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Financial Sector of India

Financial Sector of India is intrinsically strong, operationally sundry and exhibits competence and flexibility besides being sensitive to Indias economic aims of developing a market oriented, industrious and viable economy. An established financial sector assists greater standards of endowments and endorses expansion in the economy with its intensity and exposure. The fiscal sector in India entails banks, financial organization, markets and services. The sector is classified as organized and conventional sector that is also recognized as unofficial finance market.

Fiscal transactions in an organized industry are executed by a number of financial organizations which are commercial in nature and offer monetary services to the society. Further classification includes banking and non-banking enterprises, often recognized as activities that are client specific. The chief controller of the finance in India is the Reserve Bank of India (RBI) and is regarded as the supreme organization in the fiscal structure. Other significant fiscal organizations are business banks, domestic rural banks, cooperative banks and development banks. Non-banking fiscal organizations entail credit and charter firms and other organizations like Unit Trust of India, Provident Funds, Life Insurance Corporation, Mutual funds, GIC, etc.

Financial Sector of India Eligibility for government autonomy Mentioned below are certain criterions that are required to be fulfilled for acquiring government autonomy in India:
Availability of sufficient fund of up to 8% Accessibility of total non-performing wealth of below 9% Minimum net possessed funds of more than USD 2.5 million and net revenues of minimum past three years. Financial institutions that satisfy the abovementioned requirements will be authorized functional independence in almost all managerial areas. Financial Sector of India RBI guidelines for NBFC's The Reserve Bank of India has relaxed its guidelines for the operation of non-bank finance companies (NBFCs) in India considering the various investments from the investors. It has also permitted leasing of machinery and rent-buying credit firms with endowment level rankings to avail public savings increase the maximum limit on the amount of public investments on these NBFCs that may allow and expand the closing date for observance on its norms by two years. The fiscal competitiveness of several NBFCs persists to be of importance to the administration and reserve bank of India controllers. There is a significant merging activity in this industry as NBFCs are regulated by stringent yardsticks that are obligatory to fulfill.

In addition, India has entered into new agreements with WTO in the area of fiscal services in Geneva on December 1997. Financial Sector of India Chief Characteristics Some of the major characteristics of Financial Sector of India are:

The financial sector of India allows Most Favored Nation (MFN) reputation to all international banks and firms offering financial The sector has relaxed previous MFN tax exemption on banking activities. Allows 12 new financial bank division authorizations every year to international banks, that is higher as compared to the Raises the 10% limit of reinsurance by insurance firms in India. Permits 51% foreign endowment in fiscal advisory, issuing, hiring, business enterprise capital, business banking and non-


existing 8 every year.

banking credit firms.

Analysis of Indian Financial Sector

Analysis of Indian Financial Sector reveals that it is at present going through a phase of stable growth rate which is experiencing a upward swing. The rise can be maintained over a long period by keeping the inflation down. The financial sector in India has experienced a growth rate of 8.5% per annum. The rise in the growth rate suggests the growth of the economy. The financial policies and the monetary policies are able to sustain a stable growth rate. The reforms pertaining to the monetary policies and the macro economic policies over the last few years has influenced the Indian economy to the core. The major step towards opening up of the financial market further was the nullification of the regulations restricting the growth in the financial sector. To maintain such a growth for a long term the inflation has to come down further. The analysis of Indian financial sector shows the growth of the sector was the result of the individual development of the divisions under the sector.

The analysis of Indian financial sector

Analysis of the Indian Capital market

The ratio of the transaction was increased with the share ratio and deposit system The removal of the pliable but ill-used forward trading mechanism The introduction of infotech systems in the National Stock Exchange (NSE) in order to cater to the various investors in Privatization of stock exchanges

different locations

Analysis of the Indian Venture Capital market


The venture capital sector in India is one of the most active in the financial sector inspite of the hindrances by the external set

Presently in India there are around 34 national and 2 international SEBI registered venture capital funds.

Analysis of the Indian Banking sector

The banking system in India is the most extensive. The total asset value of the entire banking sector in India is nearly US$ 270

billion. The total deposits is nearly US$ 220 billion. Banking sector in India has been transformed completely. Presently the latest inclusions such as Internet banking and Core banking have made banking operations more user friendly and easy.

Analysis of the Indian Insurance sector

With the opening of the market, foreign and private Indian players are keen to convert untapped market potential into

opportunities by providing tailor-made products. The insurance market is filled up with new players which has led to the introduction of several innovative insurance based

products, value add-ons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life.

The competition among the companies has led to aggressive marketing, and distribution techniques. The active part of the Insurance Regulatory and Development Authority (IRDA) as a regulatory body has provided to the

development of the sector.

Opportunities for the financial sector of India

The distributed financial gain of the venture capital funds is not taxed. The financial gains are taxed after the investors receive

as income. The have more insurance and banking products introduced into the market to broaden the spectrum which in turn would boost

the growth of the sector. Further nullification of the regulations have to take place in order to increase the competition and boost the growth of the

financial sector to reach the US$ 51 billion mark. Find below detailed information on Financial Sector in India:

Growth of Financial Sector in India

The growth of financial sector in India at present is nearly 8.5% per year. The rise in the growth rate suggests the growth of the economy. The financial policies and the monetary policies are able to sustain a stable growth rate.

The reforms pertaining to the monetary policies and the macro economic policies over the last few years has influenced the Indian economy to the core. The major step towards opening up of the financial market further was the nullification of the regulations restricting the growth of the financial sector in India. To maintain such a growth for a long term the inflation has to come down further. The financial sector in India had an overall growth of 15%, which has exhibited stability over the last few years although several other markets across the Asian region were going through a turmoil. The development of the system pertaining to the financial sector was the key

to the growth of the same. With the opening of the financial market variety of products and services were introduced to suit the need of the customer. The Reserve Bank of India (RBI) played a dynamic role in the growth of the financial sector of India.

