Yojana Feb 2010

FEBRUARY 2010 A DEVELOPMENT MONTHLY RS 10

ISSN-0971-8400

With automated teller machines fast turning out to be the

primary channel for cash withdrawals, banks are working

on ensuring that even handicapped customers have access

to these machines. For starters, around 7,000 ATMs of State Bank of

India are being readied for use by blind customers for most banking

transactions.

SBI has completed a pilot project for ATM while the software for

internet banking for visually-challenged is in place.

The move to do so follows a dictate from RBI to banks early this year

that all their branches and ATMs should be made accessible to

persons with disabilities. RBI had also said banks should make at least

one third of new ATMs installed as talking ATMs with Braille keypads

and place them strategically in consultation with other banks to ensure

that at least one talking ATM with Braille keypad is generally available

in each locality for catering to needs of visually-impaired persons.

Banks may also bring the locations of such talking ATMs to the notice

of their visually-impaired customers.

Out of 18,000 ATMs, 7,000 ATMs of SBI would be accessible to the

visually-disabled. They will be issued special debit cards for this.

With regards to internet banking they have also acquired a software

called Jaws to enable internet banking for visually-impaired. The key

features under internet banking include checking the balance, funds

transfer and download account statement. It will also have a 'dead-

man's switch – wherein the user can enter this key if he fears intrusion

to his privacy while he is doing online transactions, following which the

page will collapse and the account will not be accessible for three

days, or till such a time the account-holder approaches the bank to

activate it. Banks are looking at putting ramps at some of their ATMs to

help the physically challenged access ATMs.

ATMs TO BECOME BLIND FRIENDLY

SBI Plans to open 7,000 such ATMs, Banks to Notify Visually-Impaired

YOJANA February 2010 1

C O N T E N T S

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February 2010 Vol 54

Chief Editor : Neeta Prasad

Senior Editor : Rakeshrenu

Editor : Manogyan R. Pal

Joint Director (Prod) : J.K. ChandraCover Design : Sadhna Saxena

E-mail (Editorial) : [email protected] : [email protected]

Website : www.yojana.gov.in

Let noble thoughts come to us from every sideRig Veda

(Circulation) : pdjucir_ [email protected]

BANKING SECTOR: EMERGING CHALLENGES ..................... 5 K R Kamath

INDIAN BANKING SECTOR : SOUND AND RESILIENT .................................................................................... 10 K B L Mathur

BEST PRACTICES A BANK ACCOUNT FOR THE WAGE EARNER ................................................................... 15 Rupali Das

NORTH EAST DIARY ............................................................... 17

THE CREDIT PLUS APPROACH TO RURAL DEVELOPMENT ........................................................................... 18 K G Karmakar

NATIONALISED BANKS FARE WELL WITH THIRD GENERATION CUSTOMERS ...................................................... 24 Tripti Nath

J&K WINDOW ........................................................................... 29

SHODH YATRA REVOLUTIONIzING PERSONAL HYGIENE FOR WOMEN.............................................................. 30

AUTOMATION OF BANKING SECTOR IN INDIA ................... 32 V Dheenadhayalan

DO YOu KNOW? ....................................................................... 36

EVOLUTION OF BANKING ........................................................ 38 Avanindra Nath Thakur

ART AND SCIENCE OF DEVELOPMENT PRACTICE .................................................................................... 41 Rajeev Ahuja

RURAL BANKING IN INDIA ...................................................... 43 A Amarender Reddy

SCHEDULED COMMERCIAL BANKS : GROWTH TRENDS ...................................................................... 48 Anand Singh Kodan, Shalinder kumar, Narander kadian

BOOK REVIEW Information Technology Revolution in India ........................................................................................... 51

2 YOJANA February 2010

*Only at Khan Study Group

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There have been many positive developments in the Indian banking sector during the last decade. Changes in policy and regulation brought about during this period have led to an overall improvement in the growth, asset

quality and profitability of our banks, so that they now compare very favourably with other banks in the region. Banking index has grown at a compounded annual rate of 51 % since April 2001 as compared to a 27 % growth in the market index during this period. The capital to risk weighted assets ratio (CRAR) for all the scheduled commercial banks has increased to 13.2 percent from 11.4 per cent in 2001, which is more than the 8 per cent requirement specified under Basel frameworks, or the 9 percent norm adopted by the RBI for an Indian Bank. Outstanding records of growth and innovation have been established by some banks. Even the public sector banks have stood up to the challenge posed by the new private banks, and have worked consciously upon improving their efficiency. The fact that Indian banks have come out almost unscathed through the global downturn in a year that has seen the fall of several leading foreign banks, speaks volumes about their resilience.

Their success notwithstanding, a lot more needs to be done to strengthen and streamline the sector so that it can respond to market realities and support the kind of growth to which India aspires. Bank penetration continues to be rather low in the country, despite expansion of services in rural areas. There are structural weaknesses in the system like restrictions on availability and deployment of capital, weak institutional support infrastructure, restrictive labour laws, ineffective regulations and governance issues. These need to be addressed urgently.

Financial inclusion holds top priority for policy makers today, because unless we are able to meet the credit needs of our people, we can never hope to grow in a sustainable way. In order to reach the maximum number of people in the most efficient manner, banks need to have robust risk management practices, advanced technology, skilled manpower and very sound marketing practices. All this would require huge investment. Further, competition from foreign banks is likely to intensify in the coming years, and the domestic banks need to prepare themselves to face the challenge. With innovations in products and services coming up everyday, banks also need to acquire new skills in sales, marketing and credit operations.

The current issue of Yojana has experts from the sector discussing these and other issues related to the growth and development of the banking sector in India, the challenges and opportunities that it faces today, and the way forward that policy makers and bank managements need to take in order to strengthen the sector.

About the Issue


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Subjects Offered

GENERAL STUDIES by

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PUB. ADMN.

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SOCIO

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Praveen Kr. Pandey

ANTHROby

Vaid Sir

HISTORYby

Vijay Kumar


Those who survive and

prosper would be those who

keep the focus on customers,

shareholders and employees, and who

have the vision, patience and resolve

Banking Sector: Emerging Challenges

baNKiNg

HE INDIAN economy is one of the fastest growing economies in the world irrespective of non conducive economic h e a d w i n d s b l o w i n g

globally. Indian economy did not suffer a free fall like various other high profile economies pursuant to recent global financial meltdown. Indian economy registered a faster than expected recovery from the slowdown in growth witnessed in the aftermath of the global financial crisis. The slowdown in growth from the average of 8.8 per cent during 2003-2008 to 5.8 per cent in the second half of 2008-09 was successfully arrested by the expansionary fiscal and monetary policy. Even this lower rate of 5.8% was one of the best globally when economic giants are still struggling with negative or negligible growth. The strong recovery in growth in the second quarter of 2009-10 at 7.9 per cent has added to the comfort level of expecting a sustained recovery and growth.

T

The author is Chairman & Managing Director, Punjab National Bank.

The factors that support the prospects of a sustained growth include the impact of expansionary policy stimulus, visible signs of strong industrial recovery along with the core infrastructure sector, significant upturn in the business confidence as per different business expectations surveys, revival in capital flows, revival in the stock market and improving overall global economic and financial conditions. This revival naturally would expect an equally stronger support from the financial sector. The Banking sector also has to get ready to be able to support adequately the higher economic growth as well as prepare itself for facing new challenges in the present scenario.

Opportunities and Challenges of Financial Sector

Financial sector has undergone a rapid transformation. The competitive and deregulatory forces have brought about a perceptible shift in the customers’ expectations. With the advancement in ICT

Way ahEaD

K R Kamath

We may have a strong economy today, but our prosperity and economic leadership will not last unless we respond boldly to a series of competitive challenges created by these realities.

Thomas J. Donohue, President of the United States Chamber of Commerce


(Information and Communications Technology), the customers expect easy, fast, efficient and secure financial services at reasonable costs through single window servicing. In this changed business scenario, customers want to liberally exercise choices available to them. The traditional concept of loyalty built over a period of time pales into insignificance if the relationship is not nurtured afresh. Accordingly, in order to remain competitive and to meet rising expectations of the customers, banks are enhancing their role from the traditional one of accepting deposits and lending to that of becoming comprehensive Financial Services Providers. Banks are now offering a host of financial products architected to meet the customer aspiration and increasing needs. It is the customer who is the direct beneficiary of this evolution. In this process apart from broadening their services portfolio, banks have been striving to lower the transaction costs as well.

Deregulation in the financial sector has brought about new opportunities; which have also added to the risk profile of banks. The operating environment has become more dynamic and market more volatile. Banks face a variety of risks viz. Operational, Market and Credit Risk which include interest rate risk, liquidity risk, forex risk, default risk, portfolio risk, etc. besides reputational risk. Recognizing the quantum and implication of these risks, banks have implemented IT powered risk management systems.

Technology has played and is playing a critical and arguably the most important role in redefining the financial business. Financial intermediaries have adopted

technology on a pervasive scale. Technology has enabled a paradigm change in banking by shifting the power into the hands of the customer who is now demanding user friendly and qualitative financial solutions. Banks are responding by offering alternative delivery channels like ATMs, telebanking, internet banking, mobile banking etc. Most of the banks have already implemented Core Banking Solution (CBS) across all offices to provide “anytime anywhere” banking in true sense. The technology platform needs to be adaptable and scalable to offer a variety of value-added products and services over and above the core banking functionality. For instance, at Punjab National Bank, we are offering the facility of electronic bill presentation and payment, on-line payment for utilities, e-tax payment, etc. A technological revolution has occurred in the financial industry which is continuing and is yet far from over.

Keeping the above in view, the likely scenario that the banks in India may face and path that they may adopt in near future is outlined :

l Banks may move towards universal banking driven by the forces of deregulation, liberalisation and technological advancements. The pressures w o u l d e m a n a t e f r o m Supermarkets, utility service providers, etc.

l Size will assume significance as banks would require to compete with other big global entities. This would lead to mergers among banks. The Banks may think in terms of forming strategic alliances to

remain competitive. The focus may shift from ‘competition’ to ‘collaboration’. There may be more foreign players with larger stakes in Indian banks.

l With core banking automation in place, the branch network landscape would need to be rationalized. A rationalization would have to be done as to how many “bricks” are needed to support the “clicks” to offer competitive services.

l W i t h b r a n c h e s b e i n g supplemented with virtual branches like ATMs, Kiosks, Business correspondents , Internet/Mobile banking, POS terminal, etc., channel migrations would be done by Banks as soon as possible to reap returns on heavy technology investments done so far and recurring cost thereon.

l Banks may be required to adopt flatter organizational structure and a customer-centric business model to enable them to understand, anticipate - proactively or at least quickly react to customer needs; learn continuously from customers; provide customer access, wherever and however they want to transact and interact especially for catering to younger IT savvy population; focus on per sonalisation/customization of products and services; and build strong customer relationships. To do business in a competitive environment, banks would also need to further reorient themselves to be more responsive to market dynamics. B u s i n e s s m o d e l s w o u l d need to be recast, processes reengineered, redundancies


removed, e ff ic iency and productivity improved.

l The HR poses the biggest challenge to the Public Sector Banks in India. The virtual freeze in recruitment for almost a decade in PSUs has resulted in high average age of staff that imposes a significant challenge in reskilling of staff as changes in technology and customer expectations require new skills and behaviours. The staff has a lot to un-learn along with the learning curriculum. Further, another expected key change relates to roles specialisation. Most our bankers as of today belong to the generalist cadre. However, changing profile of organisations towards “customer centricity requires specialists who are well versed in nuances of different verticals of products and customers”. The people have to be offered career tracks linked to specialised business offerings like corporate banking or forex etc or even based on functional departments like IT, Finance or HR. The Banks are responding to this challenge by training the existing workforce as well as induction of specialists. Thus Banks would need to focus on recruitment/career planning, performance-linked incentives and succession planning for attracting & retaining talents.

l The revenue model will get altered. Fee-based non interest income will get more and more significance due to shift from transaction-based services to value-added services.

l Adoption of technology on a wider scale is expected to reduce transaction costs. Banks

will require to have a hard and deep look on the COST-benefit aspect of Technology. Today Technology has become the ‘driver’ of business as against being a mere ‘enabler’ earlier. The difference among technology infrastructures of various banks today results in difference of perceptions by customers of these banks in direct proportion. Cost control which is crucial in a competitive environment can be achieved through intelligent adoption and use of technology. Shared network, outsourcing of services, centralized processing, Fault tolerant Systems (hardware and System Software both), Data Warehousing, CRM (Customer Relationship Management), Green IT, Vir tual izat ion, Service Oriented Architecture, On demand computing, High Quality Call Centre Services, High Quality Portal/Website, KM (Knowledge Management) oriented messaging services, M o b i l e c o m m e r c e , E R P (Enterprise Resource Planning), unified security, Business Continuity/ multi-level disaster management systems etc are some of the technologies which are required to be looked into and adopted to meet the objectives. Any cost on Technology must lead to increase in productivity which is to be achieved by matching increase in volumes which IT is capable of handling without matching increase in operational cost particularly staff cost.

l The technological developments have resulted in higher efficiency levels and customer satisfaction. But it has also escalated the risk

concerns. Banks being financial entities are prone to various frauds in case of any deficiency in the internal control processes of the IT implementation or due to the deficiencies in the software and hardware itself or due to increasing technical skills and behavior of some users. Security in an IT-based transaction processing environment is therefore very critical. Adequate IT security and access control mechanisms (at user level, network level, server level and application level) will therefore be a ‘must’ and would require to be deployed and constantly upgraded to meet the demands of changing technological scenarios. Banks may be forced to continuously revisit their enterprise IT architecture and make path breaking changes in their IT infrastructure to prevent a collapse of their business due to IT failure or breach of Security

l The emphasis on self-regulation will continue. Banks will strive to adopt best practices in corporate governance and CSR (Corporate Social Responsibility). This will enhance their image and can help them in enlisting confidence of international investors. This also implies additional responsibility on Board members towards f u r t h e r i m p r o v e m e n t i n transparency regarding conduct of operations.

l The opportunities to the banking sector from retail segment will keep on increasing. Higher disposable incomes, better jobs and earning opportunities for the young, exposure to g loba l i zed env i ronment , chang ing demograph ics ,


lifestyles and affluence levels led to retail revolution in recent past. This trend will further accelerate, especially in housing and education loans. Banks are expected to come out with innovative and attractive offerings to capture this potential. Risk of jobs no longer being that secure needs to be factored.

l The evolving demographic dividend in India will offer a great opportunity to Financial Service Providers. While almost one-third of the population is below the age of 15 years, nearly 300 million youth are estimated to enter the “fresh income earners group” by 2025. The younger generation (highest number in the world) is far more open to consumer loans, financial products like insurance, mutual funds and wealth management and thereby offers a much bigger revenue base for financial-service providers in years to come. According to a NASSCOM study, the number of students enrolled for tertiary education in India is close to 10 million. While banks are now regularly extending education loans for courses in India and some banks are also extending education loans for courses aboard, this is indicative of the enormous growth potential of education loans in India.

l Banks will work hard for Financia l Inc lus ion. The rural financial system will be strengthened to emerge as a "one-stop-shop" for various types of financial products and services in rural/semi-urban areas. Banks will try

to go all out in their efforts towards capacity building in rural sector to improve rural productivity and rural income. High Transaction costs will offer some roadblocks but the same are expected to be surmounted through the use of innovative and cost effective technology finally. Presently f ind ing a cos t e ff ec t ive technology for f inanc ia l inclusion is a chal lenge. Though this initiative may necessarily not be a profitable venture initially, but slowly as the excluded people are made a part of the economy’s growth, their inclusion is bound to fetch volumes as well as future customers with good potential. Large number of farmers have greatly benefited by the initiatives taken by some of the leading banks/corporates through contract farming, rural kiosks, rural malls, etc. PNB has played a pioneering role in this direction through its initiative of Farmers’ Training Centres and the RUDSETIs (Rura l Development and Self Employment Training Institutes), that are improving skills of farmers and rural youth. Rural lending, being a profitable proposition, would require lot of attention, time and energy of the banking sector. Our future customers stay in rural areas and taking India to the next level will not be possible without including them in the growth. Banks will earn social goodwill apart from business by doing full justice to this opportunity before them. Growth of rural economy and that of banks will support each other.

l Banks will find SMEs (Small and Medium Enterprises) as an attractive and high growth business proposition. Banks will support this sector in increasing measure now as the same will usher in an area of high growth, creation of national wealth and all round increase in income levels besides the leading national economic priority – creating jobs. Sensing the potential and opportunity offered by this sector and increased growth & contribution of service sector in the economy, our Bank is recruiting technical hands to support boost in lending to this sector in a big way. This is in alignment with the Government’s policy stance of promoting this sector at a faster pace. Banks have therefore come out with sector specific products to satisfy their resource demand.

