Supporting the inclusion aspirations: Rural and agriculture banking

1. Supporting the inclusion aspirations: Rural and agriculture banking September 8, 2010

2. Significant growth recorded in non-urban credit between 2005-09 ... Growth in non urban credit ( 05-09) CAGR (%) '05-'09 • 75 Amount outstanding • 60.0% No. of accounts • 50.0% • 50 • 25 • 18.5% • 16.0% • 8.0% • 7.0% • 5.8% • 5.5% • 0 MFI1 Commercial Banks RRB Co-operative Banks Avg. ticket size (Rs) 5,000 98,000 36,000 15,000 Outstanding (Rs cr) 11,000 414,000 60,000 108,000 1. Growth rates for MFI 07 to 09 Note: For commercial banks and RRB the data pertains to semi–urban and rural business Source: RBI BSR, NABARD, M–CRIL, BCG analysis

3. ...But many challenges to be addressed • Limited and skewed accessibility • Banks can't serve the segment with existing models • Investment credit not keeping pace • 'Non banking' loans carry high cost • Need to address 'rural' issues holistically including focus on creation of rural infrastructure

4. Limited and skewed accessibility Large population out of net Huge regional variations Agri-credit per hectare by commercial banks (Rs / hect) - FY09 • Total number of farmers in India • 12 - 12.5 Cr • Number of farmers with access to bank credit • 4.5 – 4.8 Cr • (~38% - 42%) • 42,601 • Number of farmers with out access to bank credit • 7.0 – 7.5 Cr • (~58% - 62%) • 26,038 • 5,539 • Tamil Nadu • West Bengal • Assam Note: Agi credit per hectare computed as agri-credit / net sown area Source: RBI, Ministry of Agriculture, Indiastat, NABARD

5. Banks lacking confidence in addressing financial inclusion challenges Survey Q: Percentage of banks responding as "Highly Likely" Public Sector Banks Private/Foreign Banks • % respondents • % respondents Industry will find a solution to serve the excluded in profitable manner • 14% • 9% • 0 • 50 • 100 • 0 • 50 • 100 Note: Sample Size: 13 PSU banks, 7 Private banks, 4 Foreign banks. Source: IBA–BCG Survey of banks.

6. MFIs have begun focusing on profitability MFIs have begun focusing on profitability • % • 40 • Yield • 30 Continuously widening margins • 20 • Op Ex Ratio • 10 • 2002 • 2004 • 2006 • 2009 Why are MFIs not able to reduce cost of loans despite reducing operating expenses? 1. Surveys have shown that the number of MFI loans in each poor household in select areas of Karnataka and AP stands at 2.6 and 8.2, respectively Source: M-CRIL Microfinance Analytics, 2009; Media reports

7. Financial inclusion is not sufficient, need to create infrastructure • Across the spectrum • Irrigation, roads, storages, market linkages, water, health, education • Rural infrastructure faces market failure challenges • Implementation challenges in public sector • Success eluding PPP models in rural India • Very limited "profitable" ways to do it • Need for a dedicated agency to be funded through government support to fund quality rural infrastructure at accelerated pace

8. Solutions should address characteristics of rural and agricultural banking customers • Developing business models which can cater to smaller ticket size and lower floats • Customizing approach to address geographically dispersed and divergent social norms • Products to address lending risk and unpredictable cash flows • Fulfilling total financial product needs – production and consumption credit, savings, transactions • Addressing creation and maintenance of infrastructure

9. For discussion Commercial banks Cooperatives/RRBs MFIs/NBFCs NABARD Government • How are banks thinking about newer approaches and channels like 'for profit BCs'? • ... • Why are cooperatives not exploiting local presence to lower cost, customise offerings, improvise monitoring? • ... • How can MFIs reduce yields and operating costs? • ... • Can NABARD offer more development led products? • ... • Should government fund an apex agency for rural infrastructure like urban infrastructure? NABARD? • ...