INCLUSIVE GROWTH AND SIGNIFICANCE OF GRAMIN BANKS IN INDIA: A STUDY WITH A FOCUS ON KERALA GRAMIN BANK

Transcription

1 INCLUSIVE GROWTH AND SIGNIFICANCE OF GRAMIN BANKS IN INDIA: A STUDY WITH A FOCUS ON KERALA GRAMIN BANK LAKSHMI 1 Dr. MANOJ P K 2 1 Assistant Professor, Chinmaya Institute of Technology, Kannur (KERALA) & Ph.D Scholar (Management), Karpagam University, Coimbatore (TAMIL NADU) Abstract INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW 2 Assistant Professor (Finance & Econometrics), Department of Applied Economics, Cochin University of Science and Technology (CUSAT), Kochi (KERALA). Regional rural banks (RRBs) or Gramin Banks in India have been doing a commendable job in the field of rural credit, particularly agricultural credit, ever since their inception in However, the financial viability of the RRBs has been a matter of concern right from the 1980s, just five years since their inception. Given the vital significance of RRBs in bringing about the national priority of Inclusive Growth especially Financial Inclusion, their sustained financial performance and financial stability are essential for faster attainment of the above national goal. In the ongoing regime many consolidations are going on among the RRBs as part of their restructuring initiatives, and their number is fast coming down. As of March 31, 2014 there were 57 RRBs in India as against 64 as of March 31, In the above backdrop, this paper looks into the problems and prospects of RRBs in general, and those of Kerala Grameen Bank (KGB) in particular the Kerala-based RRB and also the largest RRB in India. Accordingly, based on the findings of the study, the paper makes a few generic strategies for sustained and viable performance of RRBs in India and specific strategies for KGB in particular the Kerala-based RRB., Key Terms: Financial Inclusion, Rural Credit, RRBs, Profitability, Viability 1. Introduction Indian economy is one of the fastest growing economies in the whole world with a GDP growth rate of about 8 per cent over the last one decade or more. In spite of the sub-5 per cent growth rate over the last two fiscals viz and (Table I), Indian economy is expected to overcome this situation in the current fiscal ( ), and attain the average growth rate of about 8 percent as registered consistently by the country over the last few years in a row. Accordingly, Indian economy could look forward for better growth prospects from and beyond (Government of India, Economic Survey , July, 2014) [1]. It is noted that Services sector in India has been constantly growing right from the 1950s and as per the latest statistics (as of ), services sector accounts for per cent of the GDP of the country icmrrjournal@gmail.com

2 2. Rural Banking in India Banking service sector is one of the major segments in Indian economy and is growing rapidly. The financial sector reforms and policies implemented by the Government of India and Reserve Bank of India since 1991 has resulted in high rate of growth and tremendous change in the banking sector with massive expansion of the foreign and new generation banks. Even though the share of agriculture has declined consistently over the years it is true that every fourth farmer of the world is an Indian. Agriculture plays a dominant role in Indian economy. As high as 70 per cent of the population in India live in villages. To meet the credit requirements of the people living in rural area State-sponsored, State-participated and Statepatronized cooperatives were formed. The performance of the Co-operatives, though impressive in itself were inadequate to meet the credit requirements of the rural poor. The Cooperatives could not play any major role in mitigating the miseries of the villagers caused by the Money lenders. The All India Rural Credit Committee (1945) felt the need for the commercial banks to purvey credit for agriculture in specialized areas and recommended the conversion of the Imperial Bank of India into State Bank of India. The study group (1968) under the Chairmanship of Prof. D.K. Gadgil emphasized the need to involve the commercial banking system in providing rural credit. However nationalization of commercial banks resulted in limiting their role as provider of rural credit. The Government of India took cognizance of this fact and appointed a working group under the chairmanship of Shri Narasimhan in July 1975 for setting up a new institution. Accepting the recommendations of the Narasimhan committee the Government passed the Regional Rural Banks Act in 1976 (RRB Act, 1976). The main objective of Regional Rural Banks (RRBs) is to provide credit and other facilities for the development of agriculture, trade and commerce, industry and other productive activities in the rural areas. The RRBs have registered impressive growth since its inception in They have played a pivotal role in rural institutional financing in terms of geographical coverage and development of rural economy by holding a joint share with Central government, State Government and Sponsoring bank in the proportion of 50:15:35. Because of restructuring in the industry (like, mergers, takeovers etc.), the number of RRBs has come down from 64 as of 31 March to 57 as of 31 March, This trend continues. In respect of agricultural credit, the share of RRBs went up from per cent in to per cent in icmrrjournal@gmail.com