The growth of financial sector in India was due to the development in sectors

Growth of the banking sector in India

The banking system in India is the most extensive. The total asset value of the entire banking sector in India is nearly US$ 270 billion. The total deposits is nearly US$ 220 billion. Banking sector in India has been transformed completely. Presently the latest inclusions such as Internet banking and Core banking have made banking operations more user friendly and easy.

Growth of the Capital Market in India

The ratio of the transaction was increased with the share ratio and deposit system The removal of the pliable but ill-used forward trading mechanism The introduction of infotech systems in the National Stock Exchange (NSE) in order to cater to the various investors in Privatization of stock exchanges

different locations

Growth in the Insurance sector in India

With the opening of the market, foreign and private Indian players are keen to convert untapped market potential into

opportunities by providing tailor-made products. The insurance market is filled up with new players which has led to the introduction of several innovative insurance based

products, value add-ons, and services. Many foreign companies have also entered the arena such as Tokio Marine, Aviva, Allianz, Lombard General, AMP, New York Life, Standard Life, AIG, and Sun Life.

The competition among the companies has led to aggressive marketing, and distribution techniques. The active part of the Insurance Regulatory and Development Authority (IRDA) as a regulatory body has provided to the

development of the sector.

Growth of the Venture Capital market in India


The venture capital sector in India is one of the most active in the financial sector inspite of the hindrances by the external set

Presently in India there are around 34 national and 2 international SEBI registered venture capital funds ENHANCE RELEVANCY OF FINANCIAL SERVICES TO RURAL INDIA Only 30% of the bank branches operate in the rural areas that house 72.2% of the countrys population. Further, rural India accounts for just 9% of total deposits, 7% of total credit, 10% of life insurance and 0.6% of non-life business. There is therefore an urgent need to fast-track financial inclusion, he said, adding that the various technological and financial services and initiatives need to be dovetailed for this. Even as FMCGs have penetrated rural markets in a major way and there are over 600 mobile subscribers around the country, only 40% of the population still has holds bank accounts. So, financial inclusion remains a study in contrast to the advancements that have taken place in many business sectors. The situation calls for a shift in the mindset of the large segment of society toward accessing banking services, especially in rural India. the priority sector lending that is mandated on banks has somehow not delivered the expected results in terms of financial inclusion. The big change, would come about with the adoption of tailormade solutions, such as, use of regional languages in banking transactions. panchayats across the country being connected with broadband services, technology can be better used to further financial inclusion in the rural areas. At the same time, due attention is required to ensure that the banking services are safe, secure and affordable. Importantly, the benefits need to be visible to the larger populace. The effort for financial inclusion should go beyond creating no-frills accounts that largely remain dead accounts and instead link up the financial inclusion initiative with the economic activities of the stakeholders. 2.5 lakh common service centres are being set up across the country through which people would be able to access various financial services. Only 30% of the bank branches operate in the rural areas that house 72.2% of the countrys population. Further, rural India accounts for just 9% of total deposits, 7% of total credit, 10% of life insurance and 0.6% of non-life business. There is therefore an urgent need to fast-track financial inclusion. the various technological and financial services and initiatives need to be dovetailed for this.


Panchayati Raj Institutions in India are the backbone of our democracy. To promote a decentralized, participative & holistic planning process for the local elected bodies and make then more meaningful a number of initiatives have been taken by the Ministry of Panchayati Raj. The Backward Region Grant Fund This Scheme promotes decentralized, participative & holistic planning process, as an essential condition for getting BRGF grant. It bridges the critical gaps in development and builds capacity of PRIs & official functionaries. The evaluation study done recently shows that BRGF is extremely useful in meeting the local needs and PRIs and States have acquired good experience in planning and implementing the Scheme. Out of the plan outlay of Rs.4670 Cr. for 2009-10 for BRGF, Rs. 3240 Cr has already been released to States by 31st December 2009. e-Governance Project e-PRI is identified as one of the Mission Mode Projects (MMPs) under NeGP. It proposes to provide a whole range of IT related services such as Decentralized Database & Planning, PRI Budgeting & Accounting, Implementation & monitoring of Central and State sector schemes, Citizen-centric Services, Unique codes to Panchayats and Individuals, Essential GIS based applications, On-line Self-learning medium for elected representatives and official functionaries. e-PRI has the potential to revolutionize PRIs as the symbol of modernity & efficiency and induce mass ICT culture. e-PRI envisages providing computing facilities along with connectivity to all the 2.36 lac Panchayats at a tentative cost of Rs. 4500 cr. over 3 years. Panchayats being the basic unit for planning and implementation of Cenral/States programmes & schemes, e-PRI would, in a way, be the umbrella MMP. Government would, therefore, give high priority to e-PRI under NeGP. Information and Service Needs Assessment, Business Process Engineering and Detailed Budget Reports for 27 States has already been done and the Project is ready for roll out. 50% Reservation for Women The President in her Address to the Parliament on 4.6.09 had mentioned the intent to provide fifty percent reservation for women in Panchayats as women suffer multiple deprivations of class, caste and gender and enhancing reservation in Panchayats will lead to more women entering the public sphere. Accordingly, on 27.08.2009, the Cabinet approved the proposal to amend Articles 243 D to provide 50% reservation for women in seats and also offices of Chairpersons in all 3 tiers of Panchayats. Minister of Panchayati Raj introduced the Constitutional (One Hundred and Tenth) Amendment Bill, 2009 in the Lok Sabha on 26.11.2009. Presently, out of approx 28.18 Lakhs elected representatives of Panchayats, 36.87% are women. With the proposed Constitutional Amendment, the number of elected women representatives is expected to rise to more than 14 lakhs. Devolution of Functions, Finance and Functionaries to PRIs Panchayats are the grassroot democratic institutions and need to be further empowered through effective devolution of functions, finances and functionaries (3Fs) following the principles of subsidiarity and centrality of Panchayats. This would also ensure convergence of plethora of schemes and pooling of resources through holistic planning by Panchayats. Panchayat Empowerment and Accountability Incentive Scheme, which aims at incentivising States to

