Index.
1. Introduction ………………………………………………………….1 2. Banking in Ancient India………………………………………….2 3. Banking in Medevial India………………………………………..2 4. Indian banking during earlier British Regime………………....3 5. During the Swadeshi movement………………………………….4 6. Banking during the Vedas…………………………………….....4 7. Approach to Rural Banking…………………………………….7 8. Post – independence scenario…………………………………….7 9. Multi – agency approach…………………………………………8 10. Era of Nationalised Commercial Banking……………………9 11.Mobilization of financial resources…………………………....10 12.Recovery, non-performing assets, capital adequacy, inter-firm
comparsion and customer service…………………………..…13 13.Recovery of loans……………………………………………….14 14.Deposit Insurance & Credit Guarantee Corporation…………15 15.Customer service and customer relations……………………...16 16.Dynamics of rural economy……………………………………...19 17.Technology and Rural Banking………………………………….22
1
INTRODUCTION.
Banking in India is as old as its civilization. But in its present form it started on British model in 18th century. However, the commercial banking in India till1947 was characterized by four things. Firstly, it was only urban banking leaving the vast rural sector unbanked. The only deposit accepting Government agency in villages was post- office whose primary function was to provide postal services. Secondly, Indian commercial banking was elite class banking and not a mass- banking system . In other words , it was an armed chair banking where bankers used to wait for customers to reach them for depositing their savings and / or for availing credit. Thirdly, the banks were conservative and highly risk aversive and, hence, provided credit mostly against highly liquid collateral securities. The results was that there was a shortage of venture capital and entrepreneurship. Finally, each business house in India promoted its own bank with the result that the banks became a source of
funding the specific industries. For example, Birlas promoted the UCO Bank . Likewise the Central Bank Of India was Tatas Bank. In a nutshell in the pre – independence India the banking facilities were merge that too were concentrated in the cities.
BANKING IN ANCIENT INDIA
In India, the indigenous bankers continued to be active from the ancient period. The ancient scriptures mention the activities of indigenous bankers who were called SHRESHTIS, SHROFFS, etc, and prescribe certain norms regarding interest to be charged.
BANKING IN MEDIEVAL INDIA
During the Mughal period, the indigenous bankers were very prominently connected with financing of trade, offering credit through the use of certain banking instruments such as Hundis to the pep for trade purposes. However, these indigenous bankers were mainly from specified communes like
Vaishnyas, Chettiars, Khattris, Aroras, Multanis, Shroffs and Rastogis, etc, and their activites confined mostly to lending money, though sometimes, they used to accept deposits for safe keeping on which they used to pay no interest , while at times, they used to charge some service charges for safe- keeping.
INDIAN BANKING DURING EARLIER BRITISH REGIME.
The European merchants came to develop trade with India and settled around Calcutta, Cochin and Madras, etc. They felt difficulty in finding suitable agencies for financing foreign trade. To overcome this difficulty, some of the English trading houses added banking business to their trading activities. This could well be regarded as the beginning of organized banking in India. The first organized bank called as the Bank of Hindustan was started by Alexander & Co. in 1771. Later in 1784, the Bengal Bank was set up which was the first bank which was not connected by any agency house. In 1786, the General bank of India was established as the first joint stock bank. The East India Company started the Bank of Bengal in 1806, the Bank of Bombay in 1840 and the Bank of Madras in 1854 as presidency banks, which were assigned some central banking functions also. By1894 there were 14 joint stock banks operating in India, mostly run by the Europeans.
DURING SWADESHI MOVEMENT.
A number of other banks with the Indian capital and management were established in the beginning of 20th century such as the Bank of India, Ltd, in 1906, the Indian Bank, Ltd, in 1907 the Bank of Baroda, Ltd, in 1908 and the Central Bank of India in 1911. In 1920, the three presidency Banks were amalgamated to form the Imperial Bank Of India. During the pre – world war 2 period the banking business witnessed tremendous growth, so much so, that by 1939 there were tiny establishments, and were later liquidated, while some others later on, got amalgamated with other banks. All these banks were, however, established at important trading centres, and catered to the needs of growing trade and commerce.
Banking during the Vedas.
The literature of the Buddhist period, e.g., the Jatakas, and recent archaeological discoveries supply evidence of the existence of
Sresthis, or bankers. From the law of Manu, it appears that money-lending and allied problems had assumed considerable importance in ancient India.
What were interest rates? The role of interest rates was recognized in ancient India. Interest rates were prescribed by almost all Hindu law-givers Manu, Vasistha, Yajnavalkya, Gautam and Baudhayana as also Kautilya. A common base number was 15 % per annum- what the bankereconomist Dr. Thingalaya calls Hindu rate of interest. Incidentally, this is higher than current Prime Lending Rate (PLR) of many banks! It was not as though everyone used to get loans at PLR. Only prime borrowers got at PLR, though the basis was different then. According to Manu and Vasistha, the interest rates were not to vary depending on the risk involved or the purpose for which the money was borrowed. But they were directly linked to the caste classification of the borrowers. Bhramin was to be charged 2%, Kshatriya 3%, Vaishya 4% and Shudra 5% per month. However, Chanakya’s interest rate structure was involved in the borrowers business. The interest rate worked out to be 15% per annum for general advances. The traders were charged a rate of 60% per annum. Where the merchandise had to pass through forests, the traders had to pay 120% per annum while those engaged in the export-import business handling sea-borne cargo had to pay 240% per annum.
Again, it was not everyone who could take up banking business. Only men belonging to the Vaishya caste could take up the money-lending profession. In other words, in ancient times, your caste gave you license to banking and not RBI!
