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Business model for financial inclusion

1

Project report

On

A comparative study of business models of co-operatives

MFIS and FINANCIAL INCLUSION

Project Supervisor:

Dr. Mahil Carr

(Associate Professor, IDRBT)

Submitted by:

Sandeep kumar.padala

MBA-Banking Technology

School of Management

Pondicherry University

Puducherry-605014

Institute for Development and Research in Banking Technology

Castle Hills, Masab Tank

Hyderabad – 500 057

Phone: 90-40-23534981 (8 Lines); Fax: 90-40-23535157

Web: http://www.idrbt.ac.in

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Certificate

This is to certify that project has been successfully completed to my

satisfaction and that the goals set upon at the outset of this endeavor have

been worked upon to the best of the students abilities and resources. I hereby

allow this project to be presented for evaluation with my full consent.

Dr.Mahil carr,

Associate. Professor,

IDRBT

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Contents

1.Introduction 4

1.1Financial exclusion

4

1.2Business model 5

1.3Financial inclusion 7

1.4 Financial Inclusion – Steps

Taken

7

2. Cooperative movement in India 8

3. RRBs 13

4.MFIs

22

5. Evolution of Banking In India 286. RBI and financial inclusion 30

7. Business correspondent Model 33

8. Electronic Benefit Transfer 36

9.Mathematical model For Financial

inclusion

39

10.Business model for financial

inclusion

41

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1.Introduction

1.1 Financial exclusionFinancial Exclusion is the process by which a certain section of the

population or a certain group of individuals is denied the access to basicfinancial services.

Financial Exclusion – Who are these People?

o Underprivileged section in rural and urban areas like, Farmers,

small vendors, etc.

o Agricultural and Industrial Laborers

o People engaged in un-organized sectors

o Unemployed

o Women

o Children

o Old people

o Physically challenged people

Causes of Financial Exclusion

Demand-side Barriers: On demand constraints and opportunities, the

Following issues have a significant bearing on the extent of financial

Exclusion/inclusion:

1. Cultural factors - Women are often disadvantaged by credit requirements

such as collateral since in most of the cases property is registered under theirhusband’s name and they are to seek male guarantees to borrow.

2. Mistrust of financial institutions - The feeling that there is no point in

Applying for financial products because he/she expects to be refused, as

banks are not interested to look into their cause has led to self-exclusion for

many of the low-income groups.

3. Level of income - A higher share of population below the poverty line

Results in lower demand for financial services as the poor may not have

Savings to place as deposit in savings banks.

4. Financial literacy and skills capacity – High information barriers, low

Awareness and limited literacy, particularly financial literacy, i.e., basic

Mathematics, business finance skills as well as lack of understanding often

Constrain demand for financial services.

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Supply-side Barriers: The following issues on the supply side are major

Obstacles in providing an adequate supply of financial services to the

Currently unbanked:

1. Locational constraints – Absence of physical infrastructure in interior-

most parts of the country leads to difficulties in accessing financial

institutions (like banks, etc) resulting in a substantial proportion of

households in rural and remote areas being kept outside the ambit of the

formal financial system.

2. Real and perceived risk in lending - The perceived risk of lending to the

Poor is higher than the real risk, creating a supply barrier by triggering

higher than necessary transactions costs due to stricter than needed

prudential requirements.

3. Approaches and products - Generally, financial services tend to be

Concentrated in urban areas, allowing rural clients little access to servicesand information for making well-grounded decisions.

4. Financial viability of MFIs - MFI practitioners encounter difficulties in

having a “double bottom line”: at the same time aiming to be profitable and

stimulating local economic development.

1.2 Business Model

A business model describes the rationale of how an organization creates,

delivers, and captures value - economic, social, or other forms of value. The

process of business model design is part of business strategy.

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Infrastructure

• Key Activities: The activities necessary to execute a company's

business model.

• Key Resources: The resources those are necessary to create value for

the customer.

• Partner Network: The business alliances, which complement other

aspects of the business model.

Offering

• Value Proposition: The products and services a business offers.. It

describes the way a firm differentiates itself from its competitors and

is the reason why customers buy from a certain firm and not from

another."

Customers

• Customer Segments: The target audience for a business' products and

services.

• Channels: The means by which a company delivers products and

services to customers. This includes the company's marketing and

distribution strategy.

• Customer Relationship: The links a company establishes between

itself and its different customer segments. The process of managingcustomer relationships is referred to as customer relationship

management.

Finances

• Cost Structure: The monetary consequences of the means employed in

the business model.

• Revenue Streams: The way a company makes money through a

variety of revenue flows.

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1.3 Financial inclusion

Financial inclusion is delivery of banking services at an affordable cost to

the vast sections of disadvantaged and low income groups.

Financial Inclusion should include access to financial products and

services like,

• Bank accounts – check in account

• Immediate Credit

• Savings products

• Remittances & Payment services

• Insurance - Healthcare

• Mortgage

• Financial advisory services

• Entrepreneurial credit

1.4 Financial Inclusion – Steps Taken

• Co-operative Movement

• Setting up of State Bank of India

• Nationalization of banks

• Lead Bank Scheme

• RRBs

• Service Area Approach

• Self Help Groups

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2.Cooperative movement in in India

Cooperative is defined as

“ A voluntary association of people who have come together to

achieve a common goal”

The main principle of co operative is

“Each for all and all for each”

The origin of concept is

“May all work with same mind so that they could work well”

Situation of India in the 19th

century

• 75% population was residing in rural India.

• Majority of population depend on agriculture and agriculture related

activities

• There were no nationalized banks.• Available of rural credit is mainly through prime lenders

• There was no any other way to get the credit

• Interest charges were very high. Farmers were suffering from indebt

ness and poverty

All these conditions helped introduction of co-operatives in Indian

soil.