devolve 3Fs to Panchayats and Panchayats to be more transparent and accountable, would be given higher allocation based on a devolution index. Year of the Gram Sabha 50 years of Panchayati Raj was commemorated on 2nd Oct.09. Given the criticality of Gram Sabhas in selfgovernance and transparent and accountable functioning of the Gram Panchayats. 2.10.2009 to 2.10.2010 is being observed as Year of the Gram Sabha. Apart from making all efforts to ensure effective functioning of the Gram Sabhas, following action are being taken; legal, policy and programme changes required for empowering the Panchayats particularly the Gram Sabhas; building systems & processes for ensuring greater efficiency, transparency & accountability of the Panchayats, and launching mass awareness of and specific activities by the Gram Sabhas & Panchayats. Nyaya Panchayat Bill, 2009 The current justice delivery system is perceived as expensive, time-consuming, procedure-ridden, technical and difficult to comprehend, which prevents the poor from approaching the legal system with their grievances. To mitigate such hardships, the Ministry has proposed a Nyaya Panchayats Bill. The Nyaya Panchayats will ensure participatory and people-oriented system of justice with greater scope for mediation, conciliation and compromise. Being closer to the people geographically and psychologically, the Nyaya Panchayats would be the ideal forum to save time, trouble and expenses of parties and witnesses. It would also reduce the workload of judiciary. Panchayat Mahila Shakti Abhiyan It is a scheme for the Elected Women Representatives (EWRs) to build their confidence and capacity so that they get over the institutional, societal and political constraints that prevent them from active participation in rural local self government. 22 States have formed the Core Committee and organized the State Level Sammelans. 9 State Support Centres have been established under the scheme. (Andhra Pradesh, Chhattisgarh, Goa, Himachal Pradesh, Madhya Pradesh, Sikkim, Kerala, West Bengal and Andaman & Nicobar Island). 11 States have been conducted training sensitization programme under the scheme. (Andhra Pradesh, Arunachal Pradesh, Chhattisgarh, Goa, Himachal Pradesh, Madhya Pradesh, Manipur, Kerala, Assam, Andaman & Nicobar Island and Sikkim) 47 Divisional Level Sammelans have been organized in 11 States. (Chhattisgarh, Goa, Haryana, Andhra Pradesh, Himachal Pradesh, Rajasthan, Sikkim, Manipur, Uttarakhand, West Bengal and Andaman & Nicobar Island). State Level Association of EWRs/EYRs has been formed in the States of Goa and Sikkim. Rural Business Hubs (RBH) Scheme The RBH scheme has been started in 2007, to spread the benefits of Indias rapid economic development to the rural areas through the medium of Panchayati Raj Institutions (PRIs). RBH is a participatory development model for the rural areas of the country that is built on the platform of 4 P, i.e. Public-Private-Panchayat-Partnership. The RBH initiative is aimed at moving from mere livelihood support to promoting rural prosperity, increasing rural non-farm incomes and augmenting rural employment. 35 districts have been identified for focused RBH intervention in consultation with State Governments. Services of reputed organizations have been enlisted as Gateway Agencies for supporting Panchayats in identification of potential RBHs and their development. Financial assistance to 49 projects has been extended for establishment of RBH. Also,RBH is being evaluated for possible upscaling in the future

Regional Rural Banks in India

Rural banking in India started since the establishment of banking sector in India. Rural Banks in those days mainly focussed upon the agro sector. Regional rural banks in India penetrated every corner of the country and extended a helping hand in the growth process of the country. SBI has 30 Regional Rural Banks in India known as RRBs. The rural banks of SBI is spread in 13 states extending from Kashmir to Karnataka and Himachal Pradesh to North East. The total number of SBIs Regional Rural Banks in India branches is 2349 (16%). Till date in rural banking in India, there are 14,475 rural banks in the country of which 2126 (91%) are located in remote rural areas. Andhra Pradesh Bihar

Andhra Pradesh Grameena Vikas Bank Andhra Pragathi Grameena Bank Deccan Grameena Bank Chaitanya Godavari Grameena Bank Saptagiri Grameena Bank


Madhya Bihar Gramin Bank Bihar Kshetriya Gramin Bank Uttar Bihar Kshetriya Gramin Bank Kosi Kshetriya Gramin Bank Samastipur Kshetriya Gramin Bank



Chhattisgarh Gramin Bank Surguja Kshetriya Gramin Bank Durg-Rajnandgaon Gramin Bank

Dena Gujarat Gramin Bank Baroda Gujarat Gramin Bank Saurashtra Gramin Bank

Himachal Pradesh Harayana Gramin Bank Gurgaon Gramin Bank


Himachal Gramin Bank Parvatiya Gramin Bank

Jammu & Kashmir


Jammu Rural Bank Ellaquai Dehati Bank Kamraz Rural Bank


Punjab Gramin Bank Faridkot-Bhatinda Kshetriya Gramin Bank Malwa Gramin Bank

Assam Gramin Vikash Bank Langpi Dehangi Rural Bank

Narmada Malwa Gramin Bank North Malabar Gramin Bank


Tamil Nadu

Jharkhand Gramin Bank Vananchal Gramin Bank

Pandyan Grama Bank Pallavan Grama Bank

Madhya Pradesh


Narmada Malwa Gramin Bank Satpura Kshetriya Gramin Bank

Marathwada Gramin Bank Aurangabad -Jalna Gramin Bank


Madhya Bharath Gramin Bank Chambal-Gwalior Kshetriya Gramin Bank Rewa-Sidhi Gramin Bank Sharda Gramin Bank Ratlam- Mandsaur Kshetriya Gramin Bank Vidisha Bhopal Kshetriya Gramin Bank Mahakaushal Kshetriya Gramin Bank Jhabua Dhar Kshetriya Gramin Bank