What about disputes and debt recovery? Manu specified the punishments to be given in case disputes arising about loan repayment and listed 18 types of disputes. When a creditor sued the debtor for recovery of money, it was the duty of the king to ensure that the creditor got back his money. Manu permitted the king to employ all means, fair or foul, to recover the dues, for example, torturous punishment like killing the debtors’ wife, children and cattle or obstructing is movements. Manu held the view that a defaulter could not absolve himself of his debt burden even by death. Chanakya said that sons should pay with interest the debt of a deceased person or co-debtors or sureties. Was a spouse, i.e., husband or wife responsible to pay for the debts incurred? Yes and no. Wife was exempted from debt burdens of her husband if she had not given her assent to his borrowings. However, for the debt incurred by a wife, her husband was liable for repayments. Perhaps, this was the background in which one of the committees on rural indebtedness concluded that “the Indian farmer is born in debt, lives in debt and dies in debt”.
Approach to Rural Banking.
The reserve bank of India has a mandate to be closely involved in matters relating to rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. The major initiative in pursuance of this mandate was taken with sponsoring off All India Rural Credit Survey in 1951-52. This study made agency wise estimates of rural indebtedness and observed that cooperation has failed but it must succeed. The report of the committee on directions is still considered a classic on the subject, and two of the four members were, incidentally, from Andhra Pradesh. This is the origin of the policy of extending formal credit through institutions while viewing local, traditional and informal agencies as usurious.
Post-independence scenario.
The all India rural credit survey report, submitted in 1954 revealed that the share of institutional agencies (including cooperative banks, commercial banks and the government) in financing agriculture and rural-household sector was only 7.1% in 1951-52,whereas the corresponding share of the village money
lenders was as high as 68.6%.The All India Rural Credit Survey, therefore, felt that the then established two-tier cooperative infra-structure needed to be streamlined, and recommended the creation of an apex body in each state to control, regulate and strengthen the cooperative infra-structure. The Committee recommended further, that organizing multi-purpose cooperatives, providing integrated credit facilities, linking production with marketing of inputs an outputs, processing and warehousing activities, would provide the only viable alternatives to the credit problems of the Indian villages.
Multi Agency Approach.
The cooperative credit structure was strengthened in 1954 with the setting up of a third-tier at the state-level and with the creation of State Co-operative Banks and State Land Development / Mortgage Banks to provide long-term and medium term agricultural finance to the village people. Considering the huge gap that existed between the demand for agricultural credit in a planned developing economy and the supply of institutional credit for agricultural operations ,the government of India accepted the idea of ‘multi-agency approach ’ to the development of credit institutions. The multi-agency approach was intended to increase the farm productivity and thus raise the living standard of poor farmers. It may be apart to point out that the Imperial Bank of India nationalized by the government of India in July 1955 and was renamed as State Bank of India . The State Bank of India was expected
to extend banking facilities on a large scale, more particularly in the rural and semi-urban areas. In 1959 other 6 major states owned and states associated banks operating in the princely states were also taken over and made subsidiaries to the State Bank of India . The commercial banks were also encouraged to provide more credit to agriculture, small scale industries and other neglected areas of the economy.
Era of Nationalized Commercial Banking.
The nationalization of 14 major commercial banks in July 1969(and another 6 commercial banks in 1978) gave further fillip to the role of commercial banks in the rural sectors. Emphasis was placed on lending to priority sectors including agriculture, rural artisans, handicraft, small scale industries, small business, retail trade, transport operators and other weaker sections of the society. Initially both the cooperative and commercial banks made substantial progress in providing credit to agricultural sectors. The share of the cooperatives in the total borrowings of the rural household sector grew from 3% in 1951 to over 25% in 1974.The network of rural branches of commercial banks increased from 5,204 as on the eve of nationalization in July 1969 to 12.065 as the close of December 1974.
MOBILISATION OF FINANCIAL RESOURES.
The regional rural banks, in India, were established as rural oriented and state sponsored banks to supplement the already existing co-operative and commercial banks in rural areas. The rural bankings were expected to mobilise funds from the areas of their operation and from other agencies. These banks needed huge financial resources so as to meet the growing need for funds in agricultural sector including farmers, village artisans, dairy, fisheries and other village/cottage industries.
Thus, the capacity of Avadh Gramin Bank, Lucknow to extend financial assistance depended on its capacity to raise financial resources. Hence, procurement of adequate funds on terms and
conditions matching its investment needs is essential for the bank. Thus, the main objective is to judge effectiveness of its funds-mobilisation. There are basically two major type of sourcer of Avadh Gramin Bank, Lucknow: 1. To increase its capitals and liabilities, and 2. To decrease its assets, e.g.to recovers its debts. The major sources of funding of Avadh Gramin Bank, Lucknow in the first category have been as follows: 1. Share capital 2. Share capital deposit 3. Reserves and surplus 4. Deposits 5. Borrowings 6. Other liabilities and provisions
Share capital
Share capital of the bank is its backbone. There are four types of share capital, as follow: 1. Authorised share capital 2. Issued share capital 3. Sudscribed share capital 4. Paid up share capital Authorised share capital It is the maximum limit upto which bank can raise its capital through issue of shares. Avadh Gramin Bank, Lucknow had authorised capital of rs.1 crore in march 1991 with 1, 00,000 shares of rs.100 each which was increased to rs.5 crores in the year 1999(5,00,000 shares of rs.100 each). At present, i.e. on march 31,2003 the authorised share capital of the bank is rs.5 crores,i.e., 5lacs shares of rs.100 each. As paid up share capital of the bank is rs.5 crore,the authorised capital is appropriate.
