A PROJECT REPORT ON RURAL BANKING

For THE PARTIAL FULFILLMENT OF DEGREE OF Master of Business Administration (MBA)

Submitted To (Lecturer) (Dept. of Management)

Submitted By MBA III Sem.

AMRAPALI INSTITUTE HALDWANI

(AFFILIATED TO UTTARAKHAND TECHNICAL UNIVERSITY DEHRADUN)

STUDENT DECLERATION

This project has been undertaken as a partial fulfillment of the requirements for the award of the Master Business Administration of Uttarakhand Technical University, Dehradun. This project was executed during the 3rd semester under the supervision of Miss. Safia Khan Further, I declare that this project is my original work and analysis and findings are for academic purpose only. This project has not been presented in any seminar or submitted elsewhere for the award of any degree or diploma.

Supervisor:-

Miss. Safia Khan

Naval Kishor M.B.A. (III rd semester)

(Department of Management Studies)

ACKNOWLEDGEMENT First of all I would like to thank the almighty GOD who gave me this precious life.

It gives me immense pleasure to express my deep sense of gratitude & heartiest thanks to my project guide Miss. Safia Khan for his sincere guidance, encouragement & constructive criticism during the course of the Dissertation. This Dissertation has been made possible through the direct & indirect co-operation of various for whom I wish my express my appreciation & gratitude. I am also thankful to those entire people who helped me in for completing my project.

(Naval Kishor)

TABLE OF CONTENTS

 Acknowledgement Student Declaration Chapter -I Introductoin of Rural Banking Solution of Rural Banking Rural credit delivery system. Benefits of Rural Banking Future plans of Rural Banking

Chapter II. Banks functioning for the development of Rural areas. Co-operative bank and Rural credit. Short term co-operation. Commercial bank and rural credit. Role of RBI in rural credit. Marketing of mutual fund units- RRBs

Chapter III

Conclusion Bibliography

RURAL BANKING INTRODUCTION

Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focused upon the agro sector. Today, commercial banks and Regional rural banks in India are penetrating every corner of the country are extending a helping hand in the growth process of the rural sector in the country. The rural populace will be empowered with critical,convenient and instant services that cover: finance,markets, documentation etc. at their very doorstep.This will improve credit flow significantly. There is an immediate need to step up the flow of credit toagricultural and other rural activities in India, to improve ruralproductivity and economic welfare. TCS, ACNielsen and EnvisionInformation Systems and Technologies delivered a pilot asenvisaged by IIIT-Bangalore -- a low-cost technology platform toimprove the delivery of banking services tothe rural population.The solution uses Microsoft Windows Server System, Microsoft .NETandWindows Mobile to create a comprehensive, fully automatedcredit delivery systemfor rural banking. It also proposes a commoninfrastructure for rural data collection, information management. Bysharing this service, banks and financial institutions will be able to reduce the cost of operations dramatically. It also allows banks and financial institutions to reach out to the rural population which tillnow had not been possible to due high cost and complex logistics related issues.

Situation
The Indian banking sector is facing pressures similar to any company ensure profitability and to provide adequate returns to the shareholders. With cutthroat competition and reduced margins in the urban sector, banks are looking to diversify their portfolios and creating services to tap the rural markets.With the renewed focus of the Reserve Bank of India and the Ministry of Finance for providing micro-credit to the rural sector along with the growing competition in terms of reach and financial spread, banks and financial institutions have necessarily had toforay into the rural market. There are 135 million rural households in India with a per capita income of INR 8,000. Statistics show that rural households have no savings. A World Bank study assessing access to financial institutions found that amongst rural households in Andhra Pradesh and Uttar Pradesh, 59 percent lack access to deposit account and 78 percent lack access to credit. Considering that the majority of the 360 million poor households (urban and rural) lack access to formal financial services, the numbers of customers to be reached, and the variety and quantum of services to be provided are really large. It is estimated that 90 million farm holdings, 30 million non-agricultural enterprises and 50 million landless households in India collectively need approx U.S.$30 billion credit annually, approximately 5 percent of India's GDP. There have been several challenges faced in delivering solutions in rural India both for the populace as well as the banks. Rural credit delivery has been a major area of concern in the banking sector. Major initiatives undertaken over the years have not met with the desired level of success. Technical Challenges Some of the key challenges while creating the application were _ The cost for traditional banking in ruralIndia is very high . _ Loan servicing tasks are very expensive for a rural loan e.g. for a financial institution to locate a viable prospect, verify the prospects credit worthiness and assess collateral can be a time and resource hungry task.