Introduction of cooperatives:Raiffersen initially frames cooperative concept at the time of

German food crisis. In Germany in the year 1864.It worked out verywell at that time in Germany in the 19

th century.

Introduction of cooperatives in IndiaThe classic study by Frederic Nicholson, followed by the Edward

Law Committee on Cooperative Legislation, confirmed and

reiterated the need for the State to actively promote cooperatives. A

decade later, the Maclagan Committee (1915) advocated “there

should be one cooperative for every village and every village should

be covered by a cooperative”. The Royal Commission on Agriculture

in India, which submitted its report in 1928, suggested among other

things, that the cooperative movement should continue to focus on

expanding rural credit and that the State should patronize

cooperatives and protect the sector. It was the Royal Commission

which made the observation “if cooperation fails, there will fail the

best hope of rural India”. By this time, the State was already deeply

involved in promoting agricultural credit cooperatives. The number

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of societies reached impressive proportions and diversified their

activities well beyond agricultural credit. Debates centered on

whether or not each village should have a cooperative and whether

there should be a single purpose or a multipurpose cooperative at the

village level.The Cooperative Movement in India was formally

introduced with the promulgation of Cooperative Societies Act in

1904.The National Cooperative Union of India (NCUI), the apex

organization of the Indian Cooperative Movement traced back its

origin in 1929. When All India Provincial Cooperative Institutes

Association came into being with Shri Lallubhai Samal Das Mehta

as its first President. Having been reorganised as Indian Cooperative

Union, it was renamed later as All India Cooperative Union in 1954

and re-christened as National Cooperative Union of India in 1961.

PrinciplesCooperatives are based on the cooperative values of "self-help, self

responsibility, democracy and equality, equity and solidarity" and

the seven cooperative principles.

1. Voluntary and Open Membership

2. Democratic Member Control

3. Member Economic Participation

4. Autonomy and Independence

5. Education, Training and Information

6. Cooperation among Cooperatives

7. Concern for Community

Co operative acts in India

• 1904-cooperative society act which enabled formation of

“agriculture credit cooperatives” in villages under the government

sponsorship

• 1912-cooperative societies act (amendment of 1904 act)-formation

of non-credit cooperative societies.• 1942-multi-unit cooperative societies act- which enabled

cooperatives to open more branches

• 1984-multi state cooperative societies act-, which enabled them to

start the business in other states

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Evolution of co-operative sector in India

The Indian cooperative movement was initiated by the government.

It spread and diversified with the encouragement and support of the

government its present condition is also to a great extent because of

the intrusive involvement of, and interference by the government

The First Phase: 1900-1930

The Second Phase: 1930 - 1950

The Third Phase: 1950 – 1990

The Fourth Phase: 1990s and onwards

REASONS FOR FAILURES IN COOPERATIVES IN INDIA

• Government interference

• Poor quality of management

• Lack of awareness• Restricted in coverage

• Functional weakness

• Minimum capital requirement

• CRR IS LOW

• CRAR norms not prescribed

• Prudential accounting norms are not followed by PACs

Advantages:

• Easy to tackle the problems like

• Poverty alleviation• Food security

• Employment generation

• High interest rates

Recent Developments

Over the years, primary (urban) cooperative banks have registered a

significant growth in number, size and volume of business handled.

As on 31st March, 2003 there were 2,104 UCBs of which 56 werescheduled banks. About 79 percent of these are located in five states,

- Andhra Pradesh, Gujarat, Karnataka, Maharashtra and Tamil Nadu.

Recently the problems faced by a few large UCBs have highlighted

some of the difficulties these banks face and policy endeavours are

geared to consolidating and strengthening this sector and improving

governance.

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• The cooperative banks/credit institutions constitutes the second

segment of Indian banking system, comprising of about 14% of the

total banking sector asset (March 2007).

• Bulk of the cooperative banks operate in the rural regions with

rural co-op banks accounting for 67% of the total asset and 67% of

the total branches of all cooperative banks.

• Share of rural cooperatives in total institutional credit was 62% in

1992-93 34% in 2002-03 and 53% in 2006-07.

• Cooperative banks have an impressive network of outlets for

institutional credit in India, particularly in rural India (1 PACS per 7

villages).

• In March 2007, there were 97,224 PACS in rural India against

30,393 branches of commercial banks (more than 3 times of outlet of

coop banks).

• In March 2007, there were 102 savings A/C and 113 cooperative

bank members per 1000 rural in India.

• Cooperative banks (both rural and urban) cater to small and

marginal clients.

• Financial health of the cooperative credit institutions, particularly

the rural Cooperatives, has been found to be poor by several

Committees

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Cooperative credit structure

The distinctive feature of the cooperative credit structure in

India is its heterogeneity. The structure differs across rural and urban

areas as well as across States and tenures of loans (The urban areas

are served by Urban Cooperative Banks (UCBs), which are further

sub-divided into scheduled and non-scheduled UCBs. Scheduled

UCBs form a small proportion of the total number of UCBs. Theoperations of both scheduled and non-scheduled UCBs are limited to

either one State (single-State) or stretch across States (multi-State).

Most of the non-scheduled UCBs are primarily single State UCBs

having a single tier structure.

Rural cooperatives structure is bifurcated into

short-term and long-term structure. The short-term cooperative

structure is a three tier structure having State Cooperative Banks

(StCBs) at the apex level followed by District Central Cooperative

Banks (DCCBs) at the intermediate district level followed by

Primary Agricultural Credit Societies (PACS) at the village level.This structure is often referred to as federal structure of the short-

term credit cooperatives. The unitary structure is mainly observed in

the North-eastern region, wherein the StCBs provide credit directly

to PACS instead of any district level intermediary.

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3.Regional rural banks

Introduction

India lives in its villages and in rural India a substantial portion of the

population is engaged in agriculture or allied activities. The farming

community consists mainly of small farmers and agricultural laborers.