Issued, subscribed and called up share capital
Out of authorised share capital of rs.5 crores, Avadh Gramin Bank, Lucknow has issued, subscribed and called up capital of rs.1 crore only (1,00,000 shares of rs.100 each). Paid up share capital Paid up share capital of any corporate organisation is worked out as follows: Paid up share capital = called up share capital- calls in arrears + shares forfeited. The paid up share capital of Avadh Gramin Bank, Lucknow as on 31st march, 2003 was rs.1 crore (1,00,000 shares of rs.100 each). The share holding of the bank is distributed as follows:
Shareholder 1. Government of india 2. U.P.government 3. Bank of india (sponsor bank) Total
No.of share held 50,000 15,000 35,000 1,00,000
% of shares held 50% 15% 35% 100%
Recovery, non- performing assets, capital adequacy, interfirm comparison and customerservice.
A bank is a commercial institution and not a charity house. Without ignoring social responsibilities, a bank is expected to recover its loans and advances on time. It helps the bank in two ways. Firstly, it facilitates extension of more credit to newer customers and, secondly, it minimises losses that may arise due to bad-debts. Hence, the study will not be complete without analysing situation of recovery of loans of Avadh Gramin Bank, Lucknow. With this objective in new, the efforts have been made in this chapter to examine important aspects like recovery of loans and advances, position of NPAs, capital adequacy, customer service, customer relations and position of Avadh Gramin Bank, Lucknow vis-a-vis its sister institutions.
Recovery of loans
The position of recovery of loans of Avadh Gramin Bank, Lucknow has been studied in the following table
Recovery of loans 1991 - 92 to 2002 -2003 (Amount in lacs of Rs) Year (1) Amount of total Amount demand recovered (2) (3) Recovery percentage (4)
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 2002-2003
750.00 1113.85 1100.00 1569.23 1926.32 1871.19 2229.53 2673.41 3638.63 4129.40 5957.11 6063.32
540.00 724.00 726.00 816.00 1098.00 1104.00 1321.00 1584.00 2189.00 2525.54 3648.73 3966.55
72% 65% 66% 52% 57% 59% 59.25% 59.25% 60.16% 61.13% 61.25% 65.42%
Analysis shows that Avadh Gramin Bank, Lucknow has been facing serious problems of overdues and sticky advances. It is reflected by its recovery ratio which ranged from 52% in 1994- 95 to 72% in 1991- 92. During the period 1994- 95 to 1998- 99 the bank’s recovery was less than 60%. However after 1998- 99 the recovery position improved a little and recovery of loans and advances of is not very satisfactory. The position of overdues can be further examined through a relationship between overdues and total advances. Over dues arise due to weakness in management of credit portfolio. Its basic source is doubtful and bad debts. The position of bad and doubtful debts has been examined that percentage of good debts to total debts in 1997-98 was 46.07%. Due to efforts of the banks, proportion of its good-debts to total- debts steadily improved and reached to 79.12% in year 2002- 2003. Its substandard and doubtful debts which were 53. 97% in 1997- 98 gradually decreased and reached to 20.47% in the year 2002-03. During the period 1997- 98 and 2002- 03 the ratio of bad debts to total debts ranged from 0.12% in 2001- 02 to 0.94% in 1998- 99. Information relating to its debt composition before 1997- 98 was not available.
Deposit Insurance and Credit
Guarantee Corporation (DICGC)
Avadh Gramin Bank, Lucknow availed guarantee of eligible loans from DICGC w.e.f. April 1, 1995 the bank opted out of this system. However the bank continued to pay premium on loans guaranteed during 1992- 1995 and could get loans reimbursed from DICGC later on also. However, during last two years, i.e., 2001-2002 and 2002- 03 no claims have been settled by DICGC and on March 31, 2003 the amount of claims outstanding with the corporation was Rs. 234.96 lacs. Thus this mechanism of recovery has now practically died out.
CUSTOMER SERVICE AND CUSTOMER-RELATIONS:
The bank is supposed to provide its services to the satisfaction of its customers. Firstly, its duty is to extend its traditional services like accepting deposits and extending credit to various categories of its customers. Besides the bank is also supposed to tailor its policies or schemes of
deposits and credits according to the needs of customers. Certain degrees of innovations have been tried by the Avadh Gramin Bank, Lucknow. For example, Kishan Credit Cards have been introduced. But, as highlighted in Chapter-5 the bank collects primarily deposits and invests them in government and other securities. Here, it is essential to point out that RRBs were established with an objective to make farmers free from clutches of indigenous bankers. More so, they were visualized as catalytic agents of socio-economic changes in the rural India. This role cannot be fulfilled till the banks identify the projects, conduct viability studies and market their services under one umbrella. The real impact cannot be expected unless the banks consider themselves as friend, philosopher and guide of their customers.
Hence, with a view to draw inferences about quality of customer-service provided by Avadh Gramin Bank, Lucknow opinion survey was attempted. A structural Questionnaire was prepared and administered on customers of this bank. For this purpose, besides Head Office of the Bank, regional/area offices and five branches were visited. Because of non-availability of names and addresses of depositors and loans, random sampling was not possible. Instead, on the basis of convenience whosoever customers were found at different offices questionnaire was got filled. In all 300 responses were obtained.
Thus, opinion survey, though is not very methodically done but it certainly helped the author to get 1st hand information from customers of the bank. Besides it, a few officers and employees of the bank were also interviewed. But for this purpose no structured interview schedule was prepared and used. Moreover, personal visit to various offices enabled the author to have personal
feel of the quality of customer service and customer relations in the bank. Hence, the observations given in the remaining part of this chapter would be subject to limitations given above. However, it may not detract from value of the findings.
