Deepali Pant Joshi: Indian rural banking sector - big challenges and the
road ahead
Speech by Dr Deepali Pant Joshi, Executive Director of the Reserve Bank of India, at the
Mangalore Institute of Technology and Engineering (MITE), Mangalore, 4 May 2013.
* * *
Assistance rendered by Shri A.K. Misra, General Manager, Shri T.V. Rao, Deputy General,
Smt. Sushma Vij, Deputy General Manager, Shri P. Manoj, Assistant General Manager, Shri
Bipin Nair, Assistant General Manager and Smt. Mruga Paranjape, Manager is gratefully
acknowledged.
Respected Dr. Thingalaya, Former CMD Syndicate Bank, Dr. G. L. Easwara Prasad,
Principal, Mangalore Institute of Technology and Engineering, senior bankers and dear
students. I am extremely delighted to be amongst you in this prestigious institute which has
several achievements in engineering studies to its credit in a very short span of time. I am
honoured, privileged and happy to inaugurate this topical seminar aptly titled Indian Banking
Sector Big Challenges and the Road Ahead and speak in a hallowed place which is
considered the cradle of Indian Banking. I felicitate the organizers and especially respected
Dr Thingalaya and thank you for having me here.
The global financial crisis and the current Euro zone crisis have affected the banks in the
advanced economies; the spillover is ricocheting on banks in emerging economies including
India. Issues of financial stability, economic growth and managing inflation are the major
challenges confronting regulators in advanced economies and are equally important for
emerging economies like ours. Global economic growth has slowed from 3.9% in 2011 to
3.2% in 2012 we are not unaffected by what happens in the rest of the world our economy
too has slowed after 2010-11. In the current year CSO has projected a growth estimation of
5% while the RBI has put it at 5.5%. As Shri Chidambaram our Finance Minister has rightly
put it "Whatever be the final estimate it will be below India's potential growth rate of 8%,
getting back to that growth rate will be the challenge that faces the country". This is clearly
not feasible if large sections of society remain marginalized and people who lack access to
financial services from Institutional service providers are not mainstreamed .The challenge of
financial inclusion presents an inflexion point for Indian banking.
The biggest challenge for next decade or more to banks in the country is to capture the
banking business of over 50% population of this country of over 120 billion people. Today, I
will use the opportunity to discuss contemporary challenges facing Indian Rural Banking, i.e,
Priority Sector Lending, Regional Rural Banks, Financial Inclusion, Financial Literacy and
Education. Aptly Dr. Subbarao, RBI Governor terms Financial Inclusion as the supply side of
the equation and Financial Literacy the demand side.
(i) Priority sector lending
The definition of priority sectors has evolved over a period of time and at present, priority
sectors are broadly taken as those sectors of the economy which in the absence of inclusion
in the priority sector categories would not get timely and adequate finance. Typically, these
are small loans to small and marginal farmers for agriculture and allied activities, loans to
Micro and Small Enterprises, loans for small housing projects, education loans and other
small loans to people with low income levels. Presently, the target for aggregate advances to
the priority sector is 40 per cent of the Adjusted Net Bank Credit ANBC or the credit
equivalent of Off Balance sheet Exposure (OBE), whichever is higher for domestic banks.
Foreign banks with 20 or more branches in the country are being brought on par with
domestic banks for priority sector targets in a phased manner over a five year period starting
from April 1, 2013. For foreign banks with less than 20 branches the overall target is fixed at
32 per cent.
The domestic banks, i.e, public and private sector, could not achieve the target of 40 percent
for the year 2012 as can be evidenced from the table below.
As per 59th NSS Survey, households with 2 hectare or less land accounted for 84% of all
farmer households. The percentages of such small and marginal famers who have access to
credit is only 46.3%. A large section of farmers is still dependent on moneylenders for their
financial needs.