Poverty is generally wide spread in the rural areas, with hardly any pockets

of prosperity. As rural economy is running short of capital, it must be

assisted with adequate capital, appropriate technology and required training

in modern technology of production. Hence provision of adequate financialassistance to agricultural, rural industries and rural artisans is necessary. The

welfare and prosperity of the nation rests on the development of agriculture

and allied activities.

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The RRBs were established “with a view to developing the rural economy

by providing, for the purpose of development of agriculture, trade,

commerce, industry and other productive activities in the rural areas, credit

and other facilities, particularly to small and marginal farmers, agricultural

labourers, artisans and small entrepreneurs, and for matters connected

therewith and incidental thereto”

The first rural bank in india is prathama grameen bank(October 2nd

1975)

Reasons for establishment of RRBs

• Need of regionally oriented banks

• Cooperative banks were weak

• Commercial banks outreach was low

• Need of bank for weaker section of rural areas (small and marginal

farmers and agriculture labors

Purposes of Rural Credit For purchase of farm implements viz. indigenous wooden implements,

improved iron implements, agricultural implements, hand tools etc.

For purchase of tractors with accessories, threshers, power tillers,

combine harvesters, power sprayers.

For purchase of oil engines, electrical engines, pump sets,

construction of wells, leveling of ground for irrigational purposes etc.

For the purpose of construction and repairs to farm buildings/structure

of the type viz bullocks shed, farm store, godowns, animal farm etc.

For the purposes of bunding, terracing, leveling, drainage, reclamationof ravine lands, moisture conservation practices

For purchase of seeds including high yielding/hybrid fertilizers,

manure, pesticides, fungicides etc.

For meeting capital expenditure and working capital on units and

dairy, poultry, piggery etc. for construction of buildings, purchase of

animal equipment, feeds, medicines, vehicles etc

Structure of Rural CreditThe credit facilities are available to rural agriculturists and artisans through

financial and non financial institutions which are:

Non Institutional- Professional money lenders

- Agricultural money lenders

- Relatives and friends

- Traders and commission agents

- Land lords and

- Others

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Institutional

- Government

- Cooperative Banks and

- Commercial banks

The non institutional credit sources are considered as exploitative and high

cost system. However, they are very much accessible and easily negotiable

with the lenders. It is observed that non institutional source of credit is

continued to be an important source in rural areas.

Institutional lending or credit or loans refers to loans provided by financial

institutions.

Institutional Arrangement for Rural Credit

CommercialBanks

CooperativeSocieties

Regional RuralBanks

BranchesRural Branches

Long term Credit(investment credit)

Short term credit(production credit)

Federal Structure

State levelAgricultural and

Rural DevelopmentBank

State levelAgricultural and

Rural DevelopmentBank

Unitary structure

PrimaryDevelopment

banks

Branches

State Cooperative Banks

District Central

Cooperative Banks

Primary Agricultural

Credit Society

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Formation and Development of Regional Rural Banks

Cooperatives have been encouraged since 1904 and the commercial banks

were made to accept the responsibility of financing rural economic activities

from 1968 under social control to relieve the poor peasants from the clutches

of moneylenders. Previously banks felt that financing agriculture was not

their job and that his responsibility would be withdrawn soon. So the results

of control and the working of cooperatives had not been significant. Hence,

the government of India had nationalized the 14 major commercial banks

with the objective to channelise the resources the resources of commercial

banks to rural areas. The impact of bank nationalization on the growth of

scheduled commercial banks in rural areas is clear: the share of rural bank

offices in total bank offices jumped from 17.6 per cent in 1969 to 36 per cent

in 1972. The share rose steadily thereafter, and attained a peak of 58.2 per

cent in March 1990. Consequent to the adoption of intensive agricultural

programmes under IADP and DPAP, Green Revolution etc. the demand forfinancial inputs has increased enormously in the rural areas. Therefore it was

felt that cooperative and commercial banks alone would not be in a position

to meet all the credit needs of the expanding rural economic sector. Between

1966 and 68 various committees suggested that the rural credit structure was

weak, therefore some system of rural banks should be created to fill up the

credit gap in rural areas. These banks should extension in the rural areas for

rural people as such they must be located in rural areas and understand the

rural economic environment. Thus Regional Rural Banks were a new type of

institution, which combined

a. Local feel and familiarity with rural possess problems which co-

operative banks have.

b. Degree of business organization ability to mobilize deposit, access to

money market and modernized outlook which commercial banks

have.

The Government of India promulgated the Regional Rural Banks Ordinance

on 26th

September 1975, which was later replaced by the Regional Rural

Bank Act 1976. At to the end of June 1985, 183 Regional Rural Banks witha network of 10,245 branches have been opened in the states of the Indian

Union. The total number of Regional Rural banks functioning in the country

as at the end of June 1999 was 196 covering 451 districts spread over 23

states with the network of 14,467 branches These banks have been

established by the Government of India in terms of the provisions of

Regional Rural Banks Act, 1976. The distinctive feature of a rural bank is

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that though it is a separate body corporate with perpetual succession and

common seal, it is closely linked with the commercial bank, which has

sponsored the proposal to establish it. The central Government, while

establishing a rural bank at the request of a commercial bank, specifies the

local limits within which it shall operate. The rural Bank may establish its

branches or agencies at any place within the notified area.

Objectives of Regional Rural Banks

Regional Rural Banks were established with the following objectives in

mind:

i.) Taking the banking services to the doorstep of rural masses,

particularly in hitherto unbanked rural areas.

ii.)

Making available institutional credit to the weaker sections of thesociety who had by far little or no access to cheaper loans and had

perforce been depending on the private moneylenders.

iii.) Mobilize rural savings and channelise them for supporting productive

activities in rural areas.

iv.) To create a supplementary channel for the flow the central money

market to the rural areas through refinance

v.) Generating employment opportunities in rural areas and bringing

down the cost of providing credit to rural areas.