In the light of above facts, it can be concluded that in order to remain competitive, the financial sector would focus on organic as well as inorganic growth and other structures and mechanisms appropriate for increasing scope and scale and enhancing efficiency within the value chain. Besides, on the path of meeting the challenges indicated above, the industry will also witness challenges of leadership and management, for there would be difficulties and dilemmas to tide over due to bridging of cultures and harnessing the inherent synergies arising out of possible M&As (Mergers and Acquisitions).

The Financial Services Sector will also continue to face major challenges in deciding ways of maintaining and enhancing


r e l a t i o n s h i p w i t h e x i s t i n g customers and developing new contacts by reaching out to prospective customers and keeping the customers informed through various media. Banks and other financial institutions would require to be agile and would require adopting aggressive practices of

continuously improvising and innovating their products and marketing themselves as strong and reliable brands. Those who survive and prosper would be those who keep the focus on customers, shareholders and employees, and who have the vision, patience and resolve to make things happen on

ground, howsoever difficult the conditions are.

“ M o u n t a i n s c a n n o t b e surmounted except by winding paths”

Johann Wolfgang Von Goethe, German philosopher and writer

(E-mail : [email protected])

CORRIgENDuMIn the January 2010 issue of Yojana, there was an alignment error in the table on the second cover page . The error is regretted. The corrected table is given below.

IMPORTANT COMMITTEES OF THE CONSTITuENT ASSEMBLY AND THEIR CHAIRMEN

Name of the Committee Chairman

Committee on the Rules of Procedure Rajendra Prasad

Steering Committee Rajendra Prasad

Finance and Staff Committee Rajendra Prasad

Credential Committee Alladi Krishnaswami Ayyar

House Committee B. Pattabhi Sitaramayya

Order of Business Committee K.M. Munsi

Ad hoc Committee on the National Flag Rajendra Prasad

Committee on the Functions of G.V. Mavalankar

the Constituent Assembly

States Committee Jawaharlal Nehru

Advisory Committee on Fundamental Rights, Vallabhbhai Patel

Minorities and Tribal and Excluded Areas

Minorities Sub-Committee H.C. Mookherjee

Fundamental Rights Sub-Committee J.B. Kripalani

North-East Frontier Tribal Areas and Assam Gopinath Bardoloi

Excluded & Partially Excluded Areas Sub-Committee

Excluded and Partially Excluded Areas A.V. Thakkar

(Other than those in Assam) Sub-Committee

Union Powers Committee Jawaharlal Nehru

Union Constitution Committee Jawaharlal Nehru

Drafting Committee B.R. Ambedkar


The key financial

indicators of the banking

system do not throw up any

major concern or vulnerability and the system

remains resilient

Indian Banking Sector : Sound and Resilient

baNKiNg

H E R E I S a d e q u a t e evidence to show that over a period, and particularly during the last decade, sustained efforts by the

Government, Reserve Bank of India and banks themselves have resulted in making the Indian banking sector not only sound enough but also resilient enough to face challenges produced both by the international financial system as well as the Indian economic developments. That is why the banking system in India remained largely unaffected by the global financial crisis which had forced the developed countries like USA and UK to bailout banks with large sovereign support.

Stress test findings for Indian banks by the RBI proved a strong resilience of the financial system in the face of the severe external contagion from the global financial crisis. It is a measure of great achievement for the RBI that as at end – March 2009, all the Indian scheduled commercial

T

The author is Former Economic Advisor (Banking), Ministry of Finance, Government of India.

banks had migrated to the simpler approaches available under the Basel II framework.

Banking Segment in the Indian Financial System:

It may be of use to first note the main features and the place of the banking segment in the Indian financial system.

l Notwithstanding significant expansion of the capital market over a period particularly during the last two decades, bank intermediation continues to dominate the financial system.

l The financial sector in India has seven major components: Commercial banks, Urban Co-operative Banks (UCBs), rural financial institutions, N o n - B a n k i n g F i n a n c i a l Companies (NBFCs), Housing Finance Companies (HFCs), D e v e l o p m e n t F i n a n c i a l Institutions (DFIs) and the Insurance sector.

PERSPECTiVE

K B L Mathur


l Commercial banks account for around 60 percent of the total assets of the financial sector. Together with Co-operative banks, the banking sector accounts for nearly 70 percent of the total assets of Indian financial institutions.

l As at end March 2009:

l Scheduled Commercial Banks (SCBs) comprised 27 public sector banks (State Bank of India and its 6 associates, 19 nationalised banks and the IDBI Bank Limited), 7 new private sector banks, 15 old private sector banks and 31 foreign banks. Besides, there are 4 local area banks, 86 RRBs,and 1721 UCBs,

l Public Sector Banks (PSBs) share was 71.9% in total assets; 76.6% in total deposits, 75.3% in total advances and 69.9% in total investments, of SCBs.

l The ratio of assets of SCBs to GDP was 98.5 percent.

l Bank credit as a proportion of GDP was 56 per cent (nearly double )from 29 percent in end March 2000.

l There were 64,608 bank branches of which 39,376 were of nationalized banks, 16,062 of the State Bank Group, 4,673 of old private sector banks, 4,204 of new

private sector banks and 293 of foreign banks. In total there were 43,651 ATMs which constituted 67% of total number of branches of scheduled commercial banks.

Soundness of Indian Banking Sector:

Capital adequacy and asset quality of Indian banks, the two crucial parameters reflecting the soundness of a banking institution, have shown a significant improvement during the last decade in particular.

Capital adequacy: The overall capital to risk weighted assets

Table 1: Soundness indicators of select bank groups: 2001 and 2009( end March ).

(Percent)Soundness Indicators 2001 2009Capital Adequacy : CRAR (capital to Risk weighted Asset Ratio)All scheduled commercial banks (SCBs) 11.4 13.2Public Sector Banks (PSBs) 11.2 12.3Nationalised Banks 10.2 12.1New Private Sector Banks (NPSBs) 11.5 15.1Non Performing Assets (NPAs) : NNPA (Net NPA to Net Advances Ratio)SCBs 6.20 1.1PSBs 6.70 0.7Nationalised Banks 7.01 0.7NPSBs 3.10 1.3gross NPAs (Gross NPA to Gross Advances Ratio)SCBs 11.40 2.3PSBs 12.40 2.0Nationalised Banks 12.16 1.8NPSBs 5.10 2.8Operational Efficiency (Operating expenses to Assets Ratio)SCBs 2.64 1.7PSBs 2.72 1.5Nationalised Banks 2.76 1.5NPSBs 1.75 2.2ProfitabilityReturn on Equity (RoE) 9.61* 13.3Return on Assets (RoA) 0.50 1.0*Low due to VRS payments by PSBs. Subsequently it was more than 13.0% all throughSource : Trend and Progress in Indian Banking 2008-09. (RBI, 2009) and earlier issues.


ratio (CRAR) for all the scheduled commercial banks (SCBs) has increased to 13.2 percent at end March 2009 from 11.4 per cent as at end March 2001. For PSBs also the CRAR has increased from 11.2 per cent to 12.3 percent during the decade. (see Table 1) Four features of the CRAR status deserve special mention. First, CRAR is the most critical parameter to measure the soundness of a bank because the capital of a bank is the ultimate buffer against losses that a bank may suffer. The overall CRAR of SCBs at 13.2 percent is well above the stipulation of 8 per cent specified by the Basel Committee on Banking Supervision (BCBs) under both the Basel I and Basel II frameworks. Also it is above the norm of 9 percent as adopted by the RBI for an Indian Bank. Second, as at end March 2009 out of the 79 SCBs in India CRAR for 78 banks was over 10 per cent, while that of only one bank was between 9 and 10 percent. Third, the CRAR of Indian Banks was comparable with most emerging markets and developed economies in particular. (See Table-2). Fourth, the leverage ratio for Indian banks has remained high reflecting the strength of the Indian banking system. The leverage ratio generally refers to Tier I capital as a percent of total adjusted assets. The lower the ratio, the higher is the leverage and greater vulnerability of a bank. It is noteworthy that contrary to the trend in some advanced countries, the leverage ratio for Indian banks has improved. For instance, the leverage ratio of banks in the UK witnessed a decline throughout 1990s which was accentuated after 2000 to reach a level of about 3

percent by 2008 from around 5 percent in the 1990s. On the other hand, the leverage ratio for Indian banks has risen from about 4.1 percent in March 2001 to reach a level of 6.3 per cent by March 2009. (RBI, 2009)

Asset Quality: The most significant improvement indicating enhanced soundness of the Indian banking system has been a sharp fall in the ratio of non-performing assets (NPA) to gross advances. The gross NPA ratio for SCBs touched an all time low at 2.3 percent at end –March 2009. For PSBs also the reduction in the gross NPA ratio is sharp from 12.4 percent to 2.0 percent during the decade. More significant is the lowest level reached in the ratio of Net Non-performing assets (NNPA) to net advances. For SCBs, the NNPA ratio reduced to 1.1 percent as at end-March 2009 from 6.2 percent at end March 2001. For PSBs the reduction was still sharper from 6.7 percent to 0.7 percent only (Table 1). A low and reduced level of NPA ratio is not only an important soundness indicator for a bank, but also reflects prudent business strategy as well as conducive recovery framework of the banking system. The difference between gross NPA and Net NPA mainly reflects the provisioning made for a substandard asset. Thus the ratio of provisioning to NPA reflects the ability of a bank to withstand losses in asset value. Such a provisioning ratio for Indian banks was 52.6 percent at end March 2008 which is fairly comparable with the ratio of provisioning across most advanced countries (Table 2). Finally, it is important to note that even against a close possibility of significant

slippage in NPAs as a consequence to international financial turmoil, the slippage for Indian banks during the year 2008-09 was moderate when compared to the problem faced by banks all over the world.

Commercial Soundness:

Return on Assets (RoA): The commercial soundness of a banking system gets reflected from the RoA ratio which was 1.0 percent at end-March 2008 and 1.02 percent at end March 2009. This is very much in line with the international standards particularly when the ratio is found to be lower than one percent in some emerging market and even advanced countries (Table 2).

Return on equity (RoE) defined as the ratio of net profit after tax to total equity capital, is used as an alternative measure of profitability reflecting efficiency with which capital is being used by the bank. The RoE of SCBs increased to 13.2 percent during 2008-09 from 12.5 percent in 2007-08 despite the pressure on profitability owing to external circumstances.

Efficiency:

Operational efficiency of the Indian banking system as reflected by the ratio of operating expenses to total assets (intermediation cost ratio) has been consistently improving particularly for the PSBs. Thus the intermediation cost ratio for SCBs has fallen to 1.8 percent as at end March 2009 from 2.64 as at end March 2001. For PSBs also the decline is from 2.72 percent to 1.5 percent only during the decade.

Finally, a study in an RBI Report (Report on Currency


and Finance: 2006-08), using the data envelopment analysis (DEA) has shown that there has been a significant improvement in efficiency levels across the bank groups since the initiation of reforms. Improvement was significantly more pronounced between 1998 and 2007 than between 1992 and 1998. Despite the large gains by private bank groups, public sector banks, particularly the State Bank Group, continued to be the market leader insofar as absolute efficiency levels were concerned.

Efficiency in customer service: With regard to efficiency in customer service, however, it may be difficult to defend a case for PSBs compared to private or foreign

banks particularly when anecdotal evidences are recited. But there is no denying the fact that definitive trends in improved customer service efficiency are visible on the whole. Setting up of an independent body called the Codes and Standards Board of India (BCSBI) to evaluate, oversee and enforce observance of the ‘Code of Bank’s Commitment to Customers’ drawn by each bank, through the means of a ‘covenant’ between each member bank and the BCSBI, has been an important step taken by the RBI. The single most significant feature of the ‘Code’ is that the common man has a Charter of Rights in his hand, which he can enforce against his bank. Finally, the RBI

has issued a comprehensive Master Circular on Customer Service on July 1, 2009 incorporating various issues such as customer service, operations of deposit accounts, levy of service charges, service at counters, disclosure of information, operation of accounts by old and incapacitated persons, facilities to visually impaired persons, guardianship in deposit accounts, remittances, drop box facility, collection of instruments, dishonour of cheques, dealing with complaints, etc.

International Banking Turmoil and Indian Banking

Owing to some important regulatory, supervisory and

Table 2: Benchmarking of Indian Banking Sector( Per cent)

Country Return on Assets

gross NPL to gross Advances

CRAR Provisions to NPL

Capital to Assets

1 2 3 4 5 6India 1.0 * 2.3 * 13.0 * 52.6 * 6.4 **Emerging and Developing Economies Brazil 1.1 4.3 18.5 157.3 9.2Mexico 1.2 3.8 15.2 143.7 9.1Russia 0.5 * 7.6 18.5 90.8 13.6 *China 1 * 1.8 12.0 * 134.3 5.4United Arab Emirates 2.2 * 2.5 * 16.2 101.5 * 10.6 *South Africa 1.0 5.1 13.5 - 7.9 *Advanced Economies USA 0.2 3.8 13.5 66.5 10.1UK -0.5 * 1.6 * 12.9 * 54.6 ^ 4.4 *Japan 0.2 1.7 * 13.4 25.5 3.6 *France 0.4 ** 2.8 ** 10.2 ** 51.3 ** 4.2 *Germany 0.3** 2.7 ** 12.9 ** 56.7 * 4.5 *Italy 0.3 * 5.5 10.8 * 46.1 * 6.6 *Canada 1.3 0.9 10.3 29.8 5.8Korea 0.5 * 1.5 12.9 125.3 9.5* : Data pertains to 2008. ** : Data pertains to 2007. ^ : Data pertains to 2006. Note: Data pertains to 2009. Based on: Global Financial Stability Report, October 2009, IMF.Source: Trend and Progress in Indian Banking 2008-09 (RBI 2009)


precautionary measures taken by the RBI for the banking system, the Indian banks could be insulated from the contagion or consequential damage from the international banking and financial crisis. According to the latest assessment in the RBI Report on Trend and Progress in Indian Banking 2008-09, some of the reasons for India’s insulation are : (i) The nascent stage of development of the credit derivatives market; (ii) regulatory guidelines on securitization do not permit immediate profit recognition (iii) perseverance of prudential policies which prevent institutions from excessive risk taking and financial markets from becoming extremely volatile and turbulent; and ( iv) close coordination between supervision of banks and their regulation. It is clear that supervision and regulation by RBI alongwith its prudential policies have saved the Indian banking system from the adverse impact of the international banking crisis.

Public Sector dominance and strength of Indian Banking system

It is important to note that a conclusion drawn in an earlier

World Bank Report (World Development Report 2005, p-117) that “‘maintaining the status with a significant share of State-run banks can be dangerous for the economy’ has been absolutely disproved by the recent trends in the Indian economy. Maintaining the dominant State ownership of banks, Indian economy has been one of the fastest growing one, amongst the emerging market economies and banking sector’s soundness and efficiency has increased significantly. To the extent it is argued that all these improvements are owing to the dilution of ownership of PSBs it may well be true that the reform measures excluding privatization are highly successful. Finally, the RBI Report on Trend and Progress in Indian Banking 2008-09, has found that public ownership has proved to be a source of strength rather than a weakness for the Indian banking system. Contrary to the belief that public ownership weakens the allocative efficiency, the analytical exercises by the Reserve Bank indicate that allocative, technical and cost efficiency of the public sector banks has been much higher than

the private and foreign banks in India in the recent years. Further, the important aspect of public ownership of financial system in India has been the key role played by banks in the pursuit of social and redistributive objectives of developmental finance, which are vital to an emerging market economy like India.