The major challenge is to bring all farmers into the institutional credit framework. To boost
the credit to agriculture sector, apart from a host of initiatives, the Kisan Credit Card (KCC)
Scheme was introduced in the year 1998-99 to enable farmers to purchase agricultural
inputs and draw cash for their production needs. In 2004, NABARD revised the Model KCC
Scheme to provide adequate and timely finance for meeting the comprehensive credit
requirements of farmers under single window, with flexible and simplified procedure,
adopting whole farm approach. The scheme now covers term credit as also working capital
for agriculture and allied activities and a reasonable component for consumption needs.
During 2011-12, public sector banks have issued 68,03,051 KCCs with sanctioned limits
aggregating to Rs. 69,51,768.45 lakh. Since inception of the scheme, the number of KCCs
issued by public sector banks stood at 5,47,49,373.00 till March 2012 with sanctioned limits
aggregating to Rs. 3,53,14,527.11 lakh. We have recently revised the guidelines on Kisan
Credit Card scheme. Margin /security norms are waived for loans up to Rs.1 lakh to enhance
the flow and easy delivery of bank loans to small agricultural borrowers.
The revised priority sector guidelines lay emphasis on direct delivery of credit to the poor
beneficiaries i.e. without the involvement of intermediaries, which will ensure better
management of risks and also reduction in transaction, delivery and administrative costs for
these loans, which being essentially small ticket, low value high volume loans, do generate
profits translating to a stable low cost deposit stream for banks and to the fortune at the
bottom of the pyramid.
To make priority sector lending viable for the banks, RBI has removed the interest rate
ceiling on all types of loans including small loans by linking it to Base Rate of the banks with
effect from April 1, 2010. Thus, there is no preferential rate of interest for priority sector
loans. Thus priority sector lending is competitive and commercially viable.
Why have we removed caps on pricing? The cost of absence of bank lending to poor and
vulnerable sections of the society is heavy, as the poor have no option but to borrow from the
unorganized sector, the informal or alternative channels at usurious price. There is a need for
reorienting the approach of banks to look at priority sector areas. The challenges in priority
sector can be overcome only if banks consider priority sector lending as part of normal
business operations of the banks and not as an obligation. Rural untapped market offers a
big business opportunity to the banks. Banks need to innovate new products which cater to
the needs of farmers, weaker sections and other vulnerable sections of the society, develop
new delivery channels and embrace technological developments which will reduce the
delivery costs. Priority sector must be treated as a viable business proposition.
(ii) Regional rural banks
Regional Rural Banks (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 and familiarity
of the cooperative banks with the managerial expertise of the commercial banks. RRBs are
jointly owned by GoI, the concerned State Government and Sponsor Banks, the issued
capital of a RRB is shared by the owners in the proportion of 50 percent, 15 percent and
35 percent respectively. 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.
Several RRBs suffered humongous losses. Government of India and RBI initiated several
measures to improve the financial health of RRBs. During a review carried out by GOI in the
year 2009 it was found that the Capital Risk Weighted Assets Ratio (CRAR) of the RRBs were
too low. Dr. K.C Chakrabarty committee suggested bringing the CRAR of RRBs to at least
9 percent in a sustainable manner. The Committee inter-alia recommended recapitalization
support to the extent of Rs. 2,200 crore, to 40 RRBs in 21 States, out of which Rs.1,100 crore
was to be contributed by Central Government. The recapitalization process which started in
2010-11 has been extended till 2013-14. Several Committees looked into issues of viability
finally amalgamation of RRBS on grounds of contiguity in a particular region was adopted.
Initially, there were 196 RRBs working in the country. After the second phase of amalgamation,
which started w.e.f. October 1, 2012, 34 RRBs have been amalgamated to form 14 new RRBs.
After a massive consolidation and merger exercise to strengthen the RRBs, the number of
RRBs operating in the country today has come down to 62.
The number of sustainably viable RRBs (i.e. RRBs making net current profit and having no
accumulated losses) has increased to 60 as on March 31, 2012 as compared to 58 as on
March 31, 2011.