_ The prime targeted end users of this application will be technology challenged. Also, a small percentage of the villagers are literate in their regional language. _ Third party services such as notarization of the bank loan documents, collection agencies for defaulting customers are also not present The loan servicing process especially the credit rating of prospective customers is a big deterrent to organized micro finance. There is an urgent need to streamline the credit rating process to reach out to the rural poor. A viable credit rating system will help to minimize the non-performing assets (NPA) of the financial institutions. Also, it will help ensure optimum utilization of funds. Therefore, we decided to create a technology based rating system will enable greater transparency and objectivity, comments Dr. S. S. Satchidananda, Research Director, Center for Banking and Information Technology, IIIT- Bangalore. This will also facilitate better data management and analysis. The rural credit delivery system addresses this problem by improving accessibility and reducing delivery costs and time frames The rural credit delivery system will act as one stop customer information source for the banks in the local areas and help them in arriving at the credit worthiness of the customers; the system will also act as a front office for banks to provide credit to the rural masses.

Solution
As the first step towards improving rural banking, CeBIT, IIIT-B worked closely with Microsoft, and its partners to deliver the solution. This solution envisions a three step project. _ Collection of rural customers data using wireless PDAs and using the data for creating rural information infrastructure including banking services. _ A model for credit delivery of the rural people _ Feasibility of deploying ATMs for servicing rural citizens Design elements During the evaluation stage, Microsoft Certified Gold Partner, TCS came up with a clear list of system requirements, based on the challenges facing rural banking and financial services. These requirements have been incorporated into the solution architecture as well for each step of the solution. Key considerations for the PDA based data collection application _ The system will be used by data collection agencies to upload and verify the customer data. It will collate all information including income, assets, and provide pictorial and other proof along with the record such as voice sample for future verification. _ Ability to Work in low/no bandwidth: The ability to work offline will be required, as the data would be collected at a particular location and the synchronized with the central database when Internet access is available _ Printing: Reports must be printable in A4 paper format. Reports should also be printed in the regional language also. _ Audit trail: The audit trail for any transaction will be stored in the database leaving no room for corruption or errors. Rural Credit Delivery Solution _ Security: Security will be key; and checks and balances built to remove any misuse possible. The common users will be able to make one transaction for each logon. For the next transaction they will have to logon again. Each user will have default idle time out of 3 minutes which can be configured to a different value if required. Data can be moved both ways on a 128 bit

encrypted transaction using RC-2 Encryption protocol. This is an admin configuration. The PDA RCDS solution has 4 levels of security. The PDA has an inbuilt Password security with 9999 combinations to hack and open. Further to that the PDA Solution has a login and password stored in the database in encrypted format. TO synchronize the data the user has to go to Synchronizer and enter login / password before being allowed access. _ Performance: The performance for any transaction will be targeted to be within five to seven seconds. RCDS synchronization has three types: normal data, image and voice synchronization. The normal data and voice data for a single day is synchronized in an average of four minutes. ATM Like Machines _ Multilingual: As the application will be used by rural users regional language support is a must. This will be facilitated by using Unicode fonts and regional icons. Data ntered into the system will depend on the keyboard settings. Reference data displayed in combos will be displayed in the regional language. _ Technology challenged users: Illiterate users will be facilitated with a text to voice synthesizer (Matrubhasha). This will be incorporated into RCDS _ Usability for rural users: Icons and labels will be displayed in the regional language. Text to Voice synthesizer will provide the ability to read information. _ This system will also be used by bankers who will be involved in loan, disbursement and repayment. While the users will authenticate themselves into the system and request for transaction processing, the banking systems will put through the transactions like the opening of the accounts, and approval of the loans and communicate those approvals through the RCDS. Once this is done, the users can access the ATMs for depositing and withdrawing cash for various purposes from their savings account. Solution Architecture The complete solution consists of three major components. The PDA based solution is for data collection at the village level. This information is uploaded to the server-based rural credit delivery system from where the user data is accessed by the banks and financial institutions to process loans. In addition a kiosk based ATM like solution will act as the information kiosk for the villagers. Similarly mobile kiosks could also be used.