An Overall Assessment

A comprehensive self assessment of India’s financial sector by the Committee on Financial Sector Assessment (CFSA) in its report jointly prepared and released by the Government of India and RBI in March 2009, found that ” Commercial banks have shown a healthy growth rate and an improvement in performance as is evident from capital adequacy, asset qual i ty, earnings and efficiency indicators. In spite of some reversals during the financial year 2008-09 (up to September 2008), the key financial indicators of the banking system do not throw up any major concern or vulnerability and the system remains resilient”. q

(Email : [email protected])

Present Banking RatesHead Rates (%)

CRR (Cash Reserve Ratio) 5.0SLR (Statuary Liquidity Ratio) 25.0Bank Rate 6.0Repo Rate 4.75Reverse Repo Rate 3.25M3 (Broad Money) 18.9M1 (Narrow Money) 13.3Foreign Exchange Reserve US$ 284.8 billion


A Bank Account for the Wage Earner

bEST PRaCTiCES

I R S A M U R M U , a m a r g i n a l f a r m e r f rom Pakur d i s t r ic t of Jharkhand proudly displays his new savings

bank account with the post office located close to his village. Murmu who had been working in the UPA government’s mega National Rural Employment Guarantee Act (NREGA) to augment his meager agricultural income, has got his first ever bank account, thanks to world’s biggest ‘financial inclusion’ initiative possible mainly because of the central government making it mandatory for states to pay NREGA wages through savings bank accounts for ensuring transparency and accountability in the scheme. Similar is the story of Krishna Prasad from Chitrakoot district in the Bundelkhand region of Uttar Pradesh who has also got a savings bank account opened in a rural branch of a leading public

BRupali Das

sector bank. Till very recently, people like Murmu and Prasad were considered cases of 'unviable banking' and most banks were reluctant to extend services to them.

The UPA government has spent more than Rs 50,000 crore in implementation of NREGA. The wage component of the mega scheme is estimated to be more than Rs 30,000 crore and is paid to around 5 crore beneficiaries of which 52 per cent are women. After series of reports of irregularities in payment of wages to workers under the scheme, the central government took the initiative to pay wages only through banks, and bank accounts were launched in early 2008. Banks were initially reluctant to open so many accounts in rural areas and many banks said that they do not have branches to support such a large scale financial

The NREGA initiative of

including rural poor within

banking services has proved that the poor can provide a

key source of future business for the

banking industryThe author is a Delhi based writer.


inclusion drive. Subsequently however, there were directions from Finance Ministry and the Department of Communication supported a massive drive to open savings bank accounts of workers under NREGA with post offices and banks. Both the President and the Prime Minister also made it clear in their statements that payments under all social security schemes including pension and scholarship to students would have to be done through savings accounts only.

After the launch of the financial inclusion programme, ground level officials faced many difficulties. Banks insisted on identity cards like ration card, EPIC card rather than accepting NREGA job cards which have all the details like name, address, photograph required for opening of an account. However after much discussion and deliberation, banks and post offices agreed to consider NREGA job card under the Know Your Customer

in operation in more than 600 districts, has ensured that poorest of the poor in the country gets included in the banking system. Creating a world record, more than 8.2 crores savings bank accounts for NREGA workers have been opened with Banks and post offices in rural areas of the country. The numbers are expected to go up in the coming years.

Banks see more future business opportunities as NREGA workers have been notified under rural poor category , making them beneficiary of Janashree Bima Yojana of Life Insurance Corporation of India. The Rural Development Ministry has taken the initiative to cover NREGA workers under Rashtriya Sawasthya Bima Yojana administered by Ministry of Labour. So the NREGA initiative of including rural poor within banking services has proved that the poor can provide a key source of future business for the banking industry. q

(Email : [email protected].)

(KYC) norms. Another problem that banks were pointing out was the limited reach of banking and postal services in rural areas . While there are around 6.5 lakh villages, there are only about 70,000 bank outlets across the country and 5 lakh branches of post offices. Further, there was severe shortage of staff in many of the rural branches. Many banks were also asking for service charges to operationalise extension of banking facilities to remote areas through business correspondent model. There were delays in supply of cash to the branch offices which led to delay in payments to NREGA workers. Many branches started to levy service charges for processing of cheques . Non availability of the facility of cash chest in some banks also limits the flow of cash for disbursal to NREGA workers

After initial hiccups things are being streamlined in relation to banking services being provided to millions of NREGA workers. The scheme which is currently

YOJANAForthcoming

IssuesMARCH 2010

Yojana will bring to its readers a Special Issue covering the Union Budget in March 2010. You can look forward to analyses on various aspects of the Budget from experts in the field.

APRIL 2010The April 2010 issue of Yojana would focus on Climate Change and the various associated issues .

March 2010&

April 2010


North east diarygPS TO BE uSED FOR POSTAL TRACKINg

DARKNESS DISPELLED FROM REMOTE VILLAgE

In a bid to strengthen postal service in North-eastern States, the Postal Department has mulled to install Global Positioning System (GPS) to track the movement of Mail Motor vehicles in hilly and difficult terrain of Northeastern region, including Tripura. The Department of Post had decided to make the

system operational by March after successful introduction of freighter aircraft in the region in 2007 for transmission of mail and parcels and initially 75 mail motor vehicles would be fitted with GPS devices at a cost of Rs 12 lakh.

This would help overcome the challenge posed by the hilly and thickly forested routes in the Northeast and will ensure smooth and timely movement of mail and parcels across the regions. Besides, the department had already started inter-city transmission of mail and parcels in NE States to speed up the delivery system as well as to attract customers following expansion of private courier service.

Officials have underlined that installation of GPS devices will help the department to track down the location of vehicles all along the pre-defined destinations. The position of vehicles would be displayed on a detailed digital map, which would indicate date, time, speed, distance and nearest post office along with geographical spread of fleet operating at a given point of time on a single map window, it would also issue alert through SMS for detention beyond prescribed timings at post offices. q

A remote village sandwiched between several hills and streams in West Garo Hills has been gifted with electricity for the first time. Recently a five–kilo watt micro-hydel unit at Baladinggre was built under the RSVY scheme.

Baladinggre is a secluded village situated at the foothills of the Nokrek peak and as such was an inaccessible place. However, after the intervention of the District Administration through the then IFAD, developmental works began by way of construction of jeepable roads, etc, the construction of the micro hydle unit at the village was also undertaken to provide clean electricity to the 25 households in the village.

Baladinggre village was primarily engaged in Jhum cultivation; however, after the intervention of the District Administration the village now boasts of an apiculture centre, terrace cultivation under NREGS, bamboo plantations under Social Forestry and other income generating activities like squash cultivation, are-canut plantations, orange orchards, piggery, poultry, etc. All said and done the IFAD has totally changed the lifestyle of the village by creating new and sustainable avenues of livelihood.

However, the micro hydel unit will be by far the most life changing utility the village has ever added to its list of infrastructure development.

The Soil Conservation department will also train the villagers on sustainable agricultural practices and teach the villagers how to efficiently use whatever available resources to be self-sufficient. The power plant for the time being could sustain 36 households including nine households form the nearby village of Sakalgre. This village will feature in the NEC’s 2011 calendar wherein the achievements of the village will be highlighted. q

(Courtesy: Newspapers)


NABARD has been a profitable institution

since inception though it does not work on commercial lines in view

of its development and rural

orientation

The Credit Plus Approach to Rural Development

baNKiNg

HE NATIONAL Bank for Agriculture and Rural Development was carved out in 1982 from the Reserve Bank of India by

an Act of the Parliament 1981, and continues to be a unique institution for bringing about integrated rural development. It is an apex development financial institution entrusted with agricultural credit responsibilities, institutional development and also supervisory activities over regional rural banks and cooperative credit institutions. Owned jointly by the Reserve Bank of India and the Central Government, its mission is to promote sustainable and equitable agriculture and rural prosperity through effective credit support, related services, institution development and other innovative initiatives. It is the only institution in India which raises funds from urban areas for deployment only in rural areas. It has a staff strength

T

The author is Managing Director, NABARD.

of 3000 officers and 1800 other staff with financial and technical specialists, agricultural experts and highly qualified officers stationed in 400 districts and in all State Capitals. It also provides training facilities for Cooperatives, RRBs and Commercial Banks at six training institutions.

Credit Operations

True to its mandate, NABARD has been providing financial assistance, by way of refinance, to Commercial Banks, Cooperative Banks & RRBs, for supporting production and investment activities in agriculture/allied activities as also activities under the rural non farm sector. Refinance has accordingly been provided to RFIs by way of supplementary finance to enable them to finance agricultural credit in larger volumes and to large number of farmers, to provide resources to banks at relatively

RuRal CREDiT

K G Karmakar


cheaper rates compared to their own cost of raising resources and to channelise the flow of rural credit in the desired directions and sectors. NABARD has four major lines of credit for banks/cooperative credit institutions/State Governments as under:

Short- term credi t (upto 18 months)

• S e a s o n a l A g r i c u l t u r a l Operations (Rs.24,000 crore in 2009-10) for ensuring timely and concessional credit to farmers, as per approved scales of finance for different crops and areas.

• O t h e r a g r i c u l t u r a l / n o n -agricultural operations such as input marketing, crop marketing, pisciculture, village industrial cooperatives, forest produce, rura l ar t i sans , handloom weavers, etc.

Medium Term Credit (upto 3 years) but extendable upto 7 years in special circumstances

• Conversion loans for substantial crop damage due to natural calamities.

• Non-Schematic loans for productive assets acquisition

Investment Credit (beyond 3 years upto 25 years)

For financing all rural economic activit ies leading to capital formation through asset creation. This induces technologica l upgradation resulting in increased production, productivity and

incremental income to farmers and entrepreneurs (Rs.12000 crore in 2009-10).

Rural Infrastructure Fund (Rs.18500 crore in 2009-10)

To a u g m e n t t h e r u r a l infrastructure base in the country and to stimulate effective demand for agriculture/rural credit, term loans for 5 years are provided at concessional rates through funding support from commercial banks, 31 major sectors in rural areas are covered with 45% each for roads and irrigation sectors and 10% for social sector.

Table 1 on the next page gives the quantum of refinance from NABARD over the years.

Development Initiatives

NABARD has also initiated, over the years, a plethora of developmental and promotional measures, aimed at building the capacities of RFIs/rural clientele, strengthening socio-economic i n f r a s t r u c t u r e , d e v e l o p i n g effective and efficient credit products and services, building rural value chains, strengthening extension services, etc. , al l of which have been aimed at ensuring widening and deepening of rural credit as also greater credit absorption capacity in rural areas. While some of these initiatives have been influenced by the national priorities as spelt out in the Five Year Plans and governmental programmes, many of these initiatives have resulted

from NABARD’s own endeavours at innovating, experimenting, piloting and upscaling products and services for all round rural development. Some of the credit plus initiatives of NABARD are listed below:

Level 1. Food Security

• Cheaper crop loans to Farmers @ 7%. There is need for similar low cost loans for handloom weavers;

• Grain Bank Scheme ensures food secu r i ty fo r t r i ba l populations in food scarce areas by catalyzing traditional practices of community savings of grain in grain golas and monetizing excess savings;

• “Wadi” Programme concentrates on orchard deve lopment with support services for ensuring sustained livelihood o p p o r t u n i t i e s f o r t r i b a l families with water harvesting structures;

• Wa te r shed Deve lopmen t for improved soil and water management, better agronomic practices, water harvesting, prevention of soil erosion, rehabilitation of degraded land resources. The ‘Ridge to Valley’ approach in watershed development is now strengthened with livelihood support, credit plus activities and a women’s component for their inclusion.

• Joint Liability Group/Rythu Mitra Groups are Self Help Groups (SHGs) for farmers,


Table 1 : Refinance/Financial support from NABARD (1982-83 to 2008-09)

Year Short term refinance Investment refinance

Medium term (including

Conversion)

RIDF / Loans to State government

*

grand Total (3+4+5+6)

Limit sanctioned

Maximum Outstanding

1 2 3 4 5 6 7

1982-83 1658 1231 703 108 13 2055

1983-84 1880 1259 892 73 9 2233

1984-85 1733 1251 1061 90 9 2411

1985-86 1901 1339 1192 132 7 2670

1986-87 2009 1370 1334 236 12 2952

1987-88 2699 1841 1482 343 88 3754

1988-89 3362 2487 1270 316 45 4118

1989-90 3904 2988 1702 135 30 4855

1990-91 4135 3103 1902 233 28 5266

1991-92 4223 3104 2054 129 29 5316

1992-93 4447 3614 2359 279 24 6276

1993-94 4748 3694 2745 78 31 6548

1994-95 5770 4802 3011 151 75 8039

1995-96 6667 5340 3064 85 495* 8984

1996-97 7023 5702 3523 70 1164 10459

1997-98 7140 6000 3922 288 1149 11359

1998-99 8083 6340 4521 393 1354 12608

1999-2000 8169 6746 5215 58 2327 14346

2000-2001 8595 7011 6158 130 3238 16537

2001-2002 8701 7295 6683 316 3840 18134

2002-2003 8763 7038 7419 19 4131 18607

2003-2004 9954 6967 7605 230 4007 18809

2004-2005 11260 9451 8577 808 4328 23164

2005-2006 12080 10769 8622 1806 6000 27197

2006-2007 16089 14168 8795 60 6239 29262

2007-2008 18291 16352 9046 266 8053 33717

2008-2009 19627 17212 10635 0 10477 38324

Total 192911 158474 115492 6832 57202 338000

* Start of RIDF tranches


for ensuring effective credit facilities & other support services based on Thailand’s BAAC Model.

• Village Development Plans for 960 villages identified in consultation with commercial banks, for holistic development with bottom-up planning and peoples’ participation;

• Self Help Groups & Farmers’ Clubs which are product/activity oriented for better credit discipline, ensuring economies of sca le in procurement & market ing of speci f ic commodities;

• Farmers’ Associations for aggregators role and for ensuring better margins besides price discovery mechanism & lower price risk for farmers, also enables dissemination of technology at field level;

Level 2. Financial Inclusion

• P i l o t e d , u p s c a l e d a n d mainstreamed biggest micro finance movement in the world – the SHG Bank Linkage Programme with the help of 500 banks and 5000 NGOs;

• No Frills Deposit A/cs for all Banks as per RBI norms;

• Common Technology Platform for facilitating safe funds transfer through POS devices, etc.;

• Cooperative banks, RRBs, Insurance Cos., Post Offices, SHGs, all assist in financial inclusion;

• Remittances through Mobile phones using Common Service Centers;

• BC/BF Model for PACS / SHGs/all Banks;

• Developed effective credit products for single window credit dispensation in rural areas through Kisan Credit Cards and Swarojgar Credit Cards by Banks;

• Micro Insurance through Peoples’ Mutual Model for SHGs/farmers, are a help in Risk Mitigation;

• Financial Counselling / Literacy can be assisted by Lead Banks in Districts

• Micro - Savings and Micro – Remittances through Mobile phones is being pilot tested.

• C r e a t i o n o f P r o d u c t i o n Cooperatives – farmer friendly organisations; for improving margins of farmers

• Micro Pension Schemes for SHGs - could be a boon for very poor rural people

Level 3. Poverty Alleviation through Rural Employment

• REDPs / RUDSETIS for capacity building and employment generat ion in rural areas especially for the unemployed youth;

• Venture Capital Fund for Agr icu l tu re and Cap i t a l F o r m a t i o n S c h e m e s i n agriculture (State-specific);

• Handloom Weavers’ Groups (HWGs) for financing through group mode under guidance of master weavers;

• Microenterprises for mature SHGs through market ing initiatives;

• Wo m e n s ’ E m p o w e r m e n t through SHGs with credit /developmental inputs from NGOs / Banks;

• SHG Federations ensure product value addition, training and on lending services as also consultancy;

• M a r k e t i n g o p p o r t u n i t y by p rov id ing marke t ing infrastructure for SHGs through rural marts;

• Innovative Farm practices for enhancing Investment Credit;

• Bamboo & cane development;

• Medicinal herbs & plants;

• Producers companies for mini agro-processing ventures by farmers;

Level 4 Rural Infrastructure

• ICT utilization through Common Service Centres (CSC’s) set up by DIT, GOI with facilities for e-governance and e-mail facilities besides functioning as Agri-portal, training, record keeping for SHGs; etc.

