Indian banking system

The banking section will navigate through all the aspects of the Banking System in India. It will
discuss upon the matters with the birth of the banking concept in the country to new players
adding their names in the industry in coming few years.

The banker of all banks, Reserve Bank of India (RBI), the Indian Banks Association (IBA) and
top 20 banks like IDBI, HSBC, ICICI, ABN AMRO, etc. has been well defined under three
separate heads with one page dedicated to each bank.

However, in the introduction part of the entire banking cosmos, the past has been well explained
under three different heads namely:

 History of Banking in India

The first deals with the history part since the dawn of banking system in India. Government took
major step in the 1969 to put the banking sector into systems and it nationalised 14 private banks
in the mentioned year. This has been elaborated in Nationalisationof Banks in India. The last but
not the least explains about the scheduled and unscheduled banks in India. Section 42 (6) (a) of
RBI Act 1934 lays down the condition of scheduled commercial banks. The description along
with a list of scheduled commercial banks are given on this page.
Rural Marketing In India

The concept of Rural Marketing in India Economy has always played an influential role in the
lives of people. In India, leaving out a few metropolitan cities, all the districts and industrial
townships are connected with rural markets.

The rural market in India is not a separate entity in itself and it is highly influenced by the
sociological and behavioral factors operating in the country. The rural population in India
accounts for around 627 million, which is exactly 74.3 percent of the total population.

The rural market in India brings in bigger revenues in the country, as the rural regions comprise
of the maximum consumers in this country. The rural market in Indian economy generates
almost more than half of the country's income. Rural marketing in Indian economy can be
classified under two broad categories. These are:
• The market for consumer goods that comprise of both durable and non-durable goods
• The market for agricultural inputs that include fertilizers, pesticides,
seeds, and so on
The concept of rural marketing in India is often been found to form ambiguity in the minds of
people who think rural marketing is all about agricultural marketing. However, rural marketing
determines the carrying out of business activities bringing in the flow of goods from urban
sectors to the rural regions of the country as well as the marketing of various products
manufactured by the non-agricultural workers from rural to urban areas. To be precise, Rural
Marketing in India Economy covers two broad sections, namely:
• Selling of agricultural items in the urban areas
• Selling of manufactured products in the rural regions
Some of the important features or characteristics of Rural Marketing in India Economy are being
listed below:
• With the initiation of various rural development programmes there have been an upsurge of
employment opportunities for the rural poor. One of the biggest cause behind the steady growth
of rural market is that it is not...
Introduction

As one of the largest financial institutions in India, ICICI's overall mission has been to build the capacities
of commercial entities and, thereby, enable them to become agents of economic change. We believe that
building the capacities of the poorest of the poor to participate in the economy and society is a natural
extension of this role. With this in mind, ICICI has been contributing to the social sector for nearly 30
years, mainly by financing and advising organizations working in the development sector.

ICICI has a permanent and full-time group, the Social Initiatives Group (SIG), to concentrate on its
development-related initiatives. Through the SIG, ICICI seeks to define and effectively fulfill its
responsibilities as a corporate citizen. The group believes that education and health are basic
prerequisites for all people, especially the chronically deprived, to participate in the larger economy.
Universal access to basic financial services, and effective use of appropriate technologies will create
greater opportunities for people to participate in the economy in an equitable and productive manner. With
this in mind, the group has focused its attention on identifying and supporting initiatives in:

 Pre-primary and primary education

The group's involvement is not at the grassroots, though field visits, aimed at assessing need and
facilitating dialogue, form an integral part of their work.
Working Capital Loans
ICICI Bank's Rural, Microbanking and Agribusiness Group (RMAG) offers Overdraft and Cash
Credit facility to traders, processors, transporters, aggregators etc. in the Agri-sector.

Products offering Working Capital Loans are:

Smart Cash Credit (SCC): SCC is a financial assistance to large agri and rural enterprises for
the working capital needs of the businesses with hypothecation of stock & debtors and supported
by property as collateral security. Smart CC has a range of products like Cash Credit, Letter of
Credit, Bank Guarantee, Term Loans,Export Packing Credit (EPC) etc.