Wainganga Kshetriya Gramin Bank Vidharbha Kshetriya Gramin Bank Solapur Gramin Bank Thane Gramin Bank Ratnagiri-Sindhudurg Gramin Bank

Rajasthan Karnataka Vikas Grameena Bank Pragathi Gramin Bank Cauvery Kalpatharu Grameena Bank Krishna Grameena Bank Chikmagalur-Kodagu Grameena Bank Visveshvaraya Gramin Bank


Baroda Rajasthan Gramin Bank Marwar Ganganagar Bikaner Gramin Bank Rajasthan Gramin Bank Jaipur Thar Gramin Bank Hodoti Kshetriya Gramin Bank Mewar Anchalik Gramin Bank

West Bengal Kalinga Gramya Bank Utkal Gramya Bank Baitarani Gramya Bank Neelachal Gramya Bank Rushikulya Gramya Bank Arunachal Pradesh Uttar Banga Kshetriya Gramin Bank Bangiya Gramin Vikash Bank Paschim Banga Gramin Bank


Nagaland Ka Bank Nogkyndong Ri Khasi- Jaintia Manipur

Arunachal Pradesh Rural Bank

Tripura Nagaland Rural Bank Mizoram

Manipur Rural Bank

Tripura Gramin Bank

Mizoram Rural Bank

Uttar Pradesh Purvanchal Gramin Bank Kashi Gomti Samyut Gramin Bank Uttar Pradesh Gramin Bank Shreyas Gramin Bank Lucknow Kshetriya Gramin Bank Ballia Kshetriya Gramin Bank Triveni Kshetriya Gramin Bank Aryavart Gramin Bank Kisan Gramin Bank Kshetriya Kisan Gramin Bank Etawah Kshetriya Gramin Bank

Uttaranchal Uttaranchal Gramin Bank Nainital Almora Kshetriya Gramin Bank

Rani Laxmi Bai Kshetriya Gramin Bank Baroda Western Uttar Pradesh Gramin Bank Devipatan Kshetriya Gramin Bank Prathama Bank Rural banking without roots

Given the abysmal spread of formal credit facilities in the country, and more so in village India, it's hardly surprising that both the government as well as the Reserve Bank of India [ Get Quote ] are both talking of universal financial access or "financial inclusion" nowadays. That's perhaps why, a south India-based PSU bank is planning to adopt the union territory of Pondicherry for "financial inclusion".

The problem, however, is that unless this goes hand-in-hand with the overall development of village India, it's akin to growing grass without roots. Since financial inclusion means access to financial services, the best indicator is the proportion of families with a bank account. In the United Kingdom, about 5 per cent of the population do not have bank accounts. In Australia [ Images ], about 7-8 per cent of the population do not do banking. In India, there are a total of 31 crore (Rs 310 million) savings bank accounts, but given the number of multiple accounts, the number of people having savings bank accounts cannot be more than 20 crore (Rs 200 million). This means around 85 per cent of India's population does not have access to financial services in a cost-effective, transparent and fair manner. Pondicherry, by the way, is better off than many other places in India. It has an adult population of about 10 lakh and there are 6.67 lakh bank accounts even though the actual account holders are about three lakh, once you remove the multiple accounts. The literacy rate in this Union Territory is 87 per cent. There are 85 bank branches spread across 264 villages. The PSU bank plans to use technology to spread the message of banking. It wants to rope in BSNL in its endeavour to achieve the mission of including the entire adult population of Pondicherry for financial services. "If mobile telephony can reach remote villages, why can't banks go there?" asks the CEO of the bank. A relevant question. Of the 6,34,321 villages in India, only 9,000 villages have more than one bank branch. This is despite the fact that there are 32,227 rural branches and they account of about 45 per cent of the total branch network. Close to 60 per cent of rural households do not have a bank account and only 21 per cent have access to credit from a formal source. Over 70 per cent of marginal farmers have no deposit account and 87 per cent have no formal credit. Less than 2 per cent of rural households can access loans from a financial intermediary to meet unforeseen financial expenses and the approval for such loans takes between three and six months, and that too after bribing officials. ICICI Bank [ Get Quote ] has been trying to reach out to the rural masses in Tamil Nadu, Andhra Pradesh, Orissa and Uttar Pradesh [ Images ] by setting up Internet kiosks and automated teller machines.

Developed jointly by n-Logue Communications, promoted by IIT Madras professor Ashok Jhunjhunwala, thousands of ICICI's low-cost ATMs dot rural Tamil Nadu. ICICI has plans for mobile banking, of a different sort - in this case, vans will go around to villages collecting deposits. Now, PSU banks will join the mission as both the RBI and the finance ministry are keen that banking services must be available to the entire population. However, technology alone cannot solve the problem as financial inclusion cannot happen in isolation while vast stretches of rural India are suffering from social and infrastructural exclusion. The latest report of the National Sample Survey Organisation on village facilities -- conducted in July-December 2002 - revealed that there were no post offices in over 78 per cent of India's villages and only one-third of all villages were within two km of a telegraph office/ PCO/ email facility. The situation has not dramatically changed since then. Look at some other parameters of social infrastructure. One-fourth of the villages do not have access to electricity; non-conventional forms of energy are available in less than 12 per cent of villages; tap water is used for drinking in about 18 per cent of villages and 55 per cent of them get their drinking water mainly from tube-wells or hand-pumps. What's more, 54 per cent of the villages are more than five km away from the nearest primary health centre and 27 per cent are more than 10 km away from it. Only 10 per cent of the villages have a medicine shop and 20 per cent a private clinic or doctor. One-third of the villages do not have pre-primary schools and 28 per cent do not have primary schools. Finally, co-operative societies exist only in 30 per cent of Indian villages. Financial inclusion alone cannot do the trick for the rural masses until social exclusion is taken care of. Access to health, education and pucca roads is as important as access to a bank account and credit. However, urban India presents a different picture. Even in Mumbai [ Images ], millions of people are financially excluded, although they have access to social infrastructure.
Can rural India get access to financial services?