• Comprehensive 5 year plan for Rural Infrastructure with District Infrastructure Plan and also 5 year District Plan for Agriculture;


• A s s e s s m e n t o f R u r a l infrastructure requirements and funding;

• PPP mode for joint ventures with NGOs/commercial groups for investing in rural infrastructure for funding corporate social ventures.

• Rural Services Sector involving drinking water/sanitation/eco tourism and affordable rural housing schemes which are not served by the banking sector adequately.

• Renewable Rural Energy systems are using biogas, bio-diesel, solar/wind/micro-hydel energy systems need to be encouraged.

• Creation of modern rural Haats/Shanties in collaboration with Village Panchayats.

Level 5 V i l l a g e / C o t t a g e industries

• Cluster Development Programme to focus on agro processing, smal l /mic ro en te rp r i ses , handicrafts, rural employment generation and support for en t e rp r i s e deve lopmen t , common facilities and benefits of scale economies;

• ARWIND for training for rural women in entrepreneurship, skills upgradation, improved technology, etc., for micro-enterprises;

• MAHIMA for extending credit linked promotional assistance to agencies dealing with marketing

of nonfarm products produced by rural women;

i) Setting up modern Rural Haats through Panchayats in growth centric villages.

Level 6 Institutional Development Initiatives

• Decentralised district credit planning through potential linked plans (PLPs) in effective deployment of credit in rural areas. PLP is the reference document for banks & State Governments, in all districts of the country

• Project appraisal – conducting appraisa l of agr icul tura l projects on behalf of banks and cooperatives, district monitoring studies, training of bank/cooperatives personnel in appraisal techniques, TME Cells for reducing financial risk of RFIs, Automatic Refinance;

• Implementation of Revitalisation Package for the short term Cooperative structure (3 tier) – Rejuvenation of Cooperatives;

• DAP-MOUs for facilitating banks in formulating and implementing Action Plans for attaining current & sustainable viability;

• Turn around strategy for Regional Rural Banks with recapitalisation, amalgamation/merger, conduct of Organizational Development Initiatives.

• Assistance to Cooperative Banks from Cooperative Development

Fund for training bank personnel through cooperative training centres, support to NIBM, NIRD, IIBM.

• NABCONS – Consultancy wing for appraisal of high value/high risk projects, training etc.;

Targeted Funds

In order to channelise adequate financial resources in the form of grants and soft loans for rural development, NABARD has, over the years, instituted a number of purpose / objective specific Funds. While some of these Funds were started with token contribution from the stakeholders, it may safely be said that most Funds have been augmented annually through appropriation from NABARD’s own profits. NABARD has been a profitable institution since inception though it does not work on commercial lines in view of its development and rural orientation. To enable innovative interventions and direct credit flow to certain sectors, Funds have been created from time to time. An illustration of some of the Funds in operation in NABARD are given in Table 2 on the opposite page.

Conclusions

Bringing about integrated rural development in a vast country has its challenges. The constant demand for food security, the need for financial inclusion, the challenge of poverty alleviation, ensuring equitable regional development enhancing rural credit flow, strengthening rural financial institutions, enabling


rural employment, participating in planning approaches and ensuring equitable growth through appropriate infrastructure creation, building microfinance institutions and SHGs, are all gigantic challenges. That NABARD has been addressing all these tasks in equal measure is a tribute to the excellent systems and processes and staff, NABARD

has been able to deploy, alongwith its slender financial resources without any concessional funding. The support of RBI, banks and the State/Central Government has ensured that the task of rural development is continued at rapid pace. The use of technology as also innovative systems and processes ensures due efficiency

and continued effectiveness in the assault on poverty. The aim of commercializing agriculture and enabling farmers, the largest private sector segment in the country, to reap the benefits and earn profits from their labour is our avowed goal. q


Table 2 : Funds held by NABARDSr No

Fund Nomenclature

Created on

Purpose Beneficiaries/clients/users

O/s as on 31 March 09 (Rs Crore)

1 NRC(LTO) 1982 Investment Credit on long term RFIs & State Governments 14016.00

2 NRC(Stab) 1982 Conversion loan for Production Credit SCBs/RRBs 1555.00

3 R & D 1983 Research/Seminar/Workshops related to Rural & Agricultural Development

Universit ies/Research Institutions

50.00

4 CRF 1983 Capital Reserves - 74.80

5 CDF 1992-93 Training Activities Coop. Credit Institutions 125.00

6 AREIF 1993 Support to Risky potentially viable projects

5.00

7 RIDF 1995-96 Loans to State Govts. for creation of rural infrastructure

State Govts., PRIs, etc. 47023.00

7 WDF 2000-01 Watershed Dev. Projects in distress districts

Villagers of rainfed areas 1125.20

8 MFDEF 2000-01 Support growth of micro finance sector through diverse modalities

SHGs,NGOs/VAs, CBOs, mFIs, Banks, NABARD Trg. Estab.

9 ADF 2002-03 Support similar adivasi development Tribal families 3.4

10 TDF 2004 Integrated Tribal Development Tribal population 574.98

11 FIPF 2005 Promotion of Agri. & allied Sector Farmers/Innovators 50.00

12 RIF 2005 Support Innovations under Farm / Non-Farm / Micro finance with objective to promote livelihood opportunities & employment creation in rural areas

Farmers/Artisans/SHG members

89.28

13 RPF 2005 Promotion of Rural Non-Farm Ssector activities

Farmers/Artisans/SHG members

7.25

14 FIF 2007 Support developmental & promotional activities to secure FI among weaker sections in backward regions/areas

FIs/NGOs, mFIs, SHGs FCs, Trg. & Research Orgs., etc.

34.08

15 FITF 2007 Enhance ICT towards promoting FI -do- 48.37

16 FTTF 2008 Transfer of Technology for farmers Farming Community 50.00


The race for efficiency is therefore

on. It is now a matter

of survival of the fittest

Nationalised Banks Fare Well with Third Generation Customers

baNKiNg

HE EMERGENCE of c o m p e t i t i o n i n t h e banking sector has pushed the public sector banks to adopt innovations in

their business models. The rise of competition has come from the private sector banks, the foreign banks and the new kids on the block—viz the microfinance and non banking finance companies.

The innovations have been at three levels. At one level the banks have introduced changes in the way they source deposits from the public. Using those deposits to offer credit has also undergone changes. The third level of changes or innovation has come in the internal process of the banks.

These innovations have become necessary, as we have said, for the public sector banks to retain their

T

The author is a Delhi based journalist who reports for The Sunday Times, London and Women’s Feature Service.

supremacy in the markets. These banks between themselves control 70% of the banking business in the country, which means, when they ring in innovations the entire banking sector undergoes changes.

The first level of changes the public sector banks have made is in making it easy for the public to open an account. To understand the level of innovation, one has to know the RBI rules that guide opening of accounts in banks. The RBI rules are encapsulated in the Know Your Customer guidelines or KYC for short. Banks have to obtain exhaustive list of information on their prospective customers, before they allow a new account.

Since this involves providing a lot of documentation the process is almost closed for the relatively

iNNOVaTiONS

Tripti Nath


poor people including even those receiving salary in the organised sector, who therefore cannot transact through a bank. But it is necessary that they are brought into the banking system to obtain cheap credit and take advantage of other benefits that a bank account provides. These banks have therefore started a no-frills account class. The accounts do not require a customer to maintain a minimum balance as that is too expensive for them. In return the banks do not provide them cheque books but they can use the account with debit cards to do business. This innovation has vastly expanded the reach of the banking sector and already India has the largest number of savings bank accounts in the world. The landless labourers working under the National Rural Employment Guarantee Act too have been able to obtain bank accounts thanks to the no-frills account.

The banks have similarly introduced innovative practices in their credit practices. Till pretty recently the public sector banks were seen as too conservative in offering of loans, especially to retail customers. This picture has changed. The banks now are not only aggressive in courting them but also offer rates that are often lower than the private sector banks.

The lead was taken in this business by the State Bank of India.

It decided to enter the business of car finance in a big way. For instance it is the exclusive partner with Tata to finance their Nano car, the vehicle that will revolutionise the way India will travel in a couple of years. The changes in the credit business mean every public sector bank now offers loans to retail customers in less than fifteen days that would earlier take at least a month, through less paperwork and faster documentation.

But surpassing all these, the biggest change in the credit business is the teaser rates the public sector banks have introduced. The scheme works as follows. In the first year, the bank offers a rate of 8% as flat rate to its customers. This stays either constant or increases marginally in the next year. The rates are reset in the third year as per the prevailing rate. The attractive rates have already made the SBI the biggest player in the automotive market and the second largest player in the housing sector loans.

The o ther major change introduced in the credit business is the business correspondent model. The banks have set up some of their employees to reach the customers like the labourers, rickshaw pullers or fruit sellers as business correspondent. The employees carry a machine that has a telecom linkage with the banks, and therefore the banks are able to update any transaction with

the customers on real time. So if a rickshaw puller deposits a sum with the bank, the sum is punched in by the correspondent and is immediately reflected in the bank accounts even 15 kilometers away. The employee can also offer small time loans that are sanctioned on the spot. The popularity of the scheme is visible in the subzi mandis at New Azadpur in Delhi for instance, where several hundred labourers deposit their daily collections and so cut back on stuff like booze

The good news in the New Year is that India’s public sector banks have scored in customer care. Relying on the latest data available for 2008-’09, a prominent business daily has reported that of the 69,117 complaints received at 15 banking ombudsman offices across the country, 32 per cent or 21,982 complaints were against private banks, which is higher than their market share of 18 per cent. Private banks were followed by largest lender bank, State Bank of India and its associates. The SBI group which comprises 24 per cent of the advance and deposits of banks in India, received 18,167 complaints, which is 26 per cent of the total complaints received by the banking ombudsman.

Whi le there i s no doubt that private banks or the new generation tech-savy banks have mushroomed in the last 15 years, Nationalised banks still dominate


the banking system in India. The Finance Ministry is looking at rapid expansion of nationalized banks in the hinterland to make financial services available to the people and raise the savings rate to 40 per cent. Dr Kaushik Basu, the newly appointed Chief Economic Advisor of the Finance Ministry said at a meeting in New Delhi in the New Year that India first achieved GDP growth of nine per cent in 1975 on the back of the bank network and opening of a large number of banks in rural areas. This led to a higher rate of savings and investments of 13 per cent (of GDP). Basu said that India’s present savings rate is 38 per cent and this helped the economy bear the global financial crisis.

Most customers are of the view that private banks have played a crucial role in the development of the Indian banking industry by making banking more efficient and customer friendly. A third generation customer of a nationalised bank said that private banks should be given due credit as they are tech savvy and have compelled complacent nationalised banks to think of new schemes and innovative ideas to retain their loyal customers. Youngsters who began banking in the flexible- hour ATM (All Time Money) era, find the bouquet of services, particularly convenience banking options being offered by private banks, very appealing. But public sector banks are also catching up fast. Sanjay Chandra, Chief Manager of the 145 year

old Allahabad Bank, Timarpur branch, in Delhi says, “ We are offering convenience banking to our customers by providing internet banking, ATM facility, electronic transfer of funds known as RTGs for amount above Rs one lakh and NEFT for amount below Rs one lakh. The bank charges a nominal commission of Rs 25 for this service. We also offer core banking solutions. We offer one per cent rebate in loan to women who want to set up business and .5 per cent extra to senior citizens in term deposits.’’

The race for efficiency is therefore on . It is now a matter of survival of the fittest. q

(Email:[email protected])

PRIVATE SECTOR PLAYERS CAN SET uP LOCAL BANKS

The Reserve Bank of India has granted in-principle approval for a proposal that will allow private sector players to promote small local banks in what is seen as a new version of the local area bank schemes, withdrawn over five years ago. These banks will have an area of operations up to three

contiguous districts. The proposal came from the Raghuram Rajan committee, appointed by the Planning Commission in its report in 2008. The committee feels this could ensure inclusive banking. The Rajan committee felt that these banks are more effective in reaching out to poorer housebolds and local small and medium enterprises.

Now, with a large segment of the country’s population still lacking access to any banking services, the government appears to be keen on reintroducing the concept of LABs. These proposed entities will help bridge the gap in credit availability and will also offer credit facility in rural and semi-urban areas.

To begin with, the LABs would be allowed in under-banked or unbanked areas. As of now, the country has as many as 120 revenue blocks, with no banking facilities. Some amongst these proposed LABs that manage to establish good track record and wish to raise their own deposits could choose to become small finance banks with a capital base below Rs 300 crore. Simply put, some of these LABs can at a later stage be allowed to widen their operations and raise their stature to become commercial banks.


ROAD MAP TO 100 PER CENT FINANCIAL INCLuSION: SOME CONCERNS

World over, recognising the importance of inclusive growth, there are efforts towards making the financial system more inclusive. In India, the Committee on Financial Inclusion (Chairman: Dr. C. Rangarajan) has suggested a National Mission on Financial

inclusion and observed that financial inclusion must be taken up in a mission mode. Getting connected with the banking system would enable people to avail a range of transaction and payment services, access to affordable credit, insurance and safe savings products. It has been noticed that people without bank accounts are often the most vulnerable and impoverished. Not having a bank account excludes these people from simple credit products also, making them more likely to turn to predatory or even illegal lenders leaving them in perpetual debt.

In India, despite widespread expansion of the banking sector, particularly after nationalisation of major commercial banks in 1969 and 1980, a significant proportion of the households, especially in rural areas, are still outside the coverage of the formal banking system. These households have been dependent up on the informal money lenders for their credit needs and had few avenues for keeping their savings. A visit to the bank branch often resulted in their losing their wage for the day.

Various steps have been taken by the Reserve Bank and the Government to bring the financially excluded people to the fold of the formal banking system. The steps include efforts like nationalisation of banks, identifying priority sectors and setting up targets for the same, setting up of RRBs, LABs, credit delivery focus in rural areas through the Service Area Credit Plans, and enabling policy for microfinance by banks. Further, simplification of the KYC norms, introduction of no-frills accounts, Kisan Credit Cards, General Purpose Credit Cards, small overdrafts in no-frills accounts and permitting banks to use the business correspondent and the business facilitator models were specifically aimed to promote financial inclusion.

It has been announced in the Annual Policy Statement of Reserve Bank for the year 2005-06 that the Bank would implement policies to encourage banks, which provide extensive services while disincentivising those, which are not responsive to the banking needs of the community, including the underprivileged. Banks have been urged to review their existing practices to align them with the objective of financial inclusion.

In order to have focussed attention for the financial inclusion efforts, the State Level Bankers Committee (SLBC) has been advised to identify one or more districts for 100 per cent financial inclusion. Responsibility is given to the banks in the area for ensuring that all those who desire to have a bank account are provided with one by allocating the villages among the different banks. The 100 per cent financial inclusion drive is progressing all over the country. So far, 431 districts have been identified by SLBCs for 100 per cent financial inclusion. As on March 31, 2009, 204 districts in 18 States and 5 Union Territories have reported having achieved the target.


However, the path towards 100 per cent financial inclusion faces several issues. Some of the concerns in this endeavour are as follows: Coverage: India’s large size and population makes it difficult for any programme at a national level to reach out to everyone. The inclusion efforts in the urban centres and metros are difficult, especially in case of migrant labourers who do not have identity particulars at their place of work.

The remittance of money by these migrant workers to their home town is often dependent on informal channels. Infrastructure: Poor infrastructure in many parts of the country inhibits the development process. It is important there are adequate road, rail, digital connectivity and adequate power and infrastructure facilities which are important prerequisites for operation of a banking outlet.

Financial products: It is imperative that products that cater to the needs of the masses are available. Simple products rather than sophisticated instruments are required at affordable cost for the people. Flexibility is an important criterion and the products and services available should be flexible.

Delivery models: Efforts need to be taken to identify best delivery models/ business models for financial inclusion. The typical brick and mortar bank branches may not be feasible in all villages because of viability and other reasons. Banks have to adopt/experiment with all delivery models like satellite branches, mobile branches, business correspondents/POS, and mobile telephony services. The BC model, though a facilitating concept, is yet to scale up. The Working Group appointed by the Reserve bank to review the BC model has recommended new entities that could be appointed as BCs. The BC model, coupled with Information and Communication Technologies (ICT) solutions has the potential to reach out to the hitherto unreached.

