Rural Outreach for Banks: Challenges and Possible Solutions

Literature Review

In recent times, the banking sector in India has experienced phenomenal growth in terms of geographical reach and credit disbursal. However, penetration into the hinterlands of rural India is still, largely missing (Christabell & Vimal, 2012). As a result, especially for the rural poor, core banking services, such as, credit facility and amenities for deposits and withdrawals of money are absent. According to All Indian Debt Investment Survey in 2002 (Christabell & Vimal, 2012), nearly 111.5 million households did not have access to bank credit. Additionally, 17 million household owed money to moneylenders. As per 2011 census, 58.7% of households were availing banking services at that time (Bhaskar, 2013). Further, in 2013, CRISIL published its own financial inclusion index called “Inclusix” (Bhaskar, 2013). This index took into account three vital parameters: (a) Branch penetration (b) Credit Penetration and (c) Deposit Penetration. For 2011, the score of Inclusix was 40.1 (on a scale of 100) (Bhaskar, 2013), suggesting enormous room for improvement. With a view of making financial services available to all sections of the society, the Indian government has taken steps towards “Financial Inclusion” of the entire country. These steps may be viewed in the following three phases (Memdani & Rajyalakshmi, 2013):

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  First Phase (1969-1991): This phase included the period of nationalizing banks in India. This was done with a view of providing financial services to all society strata. Primarily, the following strategies were incorporated as a step towards financial inclusion: Lead Bank Scheme, Priority Sector Lending Norms, and Interest Rate Caps for poor clients.

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  Second Phase (2005-2006): Although nationalization fell out of favor, RBI (The Reserve Bank of India) issued a policy circular in 2006 urging banks to form strategies with a view of achieving financial inclusion. Further, RBI advised banks to start No Frills Account for the rural poor and provide for easier and transparent KYC norms.

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  Third Phase (Rangrajan Committee): The Rangrajan Committee suggested the development of a National Rural Financial Inclusion Plan, whose aim would be to provide financial services and products to approximately 50% of the rural Indian population. This committee also proposed that the government take initiative and form an association called the “National Mission on Financial Inclusion”. The objective of this group would be to bring together stakeholders and deliberate on policies to attain financial inclusion.