small
enterprises, poor people for housing, students for
education and other low income groups and weaker
sections. Those sectors which are able to get timely
and adequate credit would not qualify for status of
priority sector
Categories under Priority sector : Agriculture ,
Micro and Small Enterprises, Education, Housing ,
Export Credit, and as per the revised guidelines on

Rural Banking

Issues & Challenges in Rural Banking Priority sector lending- Categories(i) Agriculture
(ii) Micro, Small and Medium Enterprises
(iii) Export Credit
(iv) Education
(v) Housing
(vi) Social Infrastructure
(vii) Renewable Energy

Rural Banking

Issues & Challenges in Rural Banking- Priority sector

lending-TargetsCategorie Domestic scheduled
s
commercial banks and
Foreign banks with 20
branches and above
Total
40 percent of Adjusted Net
Priority
Bank Credit[ANBC] or Credit
Sector
Equivalent Amount of OffBalance Sheet Exposure,
whichever is higher.
Foreign banks with 20
branches and above have to
achieve the Total Priority
Sector Target within a
maximum period of five years
starting from April 1, 2013 and
ending on March 31, 2018 as

Foreign banks
with less than 20
branches
40 percent of
Adjusted Net Bank
Credit [ANBC defined
in sub paragraph
(iii)] or Credit
Equivalent Amount
of Off-Balance Sheet
Exposure, whichever
is higher; to be
achieved in a phased
manner by 2020 as
indicated in sub

Rural Banking

Issues & Challenges in Rural Banking- Priority sector

lending-TargetsCategori
es

Domestic scheduled commercial banks and

Foreign banks with 20 branches and above

Agricultu 18 percent of ANBC or Credit Equivalent Amount of

re
Off-Balance Sheet Exposure, whichever is higher.
Within the 18 percent target for agriculture, a target
of 8 percent of ANBC or Credit Equivalent Amount of
Off-Balance Sheet Exposure, whichever is higher is
prescribed for Small and Marginal Farmers, to be
achieved in a phased manner i.e., 7 per cent by
March 2016 and 8 per cent by March 2017.
Foreign banks with 20 branches and above have to
achieve the Agriculture Target within a maximum
period of five years starting from April 1, 2013 and

Foreign
banks
with less
than 20
branches

Not
applicable

Rural Banking

Issues & Challenges in Rural Banking Priority sector lending-TargetsCateg Domestic scheduled commercial
ories banks and Foreign banks with 20
branches and above

Foreign
banks with
less than 20
branches

Micro 7.5 percent of ANBC or Credit

Not Applicable
Enter Equivalent Amount of Off-Balance Sheet
prises Exposure, whichever is higher to be
achieved in a phased manner i.e. 7 per
cent by March 2016 and 7.5 per
cent by March 2017.
The sub-target for Micro Enterprises for
foreign banks with 20 branches and
above would be made applicable post
2018 after a review in 2017.
Advanc 10 percent of ANBC or Credit Equivalent Not Applicable

Rural Banking

Issues & Challenges in Rural Banking-Priority sector lendingStatus-(Amount in Rs. Crore): Figures in brackets percentage
of ANBC
Particul
ars
1969

2013

Agril

162
(5.4)

530370
(15.3)

MSE

257.0
(8.5)

84592
(13.7)

Total
441
Priority (14.6)
Sector

1282212
(36.9)

ANBC

3474772
( 100)

3016
(100)

Rural Banking
Issues & Challenges in Rural BankingGovernment Sponsored SchemesReserve Bank of India monitors the flow of credit under the
following credit linked Government Sponsored Schemes
implemented by various Ministries of the Government of India.
RBI issues guidelines / instructions to banks periodically on
proper Implementation of Centrally Sponsored Schemes and
collates bank Wise/State wise data on achievements made by
the banks on these Schemes.
1. National Rural Livelihood Mission (NRLM): formerly
Swarna jayanti Gram Swarozgar Yojana (SGSY) implemented
by the Ministry of Rural Development, GOI through Scheduled
Commercial Banks, Regional Rural Banks, Co-operative Banks
2. National Urban Livelihood Mission (NULM) formerly Swarna
Jayanti Shahari Rozgar Yojna (SJSRY) implemented by the
Ministry of Housing and Urban Poverty Alleviation, GOI
through Scheduled Commercial Banks (excluding RRBs )