With these objectives in mind, knowledge of the local language by the staffis an important qualification to make the bank accessible to the people

Capital Structure

The authorized capital of each Regional Rural Bank is Rs.1crore, divided

into 1 lakh fully paid up shares of Rs.100 each. The Central Government

may, after consultation with the Reserve Bank and the sponsoring bank,

increase or reduce such authorized capital, but it shall not be reduced below

25 lakhs. The issued capital of each Rural Bank is Rs.25lakh. Fifty percent

of the capital issued by a Rural Bank is subscribed by the CentralGovernment and thirty five percent by the sponsoring Bank. The Board of

Directors of a Rural Bank may, after the consultation with the Reserve Bank

and the sponsoring Bank and with the prior approval of the Central

Government, increase the issued share capital from time to time. The

additional capital shall be subscribed in the same proportion as is specified

above. The shares if the Rural Bank shall be deemed to be included in the

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securities enumerated in Section 20 of the Indian Trusts Act, 1882 and shall

be deemed to be approved securities for the purposes of the Banking

Regulation Act, 1949.

Business of a Rural Bank

A Rural Bank carries on the normal banking business i.e. the business as

defined in Section 5 (b) of the Banking Regulation Act, 1949 and engages in

one or more forms of business specified in Section 6(1) of that Act. A rural

bank may, in particular, undertake the following types of business, namely:

The granting of loans and advances, particularly to small and marginal

farmers and agricultural labourers, whether individual or in groups

and to co-operatives societies (including agricultural marketing

societies, agricultural processing societies, Co-operative farmingsocieties, primary agricultural credit societies or farmers’ service

societies) for agricultural purposes or agricultural operations or for

other connected purposes.

The granting of loans and advances, particularly to artisans, small

entrepreneurs and persons of small means engaged in trade, commerce

or industry or other productive activities within the notified area of a

Rural Bank.

Management of Regional Rural Banks

The Management of Regional Rural Banks is largely governed by the RBI’s

Act, 1976, Banking Regulation Act 1949 and the guidelines of RBI and

NABARD and sponsor banks. The general superintendence, direction and

management of affairs and business of RRBs are vested in Board of

Directors. They exercise the powers and discharge all the functions of the

RRBs. In discharging its functions, the Board of Directors act on business

principles and shall have due regard to public interest.

The Board will consist of a chairman and not more than 8 directors. The

Central Government will appoint a Chairman and three Directors, theconcerned State Government nominates not more than two Directors and the

sponsor bank will nominate not more than three Directors. The Chairman is

responsible for the overall management of the management of the bank and

hold office for a period of 5 years. The Chairman is required to devote the

whole time to the affairs of the RRBs and subject the superintendence,

control and jurisdiction of the board of directors. The tenure of office of a

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director will be 2 years and he shall hold office until his successor is

nominated and will also be eligible for renomination.

The RRBs Act has also facilitated the creation of business committees by the

Board of Directors. These committees may consist wholly of directors or

wholly of other persons or partly of directors and partly of other persons for

such purpose as it may decide. Most RRBs constitute Business Committees

for examining the feasibility of advances, mobilization of deposits,

deployment of funds in other institutions and to find ways and means of

recovery performance.

Banking Environment

Banking Organization is an open adaptive system. It has its own internal and

external environments. Internal environments of RRBs consist of Banking,Personnel, and Public Relations etc. The external environment consists of

uncontrollable economic, social, political and legal factor governing the

success or otherwise of RRBs

RRBs external Environment comprises of:

1. Legal Environment dealing with rules, regulations and legislative

measures such as General Laws, RRBs Act, Banking Regulation Act

etc.

2. Economic environment consisting of change in economic activity

such as competition, changes from other banks, financial markets andthe prescriptions of the lead banks also effect the working of RRBs.

Change in the economic environment will affect refinance from

NABARD.

3. Political environment dealing with Regional and national Politics.

RRBs activities are affected by monetary and fiscal policies of

government.

4. Social Environment describing the religious activities, social attitudes,

behavior, education and deep-rooted connections. This plays a major

role in rural villages where due to illiteracy and poverty, social and

cultural forces influence business patterns.

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Characteristics of Indian Rural Economy and Rural Borrower and the

Related Problems in the working of Regional Rural Banks

There are certain characteristic features of the Indian rural economy and the

rural borrower. Each of these features creates some hindrance in the

effective development of rural banking.

• The Indian rural socio-economic scene is still feudal in nature largely

still in the midst of illiteracy. Besides this, the Indian rural psyche is

deeply entwined with the cultural ethos.

• Rural borrowing may be seasonal in nature due to the heavy

dependence in these areas on agriculture and allied activities. Timelyavailability of funds is crucial.

• The economic profile of most rural borrowers is very weak. The

average amount of credit required is relatively low and savings

deposited may be as low as Rs. 10 or 20 per month.

Other factors leading to non-viability of Regional Rural Banks:

Non availability of adequate infrastructure facilities, like pucca houses

to locate branches, access roads to villages, police protection on the

one hand and availability of staff to keep pace with needs, on the other

hand, constitute the major handicaps of RRBs in making progress in

branch expansion.

Natural calamities in successive years leading to loss of assets.

Price fluctuations for farm produces as well as in the cost of inputs.

Inadequate support and interest of the government to the RRBs. With

50% shareholding in each RRB, Government has the right to

nominate 3 Directors on the Board of RRBs. How best the GOI could

get over the difficulty of finding enough number of the right type of

people to be nominated as directors and what steps are needed tomake the Boards function effectively are aspects receiving the

attention of GOI and NABARD.

Thus, the problem of effectively reaching the masses still remains unsolved.