Newspapers are replete with advertisements from public sector banks proudly proclaiming the number of branches and savings accounts they have opened in far flung districts of rural India. In fact, government authorities present such statistics as success stories for India's initiative for financial inclusion. Impressive as these achievements and numbers are, do they really provide the real picture? Are rural households really benefiting from the presence of bank branches in their area? How many of them are able to tap into the financial services offered by these branches? Who are the real beneficiaries of financial inclusion across rural India? Professor Rajalaxmi Kamath and Professor Arnab Mukherji of the Indian Institute of Management Bangalore and Professor Maria Sandstrom of Stockholm School of Economics, Sweden studied the spread of financial institutions in rural India to answer these and other questions. State of financial inclusion in India According to the United Nations one of the main objectives of Inclusive Finance is "access at a reasonable cost of all households and enterprises to the range of financial services for which they are bankable, including savings, short and long-term credit, leasing and factoring, mortgages, insurance, pensions, payments, local money transfers and international remittances"*. A bank account is a necessary condition for financial inclusion. Meaningful and real financial inclusion implies not just a bank account but access to services such as credit and insurance as well. (*Source: Wikipedia ( Much progress has been made on the supply side of financial inclusion, namely availability of financial institutions in rural India. Several districts in the country have been declared to be 100% financially included. A survey of 14 leading states reveals that states such as Maharashtra, West Bengal, Punjab and Gujarat have reasonably high number of financial institutions, banks and primary agricultural credit societies (PAC), in rural areas. For instance, Maharashtra has 46 banks and PACs per 100,000 persons, while West Bengal has 38. However, a look at state-wise outstanding institutional debt in rural areas, reveals serious flaws in the supply focused policy of financial inclusion. States that have the highest outstanding institutional debt rates - Kerala, Maharashtra, Orissa and Karnataka - are not the ones that have higher number of financial institutions. In fact, analysis shows that there is a very poor correlation between the number of financial institutions and outstanding institutional debt. In fact, there is no correlation if one were to consider total outstanding debt and not just

institutional debt. Rural households in some states also seem to prefer non-institutional sources for accessing debt. Clearly, presence of financial institutions alone is not delivering the results for financial inclusion that one had hoped for. Determinants of financial inclusion The level of a state's indebtedness in rural areas, amongst many factors, could be driven by the growth of state gross domestic product (GDP), per capita income in rural areas, and extent of commercialization of agriculture. The poor coupling between presence of financial institutions and outstanding debt in rural India begs the question - given a certain level of indebtedness in a state, what factors could possibly determine the extent of financial inclusion in rural India? The authors considered 14 states and analysed them for financial inclusion with respect to social and economic indicators. Table 1 below shows the variables used for regression analsysis. Table 1: Variables for analysing financial inclusion in rural India Financial Inclusion % of rural households in the state with outstanding institutional debt Social Indicators % of population belonging to Scheduled These groups are considered economically backward and most prone to Caste, Scheduled Tribe and Other financial exclusion. Low levels of financial inclusion might be seen in states Backward Classes with higher percentage of population belonging to these groups. % of population that are Hindus, Muslims, Christians or Others Economic Indicators % of operated agricultural land Operating agricultural land leads to increased financial requirements. States with higher % of operated agricultural land should ideally have higher levels of outstanding debt. Religious composition of population varies widely in India and it might provide patterns of financial inclusion or otherwise.

In the past, rural occupation was equated with agriculture. But that has % of population that is self-employed in changed in recent times. Today, households that are self-employed in nonagriculture and non-agriculture sectors agriculture have high financial needs just as those in the agriculture sector. % of population that provides labour to agriculture and non-agriculture sectors Monthly per capita expenditure(MPCE) Higher levels of MPCE should be correlated with higher financial needs and possibly higher levels of outstanding debt.

Findings A state-wise regression analysis of access to institutional debt against the variables in Table 1 above revealed interesting insights. Self-employment in agriculture / non-agriculture sectors In majority of states, households that are self-employed in agriculture are more likely to access institutional debt compared to those that are self-employed in non-agriculture activities. These states have lower number of financial institutions in rural areas. States such as Madhya Pradesh, Maharashtra and Kerala where the reverse holds, have a relatively higher number of financial institutions in the rural areas. Land ownership Higher the land ownership, more likely is the access to institutional debt. In states such as Orissa, Andhra Pradesh and Maharashtra, every hectare of land ownership increases the probability of accessing institutional debt by a staggering 10%. The figure is even more impressive at 14.6% for Madhya Pradesh.

Economically backward castes In general, populations belonging to the Scheduled Caste, Scheduled tribe and Other Backward Classes have lower chances of accessing institutional debt. The exceptions are states such as a Rajasthan and Maharashtra where members belonging to the Scheduled Tribe and Scheduled Caste respectively, are more likely to access institutional debt. MPCE Monthly per capita expenditure has no impact on the likelihood of accessing institutional debt. Religion No pattern emerges so far as correlation between religion and access to institutional debt is considered. In 7 of the states studied, Muslims were less likely to have access to debt, whereas in 2 states - Haryana and Bihar, Muslim households have a higher probability of accessing institutional debt. Summary Supply side approach to financial inclusion, namely increasing the number of financial institutions in rural India, is a necessary element of any strategy. However, it should not be considered an end in itself. Data shows that despite having a reasonably large number of financial institutions, many states lag woefully behind in financial inclusion, as measured by percentage of households with outstanding debt. The reasons for this vary from state to state, given the diverse socio-economic conditions in each of our states. What works in one state is unlikely to have similar impact in another state. For instance, rural households in some states demonstrate a bias towards non-institutional sources of credit. Increasing the number of financial institutions in such states is unlikely to have any significant impact on financial inclusion, unless it is accompanied by other measures. Land reforms for equitable land distribution and transparent landholding records can play a large role in increasing access to institutional credit in rural India. Use of technology in public schemes such as the National Rural Employment Guarantee Act, wherein payments are directly credited to the bank accounts of workers, is another way to accelerate financial inclusion. Finally, the definition of financial inclusion as practiced in India - number of savings account opened - needs to be broadened to include other financial services such as access to credit, insurance and remittances. Only then will financial inclusion deliver the impact it is meant to.
May 03, 2011 07:45 AM Eastern Daylight Time

