The biggest challenge to the banks in this country for the next decade is to capture the banking business of 50 percent population of this country of over 120 billion. Financial exclusion is a critical concern for low earning household and small businesses located in semi-urban or rural India. It is the lack of banking services for the people under poverty line.
Approximately 240 million adults in rural area do not have bank account today. Recent study of census has shown that rural households that use banking services have increased from 30% to 54% from 2001 to 2011. But still nearly 46% of the rural households are excluded from banking services.
Total no. of household
Household availing banking services
Total no. of household
Household availing banking services
The above data shows that the RRBs have performed well in rural credit and rural development. In order to expand further and to achieve the target of financial inclusion they will have to face many challenges. Some of the challenges are mentioned below:
Lack of banking facility in the locality – Expansion of the Banks:
The committee for setting up regional rural banks suggested setting up of five pilot banks in the first year at selected places on experimental basis which could be extended based on their performance. Setting up of new regional rural banks so rapidly in a relatively very short period of time will create problems for concerned regional rural banks and their sponsored banks. The time line for setting up the regional rural banks has been forced by the higher authorities, which without choice needs to be accepted by the sponsoring commercial Banks, State Governments and even the Co-operatives.
At first, the location for these branches in various districts were not selected in a co-ordinated manner at the State level, demarcating the areas of operations of the existing institutional credit agencies was suggested by Working Group on Rural Banks. The other important test in rural banking expansion process is the proportion of number of branches opened in relation to the number which was expected to be opened in the given time at unbanked centers. There was no directive from the government in this regard but the expectation was that each regional rural bank will open 20 to 30 branches in first year of its operation and another 20-30 in second year of operation to reach the target of 50-60 branches in ‘underbank’ centers of its operation. This branch expansion target seemed un-achievable by Regional Rural Banks.
Identification of Small Borrowers
RRB’s are not able to meet the expected level of loans. The reasons for not achieving the expected level of loans are mentioned below:
· Most of the RRBs are lending directly to the economically weaker section of the rural society. RRBs used borrowed funds for lending purpose. The staff of regional rural banks has to make special efforts to identify potential small borrowers who can be able to pay the loan at relatively higher rate of interest by farming, small business and small trading.
· Secondly at the time of considering the application of borrower is to verify the genuineness of the borrower as the person of small means. The farmer which the staff considers to be ‘small’ or ‘marginal’ farmer may have substantial amount of income from non-farming activities. Similarly, a small artisan or person owning a small business may not be really poor. Such persons should not deprive the genuine small borrower.
Complicated Procedural Formalities
The borrowers from the rural India are mostly illiterate and poor. They don’t deal with the staff directly to borrow the money. The complicated procedures involved in giving loans by the Regional Rural Bank causes intermediaries to emerge. These intermediaries take advantage of poverty and illiteracy of rural borrowers and exploit them to get loan from regional rural banks with certainty and within the minimum time.
Reliance on Informal Sources of Credit:
Many small borrowers still depend on the informal and non-institutional sources for the supply of credit. Regional rural banks need to study that under which circumstances small borrowers make their choice between formal and informal sources of funds. Such study will help Regional Rural banks to tap such borrowers who depend on informal sources of credit for their needs.
Regional rural banks are facing the problem of mobilizing the funds. They depend on NABARD for their operations. Poor and illiterate people from the rural India do not have a steady source of income. Thus they cannot save their money. The poor savings of these customers is the major cause that RRBs have low deposits.
Higher risk of credit:
Rural households may have highly irregular and volatile income streams. Irregular wage labor and the sale of agricultural products are the two main sources of income for rural households. The poor rural households (landless and marginal farmers) are particularly dependent on irregular wage employment. Rural households also have irregular expenditure patterns. The typical expenditure profile of rural households is small, with daily or irregular expenses incurred through the month. Furthermore, a majority of households incur at least one unscheduled expenditure per year, with the most frequent reasons being medical or social emergency. In short, the rural customer is generally considered to be a risky one.
High Non-Performing Loans (NPL):
Due to irregular income and expenditure pattern in rural India, the regional rural banks are suffering from the problem of high Non-performing loans. The irregular pattern in the expenditure and income of the rural India is because of the monsoon season and the loan waiver schemes announced by the political parties for their agenda. Agricultural sector has 7.7% of the NPLs while non agri-sector has 3.5% of NPLs. Also in order to give the targeted amount of low the employees in the bank do not check the trustworthiness of the borrower to repay the loan. Thus the untrained employees are also part of this problem. If the banks wants see the rural India as the opportunity for growth rather than regulatory requirement they have to address such issues. In order to increase financial access to rural areas banks need to focus on basic conditions such as proper infrastructure and regulatory framework. Banks need to think innovatively to increase the access to rural areas.
Lengthy Legal Process:
A Regional Rural Bank has to use lengthy court procedures for recovery of non-performing loans. The regional rural banks cannot lend more in the rural area because there is risk involves in lending to the weaker section of the society and the cost and time involve in recovering the small loans are high.
High cost to serve:
Branches are the most used channel in rural areas. This is because many rural people are not literate and are not comfortable using technology-driven channels such as ATMs, phone banking or internet banking. On the other hand, a branch is an expensive channel for banks. In addition, rural people, whenever they have access to banks, have frequent low ticket and cash-based transactions, which increase the overall transaction cost for their bank.