Rural Banking

Issues & Challenges in Rural BankingGovernment Sponsored Schemes3)Self Employment Scheme for Rehabilitation of
Manual Scavangers (SRMS) implemented by the
Ministry of Social Justice and Empowerment, GOI
through Public Sector Banks
4)Differential Rate of Interest (DRI) Scheme
implemented by the Ministry of Finance, GOI through
Indian Scheduled Commercial banks Bank credit
given to the beneficiaries (weaker sections) under the
above Schemes comes under Priority Sector lending

Rural Banking
Issues & Challenges in Rural BankingCredit Deposit RatioCD Ratio is the ratio of outstanding credit to
outstanding deposit at a particular point of time.
It is a function of credit absorption capacity which is
dependent on the development level of the States
in the form of availability of necessary
infrastructure facilities required for development of
industries, agriculture & service sector etc.
This is a regular item of agenda in SLBC & DCC
meetings and these fora identify measures to
enhance CD ratio and to increase credit absorption
capacities in the region.
In 1980, RBI advised Public Sector Banks to
achieve a CD Ratio (CDR) of 60 in respect of their

Rural Banking

Issues & Challenges in Rural BankingCredit Deposit RatioIn 2005, banks are advised to set up Special SubCommittee (SSC) of District Consultative Committee
(DCC) in districts with CDR < 40 in order to monitor
and draw up Monitorable Action Plans (MAPs) for
improving CDR on a self set graduated

basis.

Rural Banking

Issues & Challenges in Rural BankingCredit Deposit RatioArea Wise Credit Deposit Ratio as
of June 2013-in terms of %
Semi
Urban
55.68%

Urban

Rural

Metro

57.86%

68.18%

90.58%

Rural Banking

Issues & Challenges in Rural BankingCredit Deposit Ratio-Region WiseCentr

East West North South
inNort
terms
of %
h
al
June
east
2013
33.84 45.66 47.12 84.29% 85.42 94.21%
%

Rural Banking

Issues & Challenges in Rural Banking Though several efforts were made to
increase the flow of institutional credit for
agricultural and rural lending, there were
mismatches in credit and production.
Field studies conducted to determine the
reason, revealed that it was due to absence
of effective local level planning-Grass-root
level planning
It was felt that with the establishment of
large network of branches, a system could
be adopted to assign specific areas to each
bank branch in which it can concentrate on

Rural Banking

Issues & Challenges in Rural Banking The cooperative banks have different layers
and many of them have significantly large
nonperforming assets (NPAs). Many
cooperatives are undercapitalized.
The public sector banking system also
exhibits NPAs, and some of them have so far
been provided with recapitalized funds. The
RRBs also exhibit NPAs and these have been
recapitalized from the Government of India
so far, which would imply a total
recapitalization of double the amount
provided by Government of India.

Rural Banking

Issues & Challenges in Rural

Banking- Concerns regarding
current approach Non Performing Assets
Cost of Funds & Rate of Interest on
Advances in deregulated market.
Institutional credit is more likely to be
available for well to do among the rural
community.
Relatively backward regions have less
access to institutional credit than others

Rural Banking

Issues & Challenges in Rural

Banking- Concerns regarding
current approach Non-availability of timely credit and the
cumbersome procedures for obtaining
credit.
Multiple financing, over financing and
under financing.
Different agencies often fail to formulate
and develop meaningful agriculture
programs in given blocks and districts.

Rural Banking

Issues & Challenges in Rural

Banking- Concerns regarding
current approach Problems in the recovery of loans lent to
same person by different agencies.
Flow of formal credit to agriculturally
developed regions and to relatively larger
farmers leaving the backward regions and
small farmers.
The transaction costs vary with type of
credit agency involved, the type of
borrower and farm size.
Effective cost of borrowings for smaller

Rural Banking

Way Forward
Expand Reach Tie up with India Post to
penetrate the rural market. Partner with NGO /
MFI to act as Business Facilitators/ Business
Correspondent.
Focus on Micro Finance
Banks currently have to invest 40% in priority
sector lending (Agriculture, SME & Government
Securities).
Micro Finance lending provides 10-12% return as
against 6-7% in Government instruments. Risks
could be mitigated further by partnering with MFI
in specific markets and while dealing with SHG

Rural Banking

Way Forward
technology Offer Convenience.
Develop innovative products in Agri business
instead of routine products like crop loan & tractor
loans The Innovative products are-i) Warehouse
construction financing ii)Warehouse receipt
financing iii) Cold chain financing iv) Dairy
financing v) Contract farming.