Features:
• Limit: Minimum Rs. 25 lakhs, maximum Rs. 20 crores.
• Product range: Cash Credit, Term Loan, Letter of Credit, Bank Guarantee,Export Packing
Credit (EPC) etc.
• Tenure: Cash Credit for 12 months, Term Loan up to 5 years, Letter of Credit/ Bank Guarantee
for 12 months.
• Security: Charge on current assets i.e. stocks and debtors supported   with commercial /
residential property.
• Repayment: For Cash credit, the interest on the outstanding loan   amount is payable monthly,
term loan is repaid as per fixed EMIs.
• Repayment Mode: Through regular transactions in the account.
• Renewal of the account depends on maintenance of good track   record and submission of fresh
financial documents.

Agri Credit Line (ACL): Agri Credit Line is the financial assistance to rural enterprises in the
form of overdraft based on property & income. The borrower can avail OD facility upto 5 crores
and the interest will be charged only on the utilised amount.

Features:
• Limit: Minimum Rs. 10 lakhs, maximum Rs. 5 crores.
• Tenure: The overdraft term is 12 months and is renewable.
• Security: Self-owned residential /commercial/ industrial land or   property.
• Repayment: For overdrafts, the interest on the outstanding loan   amount is payable monthly.
• Through regular transactions in the account.
• Renewal of the OD account depends on maintenance of good track   record and submission of
fresh financial documents.
Jet Overdraft
Faster and quicker overdraft facility for business needs based on income, secured with property.

Features:
• Limit - Minimum Rs. 10 lakhs to Maximum Rs. 65 lakhs.                 
• Faster and quicker.
• Security: Facility against Residential Property/ Commercial Property /   Industrial property.
• Interest charged only on amount used.

Maximum Rate of Interest ( Fund Based Facility): I-BASE + 12% plus applicable interest tax
or other statutory levy.

Maximum Rate of Interest ( Non- Fund Based Facility) : Commission : 2% per annum. Final
applicable rate is decided by ICICI Bank based on various other parameters as per the policy of
ICICI Bank and will be communicated to the customer upon sanction of loan, subjected to
minimum of I-BASE.

Processing Fee: A non-refundable processing fee upto 2% (plus applicable service taxes) on the
loan sanctioned by ICICI Bank shall be payable by the customer. The applicable processing fee
that will become payable at the time of sanction/every disbursement, will be communicated to
customer on sanction of the loan application by ICICI Bank.

Front End Fee: Front End Fee up to 1% (Plus applicable service taxes) of facility(ies)/ loan(s)
amount applied for 75% of the total Front End Fee would be refunded (without any interest) in
the event of rejection of the facility (ies) / loan Application by ICICI Bank.

Prepayment Charges: Prepayment charges of 2% of the sanctioned facility (ies) / loan amount
or the rate as may be specified by ICICI Bank from time to time.

Other Charges: Other charges including but not limited to statutory charges, such as stamp duty
on documentation etc., as applicable, are payable on actual basis and any other charges as
communicated to the customer from time to time by ICICI Bank.
Maruti Nathu Gadge is a sugarcane farmer from Rahuri, a village in the Ahmednagar district of
Maharashtra. Last year’s unusually heavy rain had left his crop a soggy mess. So, he needed to borrow
money to get ready for a new crop this year. Gadge was wary of moneylenders and babus of co-
operative societies, whom he would have had to bribe before getting any work done. He was in a fix:
where could he get the money he needed to get started? He then happened to walk into Sanjay
Jambukar’s tent on a bazaar day in his village.

Jambukar is an ICICI Bank bhai, and a part of the marketing team of the ICICI credit access centre at
Rahuri. He explained to Gadge that the bank would give him a crop loan of Rs 32,000, enough to prepare
his field for the next harvest. The only documents that he had to give the bank were his saat-baara (the
land deed) and his ‘Seshan’ card (the voter’s ID card). Gadge complied. His loan was processed in less
than a week by the ICICI Bank branch at Ahmednagar.