In other words, rural banks as they are cannot be expected to become

genuinely rural in the outlook and operations. For any meaningful

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Political

Environment

participation in the overall national rural scene there need be set up at least

20,000 branches of RRBs. Compared to the present number of branches

(about 8000) this only shows the magnitude of the task before RRBs and the

others who have a stake in its success.

Outreach

Total no .of RRBs in 2004 was 196 out of 166 reported profits with coverage

of 518 districts and network of 14466 branches. After amalgamation no. of

RRBs reduced from 196 to 133 out of which 111 reported profit with

coverage of 525 districts with a network 14494 branches

The RRBs external Environment consists of:

Economic

Administration andrelations with other

institutes

Social

Environment

Legal

Environment

Economic

Environment

RRBs

Religion Education

Culture

National

Politics

Regional Politics

RRBs

ActBankingRegulation

Act

General

Laws

Competition

from other banks

Financial

Markets

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Micro Finance

Micro finance has been defined by the task force set up by the NABARD as

"provision of thrift, credit and other financial services and products of very

small amounts to the poor in rural, semi-urban or urban areas for enabling

them to raise their income levels and improve living standards. Micro

finance institutions can include NGOs (Non-Government Organisations), co-

operatives, banks (commercial, RRBs, other nationalized and public sector

banks) and NBFCs (Non-Banking Financial Companies). The NABARD felt

that banks would be unable to efficiently organize such grass-root level

groups and thus NGOs and Voluntary Agencies were introduced into the

picture. New micro credit companies such as Basix and the SEWA-aided

bank represent a primarily NGO-driven effort to charge market linked, risk

adjusted rates of interest on small loans to small borrowers. At the same time

they ensure hurdle free access to borrowers and high repayment rates forthemselves.

In addition to financial intermediation, many micro finance institutions

provide social intermediation such as group formation, training in financial

literacy and management capabilities. Micro finance is therefore not just a

banking tool but also a development tool. Along with benefits to the rural

population, the financial institutions advancing the credit also enjoy better

recovery rates.MFIs don’t accept savings like banks.

Methods for providing micro finance• SHG

• JLG

Both banks and MFIs are providing micro finance.

JLG

In India most of the MFI s are following joint liability group approach.

Characteristics

A joint liability group consists of 5-10 women.

• 5-10 these type of groups are combined As centers

• for every one week these groups have to meet.

• As name suggest joint liability,all the people in the group are liable

for every loan taken by anyone in the group.

This model looks like grameen model to some extent. Which is

popular in Bangladesh.

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Advantages of JLGo Credit worthiness of borrower can be easily assessed by bank or

mfi

o Credit can be easily avail by borrowers since joint liability

o Operation cost , average collection period will be less for bank

o Credit risk is very low

SHGThe most prevalent method of providing micro finance in India is through

Self-Help Groups (SHGs

A SHG is a group of individuals ranging from 5 to 20 members, who come

together for a mutually beneficial purpose. They are homogenous in somerespect and have certain pre-defined social binding factors.

Members of a SHG contribute to a common fund from which collateral-

free loans are given to needy members as per the group decisions.

After at least 6 months if a bank is convinced, the SHG can become

eligible for linkage to the bank for availing credit and can open a savings

account in its name and can receive up to 4 times its savings balance as

credit. The members of the SHG in turn receive credit as per their needs.

This linkage was introduced by the NABARD in 1991-92 through pilot

project. . The SHG decides the rate to be charged to its members.

Similarly, the bank negotiates about appropriate repayment period with

the SHG and the SHG decides on the repayment schedule for its

members, generally in weekly installments.

If members require larger amounts of loans they can approach the bank

for individual loans, with the SHG accepting responsibility for proper

credit utilization, repayment by the member and monitoring of the same

SHG-Bank Linkage Program in India

In India, three types of SHG models have emerged:

1. Bank-SHG-Members: The bank itself acts as a self-help

group promoting institution (SHPI).

2. Bank-Facilitating Agency-SHG-Members: Facilitating

agencies like NGOs, government agencies, or other

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community-based organizations form groups.

3. Bank-NGO-MFI-SHG-Members: NGOs act both as facilitators

and microfinance intermediaries. First they promote

groups, nurture them, and train them, and then they

approach banks for bulk loans for lending to the SHGs.

10.2 Partnership model of SHG-Bank Linkage:

1. Predominant model of microfinance:

Loan to group

Repayment

Commission

(Group formation and linkage)

2. Recently emerging model: financial intermediation by MFIs:

Loan Loan

(Banks lends to MFI

based on their capital) (MFI on lends)

Bank SHG/

Individuals

NGO

Bank MFI SHG/Individual

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On lending of same funds

Partnership model:

Loan 9% - 11%

Repayment Monitor

Originator

Repayment

Collection

Micro finance is thus a potent method of rural credit delivery with

tremendous potential for serving the rural masses.

A New Business Model for Micro finance

Dimension Traditional Model New Business Model

Target Market Micro enterprise Low-income

households

Core Product Working capital

loans and other

business credit

Full financial services

(savings, remittances,

insurance, education,etc.)

Delivery Channel Branches Retail outlets, payment

systems, (ATMs, POS,

cards, cell phones)

Bank MFI SHG/

Individual

NGO

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Relationship Manager Loan officer Promoters

Organizational Structure Decentralized Centralized

Credit Underwriting Integrated,

personalized, high-touch services

Specialized functions,

increased automation

Risk Management 6th sense,

experience,

delinquency - zero

tolerance

Statistical modeling,

risk-based pricing

Technological Platform Personalized MIS &

applications (if

automated)

Common, networked

systems, standardized

software

Plusses for clients

• Flexible

• No need for bank at

all

• Highly empowering

• Members can saveand borrow as needed

• Free to chose

suppliers

• No enforced loan

ladder

• Can evolve from

existing groups, chit

funds, credit unions

etc.