Customer Data Collection

IIIT-B created the solution architecture for an application that authenticates rural each citizen and his or her assets. ACNielsen was chosen as the nodal agency to collect the data for the pilot that included five villages in Honawar District in Karnataka, which has a sample size of over 500 families and 20000 individuals. Microsoft brought in Envision Information Systems and Technologies Private Limited, a Microsoft Certified Partner to deliver the solution the PDA based solution. Envision is a leading provider of PocketPC based mobile solutions. The field staff collected the information using HP iPaq PDAs using an application for collecting the requisite information such as identity of each person along with records such as birth certificate and photograph; and supporting information including photographs of assets (e.g. house, land etc.). This information is transmitted to the server using the PDA. The Microsoft Windows CE 4.0 based application has three key layers. The presentation layer of the application provides a user friendly interface using Windows Forms developed using Microsoft

.NET Compact Framework 1.1 and C#. The business rules are encapsulated in the C# Business Objects. The application has been developed using Microsoft .NET Compact Framework 1.1, while the data layer used Microsoft SQL CE 2.0 as the database. Microsoft ADO.NET has been used to link the user interface with the database. The application also documents all assets through digital pictures. As the PDA is not used to take the pictures as the assets and people are not available at the time of data collection, an Image mapping component has to be added to the application. The photos are mapped to the corresponding asset record, the SDF card is taken from the camera and inserted into PDA. The module replaces the pictures file name with the corresponding assets ID. Another unique feature of the application is voice sampling. The respondent voice is captured for future verification at the time of capturing the family details. The default system API is used for recording the voice. The user can playback the recorded voice for confirmation. The PDA connects over the Internet to the TCS developed rural credit delivery system (RCDS). SQL CE synchronizes with the central database, SQL Server 2000 using Web Services. Here again checks and balances are maintained. Only records for which all mandatory data is completed can be transferred to the central server. The transferred data will be set as transferred to avoid redundant data transfer.

Rural Credit Delivery System

The rural credit delivery system (RCDS) provides a single repository for all customer related information that banks and financial institutions require to arrive at the credit worthiness of the customer. The application for rural credit rating was created by TCS. As envisaged by IIIT-B, TCS created a Web based application that is accessed using the https protocol. The presentation layer is accessed using Microsoft Internet Explorer 6.0. This layer carries out the validations and authentication before accepting user inputs. The application is used by the banks front office using Microsoft Internet Explorer 6.0, after necessary authorization and validation. The application is based on Windows Server 2003 Standard Edition with Internet Information Services 6.0 is the Web server while the application has been coded in C# and ASP.NET. The ASP.NET (C#) pages reside on the Web server, and it calls business components as per the logic of the application. The central database is Microsoft SQL Server which communicates with the applications business logic using Microsoft ADO.NET, the data-access component of the Microsoft .NET Framework and ActiveX scripts The business logic of the application resides in a separate layer, so as to decouple presentation and business logic. The workflow components have been developed using Microsoft C#. These can also be configured as per the requirement and changes in business logic. TCS used Microsoft SQL Servers Reporting Service using Web services. The reports are exported into PDF and made available in English as well as regional languages for therural population. Often, software comes across a condition or an error that causes the program or microprocessor to branch to a different routine. This is known as an exception. The Microsoft Exception Handling Block, a part of Microsoft .NET Framework 1.1 allows the developers to handle exceptions, log these exceptions and then creates policies to handle exceptions. By using Microsoft Exception Handling Block exceptions and creates a consistent strategy for processing exceptions that occur throughout the architectural layers. The application also uses Data Access Application Block, a feature of .NET Framework that simplifies common data access functionality. Applications can use the application block in a variety of situations, such as reading data for display, obtaining data to pass through application