Around 300 km away from the dusty fields of Rahuri, at the imposing headquarters of ICICI Bank in
suburban Mumbai, small loans such as these are adding up in the books of the country’s second-largest
bank to give its rural push a momentum of its own. Deputy managing director Nachiket Mor is in charge
of driving ICICI Bank deep into the rural hinterland. In a mere six years, the bank’s rural portfolio has
grown from nothing to Rs 16,300 crore, and now accounts for over 6 per cent of the total bank assets of
Rs 2,51,300 crore. This loan portfolio grew at over 50 per cent in the last two years. The bank now has a
presence in 220 districts. Mor is, however, not resting on his laurels. He is keen to plant the bank’s flag
in 450 districts by 2008.
To achieve this stiff target, he is encouraging innovations in distribution, product design and technology.
Where it is viable, ICICI Bank is actively seeking out partners with local knowledge to help it service its
emerging rural clientele more effectively.

Much of this is new to the hidebound world of Indian banking. Traditionally, rural banking has been
seen as a social obligation rather than as a profit opportunity. It was thrust down the throats of banks
by the government. Mor and his team are trying to combine social obligations and profitability. That
puts them square within the larger task of reforming rural India — everything from building rural supply
chains, to providing risk management tools to farmers, to working creatively with microfinance groups.
Mor believes that in almost every region of India, there exists a set of economically viable occupations
that even the poorest of the poor can engage in, if the necessary inputs are provided to them at market
prices.

“Access to basic financial services, which include savings, credit, insurance and tools for risk
management can allow families to start with extremely low-skilled occupations, such as buffalo rearing,
and then gradually move up to a level where they can afford minimal meals and even come to a point
where their children are withdrawn from the work force to attend school,” he says.
ICICI Bank CEO K.V. Kamath has identified the rural foray as one the key drivers of revenue growth in the
coming years. He meets the core team every fortnight. Kamath believes that the Indian economy can be
put on a firm footing only if the benefits of economic growth percolate down to rural India. His vision is
to provide the whole range of financial services to people in rural areas, so that they can be brought
within the ambit of mainstream economic activity.

Genesis Of A Strategy

The push into rural India began at the end of 1999, when USAID provided money to the Indian
government to finance activities that would assist the development of a dynamic private agricultural
sector in India. The programme was called the Agricultural Commercialisation and Enterprise (ACE)
Programme. ICICI was chosen to be the implementing agency. A two-member team comprising
Brahmanand Hegde and Zarin Daruwala was in charge of ACE. Then came ICICI Bank’s acquisition of
Bank of Madura in 2001. While ICICI Bank had grown out of the industrial lending strengths of ICICI — its
parent — and had then made a very successful foray into consumer lending, it had almost no strengths
in lending to farmers and others in rural India.

Bank of Madura, on the other hand, had a substantial rural reach. Its core
strength was mass banking. In April 2000, Kamath asked Mor, Chanda Kochar and the
members of the ACE team to form a separate team to explore opportunities in the rural areas.

Despite the hue and cry about the need to have an inclusive banking system, 58 per cent of rural
households do not have a bank account and only 21 per cent have access to credit from a formal
source. That is the opportunity in rural banking. Says Mor: “The banking system, thus far, was not able
to internalise lending to the poor as a viable business activity, but looked at it as a mere social
obligation. We wanted to change that.”

In 2005, Suvalaxmi Chakraborty, who was then in ICICI Bank’s retail business, took charge of the rural,
micro banking and agribusiness group (RMAG). It was only after this that ICICI Bank’s rural push really
took off. A team of 10 members at the centre is now functioning as the nodal point of RMAG. They
handle portfolios from product and credit development to legal and regulatory compliance, and are
more innovators than anything else. RMAG is the new kid on the block for the largest retail loans
provider of the country today.

Says Chakraborty: “We have developed a robust hybrid channel structure with a combination of branch
and non-branch channels. Biometric cards and rural ATMs further aim to bring convenience that aid our
efforts to bring doorstep banking to rural India.” The bank currently has over 200 rural branches, 1,500
credit access points and 5,000 kiosks.