Undeniably, these initiatives have enabled a very wide network of rural financial institutions, development of banking culture, penetration of formal credit to rural areas and a counter to the dominance of moneylenders. These initiatives have also financed modernization of rural economies and implementation of anti-poverty and self-employment programs. However, for the purpose of focusing on the future, generalization on some concerns regarding the current approach to rural credit and banking would be appropriate. Firstly, the cooperative banks have different layers and many of them have significantly large non-performing assets (NPAs). Many cooperatives are undercapitalized. The public sector banking system also exhibits NPAs, and some of them have so far been provided with recapitalized funds. The RRBs also exhibits the NPAs and these have been recapitalized from Government of India so far, which would imply a total recapitalization of double the amount provided by Government of India. Secondly, according to the All-India Debt and Investment Survey, 1991-92, the share of debt to institutional agencies in the case of rural households has
increased marginally from 61.2% to 64% between 1981 to 1991. However, it must be noted that this figure relates to debt outstanding and the overall share of the institutional credit in the total debt market is likely to be smaller than what this figure indicates.
Thirdly, the cost of financial intermediation by the various rural institutions is considered to be on the high side. The difference between the costs of resources made available to NABARD by Reserve Bank of India and the commercial rates of the interest at which the cooperative banks lend for agriculture in the deregulated interest rate regime is also considered to be on the high side. Fourthly, empirical studies indicate that institutional credit is more likely to be available for well to do among the rural community. Fifthly, empirical studies also indicate that relatively backward regions have less access to institutional credit than others do.
Sixthly, the non-availability of timely credit and the cumbersome procedures for obtaining credit are also attributed to the
functioning of the financial institutions, though this is equally valid for rural and urban banking. Finally in regard to government sponsored schemes, there has been overlap in accountability in as much as the beneficiaries are identified on a joint basis. Banks have been indicating that NPAs are proportionately more due to this overlapping.
Dynamics of Rural Economy.
Problems, prospects and solutions to many of the issues mentioned have been researched and debated, primarily with a view to strengthening, revamping or re-orienting rural financial institutions. However, there is merit in viewing the problems of rural credit and rural banking in a wider context. In this regard, it will be useful to recognize some dynamics of rural economy. First, services sector is getting increasing importance in the rural areas also from coffee shops to cable television operators. Assessing and meeting of credit needs of this sector is important. Second, the integration between rural and urban areas has increased significantly with the result mobility of labour, capital, products and even credit between the two is increasing.
Third, commercialization of agriculture particularly the increasing role of cash crops like cotton has resulted in substantial role for ‘suppliers’ and ‘buyers’ credit. Thus fertilizer and pesticide are supplied to farmers on credit, often on deferred payment basis. In such deferred payment arrangements, credit terms are built into price and hence it is difficult to isolate terms. Similarly, the commission agents advance money towards purchase of output from farmers, which amounts to providing credit and includes an element of forward trading. These arrangements are often entered into on a voluntary basis. The present banking system does not generally encourage financing the transactions of this nature. However, a few non-banking financial companies do provide indirect finance for such purpose. Fourth, compared to cereal production and food items including poultry and fish are growing at a faster pace. In other words, rural agriculture is getting increasingly diversified in terms of products and processes. Fifth, in areas where commercialization of agriculture has reached significant levels, the traditional landlord-based tenancy is replaced with commercial based tenancy. Where intensive cultivation of cash crops such as cotton is called for, this has become quite common. However, the present credit and banking procedures do not cater to the working capital needs of such commercial based tenancy relationship.
Sixth, given the diversified activities and large work force in rural areas, there is increasing recourse to multiple occupations to earn a decent livelihood. For example, a small farmer is also a petty trader and may also be a satellite based cable television operator in the village. The end-use specification and monitoring of credit is more difficult in such circumstances. Seventh, to the extent employment and indeed incomes could be seasonal, especially for agricultural labour, there is reason to seek and obtain consumption loans. Such assurance is possible with prosperity in rural employment. Present arrangements in formal credit markets are inadequate to meet such requirements. Eighth, while there is significant commercialization and diversification of rural economies, progress is very uneven in different parts of the country .so, there are still many areas, where exploitation of tribals by money lenders or of agricultural labourers by landlord money lenders still persist. Norms and procedures of credit, therefore need to be different to meet varying circumstances. Ninth, from the data on credit deposit ratios, it is clear that the banking system is a conduit for net transfer of financial savings from rural to non rural sectors. On the other hand , a major part of informal markets would be local and hence savings would be locally deployed, within the rural areas.
Technology and rural banking.
Development relates to the gradual undermining of the importance of branches of banks. The emergence of new technology allows access to banking and banking services without physical direct recourse to the bank premise by the customer. The concept of automated teller machines (ATMs) is the best example. At present, ATMs are city oriented in our country. It is inevitable that ATMs will be widely used, in semi-urban and rural areas. The technology-led process is leading us to what has been described as virtual banking. The benefits of such virtual banking services are manifold. Firstly, it confers the advantage of lower cost of handling a transaction. Secondly, the increased speed of response to customer requirements under virtual banking vis-à-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost of operating branch network along with reduced staff costs leads to cost efficiency. Fourthly, it allows the possibility of improved quality and an enlarged range of services being available to the customer more rapidly and accurately at his convenience. It may not be possible to deny these facilities to rural areas in our country since, if banks do not provide them, some non-banks will do it.
Another development relates to the increasing popularity of credit cards, which are bound to reach rural areas. Many public sector banks are already in credit card business. In fact, multipurpose cards could be a facility that IT could usher in for rural population. The potential can be illustrated with SMART cards. SMART cardswhich are basically cards using computer circuits in them thereby making them ‘intelligent’ – would serve as multipurpose cards. SMART cards are essentially a technologically improved version of credit and debit cards and could be used also as ATMs cards. They could be used for credit facilities at different locations by holders. SMART cards could also be used for personal identification and incidentally for monitoring credit usage.
Bibliography.
• Rural banking in India- By Sanjay Singh Rathore.
• Indian Sector and financial reforms in the new millenniumBy Raj Kapila and Uma Kapila.
•
www.google.com.
