Rural Retail Banking in India
Content
MADE BY: ITEE SHREE CHAUDHARY MBA-INSURANCE AND BANKING MB 11058
Financial inclusion is seen as one of the means for overall economic development of a country. The growth of the rural retail banking industry fosters financial inclusion by providing financial products and services to people in the farthest reaches of the country. In India, even now the rural areas lack access to basic financial services. However, the recent emergence of microfinance institutions (MFIs) and non-banking financial corporations (NBFCs) in this sector has led to a commendable growth in the industry. This study aims to identify the most probable scenarios for the industry in the year 2020 using the Delphi study approach. This article has tried to understand how the Indian rural retail banking industry (industry) will develop over the next decade. It is aimed to identify the institutional environment of this industry in the coming decade as well as the activities that banks and other financial institutions (FIs) in India will need to invest in to realize the full potential of this market.
Rural Retail Banking
The Reserve Bank of India (RBI) had a mandate to promote rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. Through the State Bank of India (SBI) Act in 1955, the SBI was made an important organisation for extending rural credit to supplement the efforts of cooperative institutions. These cooperative institutions, better known as primary agricultural credit societies (PACS)1 also provide other agricultural inputs to the farmers. The next step to supplement the efforts of cooperatives and commercial banks was the establishment of regional rural banks in 1975 in different states with equity participation from commercial banks, central and state governments. In 1982, to consolidate the various arrangements made by the RBI to promote/supervise institutions and channel credit to rural areas, the National Bank for Agricultural and Rural Development (NABARD) was established.
Factors influencing demand and supply in the rural retail banking industry
Delphi Study Approach
The Delphi study approach has been used to identify and understand the different scenarios that will emerge for rural retail banking in 2020. It is a method for the “systematic solicitation and collation of judgments on a particular topic through a set of carefully designed sequential questionnaires interspersed with summarized information and feedback of opinions derived from earlier responses” Opinions about a certain problem or task are solicited through mail or electronic means in a geographically dispersed network.
Future Trends in Rural Retail Banking
Based on our secondary research and interviews with experts in the industry 20 projections were formulated for the possible scenario in the industry in the year 2020. These projections can largely be classified into – outcome and enabler projections. Outcome Projections These projections concern the actual state of affairs in the industry in 2020. They are a description of a specific situation in 2020 rather than an activity by a specific player in the society. These projections are further categorised under the following four fronts: Political scenario – A strict regulatory regime is expected for the industry in the future, accompanied with increasing changes in norms and frameworks, primarily, the removal of the cap on interest rates as imposed by the RBI at present. Economic scenario – The greater share of the market will be serviced by the MFIs and NBFCs. A collaborative alliance with internationally banks will be the primary source of funds and other resources for the
Social scenario – Urbanization and migration from the rural areas would substantially decrease the size of the market for the FIs. Even the consumers would become more aware and knowledgeable about the various financial services and products and hence, would expect one-stop shop solutions from the FIs. Technological scenario – Consumer databases providing information about the credit history and financial dealings of the consumers and thus enabling the FIs to design customized products and better manage their credit portfolio will be put in place. In addition, mobile phones would become the means of the primary delivery mechanism in the rural areas owing to their high penetration and reach and low costs. Enabler Projections
The other kinds of projections for the industry in 2020 were the enabler projections. These projections pertain to the stakeholders in the industry – customers, suppliers, competitors, government and society. These projections reflect the actions that are needed to be taken by these shareholders to enable the outcome projections.
Analysis of the Projections
The projections formulated for the year 2020 were analysed using the Delphi approach. The various experts who took part in the study were asked to rate the projections on the following counts : The probability of occurrence of the respective projection in 2020. The impact on the industry if the projection is true. The scale used was a 5-point scale from 1 to 5 where 1 signifies very low impact and 5 signifies very high impact. The desirability of the occurrence of the projection. The scale used for was a 5-point scale from 1 to 5 where 1 signifies very low desirability and 5 signifies very high desirability. Based on the responses of the participants in the study two metrics were calculated for each projection – consensus and convergence.
Consensus
Consensus signifies the consensus among the experts as to the probability of occurrence of the projections. The variance among the responses of all the experts is taken as a measure of the consensus among the experts. A variance of up to 25 is taken as a sign of strong consensus, from 26 to 40 is taken as a sign of moderate dissent and greater than 40 is taken as sign of high dissent.