layers, and submitting changed data back to the database. IIT-B envisions that credit will be monitored by an expert agency either at the bank or through any self-help group involved in providing rural finance. It involves the verification of securities, verification of enduse of funds and provides an update on the borrowers profile. Feasibility for deploying ATMs in Rural India IIIT-B worked closely with Microsoft to create an integrated multi-entity database system (IMDS) system, a data hub that is set up for a cluster of villages. It is connected to the multiservice delivery system (MSDS), an ATM-like machine in each village. The database handles the workflow and decision-making processes. The IMDS is a multi-entity database interfacing with multiple banks. This ensures a two-way connectivity to the multi service delivery machine that provides banking, extension and other services. The credit rating application will interface with the ATM to push the customers transactions back into the application.

Benefits
Provides information to investors The key reason that private banks did not enter the rural market was the lack of information. If each bank tries to verify the creditworthiness of each individual, it will not be able to sustain the business as the cost per transaction will make it unviable. Therefore, a centralized credit rating system will provide the information to banks and other service providers to enter the rural market, Improves credit flow With information availability, the banks can create specific plans and allocate funds for the rural sector. This will help improve the agriculture based economy the living standards of rural India. Reduces costs A central information store helps the banks to reduce the cost of doing business, thereby making it a more feasible business option. The solution itself minimizes costs because there is no need for additional licensing costs for database, reporting services or for other components. Wherever possible, the project uses reusable components and standards such as Microsoft interoperability standards based on Web Services supported by Microsoft .NET framework, says Dr. S. S. Satchidananda, Research Director, Center for Banking and Information Technology, IIITBangalore. High Security The secure hypertext transfer protocol (HTTPS) is a communications protocol designed to transfer encrypted information between computers over the Internet, this has been deployed for higher security. Also, an audit trail of every transaction is maintained, which ensures that the solution is tamper proof. In addition, the application stores the workflow to maintain the authenticity of data. Forms authentication is used to restrict user access .Local Language Support Rural India has a large percentage of uneducated people. For them, banking services will be a new phenomenon. To avoid another breed of middlemen and touts, it is important that the service is simple and can be used by the villagers. For this, the application will provide text to voice synthesizer as a browser plug-in. In addition, Microsoft .NET Framework 1.1 and SQL Server 2000 support Indian languages that will allow reports to be generated in rural language for customers and banking staff. Ideal for low bandwidth situations such as rural India The solution has been built to function in either offline mode where there is no internet access and in other instances, it ensures that data integrity is maintained in low bandwidth situations. For example, in case the connection drops during transfer, the server records the point at which the connection was terminated, thereby lowering redundancy.

Future Plans

The centralized database will eventually provide access to the multiple banks through suitable linkages. The aim is that the rural populace should be able to avail the multi-service delivery system for all their banking requirements. The MSDS will be connected to the nearest IMDS. The IMDS itself is part of a grid, which is envisaged to eventually provide nation-wide connectivity. The database system will be able to query other databases such as Bhoomi lan records, etc. for their services. The IMDS is the engine that powers all banking transactions made from any MSDS. It is independently supported and reliably sourced - to provide up-to-date data on all aspects affecting credit delivery. This includes transaction data in the form of user accounts. It also acts as a crucial information source for analytical activities and decision support systems. Since a single IMDS database may not be scalable, the long-term strategy is to model the IMDS in the form of a grid, comprising of several data centers. Each data centre will also provide specific geographical data and be accessible to every 2,00,000 citizens. This program will also be integrated with Microsofts rural kiosk initiative, called Saksham. The Saksham kiosks will become an extension to this program and will be used for delivering information to the villagers, and will become an additional channel for data collection and processing transactions.