Research and Markets: Rural Banking in India 2011 Edition - Renewed Emphasis on Agricultural and Rural Development by India's Government Leads To a Growing Demand for Financial Services

DUBLIN--(BUSINESS WIRE)--Research and Markets( has announced the addition of the "Rural Banking in India" report to their offering. Agriculture and rural sectors play an important role in India?s overall development strategy in terms of income and employment generation and poverty alleviation. Great significance has, therefore, been accorded to developing appropriate institutions and mechanisms for catering to the credit requirements of these sectors. Government of India promoted Regional Rural Banks (RRBs) through the RRBs Act of 1976 to bridge the gap in the flow of credit to the rural poor. The RRBs have a special place in the multi-agency approach adopted to provide agricultural and rural credit in India. These banks are state-sponsored, regionally-based and rural-oriented. Besides the RRBs, commercial and co-operative banks have been catering to the credit requirements of the rural sector. The renewed emphasis on agricultural and rural development by the Government of India would lead to a growing demand for different types of financial services in the rural areas. The present structure of rural credit may not be able to cater to the same. RRBs would be called upon to play a greater role in providing such services due to their rural character and feel. RRBs have to take over a larger share of credit disbursements calling for much larger resource mobilization, as also greater efforts for their institutional strengthening. It was announced in the Union Budget for 2008-09 that the Central Government and the State Governments had reached an agreement on the content of the package for revival of the long-term cooperative credit structure. The cost of the package was estimated at Rs. 3,074 crore, of which the Central Government's share would be Rs. 2,642 crore. Key Topics Covered:

History and Significance of Rural Banking in India - Rural Sector in the Indian Economy; Post-Independence History of Banking in India; Rural Financial Institutions; Regional Rural Banks (RRBs); Review of Literature on Rural Banking. Development of Regional Rural Banks (RRBs) in India - The Genesis; Banking Commission (Chairman: R.G. Saraiya), 1972; New Economic Programme; Working Group (Chairman: M. Narasimham), 1975; Establishing a RRB: The Basic Requirements; Special Concessions and Privileges allowed to RRBs; Steering Committee for Framing up Policies of the RRBs at National Level; Development of Regional Rural Banks in India; State-wise Distribution of the RRBs; Sponsoring Bank-wise Distribution of the RRBs. Conceptual Issues Related to Regional Rural Banks (RRBs) - Role of RRBs; Objectives of Setting up RRBs; Prominent Postulates of the RRBs; Business of RRBs; Capital Structure of the RRBs; Management and Staff Pattern of the RRBs; Board of Directors; RRBs versus Commercial Banks; RRBs versus Cooperative Banks.


Institutional Financing for Rural Credit in India - Post-Independence Rural Development; Rural Credit Requirements; Sources of Rural Finance; Need for Institutional Finance for Rural Credit; History of Institutional Arrangements for Rural Credit. Performance of RRBs: A Region-wise Analysis - Structural Growth; Mobilization of Deposits; Loans and Advances; Profitability Performance; Non-performing Assets (NPAs); Summary and Recommendations Appendix: Regional Rural Banks in West Bengal; Bibliography; Index

Dr. Manas Chakrabarti is presently an Assistant Professor in the Department of Commerce, Balurghat College, Balurghat, West Bengal. He received his M.Com and Ph.D. degrees from Calcutta University in 1993 and 2009 respectively. He is also a Guest Faculty (Commerce) at the Netaji Subash Open University (Balurghat College Centre).
Financial Services

Last Updated: July 2011

The financial services sector in India has witnessed a fundamental transformation since the country was liberalised. India, in the last few years, has emerged as the one of the most rapidly growing economies across the globe. The financial services market is growing rapidly, and there is significant potential for further growth. The financial services sector includes broking firms, investment services, national banks, private banks, mutual funds, car and home loans, and equity market Financial Services in India - Key Drivers

Indias high savings rate offers significant opportunity to put resources into the financial markets. The country has a favourable demographic profile with a large segment of the population under 30 years. The Census 2011 shows that 56.9 per cent of Indias total population comes in the age group 15-59 years. The country will witness a sharp decline in the dependency ratio over the next thirty years which will be a great dividend. As the dividend begins to pay off, with the working age-group population rising disproportionately over the next two decades, the savings rate is likely to rise further, according to Mr Pranab Mukherjee, Union Finance Minister A large, untapped domestic market, with a huge growth potential Presence of financial and capital market mechanisms A large and continuously growing intellectual capital Healthy rate of economic growth

