With an average rural literacy rate of 71 per cent most rural Indians are not likely to sacrifice an entire day’s wage to travel to a bank branch which is open between 10.00 AM to 5.00 PM. Intermediaries like NGOs, Self-help Groups, Micro Finance Institutions, semi-formal delivery channels like Banking Correspondents and Business Facilitators, are being used by banks to improve access to credit and savings. However, these channels in their current form, offer limited services and suffer from many a lacunae.

Why are rural markets not viewed as economic opportunity by banks?

• Due to irregular income and expenditure patterns, the banks have high Non- Performing loans in rural areas.
• Dependence of the rural economy on vagaries of monsoons.
• The loan waivers driven by political agenda.
• The average ticket size of both a deposit transaction and a credit transaction in villages is small, which means the banks need more customers per branch or channel to break-even.
• Since many rural folks are not literate and so not comfortable using technology-driven channels like ATMs, phone banking or internet banking, hence mostly dependent on bank branches, leading to banks’ high cost to serve.
• The highly irregular and volatile income streams and unscheduled expenditure like medical or social emergency, attribute to higher risk of credit for the banks.
• Poorer groups might need basic savings services and micro-credit to cover production costs and emergency expenses
• Farmers and farmers’ organisations require larger amounts of credit to finance production, inputs, processing and marketing besides risk mitigation products, for example, insurance for loss of life and assets.

Need for Rural banking:

The new rural finance paradigm needs to be based on the premise that rural people are bankable and rural clientele is not limited only to the farmers and uneducated but also includes a generation which can use and adopt technology, and hence, a demand-driven design and efficient provision of multiple financial products and services through an inclusive financial sector comprising sustainable institutions serving a diverse rural clientele, is the need of the hour. Thus, developing an inclusive yet sustainable rural financial system is extremely challenging and involves comprehensive understanding of the host of complementary issues, which can be placed in seven broad categories-

Challenges in developing an inclusive yet sustainable rural financial system:

1. Product strategy: For catering to the varied needs of small ticket size transactions, whether a chunk of diversified products and services can be developed without compromising on the flexibility, continuous availability and convenience of the products? Which types of financial products have the greatest impact on reducing poverty and lifting growth rates in deprived rural areas?
2. Processes: What kinds of business processes can help banks to reach deprived and vulnerable segments and provide hassle-free near doorstep service to the customers without endangering financial viability? How to design an efficient hub and spoke model overcome the hurdles in the agent-led branchless banking?
3. Partnerships: What are the constraints faced by the unbanked and under banked people in accessing financial services from different types of service providers? Are the bank-non-bank partnerships, such as, Business Correspondents, SHGs, MFIs, etc. working efficiently in easing the accessibility and availability of financial services?
4. Protection: What measures and mechanisms are needed to protect both the providers and the receivers of rural finance from abuse and misuse of such services? Whether enough risks mitigants are there for the borrowers given the higher vulnerability in the sector? Are lenders protected against ebb and flow of uncertainty in credit culture?
5. Profitability: Whether the business strategies and delivery models are geared to provide affordable and acceptable services to the rural clientele while ensuring that rural finance service providers function profitably on a sustained basis? How do we tap into the customer willingness to pay through an appropriate pricing model?
6. Productivity: How do we increase the productivity of financial services provided in the rural areas? What are the strategies needed to synergize other resources with finance (say, under a “credit plus” approach) to ensure more productive and optimal use of financial services?
7. People: Are the rural branch staff well-equipped to meet the needs of driving the process of financial inclusion in terms of knowledge, skill and attitude? Do these people have the capacity, ‘comprehension and commitment to identify potential customers and offer them timely advice and multiple banking services?

Initiatives taken by our government with a view to addressing the challenges of rural banking:

• Reserve Bank of India (RBI) has been undertaking financial inclusion initiatives in a mission mode through a combination of strategies ranging from provision of new products, relaxation of regulatory guidelines and other supportive measures to achieve sustainable and scalable financial inclusion. Some of these steps are: facilitating no-frill accounts and General Credit Cards (GCCs) for small deposits and credit, norms were relaxed for people intending to open accounts with annual deposits of less than 50,000.
• With a view to provide hassle-free and timely credit to farmers, Kisaan Credit Cards (KCC) have been issued by the banking system.
• In January 2006, RBI permitted commercial banks to make use of the services of Non-Governmental Organizations (NGOs) Self Help Groups (SHGs), micro-finance institutions, and other civil society organizations as intermediaries for providing financial and banking services.
• RBI also directed the commercial banks in different regions to start a 100 per cent financial inclusion campaign, as a result of which UTS like Puducherry and states like Himachal Pradesh, Kerala announced 100 per cent financial inclusion in all their districts.
• RBI’s vision for 2020 is to open nearly 600 million new customers’ accounts and service them through a variety of channels by leveraging on IT.
• Enormous success in opening of about 26 crore accounts under Jan Dhan Yojana.
• Setting up Micro Unit Development Refinance Agency (Mudra) for providing micro credits.
• Various social sector schemes like Atal Pension Yojana, Pradhan Mantri Suraksha Bima Yojana and pradhan Mantri Jeevan Jyoti Bima yojana which would provide social security.
• Providing banking services through banking correspondents and business facilitators.
• Proposed concessions on credit and debit transactions.
• Aadhaar enabled micro ATMs and RuPay cards to replace cash transactions
• Promoting differential banking through new licenses given to payment banks and to small finance banks.
• Launching of India Posts Bank.

Addressing issues in Rural Banking:

• For optimum usage of Banking Correspondents, they need to be adequately compensated by banks so that they are sufficiently incentivized to provide banking services to villagers at their doorsteps.
• Designing suitable innovative products to cater to the requirements of poor villagers at affordable rates is an absolute imperative.
• To wean away villagers from borrowing from money lenders, banks should develop simplified credit disbursement procedures and also flexibility in their processes.
• In an ICT enabled environment, technology is the main lever to achieve the eventual goal of functional inclusion at the earliest.
• Banks need to enhance their ATM network in rural and unbanked areas to serve the rural villagers.
• Adequate security measures, as well as Financial Literacy campaigns, need to be undertaken.
• To reduce the overall transaction costs, associated with small ticket transactions in rural areas, use of domestic RuPay Cards may be enhanced.
• There is a need to promote Electronic Benefit Transfer systems effectively for boosting rural banking.
• The need for vernacularisation of all banking forms is an absolute must, at least in major languages. As part of the Financial Literacy drive, banks need to undertake pro-active steps in helping the common public to get over their English phobia.