Convergence
Convergence refers to the changes in the responses of the participants over the period of the study as they studied the responses of the other participants and altered their responses accordingly. It is calculated as the change in absolute deviation of the final responses from the absolute deviation of the initial responses as a percentage of the absolute deviation of the initial responses. An absolute value of convergence up to 10% is taken as moderate convergence, from 11% to 20% is taken as strong convergence and greater than 20% is taken as very strong convergence. Exhibit 4 gives the mean value of probability, impact and desirability and the degree of consensus and convergence for
Conclusion
Based on our study we have concluded that the following scenarios are the most probable in the year 2020 for the Indian rural retail banking industry: Consumer awareness Consumer databases Capitalization of MFIs
Localized institutions
Mobile-based delivery model
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Financial inclusion is seen as one of the means for overall economic development of a country. The growth of the rural retail banking industry fosters financial inclusion by providing financial products and services to people in the farthest reaches of the country. In India, even now the rural areas lack access to basic financial services. However, the recent emergence of microfinance institutions (MFIs) and non-banking financial corporations (NBFCs) in this sector has led to a commendable growth in the industry. This study aims to identify the most probable scenarios for the industry in the year 2020 using the Delphi study approach. This article has tried to understand how the Indian rural retail banking industry (industry) will develop over the next decade. It is aimed to identify the institutional environment of this industry in the coming decade as well as the activities that banks and other financial institutions (FIs) in India will need to invest in to realize the full potential of this market.
Rural Retail Banking
The Reserve Bank of India (RBI) had a mandate to promote rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. Through the State Bank of India (SBI) Act in 1955, the SBI was made an important organisation for extending rural credit to supplement the efforts of cooperative institutions. These cooperative institutions, better known as primary agricultural credit societies (PACS)1 also provide other agricultural inputs to the farmers. The next step to supplement the efforts of cooperatives and commercial banks was the establishment of regional rural banks in 1975 in different states with equity participation from commercial banks, central and state governments. In 1982, to consolidate the various arrangements made by the RBI to promote/supervise institutions and channel credit to rural areas, the National Bank for Agricultural and Rural Development (NABARD) was established.
Factors influencing demand and supply in the rural retail banking industry
Delphi Study Approach
The Delphi study approach has been used to identify and understand the different scenarios that will emerge for rural retail banking in 2020. It is a method for the “systematic solicitation and collation of judgments on a particular topic through a set of carefully designed sequential questionnaires interspersed with summarized information and feedback of opinions derived from earlier responses” Opinions about a certain problem or task are solicited through mail or electronic means in a geographically dispersed network.
Future Trends in Rural Retail Banking
Based on our secondary research and interviews with experts in the industry 20 projections were formulated for the possible scenario in the industry in the year 2020. These projections can largely be classified into – outcome and enabler projections. Outcome Projections These projections concern the actual state of affairs in the industry in 2020. They are a description of a specific situation in 2020 rather than an activity by a specific player in the society. These projections are further categorised under the following four fronts: Political scenario – A strict regulatory regime is expected for the industry in the future, accompanied with increasing changes in norms and frameworks, primarily, the removal of the cap on interest rates as imposed by the RBI at present. Economic scenario – The greater share of the market will be serviced by the MFIs and NBFCs. A collaborative alliance with internationally banks will be the primary source of funds and other resources for the
Social scenario – Urbanization and migration from the rural areas would substantially decrease the size of the market for the FIs. Even the consumers would become more aware and knowledgeable about the various financial services and products and hence, would expect one-stop shop solutions from the FIs. Technological scenario – Consumer databases providing information about the credit history and financial dealings of the consumers and thus enabling the FIs to design customized products and better manage their credit portfolio will be put in place. In addition, mobile phones would become the means of the primary delivery mechanism in the rural areas owing to their high penetration and reach and low costs. Enabler Projections
The other kinds of projections for the industry in 2020 were the enabler projections. These projections pertain to the stakeholders in the industry – customers, suppliers, competitors, government and society. These projections reflect the actions that are needed to be taken by these shareholders to enable the outcome projections.
Analysis of the Projections
The projections formulated for the year 2020 were analysed using the Delphi approach. The various experts who took part in the study were asked to rate the projections on the following counts : The probability of occurrence of the respective projection in 2020. The impact on the industry if the projection is true. The scale used was a 5-point scale from 1 to 5 where 1 signifies very low impact and 5 signifies very high impact. The desirability of the occurrence of the projection. The scale used for was a 5-point scale from 1 to 5 where 1 signifies very low desirability and 5 signifies very high desirability. Based on the responses of the participants in the study two metrics were calculated for each projection – consensus and convergence.
Consensus
Consensus signifies the consensus among the experts as to the probability of occurrence of the projections. The variance among the responses of all the experts is taken as a measure of the consensus among the experts. A variance of up to 25 is taken as a sign of strong consensus, from 26 to 40 is taken as a sign of moderate dissent and greater than 40 is taken as sign of high dissent.
Convergence
Convergence refers to the changes in the responses of the participants over the period of the study as they studied the responses of the other participants and altered their responses accordingly. It is calculated as the change in absolute deviation of the final responses from the absolute deviation of the initial responses as a percentage of the absolute deviation of the initial responses. An absolute value of convergence up to 10% is taken as moderate convergence, from 11% to 20% is taken as strong convergence and greater than 20% is taken as very strong convergence. Exhibit 4 gives the mean value of probability, impact and desirability and the degree of consensus and convergence for
Conclusion
Based on our study we have concluded that the following scenarios are the most probable in the year 2020 for the Indian rural retail banking industry: Consumer awareness Consumer databases Capitalization of MFIs
Localized institutions
Mobile-based delivery model
QUERIES ??
THANK YOU