Rural Banking

Issues & Challenges in Rural BankingFinancial InclusionFinancial Inclusion is the process of ensuring
access to appropriate financial products and
services needed by all sections of the society in
general and vulnerable groups such as weaker
sections and low income groups in particular at
an affordable cost in a fair and transparent
manner by mainstream institutional players.

Urban Cooperative
Banks

Urban Cooperative Banks

Cooperatives are based on the principles of community
camaraderie, - mutual help, democratic decision making
and open membership.
Cooperatives represent a new and alternative approach
to organization as against proprietary firms, partnership
firms and joint stock companies, which represent the
dominant form of commercial organization.
Cooperatives around the world generally operate
according to the seven core principles and values,
adopted by the International Co-operative Alliance (ICA)
in 1995. Cooperatives trace the roots of these principles
to the first modern cooperative founded in Rochdale,
England in 1844.
The principles cover various aspects of cooperatives
beginning from its membership to concern on
community.

Urban Cooperative Banks

UCBs form an important vehicle for financial inclusion and
facilitate payment and settlement.
UCBs are set-up as small banks offering banking services to
people of small means belonging to the lower and
middle classes.
UCBs are at the base level of the banking system in India
providing basic banking facilities to people of small
means particularly urban poor.
The UCB sector is unique in the sense that there is a significant
degree of heterogeneity among the banks in this sector in
terms of size, geographical distribution, performance and
financial strength. The sector has unit banks, multi-branch
UCBs operating within a state and multi-state UCBs with the
area of operation in more than one state.
As on 31/03/14 There were 1606 Urban Co-operative
banks (UCBs) with Asset size of Rs. 3372.00 bn.(3.1%}

Urban Cooperative Banks

Evolution of the Urban Bank Sector
Urban Cooperative Banks (UCBs) started in India back in
1889 in Gujarat and India has one of the oldest communitybanking movement in the world. However, the real growth
and proliferation began after this sector was brought under
the purview of Banking Regulation Act in 1966. The evolution
thereafter may be broadly divided into three phases, Growth
phase, crisis phase and Consolidation phase.
1] Growth Phase (1966-2003)-In the year 1993, before the
liberalization of bank licensing policy, there were 1311 UCBs
having deposits and advances amounting to Rs. 111.08 billion
and Rs.87.13 billion, respectively, which increased to 1926
UCBs with deposits and advances of Rs.1020.74 billion and
Rs.649.74 billion, respectively by end-March, 2004. This is
because after the liberalization of licensing norms in May
1993, up to June 2001, 823 bank licenses were issued.

Urban Cooperative Banks

Evolution of the Urban Bank Sector contd

2] Crisis Phase (2003-2008) However, it was
observed that nearly one-third of these newly licensed
UCBs became financially unsound within a short period.
RBI, therefore, constituted a screening committee
consisting of outside experts in June 2001 to examine
the applications for licenses. The Committee
recommended that it should be made mandatory for all
newly proposed UCBs to come through a process of
graduation from a co-operative credit society on the
strength of demonstrated and verifiable track record.
However, in the light of the experience and the
prevailing financial health of the UCB sector after the
Madhavpura Mercantile Cooperative Bank episode, it
was announced in the Annual Policy Statement for the
year 2004-05 that the Reserve Bank would consider
issuance of fresh licenses only after a comprehensive

Urban Cooperative Banks

Evolution of the Urban Bank Sector contd
2] Crisis Phase (2003-2008)-contd
Reserve Bank took several steps to strengthen the sector
during this period. Most important among them is the
Memoranda of Understanding (MoU) with all State
Governments and the Central Government. In order to
improve the financial soundness of the UCB sector,
Reserve Bank of India entered into Memoranda of
Understanding (MoU) with all State Governments and the
Central Government since 2005. The MOUs facilitated
coordination of regulatory policies and actions through a
comprehensive set of capacity building initiatives and
measures to bring in efficiency through adoption of
technology. This phase also ushered in voluntary
consolidation in the sector by merger of non-viable UCBs
with financially sound and well-managed UCBs.

