Forex trading Education Banking

Rural Banking
&
Micro Finance

AREAS OF CONCERN

§ 3rd largest producer of food in the world but the growth of the sector has been limited

§ While the Tenth Plan assumed that agricultural production would grow at the rate of 4.0%, the growth has been less than 1.5% in the first 3 years

§ India’s entrepreneurial initiative has been behind growth in other sectors but it is still in a nascent stage with myriad laws coming in the way

§ Inadequate credit delivery mechanism to the rural sector has been the main cause

AREAS OF CONCERN (Contd.)

qAverage Growth of S.T. Agri Credit stagnated

at 15% (1970 to ’90s)

qLong Term Credit Growth Rate Declined to

12% from 20% (1970 to ’90s)

q Successive Draughts have driven farmers to

desperation & Suicides

q Reviewing the Agri Credit situation, the GOI

consciously decided to double the ‘flow of

Credit’ in two years

Initiatives in Rural Banking

§ Sec 54 of RBI Act -about rural credit and banking

§ 1955 - first step Imperial Bank nationalised as SBI

§ 1959- subsidiaries of SBI were Nationalised

§ 1968- Social Control & Lead Bank theme; financing Farm & Non Farm Activities under Priority

§ 1969 - Nationalisation of 14 major banks

§ 1970-Onwards launch of Poverty alleviation Progms.

§ 1975 Setting up of Regional Rural banks

§ 1980 Nationalisation 6 more banks

§ 1982 Formation of Self help Groups

§ 1988 Service Area Approach (SAA)

§ In nineties extensive encouragement to SHG

View point to Agri- Lending

§ It is regarded that the lending institutions must view Agriculture as a potential and dynamic sector with opportunities to commercially lend & earn profits. Failure to deliver adequate credit in a manner expected will be detrimental to the interest of both the Banks and large community of farmers.

PRIORITY SECTOR ADVANCES

Being dependent on AGRARIAN ECONOMY and vast multitude of people being below POVERTY LINE certain sectors as PRIORITY SECTORS.

Financing AGRICULTURE, SERVICES AND SMALL & MEDIUM ENTERPRISE (SSI) forms core of this sector.

It is mandatory for all Banks to finance the P. S. Sectors.

COMMERCIAL BANKS 40% OF NBC

FOREIGN BANKS 10% OF NBC

OF WHICH

DIRECT AGRI. 18% OF NBC

INDIRECT TO AGRI. 4.5 % OF NBC

WEAKER SECTIONS 9% OF NBC

D.R.I.SCHEME 1% OF NBC

(of this 40% should be to SC/ST and

66 2/3 should be through Rural Branches)

HOUSING FINANCE15% OF INCREMENTAL DEPOSIT

EXPORTS (NOT LESS THAN 12% OF NBC

IN ALL SECTORS WOMEN BORROWER’S SHARE ATLEAST 30%

INDIRECT AGRICULTURE

• DISTRIBUTORS OF FERTILISERS, PESTICIDES, SEEDS, CATTLE FEED, POULTRY FEED

• LOANS TO ELECTRICITY BOARDS REC PROVIDING LT CONNECTIONS

• LOANS TO PAC’S FSS

• SUBSCRIPTION TO NABARD BONDS

DIRECT AGRICULTURE

• S.T.CROP LOANS

• MEDIUM & LT LOANS

• IMPLEMENTS – PLOUGHS, HARROWS, LEVELLER,B UND FORMER

• FARM MACHINERY TRACTORS, POWER TILLER

• TRANSPORT EQUIP.TRUCKS, BULOCK CART

• PURCHASE OF PLOUGH ANIMALS

• ALL TYPES OF IRRIGATION LOANS LAND

• RECLAMATION DEVELOPMENT

• FARM HOUSE, STRUCTURES, ETC.

EMERGENCE OF SHGs

* Bankers perceive that poor cannot save & utilise

* Poor need credit only at concessional rates

* Poor avail loans to corner subsidy & not to repay

* Facilities to men only, who are head of the family

* Activity financed should be economically viable

* No provision to grant consumption credit

* Strict compliance against possible diversion

* Small loans without collaterals, a credit risk

* SEWA Bank of Ahmedabad and Dr. Md. Yunus

Bangladeshi Grameen Bank experience of 1972

* Thus emerged the concept of Self Help Groups

‘SEWA’ BANK EXPERIENCE

*Inception & growth of SHGs in India, traced to 1972

*In Ahmadabad dist., S E W A (Self Employed Women’s

Association), started in 1972, women entrepreneurs, f or

their economic independence

*Objective: to improve income levels, self employment

opportunities and social security, but denied bank credit

*In 1974, set up Mahila SEWA Co-operative Bank Ltd. to

provide working funds due to Banks’ continued apathy

* Capable members, guided illiterate & less enterprising

* Income generation and savings potential improved

* Extending advisory help, linkages , savings habits, etc.

the seed for the first Self Help Groups in India was sown

BANGLADESHI GRAMEEN BANK

* Dr. Muhammad Yunus, experimented empowering poor

women of 1974 famine, in Chittagong, setting up SHGs

* As one man NGO fought with Bangladeshi banks for loans

* Need was small but procedures were cumbersome to abide

* Seeing a dead end in his efforts, decided to loan them an

amount of Rs 28000/- from his own sources

* His success of managing a change thro’ S H Gs is a legend

* Started Bangladesh Grameen Bank in ’74, to provide

credit & customised financial services, to the borrowers

* Awarded Nobel prize in 2005, for resurrection of poor

* Incidentally setting up of similar groups, in Brazil, Latin

America & South Africa were reported around that time

WHAT is SHG?

