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A Full Paper on

Improving Access to Finance in Rural India

Authored by: VM Sai Kamalesh Edida, PGDM, Mats, Bangalore,
Co-Authored by: Jitendra Mehta, Mats, Bangalore.

1. Indian Economy:

The Indian Economy India is the 12th largest economy in the world in terms of gross
domestic product (GDP), and 4th in terms of purchasing power parity (PPP)

1. The growth of the economy is impressive with an average of over 6.5% during the last
year, when many countries saw a negative or no growth. However, in terms of GDP per
capita (PPP), India ranks at a lowly 128th among other nations

2. Within the country, there is a stark divide in the incomes of urban and rural areas with
the average monthly per capita consumption expenditure (MPCE) in urban India being
almost double that of rural India. In addition, there are significant disparities in urban and
rural consumption expenditure between different states, Chhattisgarh and Orissa, for
example, have a rural MPCE as 39% of the urban MPCE

3. In other states like Punjab and Kerala, the urban rural disparity is significantly lower
about 27.5% of the India population is below poverty line (BPL)

4. With a MPCE less than about INR 500. In some states like Jharkhand and Orissa, the
proportion of BPL is greater than 40%. The segments that are not considered BPL should
all be considered as “potentially bankable” with genuine financial needs that could be
met by formal financial and banking systems.

2. Rural India:

More than 700 million populations live in 600000 villages across rural India and the rural
market is proving to be the best destination point to almost all the marketers as they find
the huge opportunity to sell their products in an untapped market. Future of Indian
economy depends upon the consumption and investment of rural India.

3. Various Institutions Operating in Rural India:

Various financial institutions operating in rural India are:

Co-operative Banks and Rural Credit:

The co-operative banks have a history of almost 100 years. Co-operative banks in India

are registered under the Co-operative Societies Act. The RBI also regulates the
cooperative bank. They are governed by the Banking Regulations Act 1949 and Banking
Laws (Co-operative Societies) Act, 1965.

Co-operative banks in India finance rural areas under Farming, Cattle, Milk, Hatchery,
Personal finance

Central Co-operative Banks (CCBs):-

The central co-operative banks are located at the district headquarters or some prominent
town of district. These banks have a few private individuals also who provide both
finance and management. The central co-operative banks have three sources of funds:-

 Their own share capital and reserves

 Deposits from the public and

 Loan from state co-operative banks

Their main function is to lend to primary credit society apart from that, central co-
operative banks have been undertaking normal commercial banking business also, such
as attracting deposits from the general public and lending to the needy against proper
securities. There are now 367 central co-operative banks.

State Co-operative Banks (SCBS):

The state Co-operative Banks, now 29 in number, they finance, co-ordinate and control
the working of the central Co-operative Banks in each state. They serve as the link
between the Reserve bank and the general money market on the one side and the central
co-operative and primary societies on the other. They obtain their funds mainly from the
general public by way of deposits, loans and advances from the Reserve Bank and they
are own share capital and reserves.

Commercial Banks and Small Farmers:

The commercial banks identifying the small farmers through Small Farmers
Development Agencies (SFDA) set up in various districts and group them into various
categories for credit support so as to enable them to become bible cultivators. As regard
small cultivators near urban areas and irrigation facilities, commercial banks can help
them to go in for vegetable cultivation or combine it with small poultry farming and
maintaing of one or two milch cattle.

IRDP and Commercial Banks:

Since October 1980, the Integrated Rural Development Programme (IRDP) has been
extended to all the blocks in the country and the commercial banks have been asked by
the government of India to finance IRDP. The lead banks have to prepare banking plans
and allocate the responsibility of financing the identified beneficiaries among the
participating banks. Commercial banks have been asked to finance all economically
backward people identified by government agencies.