Urban Cooperative Banks

Evolution of the Urban Bank Sector contd

3] Consolidation Phase (2008 onwards) -As a result of
the new initiatives and sustained efforts by RBI, the number
of financially weak banks in the UCB sector declined and
consequently the total number of UCBs declined from 1770
as end-March 2008 to 1606 by end-March 2013.
However, the deposits and advances of urban banks
increased from Rs.1398.71 billion and Rs.904.44 billion to
Rs.2769.41 billion and Rs. 1809.60 billion, respectively,
during the same period. Thus, there was an average annual
growth of 20 percent in deposits and in advances, which is
more than double of the previous phase growth. Further, the
number of financially sound banks also increased from 248
as on March 31, 2010 to 684 as on March 31, 2013.
Incidentally, mergers of as many as 116 UCBs have been
effected till date after 2005.
As on 31/03/14 There were 1606 Urban Co-operative banks
(UCBs) with Asset size of Rs. 3372.00 bn.(3.1%}

Local Area Banks-

Local Area Banks These Banks are set up in Private sector to cater to the credit
needs of the local people and to provide efficient and
competitive financial intermediation services in their area of
operation.
RBI issued guidelines for setting up of LABs in August 1996.
LABs are registered as a public limited Company under the
Companies Act and are issued Licenses under the Banking
Regulation Act1949.
They are eligible for inclusion in the second Schedule of the
RBI act 1934.
The minimum paid up Capital for such a Bank is Rs. 5 Crs.
and Promoters contribution is at least Rs. 2 Crs.
These Banks are set up in District places and hence their
focus of Lending is on Agril and allied sector, SSI, Agro based
industries, Trading activities with a view to ensuring timely
and adequate Credit to Local cliantle in the area of operation.

Overall Experience with LABs /UCBs /RRBs

-Out of six LABs licensed by RBI, 2 were closed down, inter alia,
due to mismanagement and only 4 are functioning. The
overall performance of functioning LABs is less than satisfactory
as they have become high cost structures. In terms of Assets
LABS Assets constitute 0.02% of Total Assets of SCBs
-The LAB model has inherent weaknesses owing to its small size
and concentration risk resulting in unviable and uncompetitive
cost structures, adverse selection, constraints in attracting and
retaining professional staff /management due to locational
disadvantage.
- UCBs suffer from mismanagement, growing NPAs, state
intervention, politicization and poor resource base. There have
been 111 mergers and amalgamations among the UCBs with
the number of UBCs placed at 1,618 as at end March 2012.
[now 1616]
- Experience with RRBs is similar. Over the years, the number of
RRBs has come down from 196 to 62. [now 57]

Banking Structure in India :

Banking Structure in India : The

Way Forward

104

Banking Structure in India : The Way

Forward
It is recognised that the existing banking structure
in India is elaborate and has been serving the credit
and banking services needs of the economy.
However, since 1991, the Indian economy has
undergone significant transformation in terms of its
size and composition.
The economic structure has diversified substantially
and the economy has been opening up in its quest
to further integrate with the global economy. If the
real economy is dynamic, the banking system needs
to be flexible and competitive in the emerging
milieu.
Viewed from this perspective, there is a need and
scope for further growth in the size and
105
strength of the existing banking structure
to

Banking Structure in India : The Way

Forward-contd
The case for transforming the existing banking
structure into a more dynamic banking
structure stems from several considerations.
There is scope for increasing the size and
capacity of the banking structure.
There is also an imperative need for increasing
the outreach of the banking structure.
With the size of the economy increasing, banks
require a large international presence.
Several gaps exist in providing Banking
services particularly Credit to certain
sectors.
106

Banking Structure in India : The Way

Forward-contd

-As the real economy is dynamic, it is imperative that the

banking system is flexible and competitive to cope with
multiple objectives and demands made on it by various
constituents of the economy. The critical segments are
infrastructure, Small and Micro industry and businesses,
agriculture and allied activities .
-During the period since 1991, 12 new commercial banks
licenses have been issued while none of the Indian banks has
acquired the size and reach on a global scale.
-The percentage of population without access to formal
financial services is still significant. It is, therefore, imperative
that the expansion in the banking sector keeps pace
with the dynamism and competitive nature of the real
economy.
-These gaps need to be filled and there is also a need for the
presence of specialized and niche banking entities to cater to
the specific needs of a growing and dynamic economy.
107