3 3. Relevance and Significance of the Study RRBs play a significant role in the Indian Banking system. The primary objectives behind the setting up of RRBs were to bridge the credit gap in the rural areas by providing credit and other facilities to the small and marginal farmers, agricultural laborers, artisans and small entrepreneurs in rural area. They were incepted to improve the efficacy of rural credit mechanism in India. Implementation of reform measures in the Indian banking sector has resulted in tremendous changes in the rural banking scenario. There are apprehensions regarding the constantly declining share for the poor and marginalized in the fruits of development. The fast declining significance of rural credit and other priority sector advances deserves special mention. The slogan of Financial Inclusion has already been accorded very high national priority in India in the ongoing reforms era, within the broader framework of Inclusive Growth. Given the peculiar features of RRBs as noted above, their role in bringing about financial inclusion effectively and hence ensuring equitable, balanced and inclusive growth need not be over emphasized. Enhanced performance and operational efficiency of RRBs is essential for ensuring that they effectively discharge the mandated role of effecting rapid rural transformation in India. Kerala has got percent rural population in 2011 [Census of India 2011]. In the rural development front, two RRBs namely North Malabar Gramin Bank (NMGB) and South Malabar Gramin Bank (SMGB) were functioning in Kerala. SMGB had got Canara Bank (CB) as the sponsor bank while Syndicate Bank was the sponsor bank of NMGB. SMGB and NMGB used to cater primarily to the northern and southern regions of Malabar or the northern Kerala. NMGB and SMGB got merged together to form Kerala Gramin Bank (KGB) in 2013 with Canara Bank as its sponsor bank. With effect from 01 August 2013, KGB is the only RRB in Kerala and it caters to the whole state though its operations are predominantly in northern Kerala, as always. KGB, the merged entity of the erstwhile SMGB and NMGB, is the largest RRB in India. As already noted, RRBs (or, Gramin Banks) have vital significance in India in the ongoing era of financial sector reforms. As specialized entities mandated towards effective rural credit delivery, RRBs can bring about balanced and inclusive growth and hence ensure that the growth process in the country is sustainable in the long run. In the above backdrop, it is vitally relevant and significant to make an analysis of the performance of KGB the 76 icmrrjournal@gmail.com

4 largest RRB in India and the only RRB in Kerala in the broader context of all RRBs that are functioning in the country. 4. Objectives of the Study and Methodology The major objectives of this study are (i) to make an overall study of the performance of RRBs in India over the years, including the trend in respect of their earnings, profitability, advances etc. (ii) to make a focused study in respect of KGB the largest among RRBs in India and the only RRB in Kerala, and (iii) to make suggestions for enhanced performance of RRBs in general and KGB in particular, based on the study findings. The study adopts a descriptive-analytical approach. It primarily uses the secondary data. No hypothesis has been framed as the study is of an exploratory nature. Purposive sampling is used because KGB, the largest and Kerala-based RRB, has been chosen purposively for the focused study. But all RRBs in India (including KGB or its erstwhile form the two RRBs viz. SMGB and NMGB) are considered for the overall study. The data sources are primarily the published and authentic financial and operational statements relating to RRBs in India, particularly the specific financial statements (audited financial statements) in respect of KGB (or, erstwhile SMGB and NMGB). Common statistical tools are used for data analysis. 5. Literature Review Hosamani S.B (2002) [2] has made an elaborate study of the RRBs in India with a focus on the reforms era. The factors influencing their performance of RRBs, their weaknesses including various issues and challenges faced by them are covered in the book. The author has made some suggestions for the enhanced performance of RRBs, based on the findings of his study. INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW Reserve Bank of India (RBI) (2006) [3] (Misra, Biswa S) has evaluated the performance of RRBs in India focusing on the 10 year period, 1994 to The study was done on 196 RRBs, of which 150 were profit making and the rest 46 were loss making. The paper has studied in detail the problem of the loss making RRBs, and also as to whether this problem is confined to some specific sponsor banks or states. The factors influencing the performance of RRBs and the role-played by sponsor banks were studied. It is noted that the problem of loss making RRBs were neither confined to their sponsor banks nor the states to which they belong. Investments had contributed positively to the profits of profit-making RRBs. Sponsor banks had a positive influence on the financial health of the profit making RRBs. For loss making RRBs, it is noted that they need focussed attention by 77 icmrrjournal@gmail.com