•
www.wikipedia.com.
doc_762011990.doc
1. Introduction ………………………………………………………….1 2. Banking in Ancient India………………………………………….2 3. Banking in Medevial India………………………………………..2 4. Indian banking during earlier British Regime………………....3 5. During the Swadeshi movement………………………………….4 6. Banking during the Vedas…………………………………….....4 7. Approach to Rural Banking…………………………………….7 8. Post – independence scenario…………………………………….7 9. Multi – agency approach…………………………………………8 10. Era of Nationalised Commercial Banking……………………9 11.Mobilization of financial resources…………………………....10 12.Recovery, non-performing assets, capital adequacy, inter-firm
comparsion and customer service…………………………..…13 13.Recovery of loans……………………………………………….14 14.Deposit Insurance & Credit Guarantee Corporation…………15 15.Customer service and customer relations……………………...16 16.Dynamics of rural economy……………………………………...19 17.Technology and Rural Banking………………………………….22
1
INTRODUCTION.
Banking in India is as old as its civilization. But in its present form it started on British model in 18th century. However, the commercial banking in India till1947 was characterized by four things. Firstly, it was only urban banking leaving the vast rural sector unbanked. The only deposit accepting Government agency in villages was post- office whose primary function was to provide postal services. Secondly, Indian commercial banking was elite class banking and not a mass- banking system . In other words , it was an armed chair banking where bankers used to wait for customers to reach them for depositing their savings and / or for availing credit. Thirdly, the banks were conservative and highly risk aversive and, hence, provided credit mostly against highly liquid collateral securities. The results was that there was a shortage of venture capital and entrepreneurship. Finally, each business house in India promoted its own bank with the result that the banks became a source of
funding the specific industries. For example, Birlas promoted the UCO Bank . Likewise the Central Bank Of India was Tatas Bank. In a nutshell in the pre – independence India the banking facilities were merge that too were concentrated in the cities.
BANKING IN ANCIENT INDIA
In India, the indigenous bankers continued to be active from the ancient period. The ancient scriptures mention the activities of indigenous bankers who were called SHRESHTIS, SHROFFS, etc, and prescribe certain norms regarding interest to be charged.
BANKING IN MEDIEVAL INDIA
During the Mughal period, the indigenous bankers were very prominently connected with financing of trade, offering credit through the use of certain banking instruments such as Hundis to the pep for trade purposes. However, these indigenous bankers were mainly from specified communes like
Vaishnyas, Chettiars, Khattris, Aroras, Multanis, Shroffs and Rastogis, etc, and their activites confined mostly to lending money, though sometimes, they used to accept deposits for safe keeping on which they used to pay no interest , while at times, they used to charge some service charges for safe- keeping.
INDIAN BANKING DURING EARLIER BRITISH REGIME.
The European merchants came to develop trade with India and settled around Calcutta, Cochin and Madras, etc. They felt difficulty in finding suitable agencies for financing foreign trade. To overcome this difficulty, some of the English trading houses added banking business to their trading activities. This could well be regarded as the beginning of organized banking in India. The first organized bank called as the Bank of Hindustan was started by Alexander & Co. in 1771. Later in 1784, the Bengal Bank was set up which was the first bank which was not connected by any agency house. In 1786, the General bank of India was established as the first joint stock bank. The East India Company started the Bank of Bengal in 1806, the Bank of Bombay in 1840 and the Bank of Madras in 1854 as presidency banks, which were assigned some central banking functions also. By1894 there were 14 joint stock banks operating in India, mostly run by the Europeans.
DURING SWADESHI MOVEMENT.
A number of other banks with the Indian capital and management were established in the beginning of 20th century such as the Bank of India, Ltd, in 1906, the Indian Bank, Ltd, in 1907 the Bank of Baroda, Ltd, in 1908 and the Central Bank of India in 1911. In 1920, the three presidency Banks were amalgamated to form the Imperial Bank Of India. During the pre – world war 2 period the banking business witnessed tremendous growth, so much so, that by 1939 there were tiny establishments, and were later liquidated, while some others later on, got amalgamated with other banks. All these banks were, however, established at important trading centres, and catered to the needs of growing trade and commerce.
Banking during the Vedas.
The literature of the Buddhist period, e.g., the Jatakas, and recent archaeological discoveries supply evidence of the existence of
Sresthis, or bankers. From the law of Manu, it appears that money-lending and allied problems had assumed considerable importance in ancient India.
What were interest rates? The role of interest rates was recognized in ancient India. Interest rates were prescribed by almost all Hindu law-givers Manu, Vasistha, Yajnavalkya, Gautam and Baudhayana as also Kautilya. A common base number was 15 % per annum- what the bankereconomist Dr. Thingalaya calls Hindu rate of interest. Incidentally, this is higher than current Prime Lending Rate (PLR) of many banks! It was not as though everyone used to get loans at PLR. Only prime borrowers got at PLR, though the basis was different then. According to Manu and Vasistha, the interest rates were not to vary depending on the risk involved or the purpose for which the money was borrowed. But they were directly linked to the caste classification of the borrowers. Bhramin was to be charged 2%, Kshatriya 3%, Vaishya 4% and Shudra 5% per month. However, Chanakya’s interest rate structure was involved in the borrowers business. The interest rate worked out to be 15% per annum for general advances. The traders were charged a rate of 60% per annum. Where the merchandise had to pass through forests, the traders had to pay 120% per annum while those engaged in the export-import business handling sea-borne cargo had to pay 240% per annum.
Again, it was not everyone who could take up banking business. Only men belonging to the Vaishya caste could take up the money-lending profession. In other words, in ancient times, your caste gave you license to banking and not RBI!