About Envision Information Systems

Envision Information Systems was started in 2002 with a mission of enabling enterprises to seamlessly access and process information anywhere, anytime. Our entire value proposition at Envision Information Systems stems from the fact that we are able to convince enterprises to extend their existing IT systems into the field and leverage more out of it by using Mobile Computing Solutions for their field force. At Envision, our focus has always been on customers with a large concentration of Mobile salesforce. With our end-to-end Mobile Computing thrust, we are a one-stopshop for enterprises for their Mobile Computing needs. And Mobile Computing being an emerging technology, enterprises feel comfortable with a single point of accountability. Our customers across Industry verticals such as Tata-AIG General Insurance, Ranbaxy Laboratories, Pfizer, AC Nielsen, Deloitte Consulting to name a few for enterprise mobile business solutions.

BANKS: FUNCTIONING FOR THE DEVELOPMENT OF RURAL AREAS

The area of operation of a majority of the RRBs is limited to a notified area comprising a few districts in a State.SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI are spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. Apart from SBI, there are other few banks which functions for the development of the rural areas in India. Few of them are as follows.

Haryana State Cooperative Apex Bank Limited NABARD Sindhanur Urban Souharda Co-operative Bank United Bank of India Syndicate Bank Co-operative bank

CO-OPERATIVE BANKS AND RURAL CREDIT

The Co-operative bank has a history of almost 100 years. The Co-operative banks are an important constituent of the Indian Financial System, judging by the role assigned to them, the expectations they are supposed to fulfill, their number, and the number of offices they operate. Their role in rural financing continues to be important even today, and their business in the urban areas also has increased phenomenally in recent years mainly due to the sharp increase in the number of primary co-operative banks. 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

Institutional Arrangements for Rural Credit (Co-operatives)

Short Term Co-operatives Long Term Co-operatives Short Term Co-operatives | District Central Co-operative Banks | State Co-operative Banks | Primary Agriculture Credit Co-operative Societies | Branches Long Term Cooperatives | State Agriculture & Rural Development Banks | Primary Agriculture & Rural Development Banks | Branches

Primary Agricultural Credit Societies (PACSs)

An agricultural credit society can be started with 10 or more persons normally belonging to a village or a group of villages. The value of each share is generally nominal so as to enable even the poorest farmer to become a member. The members have unlimited liability, that is each member is fully responsible for the entire loss of the society, in the event of failure. Loans are given for short periods, normally for the harvest season, for carrying on agricultural operation, and the rate of interest is fixed. There are now over 92,000 primary agricultural credit societies in the country with a membership of over 100 million. The primary agricultural credit society was expected to attract deposits from among the well todo members and non-members of the village and thus promote thrift and self-help. It should give loans and advances to needy members mainly out of these deposits. Central Co-operative Banks (CCBs) The central co-operative banks are located at the district headquarters or some prominent town of the 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 Loans from the state co-operative banks

Their main function is to lend to primary credit society apart from that, central coopertive 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 RURAL CREDIT The commercial banks at present provide short term crop loans account for nearly 45 to 47% of the total loans given and disbursed by the commercial banks. Term loans for varying periods are given for purchasing pump sets, tractors and other agricultural machinery, for construction of wells and tube well, for development of fruit and garden crops, for leveling and development of land, for purchase of ploughs, animals, etc. commercial banks also extend loans for allied activities viz., for dairying, poultry, piggery, bee keeping, fisheries and others. These loans come to 15 to 16%. 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, artisians 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. Structure of regional rural bank