(iii) Financial Inclusion
Now let me turn to extension of banking penetration and branch building. A massive
exercise in this regard has been taken up by us and this is being done through the
lead bank scheme channel. We advised banks in November 2009 to draw up a roadmap to
provide banking services through a banking outlet in every village with a population of more
than 2000 and the target date was March 2012. Banks were advised that such banking
services need not necessarily be extended through a brick and mortar branch but could be
provided through any of the various forms of ICT-based models including through BCs.
Under the roadmap for providing banking outlets in villages with population above 2000,
banking outlets have been opened in hitherto 74199 unbanked villages comprising 2493
branches, 69374 Business Correspondents (BCs) and 2332 through other modes like ATMs,
mobile van, etc.
Now, you may well ask me; How do we plan to provide banking services to villages
having population less than 2000? As per the announcement in the Annual policy
Statement 2012-13, State Level Bankers' Committees (SLBCs) were advised by RBI to
prepare a roadmap covering all unbanked villages of population less than 2000 and
notionally allot these villages to banks for providing banking services in a time bound
manner, especially, to start with, EBT services. The objective is to provide a bank account to
every household/person throughout the country. To start with, banks have been advised to
provide door step services to EBT beneficiaries to facilitate transfer of all State benefits
including MGNREGA wages and various cash subsidies to beneficiaries by direct credit to
the bank accounts, through regular visits of BCs to the allocated villages and over a period of
time, provide all kinds of banking services viz. remittances, recurring deposit, entrepreneurial
credit in the form of KCC and GCC, insurance (life and non-life) and other banking services
to all the residents of the village through a mix of brick and mortar branch and BC network.
We have also emphasized planning of sufficient number of brick and mortar branches so that
there is a brick and mortar branch to provide support to a cluster of BC units, i.e., about
8-10 BC units at a reasonable distance of 3-4 kilometers. As per the Roadmap drawn about
484000 villages with population less than 2000 have been allotted to various banks for
provision of banking services in next 3 years.
Financial Inclusion Plan
Financial Inclusion (FI) 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. Reserve Bank has adopted a bank-
led model for financial inclusion which seeks to leverage on technology. In January 2006, the
Reserve Bank permitted banks to utilise the services of non-governmental organizations
(NGOs), micro-finance institutions (other than Non-Banking Financial Companies) and other
civil society organisations as intermediaries in providing financial and banking services
through the use of business facilitator and business correspondent (BC) models. The BC
model allows banks to do "cash in-cash out" transactions at a location much closer to the
rural population, thus addressing the last mile problem.
Reserve Bank has been furthering financial inclusion in a mission mode through a
combination of strategies ranging from relaxation of regulatory guidelines, provision of new
products and other supportive measures to achieve sustainable and scalable Financial
Inclusion. A structured and planned approach was followed under financial inclusion wherein
all banks were advised in January 2010 to prepare Board approved Financial Inclusion Plans
(FIPs) congruent with their business strategies and comparative advantage for three year
period extending up to 2013. The implementation of these plans was closely monitored by
the Reserve Bank through quantitative & qualitative reporting formats and through review
meetings held with CMDs/CEOs and other senior officials of banks.
I am sure you would like to know what was the performance of banks under the first
three year Financial Inclusion Plan period (2010-13)?
The Financial Inclusion Plan (2010-13), introduced in April 2010 has concluded in March
2013. The penetration of baking services in the rural areas has increased to a great extent.
A snapshot of the progress made by banks, upto December 31 2012, under FIP for certain
key parameters is given below:
i. Banking connectivity has been extended to 2,11,234/- villages from 67,694 at the
beginning of the plan period. 5694 rural branches have been opened during the
period.
ii. Numbers of Business Correspondents have increased from 34,532 to 1,52,328.
iii. Total number of Basic Savings Bank Deposit Accounts (BSBDAs) have gone up
from 73.45 million in 2010 to 171.43 million up to December 31 2012, Number of
Kissan Credit Cards outstanding have gone up from 24.31 million in 2010 to
31.73 million upto December 31 2012 and Number of General Credit Cards
outstanding have gone up from 1.39 million in 2010 to 3.11 million upto December
31 2012.
iv.
v. The number of ICT based BC transactions though encouraging is still very low as
compared to the increase in the number of banking outlets. The focus on monitoring
has, therefore, now shifted more towards the number and value of transactions in
no-frills, credit and remittance accounts opened through BCs. In this direction, we
have now advised banks to disaggregate the FIP upto the branch level and we have
involved the controlling offices of respective banks as also the Regional Offices of
RBI in all the States in the monitoring process.