Technology: Despite significant technological advancements there are issues of standardisation, inter operability and costs that inhibit smooth technology solutions. The financial services offered with the help of ICT should ideally be standardised, interoperable and cost effective. One of the major reasons for the slow progress in providing banking services in the hinterland is the high transaction costs associated with the low value large volume transactions. Technology can to a great extent reduce the cost of transactions.

Role of financial intermediaries: The banks are not uniformly geared up for financial inclusion. While the commercial banks have taken significant steps to facilitate inclusion, the RRBs and the cooperative banks need to gear up their efforts in this area.

Participative efforts: It is important that all the participative stakeholders work together to achieve the goal of financial inclusion. Banks, State Governments, technology providers, regulators and other developmental agencies need to work together in tandem to drive the efforts towards achieving total financial inclusion. q

(Courtsey RBI)


PROJECT TO SAVE SNOW LEOPARD

ECO-FRIENDLY FuEL FOR VALLEY

The State Government of Jammu and Kashmir has started work on an ambitious project to save the existing population of the endangered Snow Leopard in its bastion, the higher reaches of Ladakh with focus on its habitat improvement.

After receiving financial assistance from the Centre, the wildlife authorities have started work on the ‘Project Snow leopard’ in Ladakh. The project will span 3500 sq kms including Hemis High Altitude National Park in Ladakh.

Pertinently snow leopards are mostly found in mountainous regions of Jammu and Kashmir, Himachal Pradesh, Uttaranchal, Arunachal Pradesh and Sikkim. Poached for its attractive fur, organs and bones, just 4500 to 7000 snow leopards left in the world and India is home to approximately 400 to 600 of them. However as sixty percent of snow leopards have been found in Ladakh region, it has been included in the Species Recovery Programme being funded through the umbrella scheme ‘Integrated Development of Wildlife Habitats’.

Involvement of locals in the project, however, was imperative for its success. The department has approached wildlife experts from outside who will raise awareness about the leoperd among the locals and the wildlife staff.

Hundreds of tourists visit Ladakh only to see the snow leopard. “To cash on this aspect, the project has kept a provision for eco-tourism wherein the locals will host the tourists in their houses. This will serve dual purpose of promoting tourism and snow leopard conservation through community participation. q

THOUSANDS of trees are felled for firewood every wedding season in Kashmir. A US-based group is now trying to create alternate fuel to preseve the environment in the Valley. Mercy Corps has taken up a project to convert weeds extracted from the Dal Lake into a substitute for firewood.

They have found a substitute for the firewood in the weeds and the biomass being taken out of the Dal Lake during its cleaning. This group is engaged in humanitarian aid and development activities across the world. Since 1979, the group has provided more than $ 1.95 billion in assistance to people in 107 nations. It also organised a concert on climate change in the Valley recently featuring US pop star Terra Naomi.

The group formulated a strategy to prepare fuel bricks out of tonnes of weed dredged out of the lake. A research carried out by the Group states that the large-scale cutting down of trees contribute to global warming in two ways. They lead to loss of green cover and the use of firewood in preparing traditional dishes during the wedding season contribute to carbon emission. Felling of trees results in rise of average temperature, which further results in global warming and this leads to melting of glaciers.

Weeds from lakes as well as peels of apples and potatoes can be converted into bricks to be used instead of firewood. This will also provide employment opportunity to the youths of the Valley.

If the weeds are used instead of firewood, it will also help by making the lake cleaner as weeds mar its beauty. Mohammad Yusuf, a professor in the environmental sciences department of Kashmir University, has said: “The pollution level in the atmosphere increases during the wedding season because of wood used for cooking. Burning of weeds will also increase the smoke level, but it will prevent thousands of trees from facing the axe.” q

J&K WiNDOW


Revolutionizing Personal Hygiene for Women

ShODh yaTRa

ANITARY NAPKIN, a universally needed product, has very low penetration among the low income groups in India due to its high price, forcing

women to use cheap but unhygienic old cloth. Muruganantham, an innovator from Coimbatore in Tamil Nadu has developed an assembly of low cost and portable machines that produce quality sanitary napkins at the rate of Re.1 to Rs. 1.50 per pad. He has also improvised a vending machine that can dispense single pads with the insertion of a coin.

genesis of innovation

Muruganantham had noticed his wife using an old cloth as a substitute for sanitary napkin. He knew that millions of women in the country cannot afford this item which is so essential for their personal hygiene. He therefore set out to make a machine that could produce quality napkins at affordable prices. For this he procured the raw material from Mumbai that came in the form of sheets and boards. Next, he set about developing his own de-fibering

S unit to process the raw material in desired sizes and shapes. Having succeeded in this, he developed the machines for subsequent stages to do the core forming and sealing of napkins. Muruganantham developed the final assembly of machines in 2004. He distributed the first set of samples among his neighbors to get their feedback. He got encouraging inputs on its efficacy. Subsequently, he improved on the machine by adding the UV sterilization unit, calibration for various sizes and increased the production rate to target 1000 pads per day. After seeing the ATM in cities, dispensing cash to the customers as required, the innovator decided to build a sanitary napkin dispenser (vending machine) with a coin slot that could be set up in hospitals, colleges and public places to supply napkins on demand. The vending machine was developed in 2008 and has a capacity of 25 pads.

Product details

The main raw materials used include wood fiber; thermo bonded non-woven, polyethylene – barrier

This machine heralds a new revolution in

personal hygiene for women across

all sections of society, while

creating a revenue stream for small

scale entrepreneurs and self help groups


film, release paper, super bond paste & LLDPE 50 GSM – packing cover. The semi-automatic machine involves four stages of production. In the first stage, the raw material is taken into a de-fiberation unit (36’’ x 24”x 30”) where it is cut up by 4 blades, fitted on a disc at the bottom of a conical vessel to deliver de-fiberated wood pulp with a filament length of 1 to 1.5 mm. The unit is powered by a 1 HP single-phase motor rotating at 10,000 RPM to cut and deliver soft pulp at the rate of 150 g per minute. The second stage involves compressing the de-fibered pulp into required shape. This is done using a core-forming unit (24” x 24” x 30”), operated by a foot pedal. The mould or core block is made of food grade aluminum and facilitates making two kinds of pads; one with a variable density and the other with constant or equal density.

The third stage involves sealing the pads in the napkin-finishing machine (36” x 30”x 30”), where they are wrapped with non-woven fabrics such as polypropylene and sealed. The operator uses the foot pedal to power the unit and seal the pads in three sides. The unit is rated at 40 Watts and seals about 4-10 napkins per minute using a cam operated limit switch, which facilitates fast heating and cooling within two seconds per stroke. The fourth stage involves passing the sealed pads through a dedicated Sterilization unit. which consists of a closed container with UV lamps. In the UV chamber, sealed pads are sterilized by exposing them for 10 seconds. The UV sterilization is achieved by using short wave Germicidal Erasing Lamps with specific wavelengths between 240 - 280 nanometers with a peak wavelength of 265 nanometers.

The machine can produce over 900 sanitary napkin pads per day @ 4 napkins per minute. It needs a maximum of three people to operate the three main production stages. The rate of production can be enhanced using two core-forming dyes. In India expensive imported machines costing over twenty five lakh rupees are used in manufacturing. This puts the product beyond the reach of women in lower income groups.

This machine heralds a new revolution in personal hygiene for women across all sections of society, while creating a revenue stream for small scale entrepreneurs and self help groups Many self help groups, corporates and organizations such as M S Swaminathan Research Foundation, All India Women’s Conference, DATA, Malabar Hospital, Community Center-AAI Delhi, Mandal Mahila Samkiya and Sammilana have placed orders for this machine. Local entrepreneurs and SHGs have launched the low cost pads in various trade names (Easy Feel, Free Style, Style Free Feel Free and Be Free). These products are available in the local market at an affordable cost range of Rs 13 for a set of 8 pads and Rs 15 for a set of 10 pads.

With the support from the Micro Venture Innovation Fund (MVIF) at NIF, the innovator has been able to install over eighty units in thirteen states across the country. He has received support from other sources as well. He also received a National Award in NIF’s Fifth National Competition for Grassroots Innovations and Traditional Knowledge in November 2009. q

(E-mail : [email protected], www.nifindia.org)

SEALINg uNIT


There is a need to bring

about financial inclusion by using

technological inputs on a massive scale

to increase the reach of banking

services to the remote areas

Automation of Banking Sector in India

baNKiNg

N F O R M A T I O N T E C H N O L O G Y ( I T ) and the Communication Networking Systems (CNS) have revolutionized the working of banks and

financial entities all over the world. The Indian banking industry has also leveraged technology for achieving operational efficiency and for making financial inclusion a reality. Extending banking services to hitherto excluded persons in remote areas of the country at reasonable operational costs could never have been possible without appropriate technology. The RBI has set up an advisory group for IT Enabled Financial Inclusion to facilitate development of Information Technology solutions for delivery of banking services. Leading banks have been prompt in providing efficient customer service and offering a variety of hi-tech banking services like Automatic Teller Machine (ATM) service, Electronic Funds Transfer (EFT) system and Real Time Gross Settlement (RTGS) system. The

I

The author is Lecturer in Commerce, Annamalai University, India.

focus on technology will increase even more in times to come, and will add value to customer services, develop new products, strengthen risk management etc. E- banking has already become an indispensable reality for a large percentage of Indians. Some of the features that make this service so attractive to the user are that he can -

• Can access current/ savings account balances at any time/any place

• Can obtain charge and credit card statements

• Can pay bills online

• C a n d o w n l o a d a c c o u n t transactions

• Can transfer money between accounts

• Can keep track of accounts online

• Can send e-mails to the bank requesting the services

OVERViEW

V Dheenadhayalan


• Can have a flexible schedule

• Can also use additional services like free phone banking, ATM and payment of bill.

E – Based banking is also known as cyber banking, home banking, virtual banking and includes various banking activities that can be conducted from anywhere. It offers an inexpensive alternative to branch banking and a chance to enlist remote users.

Computerisation in Banks

The process of computerisation, which was the starting point of all technological initiatives, is reaching near completion in most banks. While the new private sector banks, the foreign banks and a few old private sector banks have already put in place ‘Core Banking Solutions’, all public sector banks have already crossed the 70 per cent level of computerization of their business. At the end of March 2009, 95 percent of the public sector bank branches were fully computerised, with Compound Annual Growth Rate (CAGR) of 6 percent (table 1). Core

Banking Solution also grew at CAGR of 48.49 percent. The Reserve Bank has been continuously encouraging banks to use technology-based solutions for increased delivery of services. The cumulative amount spent by public sector banks on automation during September 1999 to March 2009 aggregated Rs.18,168 crore, registering an increase of 21.0 per cent over the previous year.

To compete in an economy which is opening up, banks need to keep abreast of the latest technology. With the entry of foreign banks and the continuous innovation that is taking place in the realm of information technology, it has become a necessity for banks in India to make increasing use of the electronic mode for making their business customer friendly, efficient and competitive as also for providing newer products and newer forms of services in an increasingly dynamic and globalized environment. Some of the services offered by the banks using the electronic based services are Automatic Teller Machine (ATM) service, Electronic Funds Transfer (EFT) system and Real

Time Gross Settlement (RTGS) system. These developments have contributed to the speed, efficiency and safety of the payment system.

ATM Service

The ATM was one of the earliest electronic banking products introduced in the mid 1970s. It is used by banks for making customer dealings easier. This system is also known as ‘Any Time Money’ because it allows customers to withdraw money at any time from the bank. It increases existing business and generates new business. It allows the customers to transfer money to and from accounts, deposit cheques or cash, view account information. ATM is the most convenient way to withdraw cash. ATM offers benefits to banks, i.e. improved customer services, larger penetration, alternative to extended hour service, less crowding at the bank. Table 2 reveals that the total numbers of ATMs installed by the banks were 43,651 at end-March 2009 as compared with 34,789 at th end march 2008, 27,088 at end-March 2007 and 20,267 at end-March 2006 respectively.

Table 1: Computerisation in Public Sector Banks(As at end-March)

(Per cent of total bank branches) Category 2005 2006 2007 2008 2009 CAgR

%Fully Computerised Branches (i+ii)

71.0 77.5 85.6 93.7 95.0 6.00

i) Branches under Core Banking Solution

11.0 28.9 44.4 67.0 79.4 48.49

i i ) Branches a l ready Fu l ly Computerised #

60.0 48.5 41.2 26.6 15.6 -23.62

Partially Computerised Branches 21.8 18.2 13.4 6.3 5.0 -25.51

#: Other than branches under Core Banking Solution Source: Reports on Trend and Progress of Banking in India.


It can be seen that ATMs installed by foreign banks and new private sector banks were more than three

for credit cards, private level cards, charge card etc. Payment of insurance premium, mortgage

The volume of electronic transactions increased to 2,05,485 during 2007-08 as compared with 1,44,221 in the

Table 2: Branches and ATMs of Scheduled Commercial Banks (SCBs)(As at end-March 2008)

Bank group Number of Bank/Branches Number of ATMs Off site ATMs as % of total

ATMs

ATMs as % Of Branches

Rural Semi urban

Metro urban Total On-site

Off-site

Total

N a t i o n a l i z e d Banks

13,198 8,140 8,440 7,997 37,775 8,320 5,035 13,355 37.7 35.4

S t a t e B a n k Group

5,328 4,545 2,820 2,421 15,105 4,582 3,851 8,433 45.7 55.8

O l d P r i v a t e Sector Banks

808 1,498 1,270 874 4,450 1,436 664 2,100 31.6 47.2

N e w P r i v a t e Sector Banks

223 870 1147 1285 3,525 3,879 5,988 9,867 60.7 279.9

Foreign Banks 0 2 48 224 274 269 765 1034 74.0 377.4Total 19,557 15,055 13,725 12,801 61,129 18,486 16,303 34,789 46.9 56.9Source: Report on Trend and Progress of Banking in India, 2007-08.

times their number of branches, while the ATM to branch ratio was much lower for public sector 35.4 Per cent (32.9 per cent in 2007) and old private sector banks 47.2 percent (34.9 per cent in 2007). On the whole ATMs to number of branches was 47.5%, in 2007, 56.9 percent at the end of March 2008, and 67 % at the end of 2009 .

The Electronic Funds Transfer

The EFT automatically transfers money form one account to another. In this system, the sender and the receiver of funds may be located in different cities and may even bank with different banks. This system also makes possible payments

installment are also electronically transferred from the bank to the respective accounts periodically. The main features are quick and safe movement of deposit money. Retail electronic funds transfer system comprises electronic clearing services (ECS); Electronic Funds Transfer (EFT). To encourage the use of electronic mode of payments, the Reserve Bank waived the processing charges for all electronic payment systems operated by it for another year, i.e., till March 2009.

Reflecting the increased application of technology, the use of electronic payments, both ECS- Credit and ECS- Debit, has increased in recent years.

previous year, registering with CAGR of 48.76. In terms of value, transactions increased to Rs. 8, 31,159 crore during 2007-08 as compared with 1,08,714 crore in the previous year, registering a CAGR of 131.57 percent. The electronic funds transfer increased more than seven times during 2007-08 over the previous year,

Real Time gross Settlement System

The Real Time Gross Settlement System is an important landmark in the payment and settlement system initiatives being taken by the Reserve Bank of India from time to time. Corporate bodies would find the new system attractive

Table 3: Electronic Funds Transfer SystemsType Volume (000s) Value (Rupees in crore)

2003-04 2004-05 2005-06 2006-07 2007-08 CAgR 2003-04 2004-05 2005-06 2006-07 2007-08 CAgRE C S -Credit

20,300 40,051 44,216 69,019 78365 31.02 10,228 20,180 32,324 83,273 7,82,222 138.07

E C S -Debit

7,897 15,300 35,958 75,202 127120 74.32 2,254 2,921 12,986 25,441 48,937 85.07

Total 28,197 55,351 80,174 1,44,221 2,05,485 48.76 12,482 23,101 45,310 1,08,714 8,31,159 131.57Source: RBI Annual Reports.


and useful, as it would help in bringing huge savings for them. Hence forth, companies may go for RTGS enabled bank to get the benefits of instant transfer of funds from different parts of the world. The Real Time Gross Settlement system, in operation since March 2004 for facilitating faster settlement of high value transactions, based on the recommendations of an Internal Group which examined various aspects of payment systems, particularly relating to switching over to electronic modes, a minimum threshold value of Rs.1 lakh was introduced on January 1, 2007.