• Can access the fullrange of bank services

• Can evolve into

Federations, and Co-

operatives

• No need for literacy

• No need for

members’ initiative

• Protected from

internal and externalexploiters

• Poorer people are

included

• Belong to and are

supported by the bank

• Bank can offer a

range of additional

tailor-made services

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Minuses for clients

• Need management

skills and time

• Depend on good

accounts

• Can be hijacked

internally or externally

• Cash may not be

secure

• Must meet frequently

• Little freedom or

flexibility

• Group composition

not wholly under

member’s control

• Pressure to borrow

• Interest rates

inflexible

Plusses for Banks

• Lower transaction

costs

• Can fit into anybranch

• Graduation easier

• Can build on existing

groups

• Savings mobilization

easier

• Groups can absorb

odium of expelling

members

• Can resist subsidized

‘schemes’

• Tighter control• Standardized MIS

• Standardized

procedures

• Easier to forecast

need for funds

• Can use lower-grade

staff

Minuses for Banks

• Hard to monitor

• May be tempted by

other banks or by

politicians

• Slow to develop

• May form own

federations

• MIS more complex• Need NGOs or highly

committed staff to

develop groups

• Higher transaction

costs

• Need continuous

guidance and presence

• Need dedicated

system

• Hard to evolve and

change

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Suitable conditions

• Existing bank

network in rural and

poor areas.

• Diffused

communities, castes,

wealth levels

• Tradition of informal

financial services

• Wide variety of scale

and nature of

investment

opportunities

• Some local leadership

• NGOs and/orcommitted bank staff

• Very poor,

homogeneous

communities

• Marginalized people,

with little hope and

initiative

• Few traditional

informal financial

mechanisms.

• Lack of financial

institutions

• Resource poor, little

hope of graduation

• Large numbers ofsmall business

opportunities

• Few NGOs

SHG are broadly categorized into 5 groups depend on the origin and

source of funding.1. Pre exisisting groups

2. Promoted by NGOs

3. Promoted by BANKS/NBFCs

4. Promoted by government/local government agency

5. Promoted by SHG federations

Evolution of Banking In India

• 1786 General Bank of India formed followed by another bank known

as Bank of Hindustan.

• 1806June 2 Bank of Calcutta established -It was later renamed as

Bank of Bengal

• 1809 Jan 2 Bank of Calcutta becomes Bank of Bengal

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• 1840 Apr 15 Bank of Bombay is established

• 1843 July 1 Bank of Madras is formed

• 1861 Paper Currency Act is passed

• 1865 Allahabad Bank is established.This was the first fully Indian

owned Bank• 1920 Oct 31AITUC formed under Lala Lajpat Rai's presidentship at

New Delhi

• 1921 Jan 27 Imperial Bank of India established by merging 3

Presidency Banks –Bank of Bengal,Bank of Bombay and Bank of

Madras. 1920 July 09 Imperial Bank of India Indian Staff Association

is formed under the Benevolent Societies Act at Calcutta (now

Kolkata). It was duly registered under Indian Trade Unions Act only

on 24th

May’1932.

• 1926 Indian Trade Unions Act comes into existence

• 1946 Aug01 First ever Strike in Imperial Bank of India by Imperial

Bank of India Indian Staff Association continuing for 46 days. It was

withdrawn on the 15th

September’1946.

• 1947 May 3 INTUC formed at New Delhi

• 1955 July 1 State Bank of India is formed by replacing Imperial Bank

of India. It becomes the first Bank in India to be nationalized.

• 1959 State Bank of India (Subsidiary Banks) Act is passed enabling

State Bank of India to take over 8 former State associated banks as its

subsidiaries.

• 1969 July 19 Nationalisation of Banks -14 major Banks in Indianationalised

• 1971 Oct 01 State Bank of India’s Banyan Tree emblem changed to

‘Shoonya’ (Zero)

• 1980 July 15 Nationalization of Banks -6 other Banks in India

nationalized.With this Government of India owned banking in the

country rose to 91%.

• 2007 June 29 Government of India acquires the entire Reserve Bank

of India shareholding in State Bank of India consisting of over 314

million equity shares at a total amount of over 355 billion rupees.

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RBI AND FINANCIAL INCLUSION

As the central bank of the country, the Reserve bank of India has taken steps

to ensure financial inclusion in the country. It has tried to make banking

more attractive to citizens by allowing for easier transactions with banks. In

2004 RBI appointed an internal group to look into ways to improve

Financial Inclusion in the country. It came out with a report in 2005 (Khan

Committee) and subsequently RBI issued a circular in 2006 allowing the use

of intermediaries for providing banking and financial services. Through such

policies the RBI has tried to improve Financial Inclusion. Financial

Inclusion offers immense potential not only for banks but for other

businesses. Through an integrated approach the businesses, the NGOs, the

government agencies as well as the banks can be partners in growth. RBI has

realized that a push is needed to kick start the financial inclusion process.Some of the steps taken by RBI include the directive to banks to offer No-

frills account, easier KYC norms, offering GCC cards to the poor, better

customer services, promoting the use of IT and intermediaries, and asking

SLBCs and UTLBCs to start a campaign to promote financial inclusion on a

pilot basis. So far the campaign for 100% financial inclusion has been said

to be a success with many states now reaching near-total financial inclusion.

Policy initiatives by reserve bank of India

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Keeping in view the tremendous scope for improving financial coverage, the

RBI as a proactive measure, has taken several initiatives to promote

financial inclusion:

1. No-frills Accounts: The RBI in its annual policy statement for the

year 2005-06 and also in the mid term review of the policy (2005-06),

exhorted the banks, with a view to achieving greater financial

inclusion, to make available a basic banking “No-Frills” account

either with nil or very minimum balances as well as charges that

would make such accounts accessible to vast sections of the

population. The nature and number of transactions in such accounts

would be restricted and made known of transaction in such accounts

would be restricted and made known to customers in advance in a

transparent manner. All banks have been urged to give wide publicity

to the facility of such “No-Frills” account. Banks are required to make

available all printed used by retail customers in the concerned regional

language.