Mapping The Possibilities

Today, the RMAG’s focus is on a rural strategy that is different from its predecessors, who used the
same channels to cater to all customer segments in rural India with a narrow product suite and branch
driven infrastructure that was expensive. ICICI Bank changed all of that by first dividing its rural
customers into four categories: from R1 to R4 (see ‘ICICI Bank’s Rural Pyramid’). It built a strategy that
was customer driven, technology-intensive, used hybrid channels and offered multiple products.

Lessons are being imbibed from other countries. Says Madhavi Soman, consultant, RMAG: “We visited
the Netherlands, Chile, and Israel to understand the function of farmers. We found that Indian farmers
are not aware of the end-consumer of their produce, while every farmer overseas is producing for the
supermarket buyer. While we have an excellent crop of several fruits, we are not very large exporters as
we do not meet international standards. We are trying to anticipate trends and are assisting in creation
of markets as well.”

The RMAG business has two categories: corporate agribusiness and rural retail business. Corporate
agribusiness is what the bank had started out with. This business comprises direct lending to large
corporates, poultries like Godrej Agrovet and Venkateshwara Hatcheries or seed companies like
Suguna, in the form of term loans for project expansion or working capital loans. There is also the
corporate linked SME model that does dealer or vendor financing, or corporate linked farmer financing.
Programme-based lending is also undertaken to understand the SME sector.
On the rural retail side, the bank offers a basket of asset products: working capital loans, crop loans
(like the one given to Gadge), farm equipment loans as per the requirement of the farmer at any stage
of his crop, and even commodity financing when his produce is ready. For the poorer segment of
farmers there are micro-finance options and jewel loans. On the liability side, there are current accounts
for agri-traders called Agri Express Funds, term deposits and even other investment products like
insurance and mutual funds provided by ICICI Lombard and Prudential ICICI.

The Distribution Network

The bank is making use of both branch and non-branch channels to reach out to the rural populace.
Branches are classified under three categories: district cluster processing branches in locations with high
agri-rural potential, which is the processing hub for all channels. A typical example is the Ahmednagar
branch that BW visited. It caters to mostly sugarcane and onion farmers in the area. Second, there are
mandi branches that focus on servicing mostly agri-traders, giving them facilities for commodity training
and insurance. Third, there are the crop cluster branches located in belts of growers and processors of
specific crops that specialise in local knowledge and relationships and provide the farmer finance for
specific crops.

Non-branch channels include credit access centres that are repositories of local customer knowledge.
These are typically located in a district head quarter/taluk or a larger village in a district. Take, for
instance, the ICICI Bank credit access centre at Rahuri. Anup Bihani is the credit access centre manger
here, the man who has brought a smile on the faces of hundreds like Gadge. A third-generation
entrepreneur, Bihani has roped in his father, Ashok Bihani, a senior citizen who has been entrusted with
the job of hand-holding farmers who walk into his son’s ‘office’, which shares a common wall with his
two-wheeler showroom. While Anup is busy coordinating with his seven-member marketing and
research team, Bihani senior ensures that the farmer feels at home, reassured many times over that he
is not going to be duped.

That’s not all. A few kilometres away from the credit access centre, there’s another ‘touch point’ of ICICI
Bank. Chandreshekhar Kharde is a passport agent who runs the ICICI Bank Internet kiosk, located at a
distance of approximately 5 km from the credit access centre at Rahuri. Kharde was selected by officials
of the Ahmednagar branch along with Bihani to run the kiosk because of his network and his local know-
how of the credit worthiness of farmers in and around Rahuri.

Apart from the credit access points and Internet kiosks, there are the MFI branches that are platforms to
reach out to the rural poor, like Spandana at Andhra Pradesh, which is targetting the R4 segment and is
a facilitator for ICICI Bank’s micro loans, savings and insurance. And, lastly, there are some recent
additions to the retail network — business correspondents like the KAS Foundation in Orissa that is
providing banking to the under-banked areas. Their business opportunities range from opening savings
accounts and sale of third-party products, to loan disbursements and collections.