The RTGS System has several unique features. It is a single, all-India system, with the settlement being effected in Mumbai. The payments are settled transaction by transaction. The settlement is done in real time; the funds settled can be further used immediately. It is a fully secure system, which uses digital signatures for safe and secure message transmission. It provides for intra-day collateralized liquidity support for the member-banks to smoothen the temporary

can be effected through the RTGS system. Thus it provides less risk-based funds transfers for both banks and for their customers.

The RTGS system has gained significance in terms of both coverage and value of transactions over the past four years. The RTGS connectivity was available in 47,608 branches at end-June 2008, facilitating sharp increase in volumes settled through this system. The value of transactions rose by 1.48 times during 2007-08, with customer transactions almost trebled, registering a CAGR of 30.94 percent and 183.38 percent respectively. At end-May 2008, 47,608 branches had RTGS connectivity and had handled transactions valued at Rs.2,73,18,330 crore (Table 4).

Conclusion

Technological developments have vastly altered the banking landscape in India with significant improvement in processes and procedures leading to higher product iv i ty, rapid product development through alternative

a fair return to the shareholders, by facilitating greater profits to the banking sector. IT has revolutionized the services and mode of services offered by banks to their corporate clients. Compared to traditional banking, E- Banking brings a nuclear charged experience to clients that provide scope for real time transactions as well as a single integrated platform for all the banking relationships. Banks should now move from mass marketing to targeting specific customers to and respond with the right product at the right time through the right channels and deliver conveniently, efficiently and effectively. New banks' operations are mostly confined to urban areas and cites. They are able to leverage the benefits of IT better. So in order to be more competitive, appropriate action should be taken to achieve healthy growth in terms of both business volume and profitability by enhancing distribution network to rural areas. There is a need to bring about financial inclusion by using technological inputs such as smart cards, biometric IDs, E-Cheques and mobile handsets,

Table 4: Year-Wise RTgS Transactions(Value in Rupees crore)

Year Inter-bank Customer TotalVolume Value Volume Value Volume Value

2004-05 391,931 38,16,522 68,492 2,49,662 460,423 40,66,1842005-06 1,053,940 89,70,624 713,058 25,70,212 1,766,998 1,15,40,8362006-07 1,393,728 1,13,13,347 2,481,779 71,67,808 3,875,507 1,84,81,1552007-08 1,693,986 1,12,18,157 4,146,041 1,61,00,173 5,840,027 2,73,18,330CAGR 44.19 30.94 178.93 183.38 88.72 61.00Source: RBI Annual Reports.

mismatches of fund flows, thereby ensuring smooth settlements. Under the RTGS System, inter-bank transactions; customer based inter-bank transactions and net clearing transactions can be settled. Both high value and retail payments

delivery channels, and reduction in the transaction cost. In particular, technology is being leveraged increasingly to expand the banking outreach, especially in the rural areas. Information Technology (IT) has a role to play in ensuring

on a massive scale to increase the reach of banking services to the remote and rural areas and the to the people so far excluded from these services. q



DO yOu KNOW?

What is the Banking O m b u d s m a n Scheme?

The Banking Ombudsman Scheme is a forum through which bank customers can resolve complaints relating to certain services rendered by banks. All Scheduled Commercial Banks, Regional Rural Banks and Scheduled Primary Co-operative Banks are covered under the Scheme The Banking Ombudsman is a senior official appointed by the RBI to redress customer complaints.. Fifteen Banking Ombudsmen have been appointed till date, most of them in state capitals..

On what grounds can complaints be made ?

Complaints can be made to the Banking Ombudsman for various service related problems like non-payment or delay in the payment or collection of cheques, drafts, bills etc.; non-acceptance, without sufficient cause, of small denomination notes or coins and for charging of commission in respect thereof; non-payment or delay in payment of inward remittances ; failure / delay in issue of drafts, pay orders or bankers’ cheques; non-adherence to prescribed working hours ; failure / delay in providing a banking facility (other than loans and advances) promised in writing by a bank or its direct selling agents; delays,

acceptance of application for loans without furnishing valid reasons to the applicant; and non-adherence to the provisions of the fair practices code for lenders

W h e n c a n o n e f i l e a complaint?

One can file a complaint before the Banking Ombudsman if he does not receive a reply to his representation from the bank concerned, if he is not satisfied with the reply or if his representation is rejected.

under what circumstances would a complaint not be entertained ?

The ombudsman will not entertain a complaint if the institution complained against is not covered under the scheme, the issue is not pending disposal in a court of law or is beyond the ambit of the ombudsman, one has not represented to the bank in the first place or has made the complaint to the ombudsman after expiry of one year from the date one received a reply to one’s representation from the bank concerned or after more than one year and one month from the date of representation, in case no reply is received.

The Ombudsman can also reject a complaint at any stage if the compensation sought is beyond Rs 10 lakh , requires consideration of elaborate documentary and oral evidence.

BANKINg OMBuDSMAN SCHEME

non-credit of proceeds to parties accounts, non-payment of deposit or non-observance of the Reserve Bank directives, if any, applicable to rate of interest on deposits in any savings, current or other account maintained with a bank ; complaints from NRIs in relation to their remittances from abroad,; refusal to open deposit accounts without any valid reason for refusal; levying of charges without adequate prior notice to the customer; non-adherence the instructions of Reserve Bank on ATM/Debit card operations or credit card operations; non-disbursement / delay in disbursement of pension; refusal to accept or delay in accepting payment towards taxes, as required by Reserve Bank/Government; forced closure of deposit accounts without due notice or without sufficient reason; refusal to close or delay in closing the accounts; non-adherence to the fair practices code; non-observance of Reserve Bank guidelines on engagement of recovery agents by banks; any matter relating to the violation of the directives issued by the Reserve Bank in relation to banking or other services.

A customer can also fi le complaint with respect to loans and advances for non-observance of Reserve Bank Directives on interest rates; delays in sanction, disbursement or non-observance of prescribed time schedule for disposal of loan applications; non-


How and Where can a complaint be lodged ?

One can file a complaint with the Banking Ombudsman simply by writing on a plain paper. One can also file it online or by sending an email to the Banking Ombudsman. There is a form along with details of the scheme in the RBI website. However, it is not necessary to use this format.

One may lodge his/ her complaint at the office of the Banking Ombudsman under whose jurisdiction, the bank branch complained against is situated.

For complaints relating to credit cards and other types of services with centralized operations, complaints may be filed before the Banking Ombudsman within whose territorial jurisdiction the billing address of the customer is located.

The complainant can be filed by one’ s authorized representative other than an advocate. The Banking Ombudsman does not charge any fee for filing and resolving customers’ complaints.

What details are required in the application?

The complaint should carry the name and address of the complainant, the name and address of the branch or office of the bank against which the complaint is made, facts giving rise to the complaint supported by documents, if any, the nature and extent of the loss caused to

the complainant, the relief sought from the Banking Ombudsman and a declaration about the compliance of conditions which are required to be complied with by the complainant.

What is the limit on the amount of compensation?

The compensation payable to the complainant is limited to the amount arising directly out of the act or omission of the bank or Rs 10 lakhs, whichever is lower.

Can compensation be claimed for mental agony and harassment?

The Banking Ombudsman may award compensation not exceeding Rs 1 lakh to the complainant only in the case of complaints relating to credit card operations for mental agony and harassment, taking into account the loss of the complainant’s time, expenses incurred, harassment and mental anguish suffered.

How is a complaint settled ?

The Ombudsman mediates to settle the complaint by agreement between the complainant and the bank concerned. If the terms of settlement offered by the bank are acceptable to the complainant the Ombudsman will pass an order which becomes binding on both parties.

If a complaint is not settled by an agreement within a period of one month, the Ombudsman proceeds further to pass an award after giving reasonable opportunity to the complainant and the bank, to present their case. It is up to the

complainant to accept the award in full and final settlement of his complaint or to reject it.

What can the complainant do in case the ombudsman’s decision is not acceptable to him ?

In such a case one can approach the appellate authority against the Ombudsmen’s decision. Appellate Authority is vested with a Deputy Governor of the RBI.

One can also explore any other recourse available as per the law. The bank also has the option to file an appeal before the appellate authority under the scheme.

What is the time limit for filing an appeal?

Appeal has to be filed within 30 days of the date of receipt of the award. A grace of further 30 days can be granted by the appellate authority if he/ she is satisfied that the applicant had sufficient cause for not making an application for appeal within time.

How does the appellate authority deal with the appeal?

The appellate authority may dismiss the appeal; allow the appeal and set aside the award; send the matter to the Banking Ombudsman for fresh disposal in accordance with such directions as the appellate authority may consider necessary or proper; modify the award and pass such directions as may be necessary to give effect to the modified award; or pass any other order as it may deem fit.

(Courtesy RBI)


It has been responsive

to the needs of the time

and has catered to

the demands of the economy

as a whole

Evolution of Banking

baNKiNg

N A developing country like India the banking sector has played a multi dimensional and multi directional role in overall development. The nature of this role has

however, changed significantly over the period since independence. The period can broadly be divided into three phases - first, before nationalization i.e. from 1947 to 1969; second, under nationalization and before liberalization i.e., the period between 1969 and 1991 and finally, after liberalization i.e., since 1991 to till now.

First phase: pre nationalization era (1947-1969)

T h e f i r s t p e r i o d w a s characterized by two important steps taken by the government in 1949 - the nationalization of RBI and enactment of the Banking Regulat ion Act which gave extensive regulatory power to RBI over the commercial banks. These two steps allowed the government to carry out several structural reforms in the banking sector. With

I

The author is Research Scholar with the Centre for Economic Studies and Planning, Jawaharlal Nehru University, New Delhi.

the change in policy of regulation there was massive increase in the mobilization of savings by the commercial banks. The perception of the people towards banks changed significantly, and this was reflected in higher growth in time deposits as compared to demand deposits, and the rise in the personal accounts relative to businesses account during this phase. For the first time the common man began to see banks as a secure investment option and a safe place to keep money.

Another important step was the establishment of State Bank of India in 1955 and its Associates in 1960, with their obligation to open new branches in rural and semi- urban areas. This opened up the undeveloped interiors of the country to a first time banking experience. However, as most commercial banks were under the control of big business houses, the expansion of branches in rural and semi-urban areas was limited despite some efforts by the SBI and its Associates, and the common

OVERViEW

Avanindra Nath Thakur


man effectively remained outside the ambit of banking. In June 1969 only 22.2 % bank offices were located in rural areas. Moreover, the rural sectors had less than 10 % and agricultural sector only about 2% share in the total net bank credit . The focus of the banking sector till 1969 was restricted to the industrial sector. The rural sector, and in particular the agricultural sector was largely neglected.

Second phase: nationalization to liberalization (1969-1991)

Fourteen major commercial banks were nationalized in 1969 in order to focus on the primary sector which was underdeveloped. Six more banks were nationalized in 1980. With the nationalization of banks, both the expansion pattern and role of the commercial banks have changed significantly. Bank offices in rural areas rose to more than 58 % of total bank offices in 1990. There was massive expansion of branches of commercial banks after nationalization under the lead bank scheme. The branches expanded at about 2400 per year till mid 1980s and thereafter at a rate of around 850 per year. More than 45% of the expansion was in rural areas.

The period between June 1969 and March 1990 was characterized by the rapid expansion of the banking sector as a whole. The number of commercial banks increased from 89 to 274 during this period. Number of bank offices increased from 8262 in June 1969 to 59756 in March 1990. Of these bank offices the percentage of rural offices increased from merely 22.2 % to 58.2 %. For the same period, population per office came down from 64 thousand to 14 thousand. Deposit as a percentage

of nominal GNP rose significantly from 15.5 % in June 1969 to as high as 48.6 % in March 1990. Similarly, credit as percentage of nominal GDP increased from 12 % to 29.5 % during the same period. The most important aspect of the changing role of banking sector as a whole was the initiation of directed credit system under the Lead Bank Scheme. Banks were directed to provide at least 40 % of their net credit to the priority sector which comprised agriculture, small scale industries and other related areas. On the recommendation of the Working Group on Rural Banks under the chairmanship of M.Narasimham, Regional Rural Banks were set up under an Act of 1976. The regional banks are required to meet the credit requirements of weaker sections, small and marginal farmer, landless labourers, artisans and small entrepreneurs.

This policy change defined a clear shift in the role of banks. Instead of channelizing savings for large industrial houses and other secondary activities, the banking sector was now playing a very crucial role in promoting overall development of rural as well as other marginal sectors which engaged about 75 % of the country's population. In 1982 National Bank for Agriculture and Rural Development was established to channelize credit in rural sector. All those banks which were not able to disburse their required share to priority sector were subjected to provide the gap of funds to NABARD and it was assigned to undertake various measures of rural and agricultural development.

The implication of directed credit system was quite visible during the entire period between

1969 and 1990. Total advances to priority sector increased from 14.6% in June 1969 to more than 40% in late 1990s. The agricultural sector raised its share from 5.4 % to 18% during the same period. Similarly the share of small scale sector increased from 8.3% to near about 15% . The shift in the credit policy of the banking sector has been proved a key factor in the development process in India for at least two decades till 1990. Success of Green Revolution and subsequently self-reliance in food production, as also the massive expansion in production, employment generation and export from small scale industries has found its roots in the active role of banking sector as a whole during this period.

However, despite the significant contribution of the banking sector to promote the less developed marginal sectors, its performance as an industry was severely undermined during the period in between 1969 and 1990. Lack of competition and immense regulation made the banking industry inefficient and loss making. Non-performing assets as a proportion of total assets rose significantly. Intermediate cost of operation became very high. Hence the debate arose that a complete restructuring recapitalization and change in the role assigned to the banking sector are needed on priority basis. After the macro economic crises India experienced in 1991-92, an altogether different approach was undertaken in regard to the functioning of the banking sector as a whole and its role in the development process.

Third phase: post liberalization era (after 1991)

In the post liberalization era the role of the banking sector


changed significantly. The system of directed credit had led to the decline in profit of the banking sector as a whole, its role in the promotion of agriculture and other small scale industries notwithstanding. It was now time to look at banks as important sectors of growth, and tap their immense potential to contribute directly in the growth process rather than being entirely treated as instrument to promote other sectors. Consequently, the government appointed a committee on financial sector in 1991 and later on banking sector reforms in 1998 under the chairmanship of M.Narasimham. Based on the recommendation of these committees the government initiated several reforms in the banking sector. Now the goal was to make banking sector efficient and a profit making competitive industry. The banks were now subject to rules concerning income recognition, asset classification and adoption of the Basel capital adequacy standards. Statuary liquidity ratio was brought down to 25 % and Cash Reserve Ratio was brought down from 15% to as low as less than 5% in early 2000. Moreover private and foreign banks were allowed to enter the market in order to promote competitiveness and consequently efficiency in the working of the banking sector as a whole. Interest rates on term deposits and prime lending rates were de regularized to a large extent.

These liberalization measures have had positive effect on the efficiency of the banking sector. Total non-performing assets as percentage of the total loan portfolio which were as high as 24.8% in 1994 came down to 2.7% as at end March 2007.

In recent years, this decline has been significant. The gross non-performing assets of Scheduled Commercial Banks as a proportion of total assets declined to 1.3% during 2007-08 compared to 1.5% during 2006-07. After adopting the standard of the Basel Norms, the quality of assets of these banks improved significantly. The capital to risk weighted asset ratio has improved during the reform period. In 1996-97, 19 out of 92 Scheduled Commercial Banks failed to satisfy the norm and only 42 had a CRAR of more than 10%. In 2003-04 only 2 out of the 90 banks failed to satisfy the norm and as many as 87 had a ratio of more than 10%. This ratio remained as high as 12.3% in March 2007 as against the minimum 9% stipulated by the RBI. Moreover, both deposit as well as credit as proportion of GDP has risen significantly during the reform period. Deposits as a proportion of GDP have risen from 48.6% in 1990 to 60.4% in 2005. Credit has risen from 29.5% of GDP to 39.1% during the same period.