2. Simplification of KYC norms: In order to ensure that persons

belonging to low income group in urban and rural areas do not face

difficulty in opening accounts has been simplified for those persons

with balances not exceeding rupees fifty thousand rupees (Rs. 50,000)

and credits in the accounts not exceeding rupees one lakh (Rs.

1,00,000) in a year.

3. Overdraft facilities in No-frill Accounts: RRBs have been

specifically advised to allow limited overdraft facilities in `No-frills`

account without any collateral or linkage to any purpose. The idea is

that provision of such overdraft facility provides a ready source of

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funding to the account holder who is thereby induced to open such

accounts.

4. One-Time Settlement: For all borrowers where the principal amount

is less than RS.25000/-, banks have been asked to offer a one-time

settlement scheme. As there is large number of such very small NFA s

with banks, offer of such an OTS was expected to restore borrowing

relationship with the formal system and thereby obviate the need to go

back to the informal system. in case where the loans are under

government sponsored schemes the state level banker’s committee

(SLBC) was expected to evolve a suitable policy.

5. General purpose Credit Card: Banks have been advised by RBI to

provide a General purpose Credit Card (GCC) facility at their rural

and semi urban branches. The credit facility extended under the

scheme will be in the nature of revolving credit. The GCC-holder will

be entitled to draw cash from the specified branch of bank up to the

limit sanctioned. Banks would have flexibility in fixing the limit

based on the assessment of income and cash flow of the entire

houdehold, without insistence on security or purpose.however, the

total credit facility under GCC for an individual should not exceed

RS. 25,000/- . it is expected that banks will come out with their own

schemes to popularise this product amongst the rural client.

6. Business Facilitators and correspondents: with the objective of

ensuring greater financial inclusion and increasing the outreach of the

banking sector, banks were permitted to use the services of NGOS/

SHGs, MFIs and other civil society Organisations as intermediaries in

providing financial and banking services through the use of business

facilitator and correspondent models.

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7. Broader definition of financial inclusion: RBI subsequently

observed that a family satisfying the following conditions also would

be treated as financially included:

A.

Member of SHG

B. Member of a PACS

C. If have a post office savings account

D. Member covered under govt schemes

Business Correspondent (BC) Model

Eligibility to become a Business Correspondent :

As per the RBI guidelines, the following entities are eligible for appointment

of

Business Correspondents (BCs) for banks:

• NGOs/ MFIs set up under Societies/ Trust Acts,

• societies registered under Mutually Aided Cooperative Societies Acts

or the

• Cooperative Societies Acts of States,

• Section 25 companies that are stand alone entities or in which NBFCs,banks,

• telecom companies and other corporate entities or their holding

companies did

• not have equity holdings in excess of 10 per cent,

• post offices ,

• retired bank employees,

• ex-servicemen ,

• retired government employees.

• Individual kirana/medical/fair price shop owners• Individual Public Call Office (PCO) operators

• Agents of Small Savings Schemes of Government of India/Insurance

Companies

• Individuals who own petrol pumps

• Retired teachers

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• Authorised functionaries of well run Self Help Groups (SHGs) linked

to banks

• Non deposit taking NBFCs (non-banking finance companies) in the

nature of

• loan companies whose micro finance portfolio is not less than 80 percent of their

• loan outstanding in the financially excluded districts as identified by

the

• Committee on Financial Inclusion

• RBI has now permitted banks to engage any individual, including

those

• operating Common Service Centres (CSCs) as BC, subject to banks’

comfort

• level and their carrying out suitable due diligence as also instituting

additional

• safeguards as may be considered appropriate to minimise the agency

risks

Appointment of BCs· Must be a permanent resident of the area in which they propose to operate.

· They should be well established, enjoy good reputation and have the

confidence

of the local people.

· The ability of BCs to invest in POS machines and other equipments.

· In case of individuals selected as BCs, the criterion are as under :· A minimum education qualification of Xth pass.

· Field Investigation /RCU for verification of residence and dealings, etc. to

be

conducted.

Scope of Activities to be undertaken by BCsThe scope of activities undertaken by BCs are as under :

· Creating awareness about savings and other products and education and

adviceon managing money and debt counseling.

· Identification of potential customers

· Collection and preliminary processing of various forms for deposits

including

verification of primary information / data

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· Filling of applications / account opening forms including nomination

clause and

submission to the Bank.

· KYC will also be completed by the BCs.

· Opening of no frill deposit accounts and other products as permitted from

time to

time by leveraging technology.

· Collection and payment of small value deposits and withdrawals ; Min :

nil; Max :

Rs. 2000/- per transaction.

· In respect of all such transactions, the BC/his agent will be authorized to

accept

/ deliver cash either at his place of work or at any convenient location

subject to the

ceilings per customer (Rs 2000/- in each case).· Furnishing of mini account statements and other account information, for a

period of 3 months.

· Any other service on behalf of the Bank, duly authorized by the

appropriate

authority.

· The activities undertaken by the Business Correspondents would be within

the

normal course of the Bank’s banking business, but conducted through and

by the

entities at places other than the Bank’s premises.

· In respect of all such transactions, the BC/his/her agent will be authorized

to

accept / deliver cash either at his place of work or at any convenient location

subject

to the ceilings per day / per customer as laid down. The Business

Correspondents

will be linked to a nearby branch (base Branch).

· Cross-selling of other financial products like insurance / mutual fund

products /pension products / any other third party product, as and when they are

assigned to

do so.

· In case duly appointed sub-agents of BCs, BCs to take care of reputational

risks involved

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4.3 Electronic Benefit Transfer (EBT) and Financial Inclusion

In India to improve the living standard of unprotected section of society

which has little means of earnings with no savings for their old age,

Government introduced social welfare programme which includes payment

of cash to beneficiaries to raise their standard of living in area of health,

insurances, education etc.