Banking Structure in India : The Way Forward-contd

With a view to moving towards a dynamic banking

structure that caters to these multiple functions, the
RBI has suggested the following basic building
blocks in the reorientation exercise:
-On tap licensing as compared to a block licensing
approach to enhance competition and bring in new
ideas and variety into the system.
- Implementing a domestic systemically important
bank[DISB] framework to deal with negative
externalities of large banks.
-Creating three or four global sized banks to have a
global presence through consolidation among large
public & private sector banks (on a voluntary basis),
keeping in view the need for competition within the
domestic banking sector and avoiding complex
structures.
108

Banking Structure in India : The Way Forward-contd

-Encouraging inclusion to reach out to the excluded

and under-banked regions. Small banks at the bottom
of the tiered structure may be the preferred vehicle for
these objectives to facilitate financial inclusion.
- Enhancing the regulatory and supervisory regimes
with increased intensity of supervision for the
systemically important banks.
-Evolving an efficient deposit insurance and resolution
mechanism to support the envisaged tiered structure.
- Converting urban co-operative banks which meet
the necessary criteria into commercial banks or
local area banks/small banks.
-Enhancing the presence of foreign banks to stimulate
competition and their subsidiarisation from the
perspective of financial stability.
109
-Expanding the size and capacity of banking
structure

Banking Structure in India :

Development Financial Institutions/Banks

Banking Differentiated Banks

Universal

-Development Financial Institutions

Development Financial Institutions (DFIs) do not require a

banking licence.
Post-Independence, DFIs were established mainly to
meet the demand for long-term finance by the
industrial sector.
They had the benefit of low-cost funds through Long Term
Operation (LTO) funds from RBI at concessional rates, funds
from multilateral and bilateral agencies duly guaranteed by
the Government. They were also allowed to issue bonds,
which qualified for SLR status. For deployment of funds,
they faced little competition as the banking system
concentrated largely on working capital finance and almost
totally yielded the term finance space to DFIs.
110

Banking Structure in India :

Development Financial Institutions/Banks

Universal Banking Differentiated Banks

-Development Financial Institutions

Post-financial sector reforms in the 1990s, the
privileged access to low-cost funds was withdrawn
forcing DFIs to raise resources at market-related
rates. On the other hand, they had to face
competition in the term finance space from banks
offering lower rates. The change in operating
environment, combined with high accumulation of
non-performing assets, due to a combination of
factors put financial stress on DFIs. Today, DFIs
are very marginal players in the financial sector.
Pursuant to the recommendations of the Khan
Working Group on Harmonizing the 111
Role and

Banking Structure in India :

Development Financial Institutions/Banks

Universal Banking
Differentiated
Banks

Development Financial Institutions

A broad policy framework was outlined in the
Mid-Term Review of Monetary and Credit Policy
of 1999-2000 of RBI indicating that the desired
path was towards universal banking. DFIs were
given the option to transform into a bank. The
operational guidelines for enabling a DFI to
convert to a universal bank were issued in
2001.
112

BANKING STRUCTURE
-What is the differentiating factor in these Banks?
-What is the similarity in these Banks?
Urban Co-op Pvt. Sect
Bank
Bank
Sarswat Coop Bank

ICICI Bank

Abhyudaya
Co-op Bank

Yes Bank

Public
RRBs
Sect.
Bank
State Bank Regional
of India
Rural
Banks
Bank of
Baroda

Banking Structure in India :

Development Financial Institutions/Banks

Universal Banking
Differentiated Banks
- Universal Banking

Under Universal Banking banks will also extend other

financial services including trading in foreign exchange,
derivatives and all kinds of securities, securities
underwriting, money broking, asset management,
settlement and clearing service, provision and transfer of
financial information and advisory and other auxiliary
financial services apart from providing traditional banking
services which includes acceptance of deposits, lending
of all types and payment and money transmission
services.
It is a One stop supplier for all Financial products
and activities. Thus it is a combination of Investment
Banking and Commercial Banking.
114

UNIVERSAL BANKING (UB)

1998 RBI took a decision that universal

banking is a desirable goal and initiated steps
to evolve a policy.
In the international banking a new
phenomena was emerging i.e. 'Universal
Banking in terms of which distinction
between commercial banking, investment
banking and development banking were
getting blurred.
In India too operating environment for banks
and Development Financial Institutions (DFI)
was changing as a result of reforms and
deregulation of interest rates.
The banks were participating increasingly in

UNIVERSAL BANKING (UB)

Till 1991 DFIs had low cost resources from Long

Term operations, Fund from RBI. Drying up of
these sources DFIs were forced to go both
domestic and international markets for raising
resources at market determined rates. DFIs
started competing for the same household
segment for mobilizing resources.
There was therefore greater need for
manoeuvrability and level playing field in resource
mobilization as banks were subject to
maintenance of CRR/SLR on their liabilities, and
DFIs had no such restrictions except overall
ceiling to raise resources by way of term deposits,
term money borrowings, Certificate of Deposits
and Inter Corporate deposits. .