Among the other positive effects, profit per employee rose from 10,000 rupees in 1995-96 to 1,30,000 in 2004-05 at constant prices. Similarly, business per employee rose from 6 million rupees in 1995-96 to 17.3 million rupees in 2004-05. Moreover, deposit per branch rose from 6 million rupees in 1994-95 to 242 million rupees in 2004-05. Profitability measured by net return on assets of public sector banks as a whole rose from -0.4% in 1992-93 to 1.12% in 2003-04 which has been one of the highest in the world. Similarly, the intermediate cost as a proportion of asset declined from a high of

2.99% in 1995-96 to near about 2% in 2005-06.

However, in the process of making the banking sector an efficient industry, some aspects which had gained priority in the pre liberalization period have been undermined in the post reform era. The share of agriculture has come down from a high of 18% in 1990 to near about 13% in late 1990s. A similar decline has been experienced in the small scale sector. The percentage of rural branches declined from 58.2% in 1990 to 45.7% in 2005. Population per branch has also risen from 14 thousand to 16 thousand during the same period. To address agrarian distress and the large number of suicides committed by farmers, focus of the banking sector was again shifted towards the agricultural sector. In March 2008, the share of agriculture in total public sector bank advances rose to 17.4%. Total priority sector advances as a percentage of total advances have risen to 44.6% in March 2008. The share of small scale industries in total advances rose to 10.9% in March 2008. Between 2004-05 and 2007-08, total credit disbursed to agricultural sector increased by 113%. More than 75 lakh farmers were financed by commercial banks and regional rural banks during the year 2007-08. Agricultural Debt Waiver scheme worth 60,000 crores was announced in the budget 2008-09.

The evolution of the banking sector in India and its role towards the growth and development of the country has been distinct and definitive. It has been responsive to the needs of the time and has catered to the demands of the economy as a whole. q

(Email :[email protected])


One’s judgment plays an important

role in making a choice, and

different people may adjudge the same

context differently. Even so, it’s still the scientific approach that ought to guide collective judgment

Art and Science of Development Practice

PlaNNiNg

HE OBJECTIVE of this paper is to bring out with the help of an illustration, the diverse considerations s u c h a s p o l i t i c a l , economic, administrative,

nature of development intervention and so forth that weigh in decision making in much of development planning and pract ice . The illustration used here is: choice of intervention areas.

Suppose you are planning to introduce a development intervention which could be for alleviation of (income) poverty through livelihood generation or reduction in disease incidence through rapid diagnosis and prompt treatment or removal of illiteracy through free and compulsory primary education and so forth. Supposing the intervention can be introduced only in a few needy districts, rather than in all the needy districts, so that a choice has to be made among the districts. There could be several reasons for choosing among districts such as limited budget, pilot or demonstration phase and so forth. For simplicity,

T

The author is an Economist with the Health, Nutrition and Population Division, World Bank, India.

suppose that the intervention can be introduced in only one of the two needy districts. One of the districts have a population of 1 million (call this district A) while the other district (district B) has a population of 0.5 million. In district A, 40% of the total population, that is 0.4 million, can potentially benefit from the intervention while in district B, 60% of the total population, that is 0.3 million, can potentially derive benefit from the intervention. Which of the two districts would you choose? The answer seems pretty obvious: district A, which has a higher number of potential beneficiaries (0.4 million). Actually, the answer is not that straightforward. If the population in district B is geographically concentrated in comparison to district A, and if the cost of reaching the concentrated population is significantly lower than that of reaching the scattered population, the implementation cost consideration would favour introducing the intervention in district B. However, there are other important considerations

ChOiCES

Rajeev Ahuja


too, such as political priority and implementation quality that would guide the choice between the districts. We discuss these below.

Political Priority: Political considerations like achieving regional balance, historical neglect and so forth may weigh in final selection of the district. If political choice crowds out more deserving districts then that is a clear case of conflict between good economics (efficiency in use of resources) and good politics, which happens often in development practice.

The other important consideration is the extent to which the potential beneficiaries are likely to be actually covered by the intervention. The key consideration here is: where the intervention is likely to be implemented better? There are several factors such as bureaucratic commitment, capacity of the district to implement the intervention, and nature of intervention that feed into arriving at the judgment on implementation quality. We take each of these in turn below.

Bureaucratic Commitment: This depends on how important t h e i n t e r v e n t i o n i s i n t h e bureaucrat’s overall program portfolio. Generally, districts with higher percentage of the beneficiaries in its total population, is likely to be higher up in the priority list of its bureaucrats. The quantum of funding is also an important deciding factor. Further, an intervention may neither get political priority nor administrators’ commitment if the target community is totally voiceless. For example, over 80 percent of incidence of Kala Azar disease, which has been eradicated from all states of India except Bihar, Jharkahand and West Bengal, is in Bihar, largely affecting the Mushar

community—the poorest of the poor who get little attention.

Implementation Capacity: You may want to select the district with stronger implementation capacity, even if it involves choosing less “endemic” district. This is especially true if the intervention is in the demonstration or pilot phase and you would want to introduce it in a district where it has a high chance of success. Higher endemic district is generally also the district with weak implementation capacity. In such situations, there is a clear trade-off between efficiency (putting resources where the problem is most acute) and implementation. This tradeoff translates to choosing between relatively small gains for larger number of needy people and large gains for smaller number of people.

Nature of intervention: Success of the intervention depends not only on the capacity of implementers but also on the receptivity of the beneficiaries which in turn depends on the nature of intervention. Whether the intervention requires technocra t ic approach i .e . , a few critical decisions by the top administrators or whether its success crucially depends on sustained community engagement, which in turn depends on how well organized the community is. If the intervention to be introduced is to piggyback on the existing system or presupposes certain building blocks to be in place, then the district with stronger system or with building blocks is likely to be the natural choice. If you are trying to develop district health accounts, for example, you will start in a district which at least has decent budget information system in place. Likewise, if an intervention requires certain complementary inputs then the choice of district will depend on whether a district

can assure sustained supply of those inputs.

Extraneous factors: Sometimes the choice is straightforward. If another development partner or agency is already having a related intervention in one of the districts, you want to introduce the intervention in the other district even if there is room for accommodating your intervention in the district in which the development partner or agency is present.

At times, you no longer have the luxury of choosing one of the districts. An intervention must be rolled out in both the districts simultaneously. For example, if the intervention is to eradicate a disease, say polio, then unless it is introduced in both the districts simultaneous the eradication objective cannot be achieved. Similarly, weak capacities in both the districts may force you to choose both the districts, knowing fully that none of the districts will be able to reach sizable proportion of the potential beneficiaries.

What holds true for districts also holds true in choosing between states, countries or even regions. So, you see several factors weigh in the choice of intervention area(s). You try optimizing the decision using multiple lenses, but looked from any single lens the decision may appear sub-optimal. “Science” has a limited role here, and indeed, in much of development planning and practice. Given the nature of intervention, choice between two competing intervention areas is more of an “art.” One’s judgment plays an important role in making a choice, and different people may adjudge the same context differently. Even so, it’s still the scientific approach that ought to guide collective judgment. q

(Email :[email protected])


The objective of encouraging rural banking

is firstly to reduce rural-

urban and agricultural

workers- industrial worker

differences in poverty

levels

Rural Banking in India

baNKiNg

H E R U R A L s e c t o r continues to play an important role in terms of contribution to GDP and employment generation

in India. Development, however, has been sluggish in these areas, in spite of new opportunities coming up in the post-liberalisation era. There is an urgent need to empower rural population and equip it with necessary knowledge, capital and entrepreneurial skills so that it can make the best of these opportunities. Another important thing is to improve their access to capital for both investment and consumption purposesso that they can up grade their living standards. For a vast majority of rural people, it is not enough to merely improve access to credit – it is also important to make available services that can help them utilize this credit more effectively. This paper tries to explore the alternatives, which will enhance the economic and social

T

The author is Associate Professor (Public Policy), Administrative Staff College of India.

viability of institutional credit system in rural areas.

Rural financial intermediation

The currently institutional rural credit system consists of about one lakh primary agricultural credit societies (PACS), 108 regional rural banks (RRBs) with more than 30,000 branches spread through out rural India and about 20,000 branches of commercial banks which provide about 60 percent of rural credit needs. The remaining 40 percent of rural credit needs are taken care of by non-institutional sources of credit like traditional moneylenders, shopkeepers and relatives.. The Indian government has encouraged many institutions beginning with cooperat ive credit societies in 1950s followed by social control in 1968, then nationalization of banks in 1969 and 1980 and the establishment of Regional Rural Banks in 1972. The government simultaneously

PERSPECTiVE

A Amarender Reddy


initiated many rural poverty alleviation/developmental schemes such as community development programmes, service area approach, lead bank scheme, Integrated Rural Development Programme (IRDP) and more recently Swarnajayanti Gram Swarozgar Yojana(SGSY) with a major component of credit with active participation of banks. With all these efforts, the network of branches in rural areas increased greatly, and now every six villages have one bank branch. With the main focus on branch expansion and credit expansion, profitability and efficiency were however, relegated to the background.

Financial sector reforms

The financial sector reforms started in early 1990s to ensure that the financial services industry operates on the basis of operational flexibility and functional autonomy with a view to enhance efficiency, productivity and profitability. The impact of these reforms is evident in the reduction of average lending rates offered by commercial banks from a peak of about 17 percent in 1996 to about 14 percent by 2002 as also in the larger profitability among most of the commercial as well as regional rural banks. However, the expansion has still not been able to address the entire credit needs of the rural areas. Commercial Banks have not participated willingly in lending to rural areas, due to the uncertain character of Indian agriculture, lack of proper accounting of agricultural transactions, small amount of individual loans, inadequate security, and difficulty

of collection from farmers.. There has been a shift in even in RRB clientele away from the poorer segments of the population and from areas with low potential to those with better off client groups.

Need for rural banking to be competitive

General ly in rural areas, demand surpasses supply of credit (as it is widely assumed that credit rationing is widely practiced both by institutional and non-institutional moneylenders). In surplus demand conditions, banks can become economically unviable only if there are high non-performing assets, controlled credit rates and high operating costs. Inefficiency of rural credit institutions was attributed to the directed and pre-approved nature of loans sanctioned under sponsored programmes, absence of any security, lack of effective follow up due to large number of accounts , legal recovery measures being considered not cost effective, riddance of repayment culture consequent to loan waiver schemes, etc. While in general the rates of interest have come down, they are available more to highly rated borrowers than to the rural sector and small and medium enterprises. Commenting on functioning of cooperatives Datt and Sundharam (2004) stated that, in many places, unscrupulous and dishonest local large farmers take all the benefits from cooperatives, thus denying the benefits of co-operation to really needy farmers, and have hopelessly wrecked the

working of the co-operatives. On the other hand RRBs are suffering from losses since their inception. Highlighting the importance of rural credit reforms RBI stated that, there is a need to examine the issue of rural credit and its delivery systems in an objective as well as transparent manner and accord it priority in legislative actions and financial allocations.

Traditional business segments and economic viability of banks

Based on an in depth study of functioning of RRBs at micro-level, the paper developed a chart showing trade-off between outreach and viability of different commonly provided credit channels. The chart is reproduced in figure 1, based on which one can conclude that all individual based credit delivery are profitable, but credit delivery though self-help groups are making loss due to high cost involving in nurturing, maintain and sustaining group operations. The key for efficient credit delivery system in rural areas lies in reducing operation and overhead costs. Keeping in cost reduction as main focus this study proposed an improved credit delivery system within the existing framework of coexistence of commercial banks and RRBs simultaneously and encouraging healthy competition between them. With the reduced government support there is greater need to develop efficient credit delivery mechanism, based on the experience of past studies.

1. SHG-linkage (credit delivery through self-help groups-unsecured)


2. ISB (Industry, service, business loans –unsecured)

3. KCC (Kisan credit cards-credit limit for three years based on land or other assets)

4. NPS (Non-priori ty sector advances secured through gold etc.)

The problem with rural banking is high cost of reaching to the remote areas and small account holders. To make operations of regional rural banks more cost competitive, these banks should become lean, technologically capable and organizationally flexible to suite to local population.

L e a n b a n k s w i t h s k i l l e d manpower

Large number of bank branches will not make economic sense in cost competitive banking system. There is an urgent need to reduce bank branches and build other alternate sources to reach out to widely spread rural population. This will reduce operating and overhead costs. Establishing one bank branch for every 40

to 50 villages according to the geographical area, population size is enough to cater to the needs of rural population. The main purpose of reducing bank branches is to have small number of banks with necessary infrastructure. The bank branch should be lean and slim it terms of number of employees, but with high level of computerization and other technical facilities and expertise.

R e a c h i n g o u t t h r o u g h mobi le-banks and agents /representatives

To reach to vast majority of rural population bank branches should organize mobile banks and take help of bank agents/representatives. These banks can recruit their own field assistants/representatives to make frequent field visits to villages and help banks to acquire new customers, loans/deposits. These representatives may be village traditional moneylender/village fertilizer shop owner/general stores person or uneducated youth/LIC agent/UTI agent. The dates of these mobile-banks

should coincide with the weekly traditional markets (mandies), as most of the villagers come to melas either to purchase/sell their farm inputs/outputs and also household consumables. The basic function of mobile banks is to do normal business of taking deposits/loans and other service provisions. The representatives should work on commission basis, as it makes them self-motivated and cost effective. New information technology greatly improves efficiency of even rural banking system The banks should be free to evolve and implement their own policies on personnel, including recruitment, training, and incentive systems. Proper training is to be given to representatives/agents in handling new customers. This will greatly reduce overhead costs.

Regional banks-flexible multi-service providers:

With the changing scenario of flexible operations, emphasis should be placed on priority setting in terms of which agro-industries/crops are to be encouraged rather than on target setting at district level. This approach gives a directive based on social goals to the regional rural banks, without compromising freedom of operations. All the banks operating in a region/district are free to set their own targets. The priority setting at district level is only a kind of direction and knowledge enhancing exercise but not a compulsion for banks to follow. This kind of exercise gives an idea about the general development out


look/government priorities/policy objectives.

The basic strategic advantage of proposed rural banks lies in their local knowledge compared to other national level commercial banks. Banks should take advantage of this local knowledge by providing as many services as possible which satisfy and can be provided competitively to the local people. For example, banks may provide information on weekly prices of inputs and outputs to farmers, advice on crop/weather insurance, assist in procuring/storing local farm inputs/outputs with the help of non-government organizations/government/local administration. As these will not require much over head costs, but facilitate farmers/local traders to come to bank branches/mobile-banks more frequently and add value to the main banking operations.

government support

The objective of encouraging rural banking is firstly to reduce rural-urban and agricultural w o r k e r s - i n d u s t r i a l w o r k e r differences in poverty levels. In the post-liberalisation era these differences are widening both between rural-urban and agriculture–industry (includes services). The share of agriculture in total bank credit had touched near 18 percent in the late 1980s thus fulfilling the target set, bur recently its share decreased, as did the share of small-scale industries . There were 62.55 million small borrower accounts at the end of March 1993 having credit limits of Rs.25,000 or less. Such

accounts formed about 22 percent of outstanding total bank credit in late 1993. The number of such accounts with the same credit limit has steadily fallen to 37.32 million and their share to total bank credit to just 5.9 percent by the end of March 2002. To provide credit to small borrowers, small farmers and village artisans, banks incur additional costs, which have to be compensated by government in terms of subsidy. Some studies point out that more exposure to rural areas/below poverty line population by regional rural banks will adversely affect the profitability of the banks by raising the cash-deposit ratio, operating costs and lowering the amount per loan account. To compensate for higher operational costs government subsidy/support should be given based on the region/district of operation and number of small accounts with that bank. This kind of support targets the source of market imperfection and enhances the overall efficiency of banking system at the same time.