Regional Rural Banks and Rural Credit:

The Narasimham committee on rural credit recommended the establishment of Regional

Rural Banks (RRBs) on the ground that they would be much better suited than the
commercial banks or co-operative banks in meeting the needs of rural areas. Accepting
the recommendations of the Narasimham committee, the government passed the Regional
Rural Banks Act, 1976. The main objective of RRBs is to provide credit and other
facilities particularly to the small and marginal farmers, agricultural laborers, artisans and
small entrepreneurs and develop agriculture, trade, commerce, industry and other
productive activities in the rural areas.

The progress of RRBs in the initial stage was quite rapid. For instance, the Sixth Five-
year plan (1980-85) had envisaged the setting up of 170 RRBs covering 270 districts by
the end of March 1985.The target was exceeded. There are now 196 RRBs in 23 states of
the country with 14,200 branches.


Micro-finance is a novel approach to "banking with poor"as they attempt to combine

lower transaction costs and high degree of repayments.The major thrust of these micro-
finance initiatives is through the setting up of Self Help Groups (SHGs),Non-
Governmental organizations(NGOs),Credit Unions etc.

Kisan (Farmers’) Credit Card:

Another notable development in recent years is the introduction of Kisan Credit

Cards(KCC) in 1998-99.The purpose of the Kisan Credit Cards(KCC) scheme is to
facilities short term credit to farmers.The scheme has gained popularity and its
implementation has been taken up by 27 commercial banks, 187 RRBs and 334 Central
cooperative banks.

Agriculture Insurance:

As Agricultural is highly susceptible to risks such as drought, flood, pests etc.It is

necessary to protect the farmers from natural calamities and ensure their credit eligibility
from the next season. Towards this purpose, the Government of India introduced a
comprehensive crop insurance scheme throught the country in 1985 covering major
cereal crops, oilseeds and pulses. Among commercial crops, seven crops viz., sugarcane
potato, cotton, ginger, onion, turmeric and chillies are presently covered.

4. Present Scenario of Finance in India:

In April, India had around 403 million mobile users. About 46% of them, or 187 million,
did not have bank accounts. Nearly 400 million Indians have bank accounts. That’s less
than 40% of the country’s population. 59% of adult population in India has bank
accounts. Barely 45 million Indians invest in mutual funds. This is about 4% of India’s
population. The comparable figure for the US is 31%. When it comes to direct investment
in equities, the number drops drastically and only 15 million Indians hold demat
(electronic share) accounts that one needs to buy stocks. Nearly 80% of the Indian
population is without life, health and non-life insurance coverage. While life insurance
penetration is 4%, non-life cover is even lower at 0.6%. The per capita spend on life and
non-life insurance is just about Rs2,000 and Rs300, respectively, compared with a global
average of at least Rs18,000 and Rs13,000.

Overall, the population covered by each branch has come down from 63,000 in 1969 to
16,000 in 2007 and the total number of check-in accounts held at commercial banks,
regional rural banks, primary agricultural credit societies, urban cooperative banks and
post offices during this period has risen from 454.6 million to 610.3 million. Still, very
few people in the low-income bracket have access to formal banking channels. Only 34%
of people with annual earnings less than Rs50,000 in urban India had a bank account in
2007. The comparative figure in rural India is even lower, 26.8%.

5. Present Scenario of Finance in Rural India:

India has over 32,000 rural branches of commercial banks; most of them are public sector
commercial banks and regional rural banks. Only 5.2% of India’s 650,000 villages have
bank branches, even though 39.7% or 31,727 of the overall branch network of Indian
banks are in rural India. 14,000 Cooperative Bank Branches, 98000 Primary Agricultural

Credit Societies, Thousands of mutual fund sellers. 154,000 outlets of post office, in rural
India, the coverage among the adult population is 39% against 60% in urban India.

India compares favorably with other developing countries in terms of the average
population served per bank branch and the average geographical area served per branch.
But the fact is majority of India’s rural poor still does not have access to formal finance.
To prove the above statement here is some results from the survey conducted by the
world bank and National council of applied economic research:-

87% of the poorest households do not have access to credit, 71% do not have savings
from a formal source, Access to formal credit is particularly a problem for the poor so
they take help of moneylenders, 44% of the households have borrowed informally and
the interest charged was 48%, Over 82% of insurance had no insurance.