5 all stakeholders, and their respective sponsor banks in particular. Hence, some critical thinking was suggested in their restructuring initiatives. Ibrahim (2010) [4], has investigated as to whether the consolidations among the RRBs in India undertaken in have helped improve their performance and studied on the topic Performance Evaluation of Regional Rural Banks in India. The researcher has used secondary data from various sources and databases of Reserve Bank of India (RBI), National Bank for Agricultural and Rural Development (NABARD), Journals like Banker and the Journal of Indian Institute of Bankers. The study was confined to specific areas like number of branches, district coverage, deposits mobilized, credits and investments made by the Indian Regional Rural Banks (RRBs) for the eight year period starting from to the year The study revealed that even though the number of RRBs has decreased the branch net work has increased. The overall performance of RRBs has improved after the post merger period. Mohindra and Kaur (2011) [5] have conducted research on the topic Efficiency of Regional Rural Banks in India: An Application of Data Envelopment Analysis. In this study they have examined the relative efficiency of regional rural banks during the post reform period from to by using Data Envelopment Analysis, taking a sample of 50 RRBs. They have divided the overall technical efficiency into two components namely pure technical efficiency and scale efficiency. It is found that 8 percentage of overall technical inefficiency is due to managerial incapability while the remaining is due to the choice of suboptimal scale of operation. A positive relationship between scale economies and bank size has been revealed Alagawadi and Savadatti (2011) [6] have studied the performance of a Karnatakabased RRB viz. Malabrapha Grameen Bank (MGB), compared its performance between pre- WTO and post-wto periods, using principal component analysis (PCA) with twenty nine variables. The study has found that in case of physical indicators based on the factor loading three dimensions during pre-wto period and two dimensions during post-wto period, could explain 74 percent and 91 percent of the variations respectively. With respect to financial indicators three dimensions during pre-wto period and three dimensions during post-wto period explained nearly 90 percent and 93 percent of the variations in the bank s performance respectively. The PCA analysis indicated the dominance of Business Component in influencing the performance of the bank during post-wto period. Hence, 78 icmrrjournal@gmail.com

6 purpose wise and beneficiary wise rationalization of credit structure and scale is a prerequisite for enhancing the effectiveness of the credit system and in turn business of the bank. Secondly, the bank has to strike a balance between advances for agricultural and nonagricultural purposes, since, safeguarding the interest of the target groups is important on one hand and sustainability of the bank on the other. Paramanandam & Packirisamy (2012) [7] have made a comparative study of NABARD in India and its counterpart viz. Grameen Banks in Bangladesh. The paper highlights the achievements of Grameen Banks in Bangladesh and also the commendable schemes like the SHG-Bank linkage model of the NABRAD. The need for further strengthening their initiatives with the active support of the Government, NGOs and Banks for the purpose of total eradication of poverty has been pointed out by the authors. INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW Rao and Rao (2014) [8] have made a recent study on the performance of RRBs in India in general and Andhra Pradesh Grameena Vikas Bank (APGVB) in particular. The vital role that RRBs provide for the development of rural and agricultural sectors have been highlighted in the paper, and is followed by detailed analysis of the performance of APGVB. The commendable performance of APGVB is pointed out. The need for expansion of the activities of APGVB and other RRBs for the faster, inclusive and sustainable development of India has been pointed out. In spite of various studies as above, mostly at the macro level and some at the micro (individual RRB) level, it is noted that studies that focus on Keralabased RRBs are virtually nil. This study seeks to bridge this research gap by focusing on KGB the Kerala-based RRB. 6. Performance of RRBs in India: An Overall Review Here, an attempt is made to make an overall analysis of the performance of RRBs in India in the ongoing reforms era. Since their inception in 1975, Gramin banks in India have come a long way passing through a number of critical periods. They could effectively tide over periods when their very survival was doubtful, and could march toward a stage of revival. Though some of the perpetually sick among them still remain, majority of RRBs have proved to be financially viable. The recent decision of the Government of India permitting the merger of some RRBs with other RRBs sponsored by the same public sector bank, at statelevel is a step in the right direction, though partial. Mergers are being made in phases in selected states, starting in September As a result of the above move, many of the weak RRBs got acquired or merged with stronger ones under their parent banks or other public sector banks in the same state icmrrjournal@gmail.com