Naturally you will want to know what are some of the major issues being faced by
banks in pursuing and achieving the Financial Inclusion Plan targets?
Efficient business model
Banks are yet to perceive FI as a profitable business model. Feedback received suggests
that many banks are still pursuing FI as a regulatory requirement rather than treating it as a
business model. Banks have to realize that the bankability of the poor holds a major
opportunity for the banking sector in developing a stable retail deposit base and in curbing
volatility in earnings with the help of a diversified asset portfolio. The recent crisis has
underscored the need for reducing banks' reliance on wholesale deposits and borrowed
funds and cultivating a retail portfolio of assets and liabilities for financial stability. Two basic
issues that need to be understood by banks while implementing financial inclusion is that:
 Financial Inclusion programmes should be implemented on commercial lines and
not on a charity basis. It is important that banking with the poor is perceived and
pursued as a sustainable and viable business model.

While poor need not be subsidized, it is important to ensure that they are not
exploited. The need is to ensure that poor people who deserve credit are provided
access to timely and adequate credit in a non-exploitative manner.
BC Model - Viability issues:
Business Correspondent model is still in the experimental stages and there are various
challenges associated with the model. The viability of BC model has remained a critical
issue. Surveys have revealed that branch officials do not visit BCs or customers and do not
take any effort in introducing BCs to villagers. One primary reason cited by branch officials
are the scarcity of staff provided to them for carrying out such visits to villages. Further, most
of the accounts opened by BCs have remained non-operational. In order to ensure
participation of all stake holders in the financial inclusion process, we have advised banks to
disaggregate the FIPs upto the Controlling Office and branch level. This would ensure that
bank officials at the ground level are aware of the banks objective under FI and of the
specific targets given to each Zone/branch for achieving the objectives.
Technology Issues
Another bottleneck in achieving financial inclusion is the non-availability of physical and
digital connectivity. For the success of the ICT based model, resolving technology related
issues is the key.
iv) Financial literacy
Financial Inclusion and Financial Literacy are two sides of the equation. Financial Inclusion
acts from supply side by providing financial market/services that people demand whereas
Financial Literacy stimulates the demand side by making people aware of what they can
demand. Therefore, access to financial services and Financial Education must happen
simultaneously. It must be continuous, an ongoing process and must target all sections of the
population.
Financial awareness has to be spread amongst the excluded masses that are illiterate and
poor. For this, evolving an appropriate Business Model & an Efficient Delivery Mechanism is
the major challenge for banks. For disseminating financial literacy and awareness, a National
Level Coordination of all stakeholders like Banks, Governments, Civil Societies, NGOs, etc.
is required. In India, the need for financial literacy is even greater considering the low levels
of literacy and the large section of the population still out of the formal financial system. To
ensure effective coordination of the efforts made by all the financial regulators and other
stakeholders, a Technical Group on Financial Inclusion and Financial Literacy has been
constituted under the aegis of Financial Stability and Development Council.The technical
group is headed by the Deputy Governor, RBI, Dr Chakrabarty with members drawn from
SEBI, PFRDA, IRDA, Government of India, State Governments, Central Education Board
etc. The Group is in dialogue with NCERT/State Education Boards for inclusion of financial
literacy in CBSE/State curriculum.
A national strategy on financial education has been prepared which would cater to all
sections of the population in the country. Since the challenge is to link large number of
financially excluded people to the formal financial system, the focus of the strategy at the
base level will be to create awareness of basic financial products through dissemination of
simple messages of financial prudence in vernacular language through large campaigns
across the country.