What about disputes and debt recovery? Manu specified the punishments to be given in case disputes arising about loan repayment and listed 18 types of disputes. When a creditor sued the debtor for recovery of money, it was the duty of the king to ensure that the creditor got back his money. Manu permitted the king to employ all means, fair or foul, to recover the dues, for example, torturous punishment like killing the debtors’ wife, children and cattle or obstructing is movements. Manu held the view that a defaulter could not absolve himself of his debt burden even by death. Chanakya said that sons should pay with interest the debt of a deceased person or co-debtors or sureties. Was a spouse, i.e., husband or wife responsible to pay for the debts incurred? Yes and no. Wife was exempted from debt burdens of her husband if she had not given her assent to his borrowings. However, for the debt incurred by a wife, her husband was liable for repayments. Perhaps, this was the background in which one of the committees on rural indebtedness concluded that “the Indian farmer is born in debt, lives in debt and dies in debt”.
Approach to Rural Banking.
The reserve bank of India has a mandate to be closely involved in matters relating to rural credit and banking by virtue of the provisions of Section 54 of the RBI Act. The major initiative in pursuance of this mandate was taken with sponsoring off All India Rural Credit Survey in 1951-52. This study made agency wise estimates of rural indebtedness and observed that cooperation has failed but it must succeed. The report of the committee on directions is still considered a classic on the subject, and two of the four members were, incidentally, from Andhra Pradesh. This is the origin of the policy of extending formal credit through institutions while viewing local, traditional and informal agencies as usurious.
Post-independence scenario.
The all India rural credit survey report, submitted in 1954 revealed that the share of institutional agencies (including cooperative banks, commercial banks and the government) in financing agriculture and rural-household sector was only 7.1% in 1951-52,whereas the corresponding share of the village money
lenders was as high as 68.6%.The All India Rural Credit Survey, therefore, felt that the then established two-tier cooperative infra-structure needed to be streamlined, and recommended the creation of an apex body in each state to control, regulate and strengthen the cooperative infra-structure. The Committee recommended further, that organizing multi-purpose cooperatives, providing integrated credit facilities, linking production with marketing of inputs an outputs, processing and warehousing activities, would provide the only viable alternatives to the credit problems of the Indian villages.
Multi Agency Approach.
The cooperative credit structure was strengthened in 1954 with the setting up of a third-tier at the state-level and with the creation of State Co-operative Banks and State Land Development / Mortgage Banks to provide long-term and medium term agricultural finance to the village people. Considering the huge gap that existed between the demand for agricultural credit in a planned developing economy and the supply of institutional credit for agricultural operations ,the government of India accepted the idea of ‘multi-agency approach ’ to the development of credit institutions. The multi-agency approach was intended to increase the farm productivity and thus raise the living standard of poor farmers. It may be apart to point out that the Imperial Bank of India nationalized by the government of India in July 1955 and was renamed as State Bank of India . The State Bank of India was expected
to extend banking facilities on a large scale, more particularly in the rural and semi-urban areas. In 1959 other 6 major states owned and states associated banks operating in the princely states were also taken over and made subsidiaries to the State Bank of India . The commercial banks were also encouraged to provide more credit to agriculture, small scale industries and other neglected areas of the economy.
Era of Nationalized Commercial Banking.
The nationalization of 14 major commercial banks in July 1969(and another 6 commercial banks in 1978) gave further fillip to the role of commercial banks in the rural sectors. Emphasis was placed on lending to priority sectors including agriculture, rural artisans, handicraft, small scale industries, small business, retail trade, transport operators and other weaker sections of the society. Initially both the cooperative and commercial banks made substantial progress in providing credit to agricultural sectors. The share of the cooperatives in the total borrowings of the rural household sector grew from 3% in 1951 to over 25% in 1974.The network of rural branches of commercial banks increased from 5,204 as on the eve of nationalization in July 1969 to 12.065 as the close of December 1974.
MOBILISATION OF FINANCIAL RESOURES.
The regional rural banks, in India, were established as rural oriented and state sponsored banks to supplement the already existing co-operative and commercial banks in rural areas. The rural bankings were expected to mobilise funds from the areas of their operation and from other agencies. These banks needed huge financial resources so as to meet the growing need for funds in agricultural sector including farmers, village artisans, dairy, fisheries and other village/cottage industries.
Thus, the capacity of Avadh Gramin Bank, Lucknow to extend financial assistance depended on its capacity to raise financial resources. Hence, procurement of adequate funds on terms and
conditions matching its investment needs is essential for the bank. Thus, the main objective is to judge effectiveness of its funds-mobilisation. There are basically two major type of sourcer of Avadh Gramin Bank, Lucknow: 1. To increase its capitals and liabilities, and 2. To decrease its assets, e.g.to recovers its debts. The major sources of funding of Avadh Gramin Bank, Lucknow in the first category have been as follows: 1. Share capital 2. Share capital deposit 3. Reserves and surplus 4. Deposits 5. Borrowings 6. Other liabilities and provisions
Share capital
Share capital of the bank is its backbone. There are four types of share capital, as follow: 1. Authorised share capital 2. Issued share capital 3. Sudscribed share capital 4. Paid up share capital Authorised share capital It is the maximum limit upto which bank can raise its capital through issue of shares. Avadh Gramin Bank, Lucknow had authorised capital of rs.1 crore in march 1991 with 1, 00,000 shares of rs.100 each which was increased to rs.5 crores in the year 1999(5,00,000 shares of rs.100 each). At present, i.e. on march 31,2003 the authorised share capital of the bank is rs.5 crores,i.e., 5lacs shares of rs.100 each. As paid up share capital of the bank is rs.5 crore,the authorised capital is appropriate.
Issued, subscribed and called up share capital
Out of authorised share capital of rs.5 crores, Avadh Gramin Bank, Lucknow has issued, subscribed and called up capital of rs.1 crore only (1,00,000 shares of rs.100 each). Paid up share capital Paid up share capital of any corporate organisation is worked out as follows: Paid up share capital = called up share capital- calls in arrears + shares forfeited. The paid up share capital of Avadh Gramin Bank, Lucknow as on 31st march, 2003 was rs.1 crore (1,00,000 shares of rs.100 each). The share holding of the bank is distributed as follows:
Shareholder 1. Government of india 2. U.P.government 3. Bank of india (sponsor bank) Total
No.of share held 50,000 15,000 35,000 1,00,000
% of shares held 50% 15% 35% 100%
Recovery, non- performing assets, capital adequacy, interfirm comparison and customerservice.