7 Particulars INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW The number of RRBs has drastically come down. From as high as 196 RRBs present in India as of 1990, their number has come down to 57 as of The number may fall further in future. The financial viability and profitability of RRBs have been constantly on the rise since 1998, unlike in the past when they used to incur net loss. This growing pattern continues now Table I: Performance of RRBs in India No. of RRBs Profit-making RRBs NA NA NA Profit-making (%) NA NA NA 85 % 83 % 84 % 90 % 93 % 95 % 91 % 96 % 98 % 100 % Advances Net Profit Net NPA (Per cent) NA NA NA Source: Audited Financial Statements of NABARD for 1990 to From Table I, it is noted that there has been consistent improvement in the performance of RRBs over the years. Though the number of RRBs has been falling constantly over the years, their profitability has been on the rise. A clearly increasing trend in respect of the ratio of the number of profit-making RRBs to all RRBs is an indicator in this regard (Table I and Figure I). It is worth pointing out that all RRBs in India (100 per cent) have been making profit as of The net amount of profit earned by RRBs has been positive ever since There has been consistent increase in net profit of RRBs over the years. (Table I and Figure II). Figure I: Trend of Profit-making RRBs in India ( 2005 to 2014) Source: Audited Financial Statements of NABARD (for 2005 to 2014) as in Table I icmrrjournal@gmail.com

8 Figure II: Trend of Profit Earned (Rs Crores) by RRBs in India ( 2005 to 2014) Source: Audited Financial Statements of NABARD (for 2005 to 2014) as in Table I. There has been a clear constantly increasing trend in respect of the advances made by RRBs throughout the period under study (Table I and Figure III). The NPA has been on the decline in spite of the constant increase in advances. This is another positive indicator regarding the growing profitability, financial stability and viability of RRBs. (Table I and Figure IV). Figure III: Trend of Advances Made (Rs Crores) by RRBs in India ( 2005 to 2014) Source: Audited Financial Statements of NABARD (for 2005 to 2014) as in Table I icmrrjournal@gmail.com

9 Figure III: Trend of Net NPAs of RRBs in India ( 2005 to 2014) Source: Audited Financial Statements of NABARD (for 2005 to 2014) as in Table I. In short, it may be clearly concluded that the profitability and financial stability of RRBs have been steadily on the increase over the years. The restructuring efforts of the Government are in the right direction. As of 2014, all the RRBs in India are profitable and financially viable. 7. Kerala Gramin Bank (KGB) the only RRB in Kerala and the Largest RRB in India. As already noted Kerala Gramin Bank (KGB) is the RRB formed on July 08, 2013 through the amalgamation of two Kerala-based RRBs the erstwhile South Malabar Gramin Bank (SMGB) and North Malabar Gramin Bank (NMGB). KGB was formed under the Sub- Section (1) of Section 3 of the RRB Act 1976 (27 of 1976). KGB was formed through a notification by the Government of India. The head office of Kerala Gramin Bank is at Malappuram and the sponsor bank is Canara Bank. KGB is the largest RRB in India, with a total business of above 15,000 Crore and a network of 508 branches spread all over Kerala. It is having dominant presence in all the 14 districts of Kerala State and is the only RRB in the state. The share capital of the bank is 2 Crore contributed by the Central Government, State Government and Sponsor Bank in the ratio 50:15:35 respectively. The CD Ratio of the bank is 105 percent. The Bank has a well dedicated team of 2700 odd staff members. The focus of KGB is to initiate appropriate intervention for overall economic upliftment of the people of Kerala by giving financial assistance to the sectors like Agriculture, Micro, Small and 82 icmrrjournal@gmail.com

10 Medium Enterprises (MSMEs), education, housing, micro-credit, weaker sections, SC/ST communities etc. KGB has carved a niche for itself through its 36 year old history of dedicated and customized service to the clientele by its predecessor RRBs. With 508 branches as on 21/01/2014, it is the third largest bank in Kerala in terms of branch network. Further, its CD ratio is the highest among major banks of Kerala. KGB leads other banks in the state in the number of persons assisted under Kisan Credit Card (KCC) and SME (Priority) schemes. As a fully Government owned undertaking, KGB is in the forefront in meeting its social commitments and also in implementing various Govt. formulated policies and schemes. With over 500 totally networked branches under CBS all over the state, KGB is a tech savvy bank dispensing technology intensive banking products. RTGS/NEFT/SWIFT facilities have been enabled in all KGB branches. NRI remittance schemes and ATM services are available in KGB branches. KGB is in the process of implementing Mobile Banking and Internet Banking facilities. KGB keeps itself abreast of the technological improvement by constantly updating its products by imbibing state-of-the-art technology. 8. Performance of Kerala Gramin Bank (KGB) A Closer Look As KGB is of recent origin (2013) it is too early to assess its performance. Its own figures for 2014 alone is available. The figures of KGB for 2014 vis-à-vis 2013 (that is consolidated figures in respect of erstwhile SMGB and NMGB the two RRBs which were amalgamated to form KGB shows commendable performance in respect of KGB. All the performance parameters in respect of KGB as of 2014 show significant improvement as against those (consolidated) of the two erstwhile amalgamated entities. (Table II). Table II: Performance of KGB the RRB in Kerala (Rs. in Crores) Particulars 2013 # 2014 Total Income Total Expenses Net Profit Advances Source: Audited Financial Statements of KGB for Note: # Consolidated figure of NMGB and SMGB icmrrjournal@gmail.com