In India there are schemes for below poverty line people such as- Social Security Pension

- National Rural Employment Guarantee Schemes (NREGS)

- Insurance Schemes.

But such scheme payments should be disbursed in time and there should not

be any misuse and leakages in the system. To ensure this Government of

Andhra Pradesh came out with a plan of Smart-card based on electronic

payment.

Financial Inclusion is categories into two phases, first phase is an EBT itmeans Government transaction such as Social Security Pension and

NREGAs and second phase is Total Financial Inclusion such as dealing in

recurring deposits, saving banks and General Credit Card etc.

Electronic Benefit transfer is a platform of Financial Inclusion created by

banks through Business correspondent. Since banks do not have branches at

remote location the services of BC is utilized. In first phase BC work is

enrolment of government beneficiaries with their biometric identification.

Than banks open a “No Frill” accounts in their books. Every account holder

is issued smart cards which contain basic data of the account holder alongwith the biometric data and photograph. BC is provided with hand held

devices in which all beneficiaries’ details and biometric identification is

stored which facilitates banks to carry out cash-in and cash-out functions on

behalf of the banks. Banks credit the accounts of the beneficiaries enabling

the BC to access the account through points – of- access devices which are

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linked to bank server by using mobile device and disburse cash at Gram

Panchayat (GP) level.

There are three model of EBT they are

- Bank-Branch model

- Bank-Led model and

- Non- Bank model

Bank-branch model operated through network of bank branches and other

two models operates through agents of banks or on their own.

In first phase of Financial Inclusion first enroll government beneficiaries and

complete government transactions and remaining people who are unbanked

in the villages need to enroll and open bank accounts under Total Financial

Inclusion and in second phase all banking products and services is to be

offered.

Currently there are some challenges in Bank- Led model such as multiplicity

banks and multiplicity correspondents in one area making the operation non-

viable for any BC so to achieve objective of Financial Inclusion they should

adopt one district one branch model.

Flow of Electronic Benefit Transfer in India

Currently in India flow of electronic benefit transfer to weaker and rural

people is given in two ways Social Security Pension (SSP) and National

Rural Employment Guarantee Schemes (NREGS). SSP is given to old age

people, widow and physically handicapped. NREGS is given to those people

who work on government project in villages. Firstly government given total

amount to the bank that has to be disbursed to such beneficiaries through

technology use and give 2% of commission to bank on total disbursement of

cash as shown in the figure 4.1. Bank transfer such amount to service

provider to disburse on revenue sharing model. Bank gets a commission of

0.25% and 1.75% is service provider commission.

Figure 4.1 Flow of Electronic Benefit Transfer in India

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Govt

Bank Service Provider

BC1 BCn BC2

District Co-coordinator

Mandal Co-coordinator

CSP1 CSP2 CSPn

Beneficiaries

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9.A Mathematical business model for financial inclusion

This model illustrates us a business model for financial inclusion and also it

gives us a break even point for financial inclusion.

Outcome of the model:Estimation of the principal amount that must be invested along with other

components like personnel, bank terminal, cards and connectivity to make

the model sustainable

Assumptions:1. A business correspondent/bank branch serves a population space of

1000 customers

2. Business correspondent/business facilitator disburses loans

3. The backend costs are not taken into account.

Terms :

T-time taken for which debt is taken

P=Principal to be invested

Pd=deposit amount

Pl=loan amount

t=time taken for which loans are made

r=interest rate for debt

R=interest rate for loans

Kc=total capital costs

Oc=total operating costs for running a BC unit

Tc=capital cost of a bank terminal

Ccard=cost of card

m=number of customers to be carded

n=period of amortization(years)

Sbc salary of the bc unit

Oexp-operating expenses such as electricity, connectivity

cost,stationary,rent etc.

Fc-cost of funds

NPAprovHere we are treating BC outlet as a point of contact with the formal

banking system and presume that it operates like a bank branch

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Model:

Kc=(Tc+(Ccard*m))/n……………….(1)

The operating costs are (annual expenditure)

Oc=Sbc+Oexp+Cc+NPAprov…………………….(2)

The cost of funds(debt) for disbursing loans

Fc=(r/100)*Pd…………………………(3)

The returns from customers

ROI=(R/100)*Pi………………………(4)(Pi=Pl-NPA)

Therefore

Oc+Fc=ROI…………………………..(5)(at break even there are no

profits)

Oc+((r/100)*Pd)=(R/100)*Pi…………(6)(substituting 3 and 4 in 5)

Oc=((R-r)/100)*P

Therefore P=(100/(R-r))*Oc……………7This is the principal required for Break Even

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Building Blocks of a business model

Customer Segments

Value propositions

Channels

Customer relationships

Revenue streams

Key resources

Key activities

Key partners

Cost structure

Customer segmentsGovernment beneficiaries

Non government benificiaries

Value proposition

Financial services

Innovative products like flexible RD for non government beneficiaries

Savings and credit facility for NREG beneficiaries

Implementation of other products like micro insurance and remittances

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Channels

Customer Relationship

As Most of the customers are illiterates,

CSP s should be trained by banks in Various aspects

Knowledge about products

Customer relationship

responsibilities

Revenue Stream

From govt benefit programs .25%for every transaction

From other programs

Income from interest

Other charges from ancillary services

Key Resources

BC/BFs

CSPs,

One employee has to be employed in the bank for fi transactions

Technology providers

Key activities

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Educating CSPs

Key Partners

Technology partners

Other institutions

NABARD

RBI

Cost structure

Banks have to minimize their equipment costs

Banks have to concentrate on NPAs

Banks can use ZSN cards instead of smart cards

bm sandeepp 2010

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