UNIVERSAL BANKING (UB)

The concept of UB was discussed in

two committees appointed by Govt.
viz
1)Committee on Banking Sector
Reforms-Narasimhan Committee-II
which recommended creation of
Multytier Banking and one stop
financial supermarkets.
2)S.H.Khan Committee recommended
harmonisation of the role and
operations of Development

Universal Banking

UNIVERSAL BANKING contd

As per RBI guidelines, a financial Institution can
transform into UNIVERSAL BANKING subject to
meeting reserve requirements. In the year 2000,
ICICI took the initiative to implement the concept of
UB and ICICI got merged with ICICI Bank in 2002
and IDBI with IDBI Bank in 2004.
Under Universal Banking banks will also extend
other financial services including trading in foreign
exchange, derivatives and all kinds of securities,
securities underwriting, money broking, asset
management, settlement and clearing service,
provision and transfer of financial information and
advisory and other auxiliary financial services apart
from providing traditional banking services which
includes acceptance of deposits, lending of all types
and payment and money transmission services. It is

UNIVERSAL BANKING contd

However, UB does not mean that every
Institution conducts every type of business
with every type of customer.
UB enables Banks to leverage from economies of
scale and scope. It has got the benefit of
diversification i.e. it can use its existing expertise
and infrastructure in one type of financial service to
provide the other types of services.

UNIVERSAL BANKING contd

In India, the universal banking model is followed. As
regards the structure of universal banks, the
conglomerate structure is bank-led, i.e., banks
themselves are holding companies which operate
certain businesses through Subsidiaries, Joint Ventures
and Affiliates.[ICICI Bank, State Bank of India]
In India, we have Commercial Banking oriented UBs
like PSBs & Private banks and Investment Bank
oriented UBs like Foreign Banks.
Risks in Universal Banking
Creates huge complex structure which brings in its
wake following risks:
-- Systemic Risk
--Too Big To Fail
-Multiple, diversified activities requiring multiple
Regulation/SupervisionRegulatory Risk
-- May create conflict of Interest among diversified

Banking Structure in India :

Development Financial Institutions/Banks

Banking Differentiated Banks-

Universal

Is it necessary now to review commitment to universal

banking? Should we go in for differentiated licensing?
What are differentiated banks
- Differentiated banks are distinct from universal banks as
they function in a niche segment. The differentiation could
be on account of capital requirement, scope of activities or area
of operations. As such, they offer a limited range of services /
products or function under a different regulatory dispensation.
The concept is not entirely new. In fact, and in a sense, the
UCBs, the PACS, the RRBs and LABs could be considered as
differentiated banks as they operate in localized areas.
Differentiated Licensing ScopeDifferentiated licensing for various banking activities like retail,
wholesale, trading in securities, mortgage lending, infrastructure
financing, micro lending, small loans, Payment and Settlement
etc. with differentiated regulatory requirements.
122

Banking Structure in India :

Development Financial Institutions/Banks
Banking Differentiated Banks

Universal

-Arguments in support of Differentiated Licensing

Specialized entities have expertise in risk assessment

and structuring of infrastructure finance.
Core competency could be better harnessed leading to
enhanced productivity in terms of reduced
intermediation cost, better price discovery and
improved allocative efficiency.
With differentiated licences, we can get around issues
of conflict of interest that arise when a bank performs
multiple functions.
Customised application of supervisory resources
according to the banking type could result in
optimisation of scarce resources.
123

Banking Structure in India :

Development Financial Institutions /Banks

Universal Banking Differentiated Banks

-Argument against Differentiated Licensing

Given the extent of financial exclusion in India, is

it advisable to create a regime where some banks
are freed of the obligation of financial inclusion?
A universal bank will be able to cross subsidise
across sectors to optimize utilization of resources
and ensure better profitability of banks.
Will specialized banks be prone to concentration
risk because of narrower business models?