Banking Services The banking sector has undergone a lot of positive developments in the last decade. The policy makers, which comprise the Reserve Bank of India (RBI), Ministry of Finance and related government and financial sector regulatory entities, have made significant attempts to improve regulation, besides framing policies that are conducive to the growth of the sector. The banking industry in India is expected to grow by 20 per cent a year, with return on equity being more than 18 per cent, according to a survey by consulting firm, McKinsey, done for the Indian Banks' Association. The growth in the sector is specifically being driven by rising aspirations of corporate India , strong regulatory thrust, technological breakthrough, innovations, rising productivities and economies of scale. The sector carries a value creation opportunity of almost Rs 2.5 lakh crore (US$ 56.38 billion) in incremental revenue by 2015, according to Ranjit Tinaikar, Partner at McKinsey. In the financial year 2010-11, Public Sector Banks (PSBs) recorded a significant credit growth of 22.44 per cent. Net Profits of PSBs have gone up from approximately Rs 39,000 crore (US$ 8.8 billion) to approximately Rs 45,000 crore (US$ 10.15 billion) in the year 2010-11. The banks achieved 35 per cent growth in credit to Micro, Small and Medium Enterprises (SMEs) sector against the target of 20 per cent. Nationalised banks accounted for 52.2 per cent of the aggregate deposits, with State Bank of India (SBI) and its Associates accounting for 22.1 per cent. The share of new private sector banks, foreign banks, old private sector banks, and regional rural banks in aggregate deposits was 13.3 per cent, 4.8 per cent, 4.6 per cent and 3.0 per cent, respectively, according to RBIs Quarterly Statistics on Deposits and Credit of Scheduled Commercial Banks, December 2010. With respect to gross bank credit, nationalised banks had the highest share of 51.6 per cent in the total bank credit. They were followed by SBI and its associates at 22.7 per cent and new private sector banks at 13.7 per cent. Foreign banks, old private sector banks and regional rural banks had shares in the total bank credit at 5.1 per cent, 4.5 per cent and 2.5 per cent, respectively. India's foreign exchange reserves were US$ 314.6 billion as on July 8, 2011, according to the data in the weekly statistical supplement (WSS) released by RBI. Indian bank loans increased by 19.9 per cent year-on- year (y-o-y) as of July 1, 2011, according to the central bank's WSS. Deposits rose by 18.4 per cent from a year earlier. Mutual Funds in India The Indian mutual fund industry has witnessed significant growth in the last few years. Besides the demographic factors, growth has been driven by the increasing reach of Asset Management Companies (AMCs) and distributors. Further, relatively low penetration levels coupled with rapid growth in the assets under management (AUM) in recent years signifies a high growth potential of the Indian mutual fund industry.

India's mutual fund industry's average AUM increased by 6 per cent to Rs 7.43 trillion (US$ 167.57 billion) in the first quarter (April-June) of the current financial year (2011-12), from Rs 7 trillion (US$ 157.87 billion) in the fourth quarter (January-March) of the last financial year (2010-11), according to the data released by industry body Association of Mutual Fund Industry (AMFI). The mutual fund industry, which comprises 43 fund houses, witnessed an increase of 6.07 per cent to Rs 425.46 billion (US$ 9.6 billion) on average AUM. The Indian mutual fund industry is expected to register robust growth, given the growing aspirations of retail customers. KPMG in India is of the view that the industry AUM is likely to continue to grow in the range of 15 to 25 per cent from the period 2010 to 2015 based on the pace of economic growth. Indian Insurance Sector The insurance industry in India has a big opportunity for national as well as foreign investors. As Indians are getting richer, the desire to save for retirement is growing. India ranks at number 11, in terms of ranking by premium volume in 2010, according to Swiss Res sigma study , World insurance in 2010. India has surpassed Spain to become the 11th largest insurance market in the world, according to the study. In the life insurance business itself, India has surpassed ten major markets in the last ten years. The total gross premium of 23 players in the non-life insurance market increased by 27 per cent in May 2011, from Rs 3,151.41 crore (US$ 710.73 million) in May 2010, according to the Insurance Regulatory and Development Authority (IRDA). The four Public Sector Units (PSUs), which account for about 59 per cent of the total general insurance industry, had their gross premium collections rise by 23 per cent to Rs 2,358.60 crore (US$ 531.9 million) in the same period. Stock Markets The Indian equity markets are among the most deep and active markets across the globe. The country's market capitalisation (cap)-to-GDP ratio, an indicator of the total listed wealth of a country as a percentage of its GDP, reached a record level of 132.47 per cent in financial year 2010-11 from 23.28 per cent in 2002-03, according to a report by SMC Global Securities. The country's market capitalisation as a proportion of the world market cap was 2.8 per cent as on June 28, 2011. Private Equity (PE Investments) in India India offers a lucrative proposition to PE practitioners on the back of its young population, large domestic market, presence of structured financial and capital market mechanisms, a large and growing number of intellectuals, and healthy rate of economic growth. Total PE investment in India increased by 71.5 per cent - from US$ 1.83 billion in the second quarter of 2010 (July-September), to US$ 3.14 billion in the second quarter of 2011. Volume of deals also increased by 52 per cent - from 90 to 137 during the same period. The median deal amount rose by 10 per cent - from US$ 10 million in the second quarter of 2010 to US$ 11 million in the second quarter of 2011. The average deal value rose by 21 per cent from US$ 24 million to US$ 29 million during the same period. Foreign Institutional Investors (FIIs) FIIs remained upbeat on Indian companies during the quarter ended June 30, 2011. Net inflows during the period were Rs 5,171.20 crore (US$ 1.17 billion). In the current month (July 2011), net inflows in equities from FIIs have already reached around Rs 7,000 crore (US$ 1.58 billion) Recent Developments/Investments The Government has approved 31 Proposals of Foreign Direct Investment (FDI) amounting to Rs 3844.70 crore (US$ 867.09 million) approximately, based on the recommendations of Foreign Investment Promotion Board (FIPB). Daimler Financial Services India Pvt Ltd, a recently established local unit of German carmaker Daimler AGs financial arm, is expecting to break even in four to five years and expects to have a loan book of US$ 500 million by 2016, according to Klaus Entenmann, global Chairman. German luxury car maker Mercedes-Benz is preparing to start leasing vehicles to consumers in the Indian market by the end of 2011. The company would start with leasing Mercedes cars to companies. Once the venture reaches a certain size, Mercedes-Benz India (MBI) would look at offering vehicles on lease to individuals as well. IDFC Private Equity, one of India's largest risk capital investors, has invested Rs 150 crore (US$ 33.83 million) to acquire a minority equity stake in Chennai based GVR Infra Projects Limited. GVR will utilise the funding for its projects in engineering and contracting space.