Challenges to Access Finance for Rural India:

The lack of access to adequate finance on reasonable terms for India’s rural poor may be
attributed to a combination of factors that affect both banks and their clients. They are as

Banks don’t want to serve the Rural Poor:

Serving the rural poor is high risk, high cost proposition for banks and they think there is
uncertainty about the repayment capacity of poor rural borrowers. And also the
transaction costs of rural lending in India are high, government policies. Banks think
government creates a financial climate which is not conducive to lend in general or rural
banking. The reasons for this are- High fiscal deficits and statutory pre-emptions imposed
on banks crowd out credit to the private sector, another persisting distortion that has
failed to generate the desired results is the “priority sector.” Lending target. Persisting
interest rates restrictions-“floors” on short term deposit rates and lending rates, “caps” on
small loans-all these impose an “implicit tax” on banks.

Government’s domination of and interference in rural banks, particularly RRBs and the
cooperative banks, further distort banker’s incentives. Banker’s risk aversion to lending is
exacerbated by a pervasive culture of suspicion of bankers, whose lending decisions are
often subject to stringent scrutiny by Parliament, the Central Bureau of Investigation.

Small rural borrowers find Rural Banks unattractive:

No flexible products and services to meet the income and expenditure patterns, High
transactional costs of dealing with formal banks, cumbersome procedures, paying hefty
bribes ranging from 10 to 20 percent of loan amount to access loan, long time taken for
approval of loan-average thirty weeks by commercial bank, Banks demand collateral
which poor rural borrowers lack.

Other challenges:

Stringent KYC norms, as many rural Indians don’t have any identity or address proofs,
Low income, Nil or low savings, Lack of assets, Unemployment, Under employment,
Use of inappropriate products, Financial illiteracy, Poor financial habits, Psychological /
disability issues, Feeling of being excluded, Indigenous/ethnic issues, Geographical
remoteness, Lack of time, Lack of PC/Internet Access, Availability of alternative
products and suppliers.

Financial Exclusion:

Financial exclusion is the lack of access by certain consumers to appropriate, low cost,
fair and safe financial products and services from mainstream providers.

Who are financially excluded?

Poor, Socially under under-privileged, Disabled, Old as well as children, Women,

Uneducated, Ethnic Minorities, Un-employed.

6. New approaches and products to improve rural access to finance in India:

Self Help Group Linkage Program:

Most notable among recent approaches to improve access to finance for the rural poor is
the “self- help groups - Bank Linkage” model, championed by the National Bank for
Agriculture and Rural Development (NABARD). The growth of SHG-Bank Linkage
from just 500 SHGs linked to banks in the early 1990s to over 1 million at present. It has
targeted the poor segment of the rural population in an effective manner by reducing the
vulnerability of clients.

Microfinance Institutions:

Small Industries Development Bank of India (SIDBI) has been the largest lender to these
emerging MFIs, through Friends of Women’s World Banking India. The outreach of

Indian MFIs is modest in comparison to SHG- Bank Linkage & MFIs elsewhere in the
world. In March 2004 the Indian MFIs sector as a whole had a total outreach of less than
2 million borrowers.

Partnerships between Private Banks, Micro financers and Service Providers:

Several private sector banks like ICICI Bank, HDFC Bank, UTI Bank and some others
are actively seeking exposure in the microfinance sector. These banks are pursuing
innovative approaches to microfinance as a potential business and not merely as a social
or priority sector lending obligation.

The Kisan Credit Card:

Kisan credit card was introduced in the year 1998-99. By march 31, 2003 31.6 million
KCCs had been issued by commercial banks, RRBs, and cooperative banks. Though
these are not credit cards, KCCs present number of advantages like reducing borrower’s
transactional costs, delays in accessing and renewing crop loans.

Agricultural Risk Management Products:

A potential means of reducing default risk in rural finance which has recently caught the
attention of the government of India is the establishment of a “warehouse receipts
system”. This involves farmers using their crops as collateral for post- harvest financing.
Weather-index insurance can be a one of the good way for farmers to hedge businesses
against imponderable weather risks and can be a cheaper substitute for crop insurance.