The procedures adopted by Regional Rural banks for loaning are strict and complex. Since many of the consumers are illiterate, they find it hard to understand these complex procedures thus RRBs have not been able to expand their lending to weaker section of society. In the matter of procedures for deposits as well as loaning, they operate very much like the scheduled commercial banks. Not all the states have issued books to all cultivators which could also be used by the RRBs for verifications of land holdings and avoiding over-financing by different credit agencies on the basis of the same assets of the borrower.
Lack of Adequate Support from Development Programs:
Successful implementation of a scheme like minor irrigation, dairy development, poultry and fisheries crucially depends on development programs of the State Governments. For example, in the case of minor irrigation, groundwater surveys, rural electrification and creation of drainage facilities are considered crucial. In the case of dairy development, animal breeding programs, veterinary services and establishment of chilling plants and centers and processing unit are required for the viability of the loans for the purchase of animals. Similarly, vertically integrated activities are also critical for the poultry and fisheries credit schemes.
Urban Orientation of Bank’s Staff:
The attitude of the staff working in regional rural banks towards the rural customer is still urban. The staff member holding the positions of officers and above are asking for higher salaries. They don’t consider themselves as the integral part of socio-economic culture in which they work. They are looking for the opportunities to shift to the banks in the cities. This attitude of staff working in regional rural banks is also a challenge.
Gap in Pay Scales:
The lower operating costs in Regional Rural Banks at present, as compared to that of the rural branches of the Commercial Banks (which had been advanced as one of the major arguments justifying the establishment of the Regional Rural Banks), may become invalid in the coming years. It would become difficult for the Regional Rural Banks to retain its staff for a longer period at salaries much lower than those provided by the commercial Banks in rural as well as urban areas. Even though it is believed that trade unions cannot be legally organized by the staff of the Regional Rural Banks under the Regional Rural Banks Act, there are indications of the formation of “STAFF ASSOCIATIONS” in some of the Regional Rural Banks with the objective of impressing upon the management the need to increase their salaries etc. It will be difficult to maintain for a long time two types of pay-scales in each area for similar work.
Financial Literacy and Education:
The majority of the rural banking customers are from unbanked population. They have very low level of awareness towards banking system. Banks, thus, needs to invest in financial literacy and awareness programs. Financial illiteracy and difficulty in understanding the banking services are the major obstacles in providing the access to the rural customers. The efforts of the banks in this direction are, however, much to be desired. NABARD has already set up fund for financial literacy of rural people in the areas of operation of branchless banking by using this fund. The RBI in their Annual Statement has indicated its dissatisfaction about delaying progress made by the banks in the rural area.
Mobile Banking is most cost effective compared to other channels to reach unbanked areas. Thus all three stakeholders viz. the Telecom Operators, Banks and Merchants should work in coordination with each other and develop a suitable business model on robust technology platform to achieve the desired results.
SUGGESTIONS REGARDING POLICY AND PROCEDURE OF FINANCING:
Simplification & Standardization of Loan Application:
Regional rural banks should make the process for application of loans simple and standardize. They should also reduce the number of documents required for the application of loan.
Reduction in Processing Time:
The time taken for processing the loan application by RRBs is above average. They do not have trained staff those who work with socio-economic responsibility. This requires a change of mindset of the RRBs staff. Such procedural delays defeat the very purpose of the borrowers when they fail to get the help at the critical time.
SUGGESTIONS REGARDING RECOVERY OF LOANS:
Revamping the Legal System:
The high level of NPA is assuming frightening proportions. The RRBs are advised to be guided only by commercial motives in granting and recovering the loans made by them to their customers. The legal system should be amended so as to reduce the long drawn legal battle for making recoveries. Enabling legislation is required to be enacted and allow the banks to foreclose the loans. Foreclosure provisions in India are inadequate under which the mortgagor is absolutely debarred of his right to redeem the property. A court decree is required for getting the foreclosure right against the mortgagor which is a lengthy and time consuming process.
Establishment of DRTs:
Debt Recovery Tribunals (DRTs) should be increased so that the debt recovery system becomes faster. The DRTs should straight away be given the powers to issue certificate of recovery. Government should give power to banks for taking possession and sale of securities without intervention of the courts.
Compromise & Settlement Scheme:
The Reserve Bank of India should approve a compromise and settlement scheme for the RRBs so that the RRBs may make compromise and settlement instead of engaging in the long drawn legal battle.
Strict Adherence to Prudential Income Recognition Norms:
RRBs should check the documents of the small lenders very meticulously. This will allow the weaker section of society to take advantage of the schemes introduced for them.
RRBs in order to show profit does not make enough provisions for bad debts. They also misclassify their accounts and understate the NPAs. The parent bank should look into this menace.
SUGGESTIONS REGARDING ORGANISATION
Restructuring of the Capital Base:
Investment in the share capital of the regional rural banks by the local investors should be allowed. Such shareholding should be open to cooperatives, other local institutions and individuals within the jurisdiction of Regional Rural Bank.
Development of Human Resources (Staff Training):
The staff of rural banks should be trained for the various banking processes. They should be provided training of behavioral sciences. The staff should be customer friendly and conversant with the local environment.
The staff at rural banks should be paid equal compensation as that of the urban banks. Proper training and remuneration should be provided to the staff of regional rural banks.
Faster Banks Expansion:
The expansion in the unbanked and underbanked area should be made faster.
Introduction of Information Technology:
The technological advancement in banking sector has not reached the regional rural banks. The business base of these banks is still very low as compared to the scheduled commercial banks. Rural areas are power deficient. Because of these two reasons information technology cannot be adopted by these banks. The different branches of a RRB should be interlinked with each other through a computer network and at a later stage ATMs may also be installed at headquarters level.