The L&T Group's financial services subsidiary L&T Finance Holdings has announced its plans to enter the capital markets to generate up to Rs 1,245 crore (US$ 280.79 million) from the primary markets by diluting up to 17 per cent of its stake. Government Initiatives India has a strong financial regulatory system controlled by RBI and supported by regulatory body such as Securities and Exchange Board of India (SEBI), which govern capital markets and mutual funds. The government has taken many steps to encourage investments in the financial sector. India will allow qualified foreign investors to invest up to US$ 10 billion in domestic mutual funds from August 1, 2011, according to a senior finance ministry official. The government expects good inflows from qualified financial institutions into mutual funds in this fiscal year to March 2012, said Thomas Mathew, Joint Secretary, capital markets at the Finance Ministry. In an effort to support hedging of currency risks for non-resident exporters and importers, the RBI has issued norms permitting them to either use overseas banks or those in the country to settle foreign trade transactions invoiced in the Indian rupee. Further, the Finance Ministry is stepping up its efforts to widen the class of foreign investors in the Indian stock market. This is evident from the fact that first, the government gave the green signal for qualified foreign investors (QFIs) to invest in mutual funds, and now, individual investors from across the globe are expected to soon get the right to buy blue-chip Indian stocks Financial Services - Road Ahead Demand for financial services in India is taking off. Noteworthy is the fact that International financial institutions are playing an increasing role in the expansion of Indias large corporations. Great opportunity lies in the SME segment, which remains largely untapped. On the retail side, India already has more middle-class people on a purchasing power parity basis than the entire population of the US, and a consumer credit market that is rising by more than 40 per cent per annum. The sector has huge growth potential, and with government considering steps to liberalise it further, the sector can be one of the most significant ones for the growth of the Indian economy. Exchange Rate Used: INR 1 = US$ 0.0225530 [as of July 24, 2011]
References: RBI documents, report from PricewaterhouseCoopers, Press Releases, Press Information Bureau, report on Mutual Funds sector from KPMG, AMFI Rural India Ready For Insurance Products

Posted: Monday, May 19, 2003 at 0000 hrs IST

A key objective in the liberalisation of the insurance sector was deepening and widening of the rural market for its products. To sell this vital element of social security, though, is no easy task as the new entrants from the private sector are discovering. It is not as if those participating in the insurance market are new to the Indian scenario. Each of the Indian partners has a major presence in their respective areas of core competency be it areas like banking or non-banking financial services, consumer goods, healthcare, telecom or even fertilisers. Distribution of physical goods or disbursement of creditl required a minimum physical infrastructure to be put in place. Those with a strong rural presence have also learnt to read the psyche of their clientele. Yet, insurance being a relationship product first, especially in the rural areas, there are significant pointers that the new insurers can exploit to their advantage. These have been compiled in a paper on rural marketing and communications brought out by Ficci recently. According to the study, rural distribution is a nightmare because of the six-lakh-odd villages in the country. It has therefore suggested a clos-er look at the purchasing patterns in these areas. It cites an IMRB study that found 90% of durables were being bought in the 2,300 towns with population of over 20,000. The paper has said that FMCG companies may face a slightly more complex problem in reaching out to the less-populated areas, but did not see the hurdles as insurmountable. Down-the-line distributor networks have been found sufficient to cater to these needs with, say, 100 or more supply outlets in 50-odd locations that can cover all villages upto the 2,000-plus category. These 85,000 larger- sized villages housing approximately 40% of the rural populace account for over 60% of rural consumption. An earlier study commissioned by the Ficci-ING Foundation of Reserach Training and Education in Insurance concluded that a strong saving habit even in low-income households and a high awareness of insurance indicated a fertile ground for a vibrant market. However, it also highlighted the challenges in marketing and delivery systems. It recommended the use of banks, cooperative institutions and self-help groups for selling insurance more effectively. Combined with the findings of the rural marketing study, there is a clear evidence that corporate entities only have to try genuinely and a whole new vista of rural purchasers is waiting to open up. For that, though, some essential characteristics of marketing to a population that still believes in the personal touch must be kept in mind. This may be a positive factor for insurers, but they must also pay heed to other critical behavioural patterns displayed by the rural clientele. Rural consumers are fundamentally different from their urban counterparts, and different rural geographies display considerable heterogeneity, calling for rural-specific and region-specific strategies. A farmer in rural Punjab is much more progressive than his counterpart in Bihar, it has observed. Simi-larly, unlike urban families where buying decisions may be taken collectively, lack of mobility and distant markets gives men the decisive role in purchases. Low literacy levels at time contribute to community decision-making as well. The study has cited the success stories of Arvind Mills cheaper Ruf & Tuf brand that made jean-clad farmers a common sight, Britannias Tiger biscuits, LGs Sampoorna TV, as also Amir Khans rustic roles in Coke ad campaigns. Also, information technology is no longer an urban phenomenon, as TV, radio and now computers pervade the rural panorama. ITCs e-choupals, Amuls dairy iformation system kiosk (DISK), etc., have promoted brand and product awareness and enhanced conscious decision-making and data analyses. A market such as this is surely ripe for insurance products as well, though relative simpler ones at the grassroot level. The study noted that a significant percentage of res-pondents across all affluence levels tended to save. They tap

avenues like chit funds, banks, post offices, cooperative banks and even informal channels. A fairly good number owned tractors, TVs, two-wheelers and telephones. This a market ready for protection instruments, whether they are targeted at lives or at goods owned. Crop insurance to personal accident or pension plans, the rural customer is now a mature entity waiting for the right marketing gambit that will appeal to his sense of security and necessity at the same time. The pricing, identification of the right product and correct positioning of its brand will define the success or failure of any insurer game to take self-financed social security to the rural masses