Hand In Hand With Partners

ICICI Bank has worked out a No White Spaces (NWS) strategy, which means that there are plans to
ensure that there is going to be an ICICI Bank ‘touch point’ within every 3-4 km of reach of every Indian,
even in the most remote corners of the country. That would mean around 100 touch points in every
district — or 45,000 totally by 2008. “So far, we have been able to establish 8,000 touch points and are
trying to significantly scale up this number,” says Mor.

The bank will leave no business opportunity in a cluster untapped by combining the use of branch and
non-branch channels. There are 80 ‘cluster CEOs’ across India, who are senior bankers in charge of two
or three districts, not necessarily based out of a rural area, but well versed with the locals. It is their job
to roll out the NWS strategy. The number of cluster CEOs will increase from the current 80 to 150 by the
end of 2006. “I have online chat sessions with my cluster CEOs once a week, which helps us identify
more opportunities that lead to more innovations,” Mor explains.

ICICI Bank is also working on a partnership module with micro-finance institutions. The bank initiated a
partnership model in 2002 in which the MFI acts as a collection agent instead of a financial intermediary.
The loans are contracted directly between the bank and the borrower, so that the risk for the MFI is
separated from the risk inherent in the portfolio. This model, therefore, has very high leveraging
capacity, as the MFI has an assured source of funds for expanding and deepening credit. The bank chose
this model because it expands its retail operations by leveraging comparative advantages of MFIs, while
avoiding costs associated with entering the market directly.

Another challenge ICICI Bank found was scaling-up the micro-finance sector and the lack of equity
capital. To solve this shortage, ICICI Bank is encouraging venture capitalists (VC) to enter the sector. The
bank has identified three venture capital funds — Lok Capital, Aavishkar and Bellwether. Lok Capital
mobilises and directs private capital to micro-finance activities and to fund long-term management and
technical support for development of commercially sustainable MFIs. Aavishkar provides micro-equity
funding (Rs 10 lakh-50 lakh) and operational and strategic support to commercially viable companies in
rural or semi-urban India. Bellwether has made three equity commitments for start-ups, and its
committee has decided to increase the size of the fund from $10 million to $25 million.

ICICI Bank has come to an agreement with these three VCs, under which it will provide take-out
financing to the MFI to buy out the venture after a period of 3-5 years, provided the MFI attains an
operational sustainability rating from Micro-Credit Ratings International and Credit Rating Information
Services of India. The ICICI Bank technology team is developing innovative products to help reduce
transaction costs considerably. For instance, a new technology is being used for rural ATMs using a
suction technology and dispensing notes from below the machine. It is able to handle old currency
notes. Though the ATM is still being improved for a full-scale roll out, there are already two that are
operational within IIT Chennai, which assisted them in building the ATM, and another in a village in
Tamil Nadu.

Also, the bank has recently taken a stake of under 20 per cent in Financial Information Network and
Operations (FINO) to provide technological solutions to reach the underserved in the country. ICICI Bank
is the lead facilitator. FINO has launched biometric card, which would act as a proof of identity and give
collateral to customers. The card would also offer multiple products including savings, loans, insurance,
recurring deposits, fixed deposits and remittances. FINO would also build-up a customer database, thus
bringing them into mainstream banking.
While the sector has been growing rapidly, and the focus has been on outreach, there is an urgent need
to fill gaps both in practice and understanding, in order to maximise the impact of this growth. To fill
these gaps, ICICI Bank has created the Centre for Microfinance Research (CMFR) at the Institute for
Financial Management Research (IFMR) in Chennai. Through research, research-based advocacy, high-
level training and strategy building, it aims to establish the links between increased access to financial
services and the participation of poor people in the larger economy.

The CMFR is involved in several studies with researchers from universities like MIT, Harvard, and Yale.
For example, it is implementing an impact evaluation of Spandana’s microcredit programme in
Hyderabad. As the first randomised evaluation of microcredit, it will allow estimating the effects of the
MFIs’ programme in an unbiased manner. Other projects include the impact evaluation of smokeless
chulhas on health and productivity in Orissa, a study on the break-up of transaction costs of MFIs and
SHGs, and an analysis of Sewa Bank’s loans and accounts panel database in Ahmedabad. The CMFR also
organises regular seminars and conducts courses for managers, researchers from NGOs, government,
international organisations and academics.