A bank is a commercial institution and not a charity house. Without ignoring social responsibilities, a bank is expected to recover its loans and advances on time. It helps the bank in two ways. Firstly, it facilitates extension of more credit to newer customers and, secondly, it minimises losses that may arise due to bad-debts. Hence, the study will not be complete without analysing situation of recovery of loans of Avadh Gramin Bank, Lucknow. With this objective in new, the efforts have been made in this chapter to examine important aspects like recovery of loans and advances, position of NPAs, capital adequacy, customer service, customer relations and position of Avadh Gramin Bank, Lucknow vis-a-vis its sister institutions.
Recovery of loans
The position of recovery of loans of Avadh Gramin Bank, Lucknow has been studied in the following table
Recovery of loans 1991 - 92 to 2002 -2003 (Amount in lacs of Rs) Year (1) Amount of total Amount demand recovered (2) (3) Recovery percentage (4)
1991-92 1992-93 1993-94 1994-95 1995-96 1996-97 1997-98 1998-99 1999-2000 2000-2001 2001-2002 2002-2003
750.00 1113.85 1100.00 1569.23 1926.32 1871.19 2229.53 2673.41 3638.63 4129.40 5957.11 6063.32
540.00 724.00 726.00 816.00 1098.00 1104.00 1321.00 1584.00 2189.00 2525.54 3648.73 3966.55
72% 65% 66% 52% 57% 59% 59.25% 59.25% 60.16% 61.13% 61.25% 65.42%
Analysis shows that Avadh Gramin Bank, Lucknow has been facing serious problems of overdues and sticky advances. It is reflected by its recovery ratio which ranged from 52% in 1994- 95 to 72% in 1991- 92. During the period 1994- 95 to 1998- 99 the bank’s recovery was less than 60%. However after 1998- 99 the recovery position improved a little and recovery of loans and advances of is not very satisfactory. The position of overdues can be further examined through a relationship between overdues and total advances. Over dues arise due to weakness in management of credit portfolio. Its basic source is doubtful and bad debts. The position of bad and doubtful debts has been examined that percentage of good debts to total debts in 1997-98 was 46.07%. Due to efforts of the banks, proportion of its good-debts to total- debts steadily improved and reached to 79.12% in year 2002- 2003. Its substandard and doubtful debts which were 53. 97% in 1997- 98 gradually decreased and reached to 20.47% in the year 2002-03. During the period 1997- 98 and 2002- 03 the ratio of bad debts to total debts ranged from 0.12% in 2001- 02 to 0.94% in 1998- 99. Information relating to its debt composition before 1997- 98 was not available.
Deposit Insurance and Credit
Guarantee Corporation (DICGC)
Avadh Gramin Bank, Lucknow availed guarantee of eligible loans from DICGC w.e.f. April 1, 1995 the bank opted out of this system. However the bank continued to pay premium on loans guaranteed during 1992- 1995 and could get loans reimbursed from DICGC later on also. However, during last two years, i.e., 2001-2002 and 2002- 03 no claims have been settled by DICGC and on March 31, 2003 the amount of claims outstanding with the corporation was Rs. 234.96 lacs. Thus this mechanism of recovery has now practically died out.
CUSTOMER SERVICE AND CUSTOMER-RELATIONS:
The bank is supposed to provide its services to the satisfaction of its customers. Firstly, its duty is to extend its traditional services like accepting deposits and extending credit to various categories of its customers. Besides the bank is also supposed to tailor its policies or schemes of
deposits and credits according to the needs of customers. Certain degrees of innovations have been tried by the Avadh Gramin Bank, Lucknow. For example, Kishan Credit Cards have been introduced. But, as highlighted in Chapter-5 the bank collects primarily deposits and invests them in government and other securities. Here, it is essential to point out that RRBs were established with an objective to make farmers free from clutches of indigenous bankers. More so, they were visualized as catalytic agents of socio-economic changes in the rural India. This role cannot be fulfilled till the banks identify the projects, conduct viability studies and market their services under one umbrella. The real impact cannot be expected unless the banks consider themselves as friend, philosopher and guide of their customers.
Hence, with a view to draw inferences about quality of customer-service provided by Avadh Gramin Bank, Lucknow opinion survey was attempted. A structural Questionnaire was prepared and administered on customers of this bank. For this purpose, besides Head Office of the Bank, regional/area offices and five branches were visited. Because of non-availability of names and addresses of depositors and loans, random sampling was not possible. Instead, on the basis of convenience whosoever customers were found at different offices questionnaire was got filled. In all 300 responses were obtained.
Thus, opinion survey, though is not very methodically done but it certainly helped the author to get 1st hand information from customers of the bank. Besides it, a few officers and employees of the bank were also interviewed. But for this purpose no structured interview schedule was prepared and used. Moreover, personal visit to various offices enabled the author to have personal
feel of the quality of customer service and customer relations in the bank. Hence, the observations given in the remaining part of this chapter would be subject to limitations given above. However, it may not detract from value of the findings.