The establishment of the Regional Rural Banks (RRBs) was initiated in 1975 under the provisions of the ordinance promulgated on 26.9.1975 and thereafter Section 3(1) of the RRB Act, 1976. The issued capital of RRBs is shared by Central Government, sponsor bank and the State Government in the proportion of 50%, 35% and 15% respectively. RRBs established with the explicit objective rural urban of: areas areas

* Bridging the credit gap in * Check the outflow of rural deposits to * Reduce regional imbalances and increase rural employment generation ROLE OF RBI IN RURAL CREDIT

Since it was set up in 1934, RBI has been taking keen interest in expanding credit to the rural sector. After NABARD was set up as the apex bank for agriculture and rural development, RBI has been taking a series of steps for providing timely and adequate credit through NABARD. Scheduled commercial banks excluding foreign banks have been forced to supplement NABARDs efforts-through the stipulation that 40percent of net bank credit should go to the priority sector, out of which at least 18 percent of net bank credit should flow to agriculture. Besides, it is mandatory that any shortfall in fulfilling the 40 percent target or the 18 percent subtarget would have to go to the corpus Rural Infrastructure Development Fund(RIDF).RBI has also taken steps in recent years to strengthen institutional mechanisms such as recapitalisation of Regional Rural Banks (RRBs) and setting up of local area banks(LABs). Micro-Finance 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. Agricultural 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. MARKETING OF MUTUAL FUND UNITS RRBS

With a view to expanding the scope of business of RRBs and considering that marketing of Mutual Fund (MF) units provides a profitable avenue for banks, it has been decided by RBI on 17th May 2006 to allow Regional Rural Banks (RRBs) to undertake marketing of units of Mutual Funds, as agents. Accordingly, RRBs may, with approval of their Board of Directors, enter into agreements with Mutual Funds for marketing their units subject to the following terms and conditions: * The bank should only act as an agent of the customers, forwarding applications of the investors for purchase / sale of MF units to the Mutual Fund / Registrar Transfer Agents.

* The purchase of MF units should be at the risk of customers and without the bank guaranteeing any assured return. * The bank should not acquire such units of Mutual Fund from the secondary market. * The bank should not buy back units of Mutual Funds from their customers. * The bank holding custody of MF units on behalf of their customers should ensure that its own investment and investments belonging to their customers are kept distinct from each other. * Retailing of units of Mutual Funds may be confined to some select branches of the bank to ensure better control. * The bank should comply with the extant KYC/ AML guidelines in respect of the applicants. * The RRBs should put in place adequate and effective control mechanisms in consultation with their sponsor banks. Catalyzed by the growth of the domestic economy, the banking sector in India has truly come of age. But with the current slowdown and fears of a global recession, the Indian economy and the banking sector have been looking for new avenues of growth. In the face of these circumstances, it is ironic that rural banking which has hitherto been a slow growth sector could prove the next development engine for Indian banks. With affordable and relevant technology driving penetration as well as providing an improved service experience, rural banking could bring in financial inclusion and help banks grow their business radically. Indian banks have awakened to the vast potential of the rural sector. Specialized and innovative schemes to improve rural penetration have become the popular mantra. No-frills credit cards, franchisee networks, supply chain financing for agriculture, investments in rural infrastructure and cross-selling of products are only some of the programs directed at the rural sector. Needless to say, at the core of these initiatives lies sophisticated yet reasonably priced technology - playing a significant role both in effective operations and delivery.

The First Steps

India lives in its villages, and the founding fathers deemed it imperative to enable financial inclusion for the rural population. The Regional Rural Bank (RRB) emerged from Indias early aspirations for a stronger institutional arrangement to develop a savings culture in the rural ecosystem, provide rural credit and agriculture finance, while enabling poverty elevation. The formation of the Narasimham Committee in 1975, and eventually the passing of the RRB Act in 1976 were key milestones in this journey. Legislation mandated joint ownership of RRBs by the Central Government, State Government and a sponsor commercial bank, in the ratio of 50%: 35%: 15%, respectively. From a modest beginning of just 6 RRBs with 17 branches covering 12 districts in 1975, the numbers grew to 196 RRBs with 14,446 branches working in 518 districts across the country, in 2004. However, given the multiagency shareholding and entailed restrictions, several RRBs failed to sustain viable operations and others merged vertically or horizontally, resulting in the total number of RRBs stabilizing at 91, in 2007, with over 14,000

