CASE STUDY OF STATE BANK MICRO FINANCING INITIATIVES

State Bank of India (SBI) is the largest commercial bank in India. The
Sakoli agricultural development branch of SBI in Bhandara district,
Maharashtra was in deep trouble in mid 1990s as the branch could not
recover the loans disbursed to the farmers in 15 villages. The farmers were
unable to repay the loans due to the failure of crops. SBI decided to close the
branch.

1. What are the steps to be taken to overcome the problems.

2. What should the branch manager to do.
INTRODUCTION:

State Bank of India (SBI) is the largest commercial bank in India. The
Sakoli agricultural development branch of SBI in Bhandara district,
Maharashtra was in deep trouble in mid 1990s as the branch could not
recover the loans disbursed to the farmers in 15 villages. The farmers were
unable to repay the loans due to the failure of crops. SBI decided to close the
branch. The branch manager visited these villages and persuaded a few of
the villagers to form Self Help Groups (SHGs) by explaining them the
benefits of SHGs and the process of saving certain amount of money every
month. After a lot of persuasion, the reluctant villagers formed an SHG.
After the SHG was formed, the villagers, who in 1995 were finding it
difficult to save even Rs 5 a month, were individually saving Rs. 500 per
month by 2005. In a span of a decade, the 15 villages, with a predominant
farming community, had changed for the better. The SHGs had borrowed Rs
500,000 to buy tractors.

OVERHEAD:

According to Chandan Jamdage, the manager from SBI who started

the microfinance initiative in these villages, "When a SHG comes together,
they save small sums on a regular basis.

The process gradually builds financial discipline. They also learn to

handle resources of a size beyond their individual capacities. The SHG
members begin to appreciate that resources are limited and have a cost. Once
the groups shows mature financial behavior, the bank feels confident about
giving them loans." Linking banks and SHGs has become one of the largest
and fastest growing microfinance programs in India. In March 2005,
microfinance reached 1.43 million SHGs with 21 million members, making
a difference to the lives of over 100 million poor people in the country. SBI
was the largest player in the microfinance sector in India and financed more
than 300,000 SHGs as of March 2005.
 With more than 9000 branches, and more than 4,000 branches of its
associated banks, SBI catered to the needs of agriculturists and landless
laborers through 6,600 semi-urban and rural branches. SBI had setup 974
branches exclusively for development of agriculture through credit
deployment. The Prime Minister of India, Manmohan Singh remarked that
SBI needed to play a major role and guide all the other banks in increasing
the market for rural credit. At the bicentennial celebrations of SBI in June
2005, he said "You (SBI) have to leverage your strengths, develop new
capabilities, and show initiative to venture into uncharted territories so that
you continue to be in the vanguard of India's growth in this century..."

ORIGIN OF SBI:

The origin of SBI dates back to the early 19th century, when the Bank
of Calcutta was established in Calcutta (present day Kolkata in the state of
West Bengal) in June 1806 under the aegis of the British-run, Government
of Bengal. Three years after its inception, the bank was renamed Bank of
Bengal on receiving its charter. It was a unique banking institution as it was
the first joint-stock bank in British India. Next came the Bank of Bombay in
April 1840 followed by the Bank of Madras in July 1843. By 1876, the three
presidency banks, together with their branches, agencies and sub-agencies,
covered major inland trade centers in India. Bank of Bengal had 18 branches
while the other two had 15 branches each. Initially, the business of these
banks was restricted to discounting bills of exchange or other negotiable
private securities, keeping cash accounts and receiving deposits and issuing
and circulating cash notes.
INTERPRETATION:

The last quarter of the 19th century witnessed rapid commercialization in

India owing to the expansion of the railway network to cover all the major
geographic regions of the country. The three presidency banks were both
beneficiaries and promoters of this commercialization process as they
became involved in the financing of practically every trading, manufacturing
and mining activity in the Indian subcontinent. The three presidency banks
were amalgamated in January 1921 to form the Imperial Bank of India. The
new bank performed the triple role of a commercial bank, a banker's bank
and a banker to the government... SBI has been actively involved in the
microfinance sector as it serves both the social and commercial objectives of
the bank. It was the largest player in the microfinance sector in India in
terms of loans disbursed to SHGs (Refer Table II for SHG-Bank Linkages of
Major Banks in India). SBI has been actively involved in the microfinance
sector as it serves both the social and commercial objectives of the bank. It
was the largest player in the microfinance sector in India in terms of loans
disbursed to SHGs (Refer Table II for SHG-Bank Linkages of Major Banks
in India).

According to Ashok Kini, managing director of SBI, "We see over 2

million people who have the will to better their lives, but have been
suffering on account of finances, to benefit from the move."
."

SBI has been an active participant in the microfinance

sector since 1992, when the National Bank for Agriculture
and Rural Development (NABARD) launched the pilot
phase of the SHG-Bank Linkages program. In that year,
SBI started the SHG linkage program on an experimental
basis in a few of its branches. After a couple of years, SBI
decided to extend the program to its rural and semi-urban
branches all across India.

According to a World Bank-NCAER Rural Finance Access Survey

conducted in 2003, the reach of microfinance was limited to only 6.6% of
the total demand in India. The average loan provided to each SHG member
was about Rs. 1,766. In 2002-03, only 22% of the existing SHGs took loans
from the banks. The southern region of India accounted for 65% of the
SHGs linked with banks and 75% of the amount being disbursed The states
in the North Eastern regions of India accounted for just 0.6% of the SHGs
and 0.3% of the amount disbursed in the fiscal 2002-03. The Eastern region
which was densely populated and poverty ridden accounted for 12.6% of the
total number of SHGs and 5.9% of the amount disbursed. The top
management of SBI visualized significant potential in SHG financing since
only about 25% of the bank's branches had formed or provided loans to
SHGs.