Homogeneous group of poor willingly coming together to

- Promote thrift habits & contribute to common fund

- Need based lending to members

-Ventures could be productive or otherwise

- Including timely hassle free emergency loans

- Extend mutual help and co-operation

* An Institution for the people by the people & of the people

with a concept of ‘One for all and all for one’

* Freedom & flexibility in thrift schemes & credit facilities

* Trust, honesty & transparency are group’s basic tenets

* Objective: visible socio economic development of all and

perceptible improvement in individual’s economic status

Formation & Functioning

* Coming together of poor artisans, Agri. Labourers, small &

marginal farmers & micro entrepreneurs for mutual help

* Generally a group of 15 to 20 members mostly women

* Practice of thrift helps inter se lending at agreed rates

* Groups are promoted by themselves or Banks or NGOs

* Forming, max. 2 months; rules/regulations framing and

functioning, opening accounts, another about 4-6 months.

* Keeping regular accounts; lending /recovery; periodical

meetings with minutes are supervised by banks is a must

*Based on the maturity of groups, on getting convinced

Bank finances as a multiple of the pooled savings

* Groups in turn can lend at agreed rates among members

* Smooth recovery as each member ensures others success

FORMATION & FUNCTIONING (Contd.)

qNumber of NGOs are active in helping group formation

qConduct survey, identify homogeneous groups & motivate

q Guide in saving, pooling to common fund, book keeping,

Credit mgt., conducting meetings, maintaining minutes,

common action plan, selection of activities, linkages etc.

q Help formulate bye laws and opening group’s a/c

q Provide vocational training & finally after stabilisation

help linking to a bank for finance

q Intervene to ensure transparency & democratic functioning

q Provide backward /forward linkages & marketing support

q NGOs attract FDI for training & development purposes

q Some NGOs raise funds, in turn to lend to groups

FINANCING SHGS-1

üObtain resolution & bye laws copy, note the

persons authorised to open and operate the

üOpen only if stabilised, note that SHGs need

not deposit all their savings

üHowever eligible for finance after six months

from the date of regular savings by them in

their books

üTo be graded and rated to assess maturity for credit linkage, but linkage only after confirmed maturity

FINANCING SHG-2

üHOW MUCH CREDIT ?

.

Linked to Group’s savings (plus interest on deposits & loans plus fines, admission fees etc) - Not the balance in SB account

External resources like Grants, Donations & Seed money may be excluded

Quantum of loan as a multiple of SHG’s savings-- May vary from 1 to 4 - May exceed even 4 times the Group’s savings in deserving cases.

FINANCING SHG-3

TYPE OF LOAN

a). Term Loan

b). CC limit for 2 years

REPAYMENT PERIOD

è2 to 10 Years for refinance

èBanks to prescribe appropriate repayment period

èfor loans to SHG/NGO

Rate of Interest (1 April 2000)

èBank to SHG - As decided by bank(RBI guide lines)

èBank to NGO - Bank free to decide.

è NGO to SHG - NGO free to decide

èSHG to Member- As decided by SHG

FINANCING SHG-4

SECURITY

RBI has permitted (July 1991) to deviate from prescribed norms relating to margin & security in respect of SHGs

SHG / Family member Defaulter

§ Not to come in the way of financing SHG, provided the

Group is rated as ‘GOOD’

§ May impose a condition not to finance a defaulter to

bank out of bank loan

Repayment Period

* Fixed in consultation with the group based on local

conditions and activities undertaken

*Repayment to bank in regular monthly installments

ADVANTAGES

q SHGs use pooled thrift to give interest bearing

loans to members, decisions at group meetings

q Every member learns prioritisation and

financial discipline.

q Capacity to think/handle larger resources

improves

q Based on maturity, bank gives loan to the SHG

q Bank loan improves group’s funds position

Above all transaction costs of both poor & bank reduced just less than Rs 40 per poor !!!

SUMMARY

§ Rural banking has a vast growth potential &opportunity

ü From urban to rural centres

§ This requires a two-level move away from the traditional banking model

ü Migration to technology-based service delivery

ü Reinventing technology itself to arrive at cost structures that are profitable in emerging markets

ü This challenge is heightened in serving low income groups and rural customers

§ A successful mass banking model

ü Is essential to meet the larger objective of supporting economic growth

ü Builds a new engine for stakeholder value creation