124

Payment Banks &

Small Finance Banks

Session Details
I. Payment Banks
Scope of activities
Traditional Banks Vs. Payment Banks
6Cs for payments banks
The way forward
II. Small Finance Banks
Background
Objective
Scope of activities
Advantages
Major Regulatory Norms
Small Finance Banks Licenses
Traditional Banks Vs. Small Finance Banks

Payment Banks

Payment Banks are differentiated

banks where people can open
current and savings accounts but the
balance they maintain can't exceed
Rs. 1,00,000.

Payment Banks

Licences granted
1. Aditya Birla Nuvo Limited
2. Airtel M Commerce Services Limited
3. Cholamandalam Distribution Services Limited
4. Department of Posts
5. Fino PayTech Limited
6. National Securities Depository Limited
7. Reliance Industries Limited
8. Shri Dilip Shantilal Shanghvi
9. Shri Vijay Shekhar Sharma
10.Tech Mahindra Limited
11.Vodafone m-pesa Limited

Scope of activities

Traditional Banks Vs. Payment Banks

Deployment of funds

The way forward

Build capabilities - digital at the core,
human touch at the fore
Analytics to provide a customerrelevant business platform
Growth, competition and customer
demand are likely to foster
collaboration
Transformation is a big challenge and
an opportunity

Small Finance Banks

The small finance bank will primarily

undertake basic banking activities of
acceptance of deposits and lending
to un-served and underserved
sections.

Small Finance Banks Background

Committee on Financial Sector Reforms (Chairman:
Dr. Raghuram G. Rajan), 2009 had examined the
relevance of small banks in the Indian context.
This was reiterated in the policy discussion paper on
Banking Structure in India The Way Forward, 2013.
Committee on Comprehensive Financial Services for
Small Businesses and Low Income Households also
discussed Role of Non-Banking Financial Companies
and their Potential Transition to Banks.
Finance Minister announced creation of Small banks
in Budget speech 2014-15.

Small Finance Banks

Objective

To further financial inclusion by

(a)provision of savings vehicles, and
(b)supply of credit to:
-small business units
-small and marginal farmers
-micro and small industries
-other unorganised sector entities.

Small Finance Banks

Licences granted1.Au Financiers (India) Ltd., Jaipur - NBFC
2.Capital Local Area Bank Ltd., Jalandhar - Largest LAB 15 yrs old
3.Disha Microfin Private Ltd., Ahmedabad - NBFC MFI
4.Equitas Holdings P Limited, Chennai - MFI
5.ESAF Microfinance and Investments Private Ltd., Chennai - MFI
Trichur
6.Janalakshmi Financial Services Private Limited, Bengaluru - NBFC
7.RGVN (North East) Microfinance Limited, Guwahati - MFI north
EASt
8.Suryoday Micro Finance Private Ltd., Navi Mumbai - MFI
9.Ujjivan Financial Services Private Ltd., Bengaluru - MFI
10.
Utkarsh Micro Finance Private Ltd., Varanasi - MFI

Small Finance Banks

Small banks have a small capital base and therefore lend to
small borrowers.
Banks with limited area of operation would require less
infrastructure and staff and, hence, the operational expenses
would be low.
Small banks would help improve penetration of banking sector
to unbanked areas and mobilize resources.
Such banks are expected to extend basic banking services and,
therefore, would attract people of small means who would
require basic banking services.
Their operations are confined to a district or few contiguous
districts and hence they would be in a better position to
understand the needs and priorities in their area of operation.
They would be able to explore business potential more tailored
to the socio economic background in the area of operation and
extend banking services to the people in that area. For
instance, community banks in the US transform local deposits
into loans to communities where depositors live and work
(Daniel Tarullo, 2010).

Small Finance Banks Scope of

Activities

Small Finance Banks

Advantages

Small Finance Banks Major Regulatory Norms

It will be subject to all prudential norms and

regulations of RBI as applicable to existing
commercial banks.
At least 25% of its branches in unbanked rural
centres.
The maximum loan size and investment limit
exposure to single and group borrowers would be
restricted to 10% and 15% respectively of its
capital funds.
At least 50% of its loan portfolio should constitute
loans and advances of size up to Rs. 25 lakh.

Traditional Banks Vs. Small

Finance Banks