branches, spread across 585 of the 622 identified districts. Thus, history has clearly established that the original mandate of promoting profitable banking with a rural focus will be an enduring phenomenon, only when the RRB is able to deliver customer-relevant products with optimal operational efficiency and ensure the functioning of a sustainable and viable business. With 80% of RRBs in rural India, it serves the larger cause of financial inclusion as well.

The Challenges
This, however, is easier said than done. RRBs today continue to traverse an increasingly rocky path, facing significant economic, infrastructural and business hurdles that heighten in complexity with every passing year.

Lack of a Robust Governance Structure

While other rural financial services providers likeScheduled Commercial Banks and private banking entrants have robust processes for functions ranging from HR to product development, RRBs are largely insulated in operation and lag behind their commercial counterparts in efficiency and rationalization of process as well as governance mandates.

Manual Operations
While automation of operations at RRBs is the vision of The Reserve Bank of India (RBI), even mechanization remains a challenge for several of these banks. Basic automation, like the Advanced Ledger Posting Machine (ALPM), for end-of-day (EOD) reporting, is yet to reach a significant number of RRBs. Lack of automation also hampers reporting and MIS, which in turn results in poor visibility into business and operational parameters, critical for management-driven business decisions.

Inadequate Infrastructure
Lack of sufficient infrastructure and consequently the inability of most RRBs to retain qualified managers affect the growth and the discharge of their operations. Inadequate infrastructure support also translates into high project preparation costs, and risk aversion amongst sponsor entities.

Dynamic Market Conditions

Few RRBs are up to the rigours of channel expansion and customer segmentation mandated to conduct business in todays fast changing times. Even the otherwise ubiquitous ATM, is ever so often a channel not supported by RRBs. Most RRBs also lack a robust product innovation agenda to deliver relevant offerings, factoring in the need for customer convenience and flexibility increasingly critical in todays highly competitive and dynamic rural marketplace.

Undefined Roadmap
The RRBs share of woes also includes budgetary constraints, mounting over-dues, lack of adequate infrastructure facilities, and limited channels of investment. Owing to these problems, some RRBs are not able to achieve financial viability. In addition, they have little visibility into operational and business imperatives. Working for growth in very challenging conditions, sustenance is possible only when RRBs have a clear roadmap for: Abiding relationships with customers through customer data analysis Operations with clear cost-efficiency and productivity Unified 360-degree view of the business Relevant and timely product innovation

CONCLUSION

RRBs' performance in respect of some important indicators was certainly better than that of commercial banks or even cooperatives. RRBs have also performed better in terms of providing loans to small and retail traders and petty non-farm rural activities. In recent years, they have taken a leading role in financing Self-Help Groups (SHGs) and other micro-credit institutions and linking such groups with the formal credit sector. RRBs should really be strengthened and provided with more resources with which they can undertake more of these important activities. And most certainly they should be kept apart from a profit-oriented corporate motivation that would reduce their capacity to provide much needed financial services to the rural areas, including to agriculture. Ideally, the best use of the resources raised by RRBs through deposits would be through extensive cross-subsidisation. This, in turn, really requires an apex body that would cover and oversee all the RRBs, something like a National Rural Bank of India (NRBI). The number of rural branches should be increased rather than reduced; they should be encouraged to develop more sophisticated methods of credit delivery to meet the changing needs of farming; and most of all, there should be greater coordination between district planning authorities, panchayati raj institutions and the banks operating in rural areas. Only then will the RRBs fulfill the promise that is so essential for rural development.

BIBLOGRAPHY www.google.com

Financial Management theory and practice by Shashi .K. Gupta & R.K. Sharma.