11 Thus, as in the case of RRBs in India as a whole or KGB in Kerala in particular, the financial performance, financial stability and viability are commendable and are showing a constantly improving trend also. Thus, the restricting efforts of RRBs initiated by the Government should continue in the future as in the past. 9. Suggestions and Concluding Remarks In view of the foregoing, it may be noted that RRBs in India are doing a commendable job in ensuring rapid and balanced economic growth of the country. RRBs are the best and most effective tools for bringing about financial inclusion as they focus on agriculture, MSMEs, rural development, customers from the marginalized sections like the SC/STs etc. Promotion of RRBs may be noted as an imperative for ensuring balanced and equitable economic growth in India, as there are growing apprehensions regarding lopsided growth and financial exclusion in the country in the ongoing era of liberalization and financial sector deregulation. The governmental efforts towards restructuring of RRBs may be noted to be a step in the right direction because of the improving trend in respect of all performance indicators of RRBs. As of 2014 all RRBs in India are profit-making, including KGB the Kerala based RRB. Efforts are required to ensure that RRBs embrace the latest and state-of the art technology in order to make their services more cost-effective and competitive. ICT initiatives will enhance their customer service, and also improve their profitability and productivity. RRBs like KGB in Kerala have already embarked on such ICT-oriented initiatives. INTERCONTINENTAL JOURNAL OF FINANCE RESEARCH REVIEW Another area that requires attention is NPA management. Though the NPA of RRBs is showing a favorable and declining trend in general, the same needs closer monitoring because the trend is not very uniform across the years, unlike the trends in respect of profitability and advances of RRBs. In this era of cut-throat competition in the wake of economic deregulation and globalization, RRBs too should think of aggressive marketing of their products. ICT adoption would ensure that they keep themselves abreast of the changes and that their services are competitive, while marketing would ensure better business growth, viability of operations and long-term sustainability icmrrjournal@gmail.com

12 REFERENCES 1. Government of India, Economic Survey (July 2014), New Delhi. 2. Hosamani, S. B., 2002, Performance of Regional Rural Banks, First Edn,, Anmol Publishers, New Delhi. 3. Reserve Bank of India (RBI), Occasional paper, Misra, Biswa S., Performance of Regional Rural Banks (RRBs) in India: Has Past Anything to Suggest for the Future? Vol. 27, No. 1 & 2, Summer & Monsoon, (Available online at 4. Ibrahim, Syed (2010), Performance Evaluation of Regional Rural Banks in India, International Business Research, Vol. 3. No 4. Pp Mohindra, Versha & Kaur, Gian (2011), Efficiency of Regional Rural Banks in India: An Application of Data Envelopment Analysis, Economic Affairs, Vol. 56 No. 2, June 2011, Pp Alagawadi, M. V., and Savadatti, Pushpa M., Performance evaluation of Malaprabha Grameen Bank in Karnataka during the pre and post WTO period Pricipal Component analsysis, Karnataka Journal of Agricultural Sciences, Vol. 24, No. 5, Pp Paramanandam, D Arul, and Packirisamy, P. (2012), A Comparative Study on the Performance of the India s NABARD with the Bangladesh s Grameen Banks, The International Journal s Research Journal of Social Science and Management, Vol. 2, No.1, May 2012., Pp Rao, B Venkat., and Rao, Dr. G Sudarsana, Performance of Regional Rural Banks in India A Study on Andhra Pradesh Grameena Vikas Bank in Andhra Pradesh, International Journal of Advance Research in Computer Science and Management Studies, Vol. 2, Issue 4, April 2014, Pp National Bank of Agriculture and Rural Development (NABARD), Government of India, Annual Reports (for the years, to ). (Available at Reserve Bank of India (RBI), Government of India, Trend and Progress of Banking in India, (for the years, to ). (Available online at Official website of Kerala Gramin Bank (KGB), Official website of the Reserve Bank of India (RBI), Govt. of India, Official website of the National Bank of Agriculture and Rural Development (NABARD), Government of India, icmrrjournal@gmail.com