Avoiding market distortion

The government assistance should be based on some index of rural development and banking development. Banks should be given freedom to lend money based on market principles, which will not create any market distortions. And the same will also create employment opportunities, thereby creating income-earning opportunities for households below poverty line. In this way probably credit may go

to economically viable projects in the region without distorting credit allocation mechanism. In the current atmosphere, bank employees do not have right incentives for recovery of loans. It is also important to see that the every rural bank should be responsible for all its financial affairs, without access to government funds. Subsidies are not entirely ruled out, but the subsidies should not be linked with efficiency of banks, and they should be fixed in advance on a pro-rated basis.

Conclusions

The regional rural banks should adopt innovative methods to make themselves economically viable and at the same time not compromising with outreach to the rural people and priority sectors in less developed regions. The paper specifically suggests reduction of number of bank branches to make individual banks economically viable and reach many villages through setting up of mobile banks/bank agents/representatives. The incentive structure for agents/representatives should be based on commission of business generated. The agents may be recruited from traditional money lenders/LIC agents/UTI agents/unemployed youth and trained properly. The banks will not provide any refinance to these agents, but use their services to reach in remote areas. In this way cost incurred in setting up of many branches are avoided, operations become incentive driven and costs of operation will reduce. q

(Email:[email protected]


Indian banking industry should change

its attitude toward

government security in context of investment portfolio

Scheduled Commercial Banks : Growth Trends

baNKiNg

ANKING INSTITUTES have been playing a vital role in economic development of different countries in the world. An

efficient and diversified banking system is a must for promoting savings and channellising them into investment (Ross 1997) and help to achieve a faster rate of economic growth (Dilip Chanda 2007). Thus, the good health of an economy is reflected in the good health of its banking system (Robert G. et al. 1999). In a modern economy, banks are considered not only as the dealers in money but also the leaders of development. The banking sector is dominant in India as it accounts for more than half the assets of the financial sector. Section 5(1)(6) of the Banking Regulation Act defines “banking” as the accepting, for the purpose of lending or investment, of deposits of money from the public,

B

The authors are Research Scholars, Deptt. of Commerce MDU, Rohtak and *Lecturer Sarawait Collage of Education Affiliated to MDU Rohtak.

repayable on demand or otherwise and withdrawal by cheque, draft, order or otherwise. Section 5(1) (c) defines “banking company” as any company which transacts the business of banking in India. However, the acceptance of deposits by companies for the purpose of financing their own business is not regard as “banking” within the meaning of the act. The essential characteristics of the banking business as defined in section 5(b) of the Banking Regulation Act are acceptance of deposits from the public; for the purpose of lending or investments; repayable on demand or otherwise and withdrawal by means of any instrument whether a cheque or otherwise.

From the defini t ion, two important functions of commercial banks emerge; acceptance of deposits and lending of funds. The present study has analyzed the trend

STaTiSTiCS

Anand Singh Kodan

Shalinder Kumar Narander Kadian*


of growth of banking industry in India.

Infrastructure Development

Table 1 shows that the number of SCB’s has increase from 89 in 1969 to 301 in 1999. But in later years the number of SCBs has decreased due to the merger and acquisition taking place in the banking system. There has been an increase in the urban as well as rural branches from 3,108 and 5,154 in 1969 to 26,792 and 47,044 in 2007

respectively. The population per office has come down from 64 in 1969 to 16 in 2006. This table also reveals that the deposits per office have increased from 2.44 crore in June 1989 to Rs. 35.68 crore in 2007. Indian banking industry has done remarkably well in developing its infrastructure.

Total Credits and Deposits

Table 2 shows the analytical results of credit and deposits by

scheduled commercial banks operating in India. Demand deposits of SCB’s have increased from Rs. 2,104 crore in 1969 to Rs. 52,3085 crore in 2009. However, time deposits of banks have increased from Rs. 2,542 crore to Rs. 33,11,025 crore in same period. The growth of time deposits in absolute term has been more than demand deposits. Total credit of SCB’s has increased from Rs. 3,599 crore in 1969 to Rs. 24,17,006 crore in 2008.

Table 1:Infrastructure Development of SCBs in India.

Indicators June 1969 June 1979 June 1989 March 1999 March 2006 March 2007

No. of Banks 89 75 78 301 222 ---

Total branches(a)urban branches(b) Rural branches

826231085154

302029024

21178

576991351944280

649391791447025

694172327146146

738362679247044

Population per office (000) 64 21 14 15 16 ---

Deposit per office* --- --- 2.44 10.71 29.80 35.68

Table 2: Total Credits and Deposits of SCBs.

Indicators June 1969

June 1979

June 1989

March 1999

March 2006

March 2007

March 2008

March 2009

Total deposits(a) demand deposits(b) time deposits

464621042542

28671------

147854------

722203117423604780

2109049364640

1744409

2611933429731

2182203

3196939524310

2672630

3834110523085

3311025Total Credit 3599 19116 89080 368837 1507077 1947100 2417006 ---Credit/deposit ratio 77.5 65.87 60.32 51.1 70.1 73.94 73.88 72.39Deposit per capita (In Rs.) --- 417 1788 7264 19069 23279 28093 33225

Source: Money and Banking Centre for Monitoring Indian Economy.

Table 3:Rural Credit by SCBs

Indicators June 1969

June 1979

June 1989

March 1999

March 2006

March 2007

March 2008

Rural Credit (Rs. crore) 55 1661 14553 53909 199423 235704 323133% Share of Rural Credit 1.5 8.4 16.2 14.1 13.17 12.11 13.37Total Credit 3609 19822 89361 382425 1513842 1947099 2417006

Source: Money and Banking Centre for Monitoring Indian Economy various issues.


Deposits per capita has increased from Rs. 4,17crore in 1969 to Rs. 33,225crore, while credit deposits ratio has decreased from 77.5 to 72.39 during the same period. The growth of credit and deposits has therefore, been significant over the period under study.

Rural Credit

As evident from Table 3, the total credit as well as rural credit has increased from Rs.3,609 crore and Rs.55crore in June 1969 to Rs. 24,17,006 crore and Rs. 3,23,133 crore in March 2008 respectively. The proportion of rural credit to total credit has also increased from 1.5 percent to 13.37 percent

in same period. Rural credit has however decreased fro 16.2 in 1989 to the present level of 13.37

Investment in government t Security

Investment in government securities to deposit ratio as percentage to GDP ratios are important indicators of growth of banking industry. Both ratios have increased from 23.07 percent and 10.90 percent in June 1971 to 30.14 percent and 56.26 percent in March 2009 respectively.

Non Performing Assets

Tables 5 shows the compositions of NPAs of Indian banking

industry. The gross and net NPAs of Indian banks have increase from 48,306crore and 23,013crore in 1998 to 67,497crore and 30,924crore in 2009 respectively. But in term of ratio the gross NPAhas decreased from 14.78 percent in 1998 to 2.42 percent in 2009.

Comparison with the Chinese Banking Industry

Return on Assets

Table 6 shows the banking profitability as return on assets. for India and China. The table shows that the RoA ratio of Indian banking industry has always been more than that for China.

Table 4: Ratio as Percentage of gDP and Investment in government Security to Total Deposits.

(As percentage)Indicators June

1971June 1979

June 1989

March 1999

March 2006

March 2007

March2008

March 2009

Inves tment in govt . sector to deposit ratio (in percentage)

23.07 24.51 25.39 31.26 33.23 29.71 29.99 30.14

Credit / gDP ratio (in percentage)

10.90 17.51 22.62 22.82 45.91 51.10 54.66 56.26

Source: Money and Banking Centre for Monitoring Indian Economy various issues.

Table: 5The Composition of NPAs of Scheduled Commercial Banks.

Item 1998 2008 2009Gross NPA(Rs in Crore) 48,306 55,842 67,497gross NPA(percent) 14.78 2.39 2.42Net NPA(Rs in Crore) 23,013 24,891 30,924

Source:The Economic Challanger Pp 14

Table: 6Banking Profitability: Return on Assets

(As percentage)Country 2002 2003 2004 2005 2006 2007China 0.1 0.3 0.5 0.6 0.7 1.0India 0.8 1.0 1.1 0.9 0.6 0.9

Source: Indian Journal of Finance. Pp 360


Return on Equity

Banking profitability as return on equity for the two countries is shown in table 7. The chine’s banking industry has shown incremental trend of RoE except in 2006 while the trend of RoE of Indian banking industry has decreased from 15.3 percent in 2002 to 12.7 percent in 2006, and further increased 13.25 in 2009.

Non Performing Loan to Total Loan.

Assets quality is an important parameter for measuring the efficiency of banking industry. Table 7 shows the qualities of bank assets of Indian and Chinese banking industries. The ratio for

both countries has decreased from 26.0 percent and 10.4 percent in 2002 to 6.6 percent and 2.8 percent in 2007 respectively. The Indian industry is therefore comparatively better off with a lower ratio.

Capital Adequacies

Table 9 shows the liquidity position of banks in the two countries. Although the CRAR for both countries is rising, they are below the Basel II requirement of 9 percent.

Conclusion

The percentage share of rural credit has decrease from 16.2 percent in 1999 to 13.37 percent in 2008.It is the matter of concern. The Indian banking industry CRAR

is only 6.4 percent against 9 percent required under Basel-II norms. However, the percent share of GNPAs has gradually decreased from 14.78 in 1998 to 2.42 in 2009, which is a significant achievement of the Indian banking industry. Agriculture plays a dominant role in the Indian Economy providing employment for 70 percent of the people and contributing 42 percent to the Gross National Product (GNP). Agriculture has been and will continue to be the life line of Indian economy. Thus, smooth and sufficient flow of rural credit is must. Indian banking industry should change its attitude toward government security in context of investment portfolio. q

(Email: [email protected])

Table: 7 Banking profitability: Return on Equity.

(As percentage)Country 2002 2003 2004 2005 2006 2007 2009

China --- --- 13.7 15.1 14.8 19.9 ---India 15.3 18.8 20.8 13.3 12.7 --- 13.25


Table: 8 Bank Assets Quality: Non Performing Loan to Total Loan.

(As percentage)Country 2002 2003 2004 2005 2006 2007China 26.0 20.4 12.8 9.8 7.5 6.6India 10.4 8.8 7.2 5.2 3.3 2.8


Table: 9 Bank Capital Adequacies: Capital to Assets.

(As percentage)Country 2002 2003 2004 2005 2006 2007

China --- 4.9 4.9 4.4 5.1 5.5India 5.5 5.7 5.9 6.4 6.6 6.4



bOOK REViEW

Information Technology Revolution in India

N D I A O W E S i t s spectacular success in the IT sector to the vision, scientific temperament, c o m m i t m e n t a n d perseverance of many

- starting from our first Prime Minister late Pandit Jawahar Lal Nehru, to legendary scientists and statisticians like Dr. Homi J. Bhabha and PC Mahalanobis, right down to the Indian bureaucracy, technocracy and industry. IT is perhaps the most widely written about technology sector in the country, but one rarely comes across literature bringing out the role of the government in developing the sector.

It is this gap that Dr Dinesh Sharma's book fills up, focusing on the government's role elaborately and lucidly. The book traces the history of India’s IT revolution, from the first generation of computers from UK/USA in the early 1960s and the decision to install a hired IBM 1401 machine in 1964. The IBM machine was utilized for scientific research, education and training activities at Indian Statistical Institute (ISI), Calcutta. Homi J. Bhabha's computer TIFRAC built in 1959 at the Tata Institute of Fundamental Research, was a landmark in computer development in India. The introduction of computer science in research institutes gave further strength to

TITLE : THE LONg REVOLuTION The Birth and growth of India's IT Industry

Author : Dinesh C. SharmaPages : XII plus 488Price : Rs. 595/- (Hard bound)ISBN : 978-81-7223-768-4

Publisher : Harper Collins Publishers Noida, India.

this development. The Department of Atomic Energy saw the setting up of analog computer EAC 62 of which 10 units were produced and supplied to different research institutes and engineering colleges by 1965. This Unit was later converted into Electronics Corporation of India Ltd (ECIL) which was projected as a national champion in the field of computers and electronics.

In his book Dr. Sharma points out that ECIL's monopoly and government regulatory controls proved counter productive, with the country not able to face the competition posed by companies like IBM and ICL. In April 1968 instances of overcharging by the IBM came to light. IBM closed down its Indian operations in 1978. Business now came into the hands of Computer Maintenance Service (CMS), India’s first third party computer maintenance company. Two more companies – Computer Maintenance Corporation/International Data Management - CMC and IDM came into existence. The manufacturing unit of IDM was taken over by another group of IBM employees Partax Manufacturing. IBM played a major role in spreading computer culture in the government and business, and in creating highly trained professionals in areas like system engineering, programming and maintenance. IBM started to

I


INCLuSIVE BANKINg VIA CELLPHONES

In a period when most banking regulators around the world have been worrying about the survival of their banks, the Reserve Bank of India (RBI) has taken progressive steps to acceletate the rollout and adoption of mobile banking services. The mobile phone represents a ubiquitous, low-cost and secure

platform–and in a country where less than 20% of the population has an active bank account, the RBI was one of the first to recognise an opportunity to leverage the mobile platform.

The m-banking guidelines–covering m-banking, money transfer, m-payments and m-commerce–were introduced in October 2008. Based on initial results in the first 12 months, the RBI has been quick to amend the guidelines to further the uptake.

The new guidelines have three major points:Transaction limit: Banks are now permitted to offer this service to their customers subject to a daily cap of

Rs 50,000 per customer for both funds transfer and transaction involving purchase of goods and sevices.Technology and security standard: Transactions up to Rs 1,000 can be facilitated by banks without

end-to-end encryption. The risk aspects involved in such transaction may be addressed by the banks through adequate security measures.

Remittance of funds for disbursement in cash: In order to facilitate the use of mobile phone for remittance of cash, banks are permitted to provide fund transfer services that facilitate transfer of funds from the accounts of their customers for delivery in cash to the recipients. The disbursal of funds to recipients of such services can be facilitated at ATMs or through an agent appointed by the bank as business correspondent.

(Courtesy : Newspapers)

put itself back into business in 1992, and IBM (India) came by the end of 1999.

The decade of the 1980s had paved the way for a liberalized Computer Policy and the introduction of computers in government, in education and public sector units. In fact, the ground work for the new Computer Policy got initiated when late Smt. Indira Gandhi was the PM, and was announced in 1984. The new computer policy assessed and permitted manufacturing of micro and mini computers along with personal computers by wholly owned private companies and enterprises with foreign equity upto 40%. However, the manufacturing of Central Processing Units (CPUs), super computers was reserved for public sector. Later on, the policy also recognized software development as an industry thereby facilitating import of computers on special low duties for developing software for export market as well as enabling software exports by establishing different

links including satellite based data links with overseas computers. DOE came up with a policy on computers software export. Indian Institute of Information Technology were set up in each of the four regions of the country. As a result, software development and the rise of Indian software companies like the Infosys, TCS, etc, became a reality.

Y2K gave Indian software companies exposure in the international arena. Telephonic and Internet activities also gained momentum, encouraging these software companies to be more competitive. The Railway Passenger Reservation system and Telephone Exchange were computerized between 1985 -1992. Further, the IT revolution paved the way for metamorphic change in the banking industry and provided a total revamp in their operations, service connectivity, receptivity and expansion of branches.

The author has also delved deep into the creation, history and

benefits of Centre for Development of Telematics (CDOT), which developed the first electrical switch for rural telephone exchange; the devise that has been crucial for the expansion of the telephone network to rural areas. He has also focused on the contribution of Shri Sam Pitroda who played a pioneering role in the development of this sector.

The book provides a detailed history of the Indian IT revolution, the evolution of MNCs and the emergence of India as an export hub and a destination for qualified and cost effective labour. The book also takes into account the political willingness and bureaucratic contribution to the development of Information Technology. The book will be useful to the professional and common man who are keen to seek information pertaining to the history of Indian IT industry and other relevant details. It is a laudable endeavor and every right thinking Indian must read this book. q

(Suryakant Sharma)

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Regd. No. RN 949/57Licenced U (DN)-52/09-11 to post without

pre-payment at RMS, Delhi (Delhi Post)Postal Regd. No. DL(S)-05/3230/2009-11

Published on 23 January 2010Posted on 25-26 January 2010

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