Chapter XVII

1. 2-1 Chapter XVII Rural Marketing of Financial Services

2. Learning Objectives • Comprehend marketing ecosystem for marketing of banking and insurance services in the rural market • Understand the evolution of rural banking • Understand opportunities and challenges in marketing of banking and insurance services in rural market

3. Learning Objectives • Understand the factors that suggest good potential for insurance business in rural areas • Know different marketing strategies for banking and insurance sector organisation to effectively tap the optimum rural market potential

4. Financial Services: An Introduction • Services refer to the provision of intangible economic activities by one party for another for satisfaction of a need that does not result in ownership. It is a process that creates benefits by facilitating either a change in customers, physical possessions, or in their intangible assets. • Financial services are a form of services that provide solution to the financial needs of the consumers. They are of various types like: banking, insurance, mutual funds etc.

5. Financial Services: An Introduction • There is a strong relationship between financial sector development and economic growth in a particular market. Agricultural credit, accounts, for the greater part of development during the past fifty years. Provision of adequate credit on reasonable terms is undoubtedly a most important part of government policy. • The very nature of economic activities of rural market are such that provision of quality access to financial solutions is vital for development of people residing in rural areas. It enables people to transform their production and employment activities to exit poverty.

6. Financial Services: An Introduction • Low–income households and micro-enterprises can be extremely benefited from credit, savings, and insurance services. • If banking services enable people to take advantage of profitable business opportunities then insurance services help all the stakeholders to manage the associated risk. The combined effect of this can create larger pool of disposable income for sustainable development of rural markets.

7. Marketing of Banking Services in Rural Markets Banks and financial institution can opt to serve rural markets with one of the following approaches and objectives: • Poverty Alleviation Objective: To uplift population residing in rural areas who are below the poverty line by extending credit to the smallest-scale economic activity. This will improve the livelihoods of the “poorest of the poor” and boost their income generating capacity. This approach can create challenges for lending institutions in designing and delivering such small-scale funds in an efficient manner and then recovering the amount that is due to be paid.

8. Marketing of Banking Services in Rural Markets • Financial Intermediation Objective: This approach involves increasing the accessibility of banking services to the poor in a commercially sustainable manner. But the process to recover all the costs of financial intermediation will make financial products too expensive for the poor.

9. Marketing of Banking Services in Rural Markets • The Third Approach: Combining both the approaches through an integrated and novel business model. So that banks and financial institutions can alleviate poverty in a financially viable and profitable manner. Insurance companies can also be integrated in this model to insure the assets that are purchased with loan money to cover the risk of farmer as well as the lending institution.

10. Key Reasons for Poor Performance of Banks in Nationalization Period • Although social objectives behind nationalization of banks were achieved but the financial performance of banks was not in a good position. • High default rate of 42% for commercial banks in 80s.

11. Key Reasons for Poor Performance of Banks in Nationalization Period • Loan repayment discipline was also affected as large-scale loan defaults were often politically condoned. • Rural interest rate subsidies. During the 1980s the average interest rate on loans from rural branches was 11% against 14% in urban branches.

12. Challenges in Marketing of Banking Services in Rural Market • Lack of Adequate Financial Market: Rural customers are expensive to reach, often too poor to afford bank products. • Low Value of Loans for Poor Sections: Many rural households can’t be served by “for-profit” financial institutions due to their demand for very low value financial product, which wouldn’t allow the banks to fully cover their transaction, financial and risk costs. • Low Density of Population: The problem of banks is confounded if a rural area has a very low population density.

13. Challenges in Marketing of Banking Services in Rural Market • Lack of Collateral: Poor people often have insufficient established forms of collateral (physical assets) to offer, so they are often excluded from traditional financial market. • Underdevelopment of Rural Infrastructure: Dependence of rural customers on natural forces increases the volatility of income, indirectly reduces the probability of profitability and adversely affecting the farmers’ debt service capacity.

14. Challenges in Marketing of Banking Services in Rural Market • Cumbersome Procedures and Delay in Loan Sanctioning: standard procedure for sanctioning loan were not consumer friendly to the needy and not that much educated rural consumers. • Lack of Financial Discipline: Practice of different governments to forego the loan repayments of credit granted by state-owned Financial Institutions has created an expectation on the part of poor people that incase they do not repay the loan sooner or later it will become a grant. So they are psychologically encouraged not to repay the loan.

15. Challenges in Marketing of Banking Services in Rural Market • Poor Judicial, Legal and Enforcement Systems: Lack of statutory backing for recoveries was major impediments to growth of banking in rural sector. • Rural Interest Subsidy: Focus in past has always been to make available cheaper credit for rural and poor population. Empirical data indicate when banks are forced to lend cheap, there has been a tendency for availing of this facility by the non-target group of beneficiaries and efforts have failed to achieve the desired results and led to willful defaulting. This has really damaged the credit culture and structure in the rural sector.