The Reserve Bank of India had launched Project Financial Literacy in March 2007 with a
view to create awareness, especially among the common persons, on matters relating to
banking, finance and central banking. Under Project Financial Literacy, several initiatives
have been taken to achieve financial awareness and literacy among various target groups,
which included publication of comic books on banking and RBI; games on Financial
Education; arranging school/college visits for creating financial awareness; participation in
exhibitions/fairs/melas at the State & District levels; conducting essay competitions and
quizzes in schools to create awareness about banking and RBI; outreach programmes
undertaken by theTop Management and Regional Offices; RBI's Young Scholars Scheme,
etc.
Banks have been advised to setup Financial Literacy Centres (FLCs) in the 630 plus offices
of the Lead District Managers (LDMs). As at the end of December 2012, 658 FLCs were
functioning and 1.5 million people were educated during the period April to December 2012.
Further, 35,000 rural branches of SCBs including RRBs have been mandated to undertake
outdoor financial literacy activities, at least once a month, with focus on financially excluded
population. In order to link the financially excluded segment with the banking system, a
"Model" for conduct of Literacy Camps to be held by banks has been designed, detailing the
operational modalities to culminate in effective financial access to the excluded people.
Further, to ensure consistency in the financial literacy material reaching the target audience
in a simple and lucid manner, RBI has prepared a comprehensive Financial Literacy Material
consisting of a Financial Literacy Guide, Financial Diary and a set of 16 Financial Literacy
Posters (few posters have been displayed below).
v) Education
One of the most important things, which I want to touch upon before concluding is education,
as I see there are a large number of youngsters assembled here. The efforts and outlay
made by Government alone will not meet the requirements of outlay on education. The
scope of education has widened both in India and abroad covering new courses in diversified
areas. Realizing the importance of education for economic development and raising overall
living standards, RBI, has classified loans and advances granted to individuals for
educational purposes, including vocational courses up to Rs. 10 lakh for studies in India and
Rs.20 lakh for studies abroad, under "priority sector". With a view to enable banks, the Indian
Banks' Association has brought out a model scheme for educational loan in the year 2001,
which facilitated economically weaker sections of the society to avail educational loans from
scheduled banks with modified easier norms. The Scheme was revised by IBA subsequently,
the latest being in September 2012.
Loans for education should be seen as an investment for economic development and
prosperity, since knowledge and information would be the principal driving force for economic
growth in the coming years
In the end, I would sum up by saying that I am hopeful that with our recently revised priority
sector norms, focusing on small loans directly to small and marginal farmers, micro and small
enterprises low cost housing projects, student and people with low income the banks will see
priority sectors as viable business opportunity to reach financial excluded sections of the
population. In the coming 10-15 years banks in India in particular would realign their position
in the pecking order based on their ability to convert financial inclusion into a viable business
opportunity. Banks which are able to craft appropriate business and delivery models to tap
the large excluded sections of society would come on top. The triad of financial inclusion,
financial literacy and financial stability would be extremely relevant in the foreseeable future.
The depth and breadth of banking in the country would determine financial stability.
The Banking sector has played a crucial role in developing the rural economy by providing
credit and creating financial awareness. But as we are aware, despite all the efforts that we
have made, a huge section of the rural population is still out of the banking net. Rural India
has huge potential for development and as I said earlier it provides tremendous business
opportunity for the banks, I urge the bankers through this platform to put their heart and soul
in making a rural India where each and every household has a bank account and is imbued
with financial awareness. Where Bharat and India morph to one entity and growth with equity
becomes a reality.
Let me again close echoing our Finance Ministers words "Any economist will tell us what
India can become as we are the tenth largest economy in the world. We can become the
eighth or perhaps the seventh largest by 2017. By 2025 we could become a $5 trillion
economy and among the top five in the world." What we will become depends on us and the
choices that we make. As Swami Vivekananda, whose 150th birth anniversary we celebrated
recently, said "All the strength and succor you want is within yourself, therefore make your
own future" and this young friends is quite the best advice I can give to you along with my
best wishes for a bright future.
Heights by great men
Reached and kept
We're not attained by sudden flight
They while their companions slept
We're struggling upward in the night
I wish the seminar and your deliberations grand success. Thank you.