7. Initiatives takes by several banks:

ICICI Bank: Through the financial intermediation models, both the microfinance
institutions and business correspondents have been designed to build a repository of
information with regard to financial behavior of the customers.

Axis Bank: Partnering with reputed Micro Finance Institutions, Lending through Self
Help Groups, Lending through Government Sponsored Schemes, Extending loans under
Differential Rate of interest scheme.

Canara Bank: Smart Card Project (Canara Vikas Card), Bio-metric Handheld Machine,
Bio-metric Voice Enabled ATM.

Oriental Bank of Commerce: By appointing an agricultural extension officer who will
strengthen agricultural and allied activity lending in rural branches, and by engaging
business correspondents for other day-to-day banking requirements, he said.

HDFC Bank: Financing Self-Help Groups, Working with Microfinance institutions,

Distribution of retail asset products through co-operative banks and societies, Tied up
with post offices in Punjab, Karnataka, and Andhra Pradesh using the “Business
Facilitator”, Providing finance to self-employed individuals, small entrepreneurs, shop
keepers, small scale service establishments, factory workers and workers in small
scale/medium scale manufacturing and processing units particularly in rural and semi-
urban areas.

PNB: Bio-metric ATMs.

SBI: NGO playing the role of a Business Correspondent, with an aggregator account at
SBI, Local level program coordination with strongly placed local NGOs and District
Administration, Aggregator of Customer Service Points, Cash Management Service and
MIS tools to CSPs, Help Desk in local languages for Customer Service Points, Hands-on
Operator Field Training for Enrollment of customers, Financial Inclusion Transactions

Non-Banking Transactions, Program level support to ensure commercial sustainability

through value added services on card, and devices through program partners.

8. Suggestions

For improving the financial Inclusion in Rural India, the financial institutions should
provide or offer - Access to Small loans or overdrafts, Check in Accounts, Small Savings
Products, Health Insurance, Life Insurance, Insurance against the failure of activity,
Financial Asset, Credit Card, Entrepreneurship credit, etc.

1) Improving Access

2) Modify existing channels

Branches, ATM’s, Phone Banking and Internet Banking, Point of Sale (POS),
Introducing New Channels, Business Correspondents, Satellite Offices, Mobile Offices.

3) Determine the combination of channels

Branches and Satellite Branches, A low cost custom made- ATM’s, An E-kiosk managed
by business Correspondent with Internet Banking, A business correspondent using

manual ledgers or POS / Palmtop to act as a deposit collector and remitting agent in
smaller rural areas.

9. Conclusion:

Future of India depends on the rural people and to develop India its very important to
make easy access of finance to rural people. In order to improve the access of finance in
rural India following things can be done:

Providing rural people with composite services like loan and insurance together,
Simplification of procedures to open a bank account and access credit so that large
numbers of rural people are encouraged to take loans from banks, Banks can make use of
technology so that the transactional costs can come down which may lead to more
demand of financial services by rural India, Better staffing policies and doorstep banking
which means recruiting local people who can understand their client needs and can
provide them with the services which they are in need, By encouraging more number of
players to invest in rural finance so that there is reduction in interest rates for lending
which can be beneficial for rural people, More numbers of private players should be
invited so that even they can bring new innovative approaches and financial products like
what ICICI did so that there are many options for the rural people, It is necessary to
restructure RRBs and rural cooperative banks, There are 215 million bankable adults in
rural India that are unbanked because of access and usage issues. This presents a
significant opportunity for commercial banks. However, to reach this market and
subsequently build an inclusive financial system, there must be a coordinated and
concerted effort by the three key stakeholders: the Government of India, the Reserve
Bank of India and the commercial banks. In addition, partnership between banks and
business correspondents, and collaboration amongst banks themselves is critical.
Furthermore, banks should tailor their product and service mix to meet rural needs, and
change their delivery model to meet the demands of the rural customer in a profitable