Undeniably, these initiatives have enabled a very wide network of rural financial institutions, development of banking culture, penetration of formal credit to rural areas and a counter to the dominance of moneylenders. These initiatives have also financed modernization of rural economies and implementation of anti-poverty and self-employment programs. However, for the purpose of focusing on the future, generalization on some concerns regarding the current approach to rural credit and banking would be appropriate. Firstly, the cooperative banks have different layers and many of them have significantly large non-performing assets (NPAs). Many cooperatives are undercapitalized. The public sector banking system also exhibits NPAs, and some of them have so far been provided with recapitalized funds. The RRBs also exhibits the NPAs and these have been recapitalized from Government of India so far, which would imply a total recapitalization of double the amount provided by Government of India. Secondly, according to the All-India Debt and Investment Survey, 1991-92, the share of debt to institutional agencies in the case of rural households has
increased marginally from 61.2% to 64% between 1981 to 1991. However, it must be noted that this figure relates to debt outstanding and the overall share of the institutional credit in the total debt market is likely to be smaller than what this figure indicates.
Thirdly, the cost of financial intermediation by the various rural institutions is considered to be on the high side. The difference between the costs of resources made available to NABARD by Reserve Bank of India and the commercial rates of the interest at which the cooperative banks lend for agriculture in the deregulated interest rate regime is also considered to be on the high side. Fourthly, empirical studies indicate that institutional credit is more likely to be available for well to do among the rural community. Fifthly, empirical studies also indicate that relatively backward regions have less access to institutional credit than others do.
Sixthly, the non-availability of timely credit and the cumbersome procedures for obtaining credit are also attributed to the
functioning of the financial institutions, though this is equally valid for rural and urban banking. Finally in regard to government sponsored schemes, there has been overlap in accountability in as much as the beneficiaries are identified on a joint basis. Banks have been indicating that NPAs are proportionately more due to this overlapping.
Dynamics of Rural Economy.
Problems, prospects and solutions to many of the issues mentioned have been researched and debated, primarily with a view to strengthening, revamping or re-orienting rural financial institutions. However, there is merit in viewing the problems of rural credit and rural banking in a wider context. In this regard, it will be useful to recognize some dynamics of rural economy. First, services sector is getting increasing importance in the rural areas also from coffee shops to cable television operators. Assessing and meeting of credit needs of this sector is important. Second, the integration between rural and urban areas has increased significantly with the result mobility of labour, capital, products and even credit between the two is increasing.
Third, commercialization of agriculture particularly the increasing role of cash crops like cotton has resulted in substantial role for ‘suppliers’ and ‘buyers’ credit. Thus fertilizer and pesticide are supplied to farmers on credit, often on deferred payment basis. In such deferred payment arrangements, credit terms are built into price and hence it is difficult to isolate terms. Similarly, the commission agents advance money towards purchase of output from farmers, which amounts to providing credit and includes an element of forward trading. These arrangements are often entered into on a voluntary basis. The present banking system does not generally encourage financing the transactions of this nature. However, a few non-banking financial companies do provide indirect finance for such purpose. Fourth, compared to cereal production and food items including poultry and fish are growing at a faster pace. In other words, rural agriculture is getting increasingly diversified in terms of products and processes. Fifth, in areas where commercialization of agriculture has reached significant levels, the traditional landlord-based tenancy is replaced with commercial based tenancy. Where intensive cultivation of cash crops such as cotton is called for, this has become quite common. However, the present credit and banking procedures do not cater to the working capital needs of such commercial based tenancy relationship.
Sixth, given the diversified activities and large work force in rural areas, there is increasing recourse to multiple occupations to earn a decent livelihood. For example, a small farmer is also a petty trader and may also be a satellite based cable television operator in the village. The end-use specification and monitoring of credit is more difficult in such circumstances. Seventh, to the extent employment and indeed incomes could be seasonal, especially for agricultural labour, there is reason to seek and obtain consumption loans. Such assurance is possible with prosperity in rural employment. Present arrangements in formal credit markets are inadequate to meet such requirements. Eighth, while there is significant commercialization and diversification of rural economies, progress is very uneven in different parts of the country .so, there are still many areas, where exploitation of tribals by money lenders or of agricultural labourers by landlord money lenders still persist. Norms and procedures of credit, therefore need to be different to meet varying circumstances. Ninth, from the data on credit deposit ratios, it is clear that the banking system is a conduit for net transfer of financial savings from rural to non rural sectors. On the other hand , a major part of informal markets would be local and hence savings would be locally deployed, within the rural areas.
Technology and rural banking.
Development relates to the gradual undermining of the importance of branches of banks. The emergence of new technology allows access to banking and banking services without physical direct recourse to the bank premise by the customer. The concept of automated teller machines (ATMs) is the best example. At present, ATMs are city oriented in our country. It is inevitable that ATMs will be widely used, in semi-urban and rural areas. The technology-led process is leading us to what has been described as virtual banking. The benefits of such virtual banking services are manifold. Firstly, it confers the advantage of lower cost of handling a transaction. Secondly, the increased speed of response to customer requirements under virtual banking vis-à-vis branch banking can enhance customer satisfaction. Thirdly, the lower cost of operating branch network along with reduced staff costs leads to cost efficiency. Fourthly, it allows the possibility of improved quality and an enlarged range of services being available to the customer more rapidly and accurately at his convenience. It may not be possible to deny these facilities to rural areas in our country since, if banks do not provide them, some non-banks will do it.
Another development relates to the increasing popularity of credit cards, which are bound to reach rural areas. Many public sector banks are already in credit card business. In fact, multipurpose cards could be a facility that IT could usher in for rural population. The potential can be illustrated with SMART cards. SMART cardswhich are basically cards using computer circuits in them thereby making them ‘intelligent’ – would serve as multipurpose cards. SMART cards are essentially a technologically improved version of credit and debit cards and could be used also as ATMs cards. They could be used for credit facilities at different locations by holders. SMART cards could also be used for personal identification and incidentally for monitoring credit usage.
Bibliography.
• Rural banking in India- By Sanjay Singh Rathore.
• Indian Sector and financial reforms in the new millenniumBy Raj Kapila and Uma Kapila.
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www.google.com.
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www.wikipedia.com.
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