16. Opportunities for Banking in Rural Areas • Significant transformations in rural economy, are creating better opportunities for financial sector to offer their services to rural consumers. • Government Thrust: Government has taken large number of deregulatory measures. • Amendments in Market Committee (APMC) Act; facilitation for contract farming, to liberate Indian agriculture from clutches of traders and intermediaries.

17. Opportunities for Banking in Rural Areas • There has been significant increase in government investments in Agri Export Zones, Cold Chains, Warehouses, Infrastructure.. • Government is encouraging banks to increase the lending to the rural sector through policy measures. • Increased flow of money in rural area will lower borrowing cost and also provide ease to the farmer in accessing the credit.

18. Opportunities for Banking in Rural Areas • Sourcing of agricultural produce from India for global markets • High-margin agricultural businesses are now possible in niche areas like organic foods, herbal products, shrimps, fruits and vegetables. • This will increase the disposable income of the farmer and increase his repaying capacity and thus making him eligible for financial products even with smaller landholdings.

19. Opportunities for Banking in Rural Areas • On account of exporting there will be investments in cold chain and transport infrastructure. This will reduce perishability of crops and will also reduce sudden oversupply of a crop in the market that leads to sudden price drop. It will add to income for farmers with same amount of produce. • Export operation will bring in better seeds, technology and farming practices. This will lead to quality improvement and spillover to domestic markets as byproduct, providing better earning opportunity for farmer. With increased incomes it will become attractive for banks to serve rural markets.

20. Opportunities for Banking in Rural Areas • Increasing Corporate Interest in Agri-business: Variety of organisations: agri-input companies, trading companies, exporters and processors are entering this sector. They are experimenting with different business models: ITC’s e-choupal, Tata Chemicals’ Kisan Kendras, HLL’s Project Shakti, Reliance, Bharti, ITC, HLL, etc. This can lead to improved productivity, better infrastructure and improved incomes for the farmers. • Strengthening Loan Recovery: SARFESI Act will help develop the credit culture through loan recovery mechanism. Healthy competition and market forces will achieve flow of credit at lower cost.

21. Opportunities for Banking in Rural Areas • Introduction of Bio-diesel: It will not only reduce cost of operation for farmers but will also increase their income This will create opportunities to lend for setting up of processing plants creating earning and employment opportunities. • Development of AEZs: This will create very good opportunities both for farmers as well as for financial lending. • Development of the Telecom and Internet Infrastructure in Rural Areas: It has made it easy and efficient to do business in the rural areas and this is enabling the development of very innovative models to take banking services to the rural markets in a very cost effective manner.

22. Opportunities for Banking in Rural Areas • Introduction of Marketing Intermediaries and Loan Recovery Agents: By instituting intermediaries for marketing and recovering loans the banks have brought down cost of their operations. These intermediaries are efficient because they work on commission basis and save the banks of investment in establishment of infrastructure and overheads.

23. Opportunities for Banking in Rural Areas • Rapid Growth in Organised Retail: It is bringing producers and consumers closer without too many intermediaries who were adding to the selling price without any value addition. Productivity gains across entire supply chain through disintermediation and superior technology can drive cost down by 35-40%. Leading to increase in consumer spends.

24. Opportunities for Banking in Rural Areas • Large Untapped Market: Credit demand in rural India is expected around Rs.1,33,000 crore, its supply was just about Rs.4,000 crore in 2005. 32000 commercial bank branches cover only 7% of rural sector and large market is still untapped; for liability (about Rs.21,500 crore) and asset (Rs.1, 20,400 crore).

25. Marketing Strategies for Banking Services • Developmental Marketing: Banks should have a developmental orientation in rural market. They should see their role as enablers: to improve the quality of people, by either increasing the income or lowering down their cost and in process produce a reasonable profit. This profit might be less per transaction but considering large rural market the overall profit can be quite significant. • A Bank can't simply venture into rural market just as a financier, who is not bothered with anything else except for repayment of loan. If farmer is not able to sell his crop and is not able to get good value for his produce than his suffering will become suffering of institutional lenders.

26. Marketing Strategies for Banking Services • Variable Lending Rate: Banks should be permitted to lend at different rates depending on the borrower's risk profile. This will help develop a superior credit culture. • New Product Lines and Delivery Models: Banks have to create different types of product lines and have innovative delivery models to take them to rural consumers. • Rural Infrastructure: Supply Chain Financing: With active corporate sector involvement new supply chain from farms to supermarkets is emerging. This will create financing possibility on various stages of entire supply chain in the area of: state of the art godowns, cold chains, milk-processing plants, post harvest processing.

27. Marketing Strategies for Banking Services • Simple and Accessible Loan Procedure: Banks need to make loan procedures simple and accessible to make inroads into the rural sector. Banks can reduce cumbersome and complicated procedures in the rural sector. This will attract quality and high net worth borrowers. • ATM enabled Kisan Credit Cards: Kisan credit cards can be integrated with ATM network. This will increase ease and reduce cost of providing credit to widespread farming community.

28. Marketing Strategies for Banking Services • Development of Low Priced Customised ATMs: Rural areas can be served by ATMs that are in accordance with the rural environment. The content has to be in the vernacular language or with audio or animation facility with touch screen option. The security of these can be based on the basis of finger (thumb) print analysis. These have to be low cost ones so that it is viable to install and maintain them.

29. Marketing Strategies for Banking Services • Non-branch Based Rural Banking: The overhead cost of operations for banks through branch network in rural India can be more because of low business per employee and the large number of small clients. However, mechanisation and centralisation of accounting and cheaper office premises, engagement of external agents for marketing of products and recovery of loans can reduce cost of operation considerably.

30. Marketing Strategies for Banking Services • Employing Information and Communication Technology: Banks can employ rural IT networks set up by different organisations to provide information and also to sell the products and services. Banks can also set up exclusive network of their own, if they see an advantage in doing that over using the network set up by others.

31. Marketing Strategies for Banking Services • Transforming Attitudes of Potential Rural Customers: Rural consumers in India have traditionally shied away from banks and paper investments in favor of more solid assets like gold. If banks can develop rural specific strategies and products than they can convert some of the investment of gold into banking products and services.

32. Integrated: Multi-Partner Delivery Models • Banks and financial institutions should integrate with other stakeholders in the rural market rather than being standalone players. • These stakeholders can be agro-processors, input suppliers, contract farming companies, marketing companies, warehouse operators, supermarket chains, rural malls and NGOs. • This would put banks in better position to offer their products as complete solutions for rural needs and also increase the safety for the loans. They would then be able to comfortably lend to farmers even without sufficient collaterals.

33. Integrated: Multi-Partner Delivery Models a) Contract Farming Financing: With contract farming there will be buyback agreement by companies with farmers. As they will be growing higher yield varieties, with latest farming practices they are likely to have better productivity and higher income. This will increase creditworthiness of farmers. Because of almost pre-decided incomes of farmers on the basis of contracts with companies, financial sector organisations would be in better position to provide loans to the farmers. Companies can negotiate better deals with the banks and financial sector players on behalf of farmers.

34. Integrated: Multi-Partner Delivery Models • Alliances of banks with corporates for credit delivery to the farmers can include crop insurance cover. As most of the banks have promoted insurance companies this coordination might not be difficult to achieve. • If the crop is healthy and productive the corporate house having contract farming arrangement with the farmer (who has also taken loan) makes repayment of installment of loan to the bank. Incase the crop fails the repayment of loan is made to the bank by the insurance company that has insured the crop. With contract farming arrangement farming will become more reliable and scientific giving encouragement to insurance companies for insuring the crops.

35. Integrated: Multi-Partner Delivery Models • 'Bundling of Inputs': A single financial institution or association of suppliers could sell several related items to the target client as a single package. This could include arrangement like: provision of credit by bank, seeds by a seed supplying company, consultancy for farm produce by another agri-input company, managing of risk by an insurer, procurement of crop by the contract farming company. Financial sector players will have to offer a basket of products and services from the perspective of solving farmers' problems by offering them a basket of products and services.

36. Integrated: Multi-Partner Delivery Models • Joint or Co-operative Promotion: Services that will be offered in an integrated manner as a solution to set of different but interrelated needs can be promoted jointly by different players reducing the promotional cost, by sharing it among large number of players: banks, contract farming companies, insurance companies.

37. Integrated: Multi-Partner Delivery Models • Promoting Self Help Group (SHG) Links: The risk to principal can be considerably reduced in rural market by involving SHGs while granting loan to the SHG nominated member. With involvement of SHGs there will sharing of responsibility because SHG will be recommending members who have high credibility and likeliness to repay the loan. As surety is provided by the SHG, this will create a psychological pressure on the member who has taken the loan to repay it.

38. Integrated: Multi-Partner Delivery Models • Developing Franchisee Model: Banks can adopt the franchisee model for widening their reach in rural areas Around 8,000 touch points have been established by ICICI Bank to penetrate the rural pockets.

39. Integrated: Multi-Partner Delivery Models • Tie up with Corporate Sector: To provide credit flow to the channel partners, banks can have tie up with parent companies. Organisations as well as the distributors will be benefited by this financing model. • Warehouse Receipts Loans: Banks and financial institution can provide loan on the basis of receipt from a warehouse. They can develop formal arrangement with warehousing corporations to facilitate provision and repayment of loans.

40. Marketing of Insurance Services in Rural Market • To increase the penetration levels, insurance companies will have to look at newer segments especially the relatively untapped rural market rather than fighting for a share in the same pie in the urban markets. • Progress in the semi-urban and rural areas would largely fuel the growth in insurance sector. • Associated Chambers of Commerce (ASSOCHAM) stated that rural and semi-urban areas would have share of US$ 35 billion (Rs.1,57,500 crore) in the US$ 60 billion (Rs.2,70,000 crore) Indian insurance industry.

41. Marketing of Insurance Services in Rural Market • Life insurance market in semi-urban and rural territories is expected to rise to US$ 20 billion (Rs.90,000 crore) mark by the year 2010 from the existing value of less than US$ 5 billion (Rs.22,500 crore) in 2006. • The non-life insurance business in semi-urban and rural regions would reach to US$ 15 billion (Rs.67,500 crore) by 2010 • This all is expected becauselarge segment of rural India is still untouched because of long distances, poor distribution and high return costs.

42. Challenges in Rural Markets for Insurance Services • Perception and belief that it is expensive to do business in rural areas. • Lack of cost-effective and efficient distribution and delivery systems • Lack of education about Insurance concept • Lack of awareness about relevant insurance products

43. Factors Suggesting Potential for Insurance Services in Rural Market • Saving habit • Uncertainty of agricultural income • Improving economic scenario • Increasing investment by government in rural sector • Low penetration level for insurance products • Development of rural specific products • Increasing rural disposable incomes • Rising product demand (general insurance business)

44. Marketing Strategies for Insurance Services in Rural Markets • Collaborative arrangement with other institutions for leveraging their Infrastructure • Lean Office Infrastructure for Rural Areas Developing alternative delivery channels: • a. Internet Kiosks • b. Non-Governmental Organisations (NGOs) • c. Self Help Groups • Potential agents to market insurance policies in rural areas: • a. Postal agents • b. Cable TV operators • c. Recruiting Youth Club Members • d. Involving Doctors and Schoolteachers • Launching Crop Insurance

45. Summary: Points to Ponder • Services are intangible economic activities offered for satisfaction of a need that does not result in ownership. It is a process that creates benefits by facilitating either a change in customers, a change in their physical possessions, or a change in their intangible assets. • Financial services are a form of services that provide solution to the financial needs of the consumers.

46. Summary: Points to Ponder • There is a strong relationship between financial sector development and economic growth in a particular market. Provision of quality access to financial solutions is vital for development of people residing in rural areas. • Banking services enable people to take advantage of business opportunities and increase their earnings. Insurance services can help all the stakeholders to manage the associated risk. The combined effect of this can create larger pool of disposable income for sustainable development of rural markets.

47. Summary: Points to Ponder • There is immense scope to expand banking and services to cover more of the rural market. For this financial services companies will have to develop rural specific marketing mix. • Banks and financial institution can serve the rural markets by combining poverty alleviation objective and financial intermediation objective through an integrated and novel business model, so that they can alleviate poverty in a financially viable and profitable manner.

48. Summary: Points to Ponder • Bulk of rural bank branch expansion in India was policy driven. 1:4 license rule was the policy instrument that coerced the banks to open branches in the rural areas. • The major challenges in rural banking are: lack of adequate financial market, low value of loans for poor sections, lack of collateral, low density of population, underdevelopment of rural infrastructure, poor judicial, legal and enforcement systems and lack of financial discipline.

49. Summary: Points to Ponder • Tremendous opportunities are being created for the financial sector in the rural market because of: sourcing of agricultural produce from India for global markets, government thrust on rural development, increasing corporate interest in agri-business, strengthening of loan recovery, development of the telecom and Internet infrastructure in rural areas, introduction of marketing intermediaries and loan recovery agents, lower level of NPAs in rural areas, lower cost of labour, infrastructure and cost of living in rural areas and large untapped market.

50. Summary: Points to Ponder • Some of the Marketing Strategies for Banking Services are: developmental marketing, variable lending rate, new product lines and delivery models, rural supply chain financing, development of low priced and customised ATMs, ATM enabled Kisan Credit Cards, integrated: multi-partner delivery models, contract farming financing, bundling of inputs, joint promotion, promoting Self Help Group links to cover the risk, developing franchisee model, tie up with corporate sector, warehouse receipts loans, partnership with NGOs for financing, simple and accessible loan procedure, non-branch based rural banking, employing information and communication technology and transforming